M2-21 (20 minutes

)
Net income computation
Service revenue (record when earned) ...............................
$100,000
Wages expense (record when incurred, even if unpaid)...........(40,000)
Net income ................................................................ $ 60,000

($25,000 + $15,000)

Net cash flow computation
Cash inflow from services rendered ............................
$50,000
Cash outflow for wages paid.........................................
(25,000)
Net cash inflow ...............................................................
$25,000

($30,000 + $20,000)

Cash inflow from services rendered will be $50,000 less than service
revenue per the income statement because Healy only collected $50,000 of
revenues in cash but reported $100,000 as revenue. Cash outflow for
wages paid will be $15,000 less than wages expense on the income
statement because $15,000 remained unpaid at year end. The combined
effects of these two items yields an overall difference of $35,000 between
net income and net cash inflow ($60,000 net income - $50,000 + $15,000 =
$25,000 net cash inflows).

M2-22 (15 minutes)
a.

A

b.

L

c.

E

d.

A

e.

L

f.

E

g.

E

h.

L

©Cambridge Business Publishers, 2008
Solutions Manual, Module 2

2-5

..........793) Other retained earnings changes.. $35.......................... 2008 2-6 Financial Accounting for MBAs......... $41......192 (15..............471 M2-25 (15 minutes) Revenues .... Expenses ......... Add: Net income (loss) ................... January 2................................................ The receipt or payment of cash does not affect the recording of revenues.................................. Likewise.......089 (19................................ 10............... 2005 2006 $89.060) $102...... 2006 Retained earnings......... (3.................... Net income. 2005......M2-23 (15 minutes) Beginning retained earnings .......... 2006............. expenses................ Less: Dividends ......... the expense is reported in 2007 when it is incurred—per the matching principle..................223 Add: Net income.......................... Ending retained earnings........ There is no revenue or expenses in 2008 ©Cambridge Business Publishers.455) 0 $69............. and net income... 3rd Edition ...................634 48.....000 200..... January 1.....411 Less: Dividends ......000 $150.....................................................................766 M2-24 (10 minutes) Johnson & Johnson Statement of Retained Earnings For Year Ended January 1...... 2007 $350......................................634 $ 69....................000 2008 $ 0 0 $ 0 Explanation: All of the revenue is reported in 2007 when it is earned—per the revenue recognition principle.................................. (370) Retained earnings..............

000 c.000 Retained Earnings Sales +500 – Cost of Goods Sold = +1.000 cash = Common Stock INV 500 Cash 500 INV 500 Cash 500 b.000 AR 2. 2008 Solutions Manual. Earned = + + ities Capital Capital Revenues – ExpenNet = ses Income – = – = 1.000 Cash 1.000 account Cash receivable -2.000 +1.000 Sales 2.000 on account COGS 500 +2.000 a.000 d.000 Accounts Receivable = -500 +1. Collect $2.M2-26 (15 minutes) Balance Sheet Transaction Cash CS Cash Noncash + Asset Assets Income Statement LiabilContrib. Purchase -500 inventory Cash for $500 cash +500 Inventory = AR 2.000 Cash 2.000 CS 1.500 Inventory INV 500 Cash AR 2.000 Accounts Receivable = – = ©Cambridge Business Publishers.000 2.000 Cash stock for $1. Sell inventory for $2.000 1.000 on +2.000 COGS 500 INV 500 AR 2.000 Sales 2.500 +2. Issue +1. Module 2 2-7 .

......................000 Wage expense......000 Retained earnings.................................. $30......................................... $18........200 Wage expense..............800 Net income.................... $30.....000 Cash ................................... $12....000 Wages payable. $18...... $ 0 Accounts receivable....................................000) Expenses ........................................................000 Net income (loss) ....................... 18.......000 Total liabilities and equity ....... 4...E2-28 (15 minutes) Baiman Corporation Income Statement For Month ended January 31 Baiman Corporation Balance Sheet January Sales..........000 ©Cambridge Business Publishers.....000 Total assets .......... Module 2 2-9 ........................ Rent expense...000 ($4..000 $10.................. 30................. 12.000 + $14........... $30........ 8........... $3....................................... 2008 Solutions Manual................................................000 E2-29 (30 minutes) Demers Company Income Statement For Month Ended March 31 Sales revenue....

Its capital expenditures are significant as the company continues to upgrade its infrastructure to implement new technology to remain competitive with other telecom and cable companies. f. ultimately. Cash is. This signifies a highly capital-intensive industry. short-term rates are typically lower than long-term rates and refinancing might save some interest expense. This is a source of useful information that includes less promotion material than other statements by the company since it is regulated by SEC disclosure rules. ordinarily. ©Cambridge Business Publishers. On the other hand. not be a problem were it not for the company’s significant existing debt load. Depreciation is a non-cash expense so Verizon did not actually use $14. High capital outlays would. to determine how much cash was generated. not by depreciation. Repaying long-term debt with short-term notes is cause for concern.P2-44 (40 minutes) a. lower-rate debt with newer higher-rate debt seems counterproductive. Verizon’s debt repayment obligation for 2005 was nearly $4 billion. net income is too low by the depreciation amount of $14. e. Dividends differ significantly from debt.047. 2008 2-28 Financial Accounting for MBAs. Refinancing with longer term debt would address liquidity concerns.047 depreciation in computing net income. c. Although stock price may fall if the company reduces dividends. Thus. balancing its debt level with the cash flow needs for capital expenditures to support its operating activities and dividends to support its stock price is a difficult challenge facing the company.047 cash to pay depreciation. in addition to the interest expense that is recorded in its income statement. in 2005 interest rates were climbing so repaying older. 3rd Edition . d. However. Dividends are not a contractual obligation until declared by the board of directors. generated by profitable operations. Depreciation is added back to undo the effect it had on the income statement. The MD&A section of the 10-K provides management’s assessment of the operating results and investment activities of the company. b. as this activity does nothing to alleviate the short term demands for cash. The depreciation add-back is twice the level of net income. Although the company is financial strong. shareholders cannot force the company into bankruptcy like debt holders can. Verizon deducted $14. Verizon’s operations generated a significant amount of cash. The depreciation add-back is NOT a source of cash as some mistakenly believe.

000 Cash cash for 155.000 Cash Inventory AR 40.000 Cash 10.000 55.000 INV 80. cost Inventory of inventory $70.000 stock and Cash NP borrowed 55.000 = c.000+100.000 Receivable + $40. paying $10. Module 2 2-29 +30.000 Note Payable +100.000 NP 40.000 Cash 10.000 INV 70.000 Cash 60.000 + +80.000 COGS 70.000 of equipment.000 Cash 60.000 Note Payable INV 80. Purchased Inventory +40.000 + Common Stock – = – = – = 100.000 = Cash PPE +40.000 Cash 80.000 Cost of Goods Sold = 100.000 credit.000 Cash 80. Received $100.000 PPE 50. 2008 Solutions Manual.000 INV 70.000 of inventory for cash -80.000 PPE 50.000 Sales d.000 = +30. Purchased $50. Purchased $80.000 .000 on Cash -70.000 ©Cambridge Business Publishers.000 AR 40.000 a.000 b.000 NP 40.000 COGS 70. Earned Rev+ = + + Assets ities Capital Capital enues – Expenses = Net Income 155.000 cash and $40.000 Accounts cash and +60.000 for $60.000 Retained Earnings Sales – +70.000 100.000 $55.P2-45 (