hhtfa8e_ch12_sm

Chapter 12 The Statement of Cash Flows Short Exercises (10 min.)

S 12-1

The statement of cash flows helps investors and creditors: a. Predict future cash flows by reporting past cash receipts and payments, which are reasonably good predictors of future cash receipts and payments.

b. Evaluate management decisions by reporting on how managers got cash and how they used cash to run the business.

Chapter 12

The Statement of Cash Flows

177

(10-15 min.)

DATE:

_______________

TO:

Managers of U.S. Rondeau Inc.

FROM:

Student Name

S 12-2

SUBJECT: Purposes of the statement of cash flows The statement of cash flows is designed to help predict the future cash flows of a business. The statement of cash flows measures past cash flows, which are a reasonably good predictor of future cash flows. Net income is an important measure of management performance, but it takes cash to pay the bills. Also, a manager’s performance should be evaluated on how well he or she uses cash. This information is given in the statement of cash flows. In evaluating the ability to repay a loan, a creditor examines the statement of cash flows to learn how the borrower has gained and spent cash. As U.S. Rondeau’s situation indicates, income may increase while cash decreases. Therefore, the statement of cash flows should be used in conjunction with the income statement and the balance sheet in evaluating a company.

Student responses may vary.

178

Financial Accounting 8/e Solutions Manual

Chapter 12


179

S 12-3 Three things that could cause operating cash flows to be positive (under the indirect method) are: 1.

Increase in net income

2.

Decreases rather than increases in current assets other

than cash 3.

Increases rather than decreases in current liabilities

4.

Depreciation and amortization

Students need to identify 3 items.

180


(15-30 min.)

DATE:

_______________

TO:

Managers of Tranquility Inns

FROM:

Student Name

S 12-4

SUBJECT: Assessment of 2010 and Outlook for the Future 2010 was not a good year. Most of the increase in net income resulted from the extraordinary gain on the insurance proceeds from fire damage to a building, which means that normal operations were not very profitable. This is confirmed by the increase in receivables, which hints that collections are lagging. The cash-flow data paint a similar picture. Operating activities used cash, which is bad news. Over the long run, operations should provide the bulk of the cash if the business expects to succeed.

Chapter 12


181

(continued)

S 12-4

During 2010, the insurance recovery helped investing activities produce a net cash inflow. Ordinarily, investing activities should produce net cash outflows as the business invests in new assets. Growth is usually indicated by investments in new assets, but during 2010 net cash flows from investing activities were positive, which means that net investments were negative. Although the net cash flow provided by investing activities may be temporary, it does not reflect especially well on the company. It means that, in part at least, the company is maintaining its cash position by liquidating fixed assets. This is a bad sign. Financing activities provided a net cash inflow, which is normal. However, coupled with the net cash used for operations and the net cash provided by investing activities, the additional debt created in 2010 may be hard to pay back. Unless next year turns out to be much better than 2010, the outlook for the company is not bright.

182


Student responses may vary. The key conclusion is that 2010 was not a good year, and the outlook is not bright.

Chapter 12


183

(5-10 min.)

S 12-5

Cash flows from operating activities: Net income……………………………………………….. $12,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………………... 8,000 Loss on sale of land…………………………………. 2,000 Decrease in accounts receivable, inventory, and prepaid expenses ($58,000 − $55,000)…... 3,000 Increase in current liabilities ($32,000 − $20,000). 12,000 Net cash provided by operating activities:…... $37,000

184


(10 min.)

O+ a. Increase in accounts payable I b. Purchase of equipment O+ c. Decrease in prepaid expense N d. Collection of cash from customers O+ e. Net income N f. Retained earnings F g. Payment of dividends

S 12-6

O− h. Decrease in accrued liabilities F i. Issuance of common stock O− j. Gain on sale of building O+ k. Loss on sale of land O+ l. Depreciation expense O− m. Increase in inventory O+ n. Decrease in accounts receivable

(10 min.)

S 12-7

Ethan Corporation Statement of Cash Flows (partial) Year ended June 30, 2010 Cash flows from operating activities: Net income……………………………………….. $ 68,000* Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………... $ 11,000 Decrease in current assets other than cash…………………………………………. 35,000 Increase in current liabilities……………… 7,000 53,000 Net cash provided by operating activities….. $ 121,000

_____ Chapter 12


185

*$228,000 − $116,000 − $33,000 − $11,000 = $68,000

186


(15 min.)

S 12-8

Ethan Corporation Statement of Cash Flows Year ended June 30, 2010 Cash flows from operating activities: Net income……………………………………….. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………... $ 11,000 Increase in current assets other than cash…………………………………………. 35,000 Decrease in current liabilities……………… 7,000 Net cash provided by operating activities….. Cash flows from investing activities: Purchase of equipment………………………… $(43,000) Proceeds from sale of land……………………. 29,000 Net cash provided by investing activities…..

$ 68,000*

53,000 121,000

(14,000)

Cash flows from financing activities: Proceeds from issuance of common stock… $ 26,000 Payment of note payable………………………. (32,000) Payment of dividends………………………….. (5,600) Purchase of treasury stock……………………. (6,000) Net cash used for financing activities………. (17,600) Net increase in cash……………………………….. $ 89,400

_____ *$228,000 − $116,000 − $33,000 − $11,000 = $68,000

Chapter 12


187

(10 min)

S 12-9

a. Acquisitions of plant assets = $71,000, as follows: Plant Assets, net Beg. bal.

+ Acquisitions − Depreciation −

$188,000 +

Book value of = assets sold

X

−

$ 30,000

−

X

=

$229,000 − $188,000 + $30,000

X

=

$ 71,000

$0

Plant Assets, net 188,000 71,000 Depreciation

Beg. bal. Acquisition s End. bal.

End. bal.

= $229,000

30,000

229,000

b. Proceeds from the sale of long-term investments = $25,000, as follows: Long-term investments Beg. bal.

+

Purchases

−

Book value of investments sold

=

End. bal.

$79,000

+

0

−

X

=

$54,000

X

=

$79,000 − $54,000

X

=

$25,000

With no gain or loss, proceeds from the sale must be the same as the book value of the investments sold, $25,000.

188


Beg. bal.

End. bal.

Long-Term Investments 79,000 Book value of investments sold 54,000

Chapter 12

25,000


189

(15 min.)

S 12-10

a. New borrowing on long-term notes payable = $15,000 ($69,000 − $54,000) This is clear from the increase in long-term notes payable. b. Issuance of common stock = $10,000 ($48,000 − $38,000) This is clear from the increase in common stock. c. Payment of dividends (same as amount of dividends declared) Beginning retained earnings

+

$237,000

= $196,000, as follows:

−

Dividend declarations

=

Ending retained earnings

−

X

=

$241,000

Net income

+

$200,00 0

X

=

$237,000 + $200,000 − $241,000

X

=

$196,000

Retained Earnings Dividend declarations Beg. bal. (same amount paid) 196,000 Net income End. bal.

190


237,000 200,000 241,000

Chapter 12


191

(15 min.)

S 12-11

a. Collections from customers = $759,000, as follows: Collections Sales = − Increase in Accounts Receivable from customers Revenue

= $770,000 − $11,000 ($54,000 − $43,000) = $759,000

Beg. Bal. Sales End. Bal.

Accounts Receivable 43,000 770,000 Collections 54,000

759,000

b. Payments for inventory = $313,000, as follows: Payments for = inventory

Cost of Decrease in Increase in Goods − − inventory Accounts Payable Sold

= $330,000 −

$12,000

$5,000 ($89,000 − $77,000) ($48,000 − $43,000)

= $313,000

Beg. bal. 192

Inventory 89,000


Accounts Payable Payments for Beg. bal.

43,000

Purchases 318,000 Cost of goods sold 330,000 End. bal. 77,000

inventory

Chapter 12

313,000 Purchases 318,000 End. bal. 48,000


193

(10 min.)

S 12-12

a. Payments to employees = $38,000, as follows: Payments to employees

Payments to employees

=

Salary expense

−

Increase in Salary Payable

=

$40,000

−

$2,000 ($26,000 − $24,000)

=

$38,000

Salary Payable Beg. bal. 38,000 Salary expense End. bal.

24,000 40,000 26,000

b. Payments for other expenses = $174,000, as follows: Payments of other expenses

Other = expense + s

Increase in prepaid expenses

+

Decrease in accrued liabilities

= $170,000 +

$1,000

+

$3,000

($6,000 − $5,000) ($19,000 − $16,000)

= $174,000

194


(15 min.)

S 12-13

Horse Heaven Horse Farm, Inc. Statement of Cash Flows Year 2010 Cash flows from operating activities: Collections from customers………………… $ 480,000 Payments to suppliers and employees…… (310,000) Net cash provided by operating activities.. $ 170,000 Cash flows from investing activities: Purchase of equipment……………………… $(136,000) Net cash used for investing activities…….

(136,000)

Cash flows from financing activities: Issued note payable to borrow money……. $ 26,000 Payment of dividends………………………... (49,000) Net cash used for financing activities…….. (23,000) Net increase in cash…………………………... $ 11,000 Cash balance, beginning……………………….. 170,000 Cash balance, ending…………………………… $ 181,000

Chapter 12


195

(5 min.)

S 12-14

Middleton Golf Club, Inc. Statement of Cash Flows (partial) Year ended September 30, 2010 Cash flows from operating activities: Collections from customers………………… $203,000 Payments to suppliers……………………….. (90,000) Payments to employees……………………… (75,000) Payment of income tax………………………. (14,000) Net cash provided by operating activities... $24,000

196


(15 min.)

S 12-15

Middleton Golf Club, Inc. Statement of Cash Flows Year ended June 30, 2009 Cash flows from operating activities: Collections from customers…………………….. $203,000 Payments to suppliers…………………………… (90,000) Payments to employees…………………………. (75,000) Payment of income tax…………………………... (14,000) Net cash provided by operating activities……. $ 24,000 Cash flows from investing activities: Purchase of equipment………………………….. $ (42,000) Proceeds from sale of land……………………… 61,000 Net cash provided by investing activities……. 19,000 Cash flows from financing activities: Proceeds from issuance of common stock….. $ 16,000 Payment of note payable………………………… (15,000) Payment of dividends……………………………. (8,000) Purchase of treasury stock……………………... (5,700) Net cash used for financing activities………… (12,700) Net increase in cash…………………………………. $ 30,300

Chapter 12


197

Exercises Group A (

I+

a. Sale of long-term investment

(10-15 min.)

E 12-16A

F– k. Payment of long-term debt

F+ b. Issuance of long-term note N payable to borrow cash I+ O- c. Increase in prepaid expenses I–

l.

Accrual of salary expense

m. Cash sale of land n. Purchase of long-term investment

F– d. Payment of cash dividend I–

o. Acquisition of building by cash payment

F–

p. Purchase of treasury stock

F+

q. Issuance of common stock for cash

O–

r.

O+

s. Depreciation of equipment

O+ e. Loss on the sale of equipment O+ f. Decrease in merchandise inventory NIF g. Acquisition of equipment by issuance of note payable O+ h. Increase in accounts payable O+ i. Amortization of intangible assets O+ j. Net income

198


Decrease in accrued liabilities

(5-10 min.)

a. Operating

h. Operating

b. Financing

i.

Financing

c. Investing

j.

Financing

d. Investing

k.

Financing

e. Operating

l.

Operating

f.

m. Investing

Investing

E 12-17A

g. Noncash investing and financing

Chapter 12


199

(10-15 min.)

E 12-18A

Cash flows from operating activities: Net income…………………………………. $ 38,000 Adjustments to reconcile net income to net cash used for operating activities: Depreciation…………………………….. $ 17,000 Loss on sale of land…………………… 22,000 Increase in current assets other than cash……………………………… (24,000) Decrease in current liabilities………... (19,000) (4,000) Net cash provided by operating activities…………………………………….. $34,000

Evaluation: Operating cash flow is positive, but relatively weak, as shown by the fact that net cash provided by operating activities was less than net income. Normally, cash provided by operations is more than net income because of the depreciation add-back.

200


(15-20 min.)

E 12-19A

Cash flows from operating activities: Net income…………………………………….. $20,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………. $ 5,000 Increase in accounts receivable……... (100,000 ) Increase in inventory……………………. (102,000) Increase in accounts payable…………. 111,000 Decrease in accrued liabilities………… (6,000) (92,000) Net cash used by operating activities………………………………………… $(72,000)

Wilderness seems to be having a very difficult time collecting receivables and selling its inventory. There are large build-ups in both Accounts Receivable and Inventory. All of the inventory buildup is being financed by those companies supplying the inventory as reflected in the growth of accounts payable. While Wilderness is earning net income, cash flow from operations is negative.

Chapter 12


201

(20-30 min.)

E 12-20A

Req. 1 Newbury Travel Products, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income…………………………………………... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ Decrease in accounts receivable……………. Decrease in inventory………………………….. Increase in prepaid expenses………………… Increase in accounts payable………………… Decrease in accrued liabilities……………….. Net cash provided by operating activities….

$ 68,900

26,000 17,000 61,000 (700) 11,000 (81,000)

33,300 102,200

Cash flows from investing activities: Acquisition of plant assets……………………….. $(160,000) Proceeds from sale of land……………………….. 27,000 Net cash used for investing activities……….

(133,000)

Cash flows from financing activities: Proceeds from issuance of common stock…… $ 80,000 Payment of long-term note payable…………….. (17,000) Payment of dividends …………………………….. (13,000) Net cash provided by financing activities….. Net increase in cash…………………………………… Cash balance, December 31, 2009………………….. Cash balance, December 31, 2010…………………..

50,000 $ 19,200 10,800 $ 30,000

202


Noncash investing and financing activities: Acquisition of plant assets by issuing note payable

(continued)

$ 52,000

E 12-20A

Req. 2 Evaluation: Newbury’s cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets without having to borrow. It was able to issue stock and pay off a long-term note payable — both financing transactions. All of these signs are favorable.

(5-10 min.)

E 12-21A

Case A

- Issuing stock generated the cash to acquire plant assets. Operations used cash while in cases B and C operations provided cash.

Case B

- A combination of operations and issuing stock generated most of the cash for acquisition of plant assets. Operations provided more cash than did cases A or C.

Case C

- The sale of plant assets generated the cash needed to acquire new plant assets. Chapter 12


203

Most healthy financially

- Case B

Mid-range

- Case C

Least healthy financially - Case A

204


(10-15 min.)

E 12-22A

a. Cash proceeds of sale = Book value of asset sold, $28,000* − Loss on sale, $4,000 = $24,000 _____ *$110,000 + $33,000 − $9,000 − Book value sold (X) = $106,000 Book value sold = $28,000

Plant Assets, Net Beginning balance 110,000 Depreciation Purchases Ending balance

33,000 Book value sold

9,000 28,000

106,000

b. Cash dividend payments = $26,000 $49,000 + $58,000 − $7,000 − Cash dividends (X) = $74,000 Cash dividends = $26,000

Retained Earnings Stock dividends Cash dividends

7,000 Beginning balance 26,000 Net income Ending balance

Chapter 12

49,000 58,000 74,000


205

(10-15 min.)

Cash flows from operating activities: Receipts: Collections from customers ($50,000 + $33,000)……………….. Collection of dividend revenue……. Total cash receipts……………….. Payments: To suppliers…………………………… To employees…………………………. For interest……………………………. For income tax………………………... Total cash payments……………... Net cash used by operating activities.

E 12-23A

$ 83,000 10,000 93,000

$(58,000) (35,000) (17,000) (24,000) (134,000) $ (41,000)

Evaluation: Operating cash flow is weak as shown by the net cash used by operating activities.

206


(5-10 min.)

E 12-24A

Salary Payable — Report cash payments to employees as an operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes payable as financing cash flows.

Chapter 12


207

(20-30 min.)

E 12-25A

Req. 1 Cobbs Hill, Inc. Statement of Cash Flows Year Ended April 30, 2010 Cash flows from operating activities: Receipts: Collections from customers ($232,000 + $13,000)………………………….. $ 245,000 Dividends received………………………………. 11,000 Total cash receipts…………………………… 256,000 Payments: To suppliers ($108,000 + $11,500 - $1,300)…. $(118,200) To employees ($46,000 + $2,000)……………… (48,000) For income tax……………………………………. (9,000) For interest………………………………………… (2,100) Total cash payments………………………… (177,300) Net cash provided by operating activities…… 78,700 Cash flows from investing activities: Acquisition of plant assets………………………… $(100,000) Proceeds from sale of land………………………… 28,000 Net cash used for investing activities………...

(72,000)

Cash flows from financing activities: Proceeds from issuance of common stock……... $ 93,000 Payment of long-term note payable………………. (17,000) Payment of dividends……………………………….. (8,500) Net cash provided by financing activities…… 67,500 Net increase in cash…………………………………….. $ 74,200 Cash balance, April 30, 2009………………………….. 21,000 Cash balance, April 30, 2010………………………….. $ 95,200 208



(continued)

$ 43,000

E 12-25A

Req. 2 Evaluation: Cobb Hill’s cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets without having to borrow. Cobb Hill was able to issue stock and pay off a long-term note payable — both financing transactions. All of these signs are favorable.

Chapter 12


209

(10-15 min.)

E 12-26A

$5,000 decrease in a. Cash collections = $ 62,000 + Accounts Receivable ($25,000 − $20,000) = $ 67,000

b.

Cash payments = $79,000 + for inventory

$3,000 increase in $2,000 decrease in Inventory + Accounts Payable ($29,000 − $26,000) ($11,000 − $9,000)

= $84,000

210


Exercises Group B (10-15 min.)

I–

E 12-27B

a. Acquisition of building by cash payment

I+

O+ b. Decrease in merchandise inventory

F+

l.

O+ c. Depreciation of equipment

O+

m. Increase in accounts payable

O– d. Decrease in accrued liabilities

O+

n. Amortization of intangible assets

F– e. Payment of cash dividend

O+

o. Loss on sale of equipment

I–

F– p. Payment of long-term debt

f. Purchase of long-term investment

I+ F+

g. Issuance of long-term note payable to borrow cash F–

O– h. Increase in prepaid expenses N

O+

k. Sale of long-term investment Issuance of common stock for cash

q. Cash sale of land r.

Purchase of treasury stock

s. Net income

i. Accrual of salary expense

NIF j. Acquisition of equipment by issuance of note payable

Chapter 12


211

(5-10 min.)

E 12-28B

a. Financing

h. Financing

b. Investing

i.

Operating

c. Operating

j.

Noncash investing and financing

k.

Financing

l.

Operating

d. Investing e. Operating f.

Investing m. Financing

g. Investing

212


(10-15 min.)

Cash flows from operating activities: Net income…………………………………. Adjustments to reconcile net income to net cash used for operating activities: Depreciation…………………………….. $ 15,000 Loss on sale of land…………………… 19,000 Decrease in current assets other than cash……………………………… 28,000 Increase in current liabilities………... 23,000 Net cash provided by operating activities……………………………………..

E 12-29B

$ 40,000

85,000 $125,000

Evaluation: Operating cash flow is strong, as shown by the net cash provided by operating activities.

Chapter 12


213

(15-20 min.)

E 12-30B

Cash flows from operating activities: Net income…………………………………….. 35,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………. $ 9,000 Increase in accounts receivable……... (1,000) Increase in inventory……………………. (3,000) Increase in accounts payable…………. 109,000 Decrease in accrued liabilities………… (6,000) 108,000 Net cash provided by operating activities………………………………………… $143,000

Lawrence Fur Traders shows no sign of trouble collecting receivables or selling inventory. There is no large build-up in either Accounts Receivable or Inventory. Lawrence Fur Traders have done an excellent job getting their suppliers to finance their costs. Also, cash flow from operations is positive and exceeds net income.

214


(20-30 min.)

E 12-31B

Req. 1 Norton Travel Products, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income…………………………………………... $ 32,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 33,000 Decrease in accounts receivable……………. 16,000 Decrease in inventory………………………….. 39,000 Increase in prepaid expenses………………… (900) Increase in accounts payable………………… 15,000 Decrease in accrued liabilities……………….. (29,000) 73,100 Net cash provided by operating activities…. 105,700 Cash flows from investing activities: Acquisition of plant assets……………………….. $(140,000) Proceeds from sale of land……………………….. 48,000 Net cash used for investing activities………. Cash flows from financing activities: Proceeds from issuance of common stock…… $ 31,000 Payment of long-term note payable…………….. (16,000) Payment of dividends …………………………….. (10,000) Net cash provided by financing activities….. Net increase in cash…………………………………… Cash balance, December 31, 2009………………….. Cash balance, December 31, 2010…………………..

Chapter 12

(92,000)

5,000 $ 18,700 13,300 $ 32,000


215


216


$ 30,000

(continued)

E 12-31B

Req. 2 Evaluation: Norton’s cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets without having to borrow. It was able to issue stock and pay off a long-term note payable — both financing transactions. All of these signs are favorable.

Case A

(5-10 min.) E 12-32B - The sale of plant assets generated the cash needed to acquire new plant assets. Operations provided more cash that Case B but less than Case C.

Case B

- Issuing stock generated the cash to acquire plant Assets but operations did not provide positive cash flow.

Case C

- A combination of operations and issuing stock generated most of the cash for acquisition of plant assets. Operations provided more cash than did cases A and B.

Most healthy financially

- Case C

Mid-range

- Case B Chapter 12


217

Least healthy financially - Case A

218


(10-15 min.)

E 12-33B

a. Cash proceeds of sale = Book value of asset sold, $23,000* + Gain on sale, $5,000 = $28,000 _____ *$102,000 + $30,000 − $12,000 − Book value sold (X) = $97,000 Book value sold = $23,000

Plant Assets, Net Beginning balance 102,000 Depreciation Purchases Ending balance

30,000 Book value sold

12,000 23,000

97,000

b. Cash dividend payments = $13,000 $46,000 + $48,000 − $11,000 − Cash dividends (X) = $70,000 Cash dividends = $13,000

Retained Earnings Stock dividends

11,000 Beginning balance

46,000

Cash dividends

13,000 Net income

48,000

Ending balance

Chapter 12

70,000


219

(10-15 min.)

Cash flows from operating activities: Receipts: Collections from customers ($80,000 + $36,000)……………….. Collection of dividend revenue……. Total cash receipts………………..

E 12-34B

$ 116,000 7,000 123,000

Payments: To suppliers…………………………… $(51,000) To employees…………………………. (40,000) For interest……………………………. (13,000) For income tax………………………... (8,000) Total cash payments……………... (112,000) Net cash provided by operating activities. $ 11,000

Evaluation: Operating cash flow is satisfactory, but not great, as shown by the net cash provided by operating activities.

220


(5-10 min.)

E 12-35B

Salary Payable — Report cash payments to employees as an operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes payable as financing cash flows.

Chapter 12


221

(20-30 min.)

E 12-36B

Req. 1 Happy Life, Inc. Statement of Cash Flows Year Ended November 30, 2010 Cash flows from operating activities: Receipts: Collections from customers ($223,000 + $16,500)………………………….. $ 239,500 Dividends received………………………………. 10,500 Total cash receipts…………………………… 250,000 Payments: To suppliers ($102,000 + $14,000 + $1,200)…. $(117,200) To employees ($42,000 - $1,700)……………… (40,300) For income tax……………………………………. (8,000) For interest………………………………………… (4,500) Total cash payments………………………… (170,000) Net cash provided by operating activities…… 80,000 Cash flows from investing activities: Acquisition of plant assets………………………… $(108,000) Proceeds from sale of land………………………… 21,000 Net cash used for investing activities………...

(87,000)

Cash flows from financing activities: Proceeds from issuance of common stock……... $ 86,000 Payment of long-term note payable………………. (13,000) Payment of dividends……………………………….. (9,000) Net cash provided by financing activities…… 64,000 Net increase in cash…………………………………….. $ 57,000 Cash balance, November 30, 2009…………………… 23,000 Cash balance, November 30, 2010…………………… $ 80,000 222



(continued)

$ 46,000

E 12-36B

Req. 2 Evaluation: Happy Life’s cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets without having to borrow. Happy Life was able to issue stock and pay off a long-term

note

payable

—

both

financing

transactions. All of these signs are favorable.

Chapter 12


223

(10-15 min.)

E 12-37B

$3,000 decrease in a. Cash collections = $ 61,000 − Accounts Receivable ($20,000 − $17,000) = $ 64,000

b.

Cash payments = $79,000 − for inventory

$4,000 decrease in Inventory ($28,000 − $24,000)

= $74,000

224


$1,000 increase in Accounts Payable ($12,000 − $13,000)

Challenge Exercises Group A

E 12-38

(20-30 min.) (All amounts in thousands)

a. Collections

b. Payments for inventory

= $23,995 =

Sales $23,984

+ +

= $18,114 =

Cost of sales $18,026

Increase in Increase in + Inventory − Accounts Payable + $268* − $180**

*$3,140 − $2,872 = $ 268

**$1,551 − 1,371 = $ 180

c. Payments for other operating = $3,572 = expenses

d. Payment of income tax

Decrease in Accounts Receivable ($614 − $603)

= $532

e. Proceeds from Issuance of stock = $70

=

Other Operating Expenses $3,875

Income Tax Expense $536

Increase in − Income Tax Payable − ($197 − $193)

Beg. Common End. Common Stock + Issuance = Stock = $445 + X = $515 X

f. Payment of dividends

= $682:

Increase in − Accrued Liabilities − ($935 − $632)

=

$ 70

Beg. Ret. Net End. Ret. Earnings + Income − Dividends = Earnings $3,828 + $1,281 − X = $4,427 X

Chapter 12

= $682


225

(20 min.)

E 12-39

a. (All in thousands) Loss on sale of property and = equipment $80

Proceeds from dispositions

−

Book value sold

$740

−

$820

=

Property & Equipment, Net Bal., 12/31/09 9,630 Capital Depreciation expenditures 4,090 Book value of property and equipment sold Bal., 12/31/10 10,950

1,950

X = 820

b.

Repayment

226

Long-Term Notes Payable Bal., 12/31/09 80 Proceeds from issuance LT debt issued for something


3,040 1,250

other than cash Bal. 12/31/10

Chapter 12

X = 290 4,500


227

Quiz Q12-40 Q12-41 Q12-42 Q12-43 Q12-44 Q12-45 Q12-46 Q12-47 Q12-48 Q12-49 Q12-50 Q12-51 Q12-52

d d b c c c c Paying dividends financing Receiving dividends operating c [Book value = $12,000 ($21,000 − $9,000; Gain = $1,000; Proceeds = $13,000 ($12,000 + $1,000)] c b c c Net inc. Gain Depr. A / Rec Invy. [$41,500 − $9,000 + $6,500 + ($13,000 − $5,000) − ($11,000− $10,000)

A / Pay

Accr. Liab.

− ($9,000 − $8,000) + ($6,000 − $4,000) = $47,000]

Q12-53 Q12-54

d a

Q12-55 Q12-56 Q12-57

d a a

Q12-58 Q12-59

c b

228

Cash received = $30,000 ($21,000 + $9,000) Cash paid = $50,000 ($71,000 − $21,000 − $6,500 + $X = $97,000; X = $53,500) Net cash used = $23,500 ($53,500 − $30,000)

Cash received from issuance of stock = $9,000 ($18,000 − $9,000) Cash paid for dividends (X) = $36,000 ($75,000 + net income $41,500 − $X = $86,500; Dividends = $30,000) Net cash used = $21,000 ($30,000 − $9,000) ($820,000 − $50,000 = $770,000) [$59,500 − ($4,500 − $3,000) = $58,000]


Chapter 12


229

Problems Group A (40 min.)

P 12-60A

Req. 1 Antique Automobiles of Dallas, Inc. Income Statement Year Ended December 31, 2010 Sales revenue…………………………........................... Cost of goods sold [$203,000 + (1 × $40,000)]…. Salary expense…………………………………………… Depreciation expense ($180,000 / 5)…………………. Rent expense……………………………………………... Income tax expense……………………………………... Net income………………………………………………...

$488,000 243,000 125,000 36,000 17,000 12,600 $ 54,400

Req. 2 Antique Automobiles of Dallas, Inc. Balance Sheet December 31, 2010 ASSETS Current: Cash Accounts receivable (488,000 × .20) Inventory (1 × $40,000) Total current assets Property, plant, and equipment: Equipment $180,000 Less Accumulated depreciation (36,000)

230

LIABILITIES Current: 231,800* Accounts payable ($80,000 − $56,000) $ 24,000 97,600 Salary payable 7,000 40,000 Total current liabilities 31,000 369,400 STOCKHOLDERS’ EQUITY Common stock 440,000 Retained earnings ($54,400 − $12,000) 42,400 144,000 Total equity 482,400


Total assets

$513,400

Total liabilities and stockholders' equity

$513,400

_____ *$440,000 − $180,000 − $203,000 − $17,000 − $56,000 + $390,400 − $118,000 − $12,600 − $12,000 = $231,800.

Chapter 12


231

(continued)

P 12-60A

Req. 3 Antique Automobiles of Dallas, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income………………………………………. $ 54,400 Adjustments to reconcile net income to net cash used for operating activities: Depreciation………………………………….. $ 36,000 Increase in accounts receivable………….. (97,600) Increase in inventory……………………….. (40,000) Increase in accounts payable…………….. 24,000 Increase in salary payable………………… 7,000 (70,600) Net cash used for operating activities.. (16,200) Cash flows from investing activities: Purchase of equipment……………………….. Net cash used for investing activities……

(180,000) (180,000)

Cash flows from financing activities: Issuance of common stock…………………… Payment of dividend…………………………… Net cash provided by financing activities Net increase in cash………………………………. Cash balance, January 1, 2010…………………. Cash balance, December 31, 2010……………...

440,000 (12,000) 428,000 $ 231,800 0 $ 231,800

232


(40 min.)

P 12-61A

Req. 1 Antique Automobiles of Dallas, Inc. Income Statement Year Ended December 31, 2010 Sales revenue…………………………........................... Cost of goods sold [$203,000 + (1 × $40,000)]…….. Salary expense…………………………………………… Depreciation expense ($180,000 / 5)…………………. Rent expense……………………………………………... Income tax expense……………………………………... Net income………………………………………………...

$488,000 243,000 125,000 36,000 17,000 12,600 $ 54,400

Req. 2 Antique Automobiles of Dallas, Inc. Balance Sheet December 31, 2010 ASSETS Current: Cash Accounts receivable (488,000 × .20) Inventory (1 × $40,000) Total current assets Property, plant, and equipment: Equipment $180,000 Less Accumulated depreciation (36,000)

Total assets

LIABILITIES Current: 231,800* Accounts payable ($80,000 − $56,000) $ 24,000 97,600 Salary payable 7,000 40,000 Total current liabilities 31,000 369,400 STOCKHOLDERS’ EQUITY Common stock 440,000 Retained earnings ($54,400 − $12,000) 42,400 144,000 Total equity 482,400

$513,400

Total liabilities and stockholders' equity

$513,400

_____ Chapter 12


233

*$440,000 − $180,000 − $203,000 − $17,000 − $56,000 + $390,400 − $118,000 − $12,600 − $12,000 = $231,800.

234


(continued)

P 12-61A

Req. 3 Antique Automobiles of Dallas, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers ($488,000- $97,600)…………………………… $ 390,400 Total cash receipts…………………………… 390,400 Payments: To suppliers ($-243,000 - $40,000 + $24,000) $(259,000) To employees ($-125,000 + $7,000)…………… (118,000) For income tax……………………………………. (12,600) For rent………………………………………..…… (17,000) Total cash payments………………………… (406,600) Net cash used by operating activities………… (16,200)

Cash flows from investing activities: Purchase of equipment………………………..... Net cash used for investing activities…..…

(180,000) (180,000)

Cash flows from financing activities: Issuance of common stock……………….…… Payment of dividend………………………….… Net cash provided by financing activities Net increase in cash…………………………….…. Cash balance, January 1, 2010……………….…. Cash balance, December 31, 2010……………....

440,000 (12,000) 428,000 $ 231,800 0 $ 231,800

Chapter 12


235

(35-45 min.)

P 12-62A

Morgensen Software Corp. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income…………………………………………... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation …………………………………….. $ 17,000 Amortization…………………………………….. 5,000 Loss on sale of equipment…………………… 5,000 Increase in accounts receivable…………….. (5,500) Decrease in inventories…………………… 71,400 Increase in prepaid expenses………………… (1,600) Increase in accounts payable……………… 1,400 Increase in income tax payable……………… 1,900 Decrease in accrued liabilities……………….. (11,700) Net cash provided by operating activities…. Cash flows from investing activities: Purchase of building………………………………. $(97,000) Purchase of long-term investment……………… (44,600) Proceeds from sale of equipment………………. 81,000 Collection of loan…………………………………... 10,600 Net cash used for investing activities………. Cash flows from financing activities: Issuance of common stock………………………. Issuance of long-term note payable……………. 236


$36,500 34,500

$ 6,500

82,900 89,400

(50,000)

Payment of cash dividends………………………. (9,300) Purchase of treasury stock………………………. (10,700) Net cash provided by financing activities….. Net increase in cash…………………………………… Cash balance, December 31, 2009………………….. Cash balance, December 31, 2010…………………..

Chapter 12


51,000 $ 90,400 30,000 $ 120,400

237

(continued)

Noncash investing and financing activities: Acquisition of land by issuing long-term note payable… Retirement of bonds payable by issuing common stock Total noncash investing and financing activities……………

`

238


P 12-62A

$ 201,000 64,000 $265,000

(35-45 min.)

P 12-63A

Req. 1 Maynard Movie Theater Company Statement of Cash Flows Year Ended June 30, 2010 Cash flows from operating activities: Net income…………………………………………… Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………… $ 15,700 Amortization……………………………………… 9,000 Decrease in accounts receivable…………….. 7,100 Increase in inventories…………………………. (2,400) Decrease in prepaid expenses……………… 4,900 Increase in accounts payable…………………. 1,600 Increase in accrued liabilities………………... 20,000 Decrease in income tax payable……………… (1,000) Net cash provided by operating activities….. Cash flows from investing activities: Purchase of equipment…………………………….. $(79,000) Purchase of building……………………………….. (44,000) Sale of long-term investment……………………... 12,700 Net cash used for investing activities……….. Cash flows from financing activities: Issuance of long-term note payable……………... $ 42,000 Issuance of common stock………………………... 24,000 Payment of cash dividend…………………………. (29,000) Net cash provided by financing activities…... Net increase in cash…………………………………. Cash balance, June 30, 2009………………….…….. Cash balance, June 30, 2010………………….……. Chapter 12

$ 54,000

54,900 108,900

(110,300)

37,000 $ 35,600 17,000 $ 52,600


239

Noncash investing and financing activities: Acquisition of land by issuing note payable……

240


$100,000

(continued)

P 12-63A

Req. 2 Evaluation: Maynard’s cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets, and borrowing — a financing cash flow — appears reasonable. All of these signs are favorable.

Chapter 12


241

(30-40 min.)

P 12-64A

Req. 1 Affordable Supply Corp. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income………………………………………………. $62,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………………. $ 17,700 Increase in accounts receivable………………… (1,200) Increase in inventories……………………………. (14,400) Decrease in prepaid expenses…………………… 2,100 Increase in accounts payable…………………….. 8,300 Increase in salary payable……………………….. 10,900 Decrease in other accrued liabilities……………. (1,600) 21,800 Net cash provided by operating activities….. 84,700 Cash flows from investing activities: Purchase of land……………………………………...... $(46,500) Purchase of equipment ($49,500 − depreciation expense of $17,700 = $31,800; $53,100 − $31,800)………………………………………………. (21,300) Net cash used for investing activities……….

(67,800)

Cash flows from financing activities: Payment of dividends ($7,900 + $62,900 − $27,500) $(43,300) Issuance of note payable……………………………… 17,000 Issuance of common stock…………………………… 22,700 Net cash used for financing activities………. (3,600) Net increase in cash……………………………………….. $13,300 242


Cash balance, December 31, 2009……………………… Cash balance, December 31, 2010………………………

Chapter 12

4,000 $17,300


243

(continued)

P 12-64A

Req. 2 This problem will help students learn how operating activities, investing activities, and financing activities generate cash receipts and cash payments. By solving this problem, students will learn how companies prepare the statement of cash flows and will thus be able to understand the meaning of cash flows from the three basic categories of business activities. This knowledge will aid their analysis of investments. For example, students should know that net cash provided by operating activities conveys a more positive signal about a company than net cash used for operations.

Student responses will vary.

244


Chapter 12


245

(30-40 min.)

P 12-65A

Req. 1 Affordable Supply Corp. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers ($446,000,000 - $1,200)…………………… $ 444,800 Total cash receipts………………………… $ 444,800 Payments: To suppliers ($-186,600 - $14,400 + $8,300) $(192,700) To employees ($-76,000 + $10,900)………… (65,100) For income tax……………………………………. (29,000) For Other operating expenses ($-49,700 + $2,100 – 1,600) (49,200) For interest…………………………………… (24,100) Total cash payments………………………… (360,100) Net cash provided by operating activities…… 84,700 Cash flows from investing activities: Purchase of land…………………………………….. $(46,500) Purchase of equipment ($49,500 − depreciation expense of $17,700 = $31,800; $53,100 − $31,800)………………………………………… (21,300) Net cash used for investing activities… Cash flows from financing activities: Payment of dividends ($7,900 + $62,900 − $27,500) Issuance of note payable……………………… Issuance of common stock……………………… Net cash used for financing activities…… 246


(67,800)

$(43,300) 17,000 22,700 (3,600)

Net increase in cash…………………………………… Cash balance, December 31, 2009………………… Cash balance, December 31, 2010…………………

(continued)

$13,300 4,000 $17,300

P 12-65A


Student responses will vary.

Chapter 12


247

(35-45 min.)

P 12-66A

Req. 1 Ramirez Furniture Gallery, Inc. Statement of Cash Flows Year Ended May 31, 2010 Cash flows from operating activities: Receipts: Collections from customers ($428,500 + $191,300)…………………….. Interest received………………………………. Dividends received…………………………… Total cash receipts………………………... Payments: To suppliers……………………………………. To employees………………………………….. For interest……………………………………... For income tax………………………………… Total cash payments……………………... Net cash provided by operating activities... Cash flows from investing activities: Purchase of plant assets……………………....... Sale of plant assets………………………………. Collection of loans……………………………….. Loan to another company………………………. Sale of investments………………………………. Net cash used for investing activities…….. Cash flows from financing activities: Payments of long-term notes payable………... Payment of dividends……………………………. Issuance of note payable………………………... Issuance of common stock……………………... Net cash used for financing activities…….. 248


$ 619,800 4,600 8,900 $ 633,300 $(368,000) (78,000) (13,400) (38,300) (497,700) 135,600 $ (72,100) 22,600 11,900 (12,300) 9,500 (40,400) $ (83,000) (48,300) 24,500 7,000 (99,800)

Net (decrease) in cash………………………………. Cash balance, May 31, 2009……………………….. Cash Balance, May 31, 2010……………………..

Chapter 12

$ (4,600) 19,100 $ 14,500


249

(continued)

Noncash investing and financing transactions: Payment of short-term note payable by issuing long-term note payable……………………. Acquisition of equipment by issuing short-term note payable…………………………….. Total noncash investing and financing transactions….

P 12-66A

$ 94,000 16,000 $ 110,000

Req. 2 Evaluation of 2010:

Year 2010 was a strong year from a cashflow standpoint. Operations provided the bulk of the company’s cash. The business acquired additional plant assets to lay a foundation for future operations. The corporation position.

250


also

reduced

its

debt

(45-60 min.)

P 12-67A

Req. 1 Daisy Electric Company Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers………………………… $ 661,800 Dividends received ………………………………….. 16,900 Total cash receipts………………………………… $ 678,700 Payments: To suppliers ($402,000+ $34,500)………………….. $(436,500) To employees………………………………………….. (143,600) For interest……………………………………………... (26,600) For income tax…………………………………………. (17,000) Total cash payments……………………………… (623,700) Net cash provided by operating activities………... 55,000 Cash flows from investing activities: Purchase of equipment…………………………………... $ (31,000) Sale of long-term investments………………………….. 14,600 Net cash used for investing activities……………...

(16,400)

Cash flows from financing activities: Issuance of common stock……………………………… $ 61,000 Payment of long-term note payable…………………… (41,500) Payment of dividends……………………………………. (47,900) Purchase of treasury stock……………………………… (22,400) Net cash used for financing activities…………….. (50,800) Net (decrease) in cash……………………………………….. $ (12,200) Cash balance, December 31, 2009………………………… 49,600 Cash balance, December 31, 2010………………………… $ 37,400 Noncash investing and financing activities: Acquisition of land by issuing common stock………. Chapter 12

$ 80,800


251

Retirement of note payable by issuing common stock Total noncash investing and financing activities……….

252


20,000 $ 100,800

(continued)

P 12-67A

Req. 2 Daisy Electric Company Cash Flows from Operating Activities Year Ended December 31, 2010 Cash flows from operating activities: Net income……………………………… $127,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………… $ 19,000 Loss on sale of investments………….. 22,100 Increase in accounts receivable……… (27,400) Increase in inventories………………… (59,700) Increase in prepaid expenses………… (600) Decrease in accounts payable………... (8,300) Increase in interest payable…………… 2,500 Decrease in salary payable……………. (7,800) Decrease in other accrued liabilities… (10,200) Decrease in income tax payable……… (2,500) (72,900) Net cash provided by operating activities. $55,000

Chapter 12


253

(45-60 min.)

P 12-68A

Req. 1 Stephen Summers Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 2010 Cash flows from operating activities: Net income…………………………………………... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 13,900 Loss on sale of land……………………………. 6,500 Increase in accounts receivable……………... (17,100) Decrease in inventories……………………..… 2,300 Increase in prepaid expenses………………… (900) Decrease in accounts payable……………..… (11,000) Decrease in income tax payable……………... (1,200) Decrease in accrued liabilities……………….. (5,700) Increase in interest payable…………………... 1,000 Decrease in salary payable…………………… (3,400) Net cash provided by operating activities….

( 15,600) 65,100

Cash flows from investing activities: Sale of land………………………………………….. $ 54,900 Purchase of long-term investment……………… (4,700) Net cash provided by investing activities…..

50,200

Cash flows from financing activities: Payment of long-term note payable…………….. $(61,400) Payment of cash dividends………………………. (48,400) Issuance of common stock………………………. 2,400 Net cash used for financing activities………. Net increase in cash……………………………………

(107,400) $ 7,900

254


$ 80,700

Cash balance, June 30, 2009………………………… Cash balance, June 30, 2010…………………………

Chapter 12

21,000 $ 28,900


255

(continued)

P 12-68A

Req. 1 Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………... Payment of short-term note payable by issuing common stock………………………….. Total noncash investing and financing activities…...

256


$14,600

5,000 $19,600

(continued)

P 12-68A

Req. 2 Stephen Summers Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 2010

Cash flows from operating activities: Receipts: Collections from customers…………….. $ 241,700 Interest received…………………………… 1,700 Total cash receipts…………………….. $ 243,400 Payments: To suppliers………………………………… $(118,600) To employees………………………………. (41,900) For income tax……………………………... (12,900) For interest………………………………….. (4,900) Total cash payments………………….. (178,300) Net cash provided by operating activities… $ 65,100

Chapter 12


257

Problems Group B ( (40 min.)

P 12-69B

Req. 1 Sweet Automobiles of Pepperell, Inc. Income Statement Year Ended December 31, 2010 Sales revenue…………………………………………….. $426,000 Cost of goods sold [$175,000 + (1 × $47,000)]….. 222,000 Salary expense…………………………………………… 90,000 Rent expense……………………………………………... 19,000 Depreciation expense ($140,000 / 5)………………… 28,000 Income tax expense……………………………………... 14,000 Net income………………………………………………... $53,000 Req. 2 Sweet Automobiles of Pepperell, Inc. Balance Sheet December 31, 2010 ASSETS Current: Cash Accounts receivable ($426,000 × .10) Inventory Total current assets Property, plant, and equipment: Equipment $140,000 258

LIABILITIES Current: $87,000* Accounts payable ($282,000 − $197,400) $ 84,600 42,600 Salary payable 5,000 235,000 Total current liabilities 89,600 364,600 STOCKHOLDERS’ EQUITY Common stock 350,000 Retained earnings


Less Accumulated depreciation (28,000)

Total assets

112,000

$476,600

($53,000 − $16,000) Total equity Total liabilities and stockholders' equity

37,000 387,000

$476,600

_____ *$350,000 − $140,000 − $175,000 − $19,000 − $197,400 + $383,400 − $85,000 − $14,000 − $16,000 = $87,000.

Chapter 12


259

(continued)

P 12-69B

Req. 3 Sweet Automobiles of Pepperell, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income……………………………………….… Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………. Increase in accounts receivable……………. Increase in inventory…………………………. Increase in accounts payable…………….…. Increase in salary payable…………………... Net cash used by operating activities…..

$ 28,000 (42,600) (235,000) 84,600 5,000 (160,000) (107,000)

Cash flows from investing activities: Purchase of equipment……………………….….. Net cash used for investing activities………

(140,000) (140,000)

Cash flows from financing activities: Issuance of common stock……………………… Payment of dividend……………………………… Net cash provided by financing activities…. Net increase in cash…………………………………. Cash balance, January 1, 2009…………………….. Cash balance, December 31, 2010…………………

350,000 (16,000) 334,000 $87,000 0 $87,000

260


$53,000

(40 min.)

P 12-70B

Req. 1 Sweet Automobiles of Pepperell, Inc. Income Statement Year Ended December 31, 2010 Sales revenue…………………………………………….. $426,000 Cost of goods sold [$175,000 + (1 × $47,000)]….. 222,000 Salary expense…………………………………………… 90,000 Rent expense……………………………………………... 19,000 Depreciation expense ($140,000 / 5)………………… 28,000 Income tax expense……………………………………... 14,000 Net income………………………………………………... $53,000 Req. 2 Sweet Automobiles of Pepperell, Inc. Balance Sheet Year Ended December 31, 2010 ASSETS Current: Cash Accounts receivable ($426,000 × .10) Inventory Total current assets Property, plant, and equipment: Equipment $140,000 Less Accumulated depreciation (28,000)

Total assets

LIABILITIES Current: $87,000* Accounts payable ($282,000 − $197,400) $ 84,600 42,600 Salary payable 5,000 235,000 Total current liabilities 89,600 364,600 STOCKHOLDERS’ EQUITY Common stock 350,000 Retained earnings ($53,000 − $16,000) 37,000) 112,000 Total equity 387,000 Total liabilities and $476,600 stockholders' equity

$476,600

_____ *$350,000 − $140,000 − $175,000 − $19,000 − $197,400 + $383,400 − $85,000 − $14,000 − $16,000 = $87,000. Chapter 12


261

262


(continued)

P 12-70B

Req. 3 Sweet Automobiles of Pepperell, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers ($426,000 x .90)........................................... $ 383,400 Total cash receipts..................................... $ 383,400 Payments: To suppliers ($175,000 + $197,400) ……….. $(372,400) To employees ($90,000 - $5,000)…………… (85,000) For income tax................................................. (14,000) For rent............................................................. (19,000) Total cash payments.................................. (490,400) Net cash used by operating activities........... (107,000)

Cash flows from investing activities: Purchase of equipment……………………….. Net cash used for investing activities……

(140,000) (140,000)

Cash flows from financing activities: Issuance of common stock…………………… Payment of dividend…………………………… Net cash provided by financing activities Net increase in cash……………………………… Cash balance, January 1, 2009………………… Cash balance, December 31, 2010………………

350,000 (16,000) 334,000 $87,000 0 $87,000

Chapter 12


263

(35-45 min.)

P 12-71B

Neighbor Software Corp. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income……………………………………………. $ 58,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………. $ 17,000 Amortization………………………………………. 6,000 Loss on sale of equipment……………………. 3,000 Decrease in accounts receivable……………… 42,100 Increase in inventories…………………………. (3,500) Increase in prepaid expenses………………….. (800) Increase in accounts payable………………….. 2,200 Increase in income tax payable………………. 12,100 Increase in accrued liabilities………………….. 7,900 86,000 Net cash provided by operating activities…… 144,000 Cash flows from investing activities: Purchase of building…………………………....... $(159,000) Purchase of long-term investment………………... (49,900) Sale of equipment………………………………….. 12,900 Collection of loan……………………………………. 11,000 Net cash used for investing activities………... (185,000) Cash flows from financing activities: Issuance of long-term note payable……………… $ 34,000 264


Payment of cash dividends………………………… Purchase of treasury stock………………. Issuance of common stock………………………... Net cash provided by financing activities…… Net increase in cash………………………………….. Cash balance, December 31, 2009…………………… Cash balance, December 31, 2010……………………

(18,800) (14,400) 74,200

(continued)

75,000 $ 34,000 26,000 $60,000

P 12-71B

Noncash investing and financing activities: Acquisition of land by issuing long-term note payable… $198,000 Retirement of bonds payable by issuing common stock… 71,000 Total noncash investing and financing activities………………… $269,000

Chapter 12


265

(35-45 min.)

P 12-72B

Req. 1 Medford Movie Theater Company. Statement of Cash Flows Year Ended June 30, 2010 Cash flows from operating activities: Net income……………………………………………. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………………. $ 15,600 Amortization……………………………………… 6,000 Decrease in accounts receivable……………... 7,700 Increase in inventories………………………… (2,200) Increase in prepaid expenses…………………. (9,200) Increase in accounts payable…………………. 2,100 Increase in accrued liabilities………………… 10,000 Decrease in income tax payable……………… (4,000) Net cash provided by operating activities…...

$ 50,000

26,000 76,000

Cash flows from investing activities: Purchase of building……………………………...... $(59,000) Purchase of equipment…………………………….. (45,600) Sale of long-term investment……………………… 13,400 Net cash used for investing activities………..

(91,200)

Cash flows from financing activities: Issuance of common stock………………………... $ 13,000 Issuance of long-term note payable……………... 26,000 Payment of cash dividends………………………... (34,000) Net cash provided by financing activities…... Net decrease cash……………………………………. Cash balance, June 30, 2009…………………… Cash balance, June 30, 2010……………………

5,000_ $ (10,200) 16,000 $ 5,800

Noncash investing and financing activities: Acquisition of land by issuing note payable.

$ 30,000

266


Chapter 12


267

(continued)

P 12-72B

Req. 2 Evaluation: Medford’s cash flows look strong. Operations are a significant source of cash. The company

is

investing heavily in new plant assets. The company is

financing

the

new

investments

borrowing than issuing stock.

268


more

by

(30-40 min.)

P 12-73B

Req. 1 King Supply Corp. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Net income……………………………………………… Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………… $ 17,400 Increase in accounts receivable ………………… (1,000) Increase in inventories……………………………. (11,600) Decrease in prepaid expenses…………………... 3,900 Increase in accounts payable…………………... 10,200 Increase in salary payable………………………... 6.400 Decrease in other accrued liabilities…………… (1,300) Net cash provided by operating activities…. Cash flows from investing activities: Purchase of land……………………………………….. $(47,200) Purchase of equipment ($49,200 − depreciation expense of $17,400 = $31,800; $53,100 − $31,800)………………………………... (21,300) Net cash used for investing activities……… Cash flows from financing activities: Payment of dividends ($27,400 + $62,000 − $47,200)…………………….. $(42,200) Issuance of note payable…………………………… 13,000 Issuance of common stock…………………………... 24,300 Net cash used for financing activities….... Net increase in cash……………………………………… Cash balance, December 31, 2009……………………... Cash balance, December 31, 2010……………………... Chapter 12

$ 62,000

24,000 86,000

(68,500)

(4,900) $ 12,600 5,000 $ 17,600


269

270


(continued)

P 12-73B



Chapter 12


271

272


(30-40 min.)

P 12-74B

King Supply Corp. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers ($445,000 – 1,000)....................................... $ 444,000 Total cash receipts..................................... $ 444,000 Payments: To suppliers ($185,100 + $11,600 - $10,200) $(186,500) To employees ($76,400 - $6,400)…………… (70,000) For operating expenses ($49,800 - $3,900 + $1,300……………………………………….. (47,200) For income tax................................................. (29,500) For interest....................................................... (24,800) Total cash payments.................................. (358,000) Net cash provided by operating activities.... 86,000 Cash flows from investing activities: Purchase of land…………………………………… $(47,200) Purchase of equipment ($49,200 − depreciation expense of $17,400 = $31,800; $53,100 − $31,800)……………………………… (21,300) Net cash used for investing activities… Cash flows from financing activities: Payment of dividends ($27,400 + $62,000 − $47,200)………………… $(42,200) Issuance of note payable……………………… 13,000 Issuance of common stock……………………… 24,300 Net cash used for financing activities Net increase in cash…………………………… Cash balance, December 31, 2009……………… Chapter 12

(68,500)

(4,900) $ 12,600 5,000


273

Cash balance, December 31, 2010…………………

274


$ 17,600

(continued)

P 12-74B



Chapter 12


275

276


(35-45 min.)

P 12-75B

Req. 1 Dunleavy Furniture Gallery, Inc. Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers ($406,000 + $201,000)................................. $ 607,000 Interest received.............................................. 4,200 Dividends received.......................................... 4,000 Total cash receipts..................................... $ 615,200 Payments: To suppliers..................................................... $(387,200) To employees.................................................. (93,700) For income tax................................................. (36,800) For interest....................................................... (13,700) Total cash payments.................................. (531,400) Net cash provided by operating activities.... 83,800 Cash flows from investing activities: Purchase of plant assets..................................... Collection of loans............................................... Proceeds from sale of plant assets.................... Loan to another company................................... Proceeds from sale of investments.................... Net cash used for investing activities...........

$(59,900) 12,100 22,300 (12,800) 11,200

Cash flows from financing activities: Proceeds from issuance of common stock....... Payments of long-term note payable................. Payment of dividends.......................................... Proceeds from issuance of note payable.......... Net cash provided by financing activities....

$ 7,000 (69,000) (48,000) 19,300

Chapter 12

(27,100)

(90,700)


277

Net decrease in cash................................................. Cash balance, December 31, 2009........................... Cash balance, December 31, 2010...........................

278


$ (34,000) 40,000 $ 6,000

(continued)

P 12-75B

Noncash investing and financing activities: Payment of short-term note payable by issuing long-term note payable…………………………… Acquisition of equipment by issuing short-term note payable…………………………… Total noncash investing and financing activities…….

$68,000 16,500 $84,500

Req. 2 Evaluation of 2010: Year 2010 was a satisfactory year from a cash-flow standpoint. Operations provided cash of $83,800. The company was able to pay off a long-term note payable in the amount of $69,000 as well as converting a sort-term note in the amount of $68,000 to a long-term note. The business invested almost $60,000 in plant assets. They paid a dividend of $48,000 and cash decreased during the year by $34,000.

Chapter 12


279

(45-60 min.)

P 12-76B

Req. 1 Spencer Electric Company Statement of Cash Flows Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers…………...................... $ 661,600 Dividends received……………………………………. 16,800 Total cash receipts…………………………….….. $ 678,400 Payments: To suppliers…………………………………………….. $(434,400)* To employees…………………………………………... (143,300) For interest……………………………………………… (27,100) For income tax…………………………………………. (18,600) Total cash payments……………………………… (623,400) Net cash provided by operating activities…….….. 55,000 Cash flows from investing activities: Purchase of equipment…………………………………... $ (31,700) Sale of long-term investments………………………….. 20,000 Net cash used for investing activities……………... Cash flows from financing activities: Payment of long-term note payable…………………… $ (41,300) Issuance of common stock………………………….….. 22,200 Purchase of treasury stock………………………….….. Payment of dividends……………………………………. Net cash used for financing activities…………….. Net (decrease) in cash…………….……………………….… Cash balance, December 31, 2009………………………… Cash balance, December 31, 2010…………………………

_____ 280


(11,700)

(26,300) (27,600) (73,000) $ (29,700) 71,500 $ 41,800

*$399,500 + $34,900 = $434,400

Chapter 12


281

(continued)

P 12-76B

Req. 1 Noncash investing and financing activities: Acquisition of land by issuing common stock……………… Retirement of long-term note payable by issuing common stock……………………………………….. Total noncash investing and financing activities……………….

282


$ 61,700 17,000 $ 78,700

(continued)

P 12-76B

Req. 2 Spencer Electric Company Statement of Cash Flows Year Ended December 31, 2010

Cash flows from operating activities: Net income…………………………………….. $4,300 Adjustments to reconcile net income to net cash flow provided by operating activities: Depreciation………………………………. $16,400 Loss on sale of investments…………… 16,700 Decrease in accounts receivable……… 14,400 Decrease in inventories………………… 12,900 Decrease in prepaid expenses………… 6,000 Decrease in accounts payable…………. (7,800) Decrease in interest payable…………… (2,200) Increase in salary payable…………….. 7,200 Decrease in other accrued liabilities…. (10,400) Decrease in income tax payable………. (2,500) 50,700 Net cash provided by operating activities.. $55,000

Chapter 12


283

(45-60 min.)

P 12-77B

Req. 1 Franny Franklin Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 2010 Cash flows from operating activities: Net income…………………………………………… Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ……………………………………… $ 13,900 Loss on sale of land…………………………….. 7,000 Increase in accounts receivable…………..….. (36,700) Increase in inventories ……………………….. (57,800) Increase in prepaid expenses……………..….. (1,000) Increase in accounts payable……………..….. 1,000 Increase in accrued liabilities……………….... 88,100 Decrease in taxes payable………………….…. (1,100) Increase in interest payable…………………... 1,000 Decrease in salary payable ………………… (2,700) Net cash provided by operating activities….. Cash flows from investing activities: Sale of land…………………………………………… $ 33,800 Purchase of long-term investments…………....... (5,000) Net cash provided by investing activities…... Cash flows from financing activities: Payment of cash dividends……………………….. $(47,800) Issuance of common stock……………………….. 21,100 Payment of long-term note payable……………... (60,700) Net cash used for financing activities……….. Net increase in cash………………………………….… Cash balance, June 30, 2009………………………….. Cash balance, June 30, 2010…………………………. 284


$ 73,400

11,700 85,100

28,800

(87,400) $ 26,500 2,400 $ 28,900

(continued)

P 12-77B

Req. 1 Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………….. Paid off short-term note by issuing common stock Total noncash investing and financing activities……..

Chapter 12

$ 15,200 7,000 $ 22,200


285

(continued)

P 12-77B

Req. 2 Franny Franklin Design Studio, Inc. Statement of Cash Flows Year Ended June 30, 2010

Cash flows from operating activities: Receipts: Collections from customers………………. $ 272,300 Interest received…………………………….. 1,400 Total cash receipts……………………… $ 273,700 Payments: To suppliers………………………………….. $(130,900) To employees………………………………… (40,000) For income tax……………………………….. (12,500) For interest…………………………………… (5,200) Total cash payments……………………. (188,600) Net cash provided by operating activities….. $ 85,100

286


Decision Cases (45-60 min.) Decision Case 1 Req. 1 (indirect method for operating activities) T-Bar-M Camp, Inc. Statement of Cash Flows Year Ended December 31, 2011 (Thousands) Cash flows from operating activities: Net income…………………………………………………. $ 97 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………….…... $ 46 Amortization of patents…………………………….... 11 Increase in accounts receivable ($72 − $61)……… (11) Increase in inventories ($194 − $181)………….….. (13) Increase in accounts payable ($63 − $56)……….... 7 Decrease in accrued liabilities ($17 − $12)………... (5) 35 Net cash provided by operating activities……………. 132 Cash flows from investing activities: Purchase of property, plant, and equipment ($369 − $259)………………………….…. $(110) Purchase of long-term investments ($31 − $0)……… (31) Net cash used for investing activities………….….

(141)

Cash flows from financing activities: Issuance of common stock ($149 − $61)…………….. $ 88 Payment of cash dividends ($156 + $97 − $213)……. (40) Payment of long-term notes payable ($264 − $179) (85) Net cash used for financing activities………..……. Net (decrease) in cash………………………….……………. Cash balance, December 31, 2010………………………… Cash balance, December 31, 2011…………………………

(37) $ (46) 63 $ 17

Chapter 12


287

(continued) Decision Case 1

Req. 2 The cash balance at the end of 2011 is low because: • The camp paid $110,000 to buy new property, plant, and equipment. • The camp paid off $85,000 of notes payable.

Req. 3 Year 2011 was a good year. Net income was $97,000, and operations were the largest source of cash. Also, the company increased its property, plant, and equipment by $110,000 and paid off $85,000 of debt. On this basis, business appears to have been successful.

288


(15-25 min.) Decision Case 2 Four-Star Catering looks like the better investment because: 1. Operations provide far more cash for Four-Star than for Applied Technology. Operations should be the main source of cash for a healthy company. 2. Four-Star is investing more in long-term plant assets than Applied is. Four-Star is laying a more solid foundation in revenue-producing assets than Applied is. 3. Applied Technology’s main source of cash is the sale of plant assets. This trend cannot continue for long without hurting the company’s ability to produce revenue. 4. Four-Star is raising more cash by selling stock than Applied is. This gives Four-Star more cash to invest in research and development of new products and other innovations to enhance the company’s competitiveness. Applied, on the other hand, is paying off debt. That is not necessarily bad for Applied, but Four-Star appears to be a step ahead in terms of financing its operations with owners’ equity and investing the cash in income-producing assets. Chapter 12


289

Ethical Issue Req. 1 Cash flows from operating Without With activities: Reclassification Reclassification Net income…………….. $ 37,000 $37,000 Increase in accounts receivable……………... (80,000) — Net cash (used for) provided by operating activities…. $(43,000) $37,000 Columbia looks better with the reclassification because net cash flow from operations is positive. Req. 2 The issue is whether or not it is ethical to reclassify accounts receivable from current assets to long-term assets.

Req. 3 and Req. 4 The stakeholders are Columbia, its officers, directors and employees, as well as their present and future creditors.

Economic analysis: The plan to reclassify accounts receivable would have an immediate positive impact on Columbia and its employees because it might enable Columbia to obtain the loan it desperately needs. However, this might be to the detriment 290


of present and future creditors, because if Columbia can’t collect the receivables, it may not be able to pay off its loans to creditors. (continued) Ethical case

Legal analysis: To reclassify receivables when, in fact, they are not truly collectible, even in the long run, might leave the company open later to a lawsuit for damages suffered by creditors

who

loan

Columbia

money

based

on

false

information.

Ethical analysis: To reclassify receivables when, in fact, they are not truly collectible in the long run, deprives the banks of accurate information they need to make sound financial decisions.

Reclassification would be unethical if Columbia

expects to collect within the current period. In that case, the reclassification would appear to be designed to create a false picture of cash flow from operations. It is not truthful and not ethical. In the long run, no one benefits from this short-sighted decision.

Req. 5 Chapter 12


291

The receivables should be classified in the way that best describes their collectability. In reality, most bank loan officers who know financial accounting (and most do) will closely examine these receivables classify them as long-term for their own lender analysis.

Req. 6

The reclassification would be ethical if Columbia expects to collect the receivables beyond the current operating cycle, or one year if longer.

292


Focus on Financials: Amazon.com, Inc. (40-50 min.) Req. 1 Indirect method. The statement of cash flows begins with net income. Also, Amazon.com, Inc. does not report collections from customers, payments to suppliers, and so on, which are reported under the direct method. Req. 2 (Amounts in millions) a. This problem requires an analysis of the activity in gross accounts receivable. The account caption is listed as Accounts receivable, net and other, meaning that several items (debit and credit) were netted against one another in order to get the balances listed on the balance sheet. It is necessary first to isolate just the accounts receivable portion of these amounts. In Footnote 1, under Accounts receivable, net and other, it states: “Included in Accounts receivable, net, and other on our consolidated balance sheets are amounts primarily related to vendor receivables and customer receivables. At December 31, 2008 and 2007, vendor Chapter 12


293

receivables, net, were $400 million and $280 million, and customer receivables, net, were $311 million and $296 million.” Immediately below that, under Allowance for doubtful accounts, we find the following: “We estimate losses on receivables based on known troubled accounts, if any, and historical experience of losses incurred. The allowance for doubtful customer and vendor receivables was $81 million and $64 million at December 31, 2008 and 2007.” In order to calculate gross accounts receivable from vendors and customers at the beginning and end of the year, it is necessary to add those two amounts to both beginning and ending balances of the allowance for doubtful accounts as shown in the T-accounts below. Then, add sales revenue to the beginning gross balance ($19,166 from the income statement) , subtract write-offs and subtract the ending balance ($657). The write off figure is calculated by taking the beginning balance of the allowance for doubtful accounts ($64), adding assumed expense (.5% x 19,166) and subtracting the ending balance ($81). Gross Accounts Receivable, Vendors and Customers Beg.Bal ($400+311+ $775 294


$64) Sales (income statement)

End.Bal.($280+296+ $81)

19,16 Write-offs (below) 79 6 Collections ($775+19,166-79-657) 19,205 $657

Allowance for Doubtful Accounts Beg. Bal. $64 Write-offs Doubtful accounts expense: ($64 + 96 - 81) 79 ($19,166 x .005) 96 End. Bal.

$81

b. Using the format provided in Exhibit 12-15: (Amounts in millions) Payments for Cost of Increase in inventory = sales + Inventory −

$14,296

= $14,896 +

($1,399 − $1,200)

Chapter 12

Increase in Accounts Payable

− ($3,594 - $2,795)


295

(continued) Focus on Financials: Amazon.com, Inc. Req. 3 (Amounts in millions) From Note 3 of the Footnotes to Consolidated Financial Statements: Property, Plant, and Equipment, Net Bal., Dec. 31, 2007 543 ($1,023 – 480) Capital spending 333 (investing section, Depreciation (Note 3) statement of cash flows) Acquisitions of other Companies (diff) 289 Bal., Dec. 31, 2008 854 ($1,409 – 555)

311

Req. 4 In 2008, for Amazon.com, Inc., 1. Net income increased from 2007 by $169 million ($645 $476). 2. Total assets increased from 2007 by $1,729 million ($8,314 $6,485). 3. Stockholders’ equity more than doubled from 2007 ($2,672 $1,197)

296


4. Cash flow from operations was almost 3 times net income ($1,697 - $645). Overall, 2008 was a very good year for Amazon.com, Inc.

Chapter 12


297

Focus on Analysis: Foot Locker, Inc. (20-30 min.) (All amounts are in thousands) Req. 1 The main source of cash is sales of short-term investments ($1,620).

This indicates that Foot Locker, Inc.’s basic

operations are not generating enough cash to finance current operations. Fortunately, the company owned trading securities, which they sold in order to raise enough cash to operate during 2007. The main use of cash is purchase of short-term investments ($1,378). This too indicates that Foot Locker’s core operations are not generating enough cash.

However, they still have

enough

to

cash

from

operations

purchase

short-term

investments which will be available next period if they need to be sold. This strategy will work as long as there is excess cash to invest in these types of securities. However, over the longrun, if operations start to use cash rather than generate it, the supply of these securities will be depleted, placing the

298


company in a position of having to borrow short-term funds for operating purposes.

(continued) Focus on Analysis: Foot Locker, Inc. Req. 2 Why net cash provided by operations differs from net income: 1. Non-cash impairment charges and store closing costs (+ $124). These were expenses that did not use cash, so they were added back to net income. 2. Depreciation and amortization (+$166). These expenses decreased net income but didn’t decrease cash. Therefore, cash flow from operations always exceeds net income insofar as depreciation and amortization are concerned. 3. Decrease in deferred income taxes payable (-$129), meaning that the company had to pay these taxes in the current year in addition to its normal income tax expense.

Chapter 12


299

(continued) Focus on Analysis: Foot Locker, Inc. Req. 3 Foot Locker, Inc. bought more fixed assets ($148 million) than it sold (none listed) during fiscal 2007. The amount purchased comes from the investing section of the Consolidated Statements of Cash Flows for 2007.

Req. 4 Cash returned to stockholders during fiscal 2007 (in millions): Dividends……………………………………………… $77 Purchases of treasury stock……………………….. 50 Total…………………………………………………….. $127 Although profits were falling, management apparently felt compelled to continue to pay a cash dividend to shareholders. Established companies often feel this pressure during difficult economic times, in order to bolster confidence on the part of shareholders in management’s ability to lead. In addition, management apparently felt that the purchase of the company’s own stock at a low price was a good use of cash. As explained in Chapter 9, repurchasing treasury stock serves to reduce the number of outstanding shares used in the earnings per share (EPS) calculation, which in turn is a factor in helping increase the price of the company’s common stock.

300


Group Projects (2-3 hours) Student responses will vary on this assignment.

Chapter 12


301

hhtfa8e_ch12_sm

Recommend Documents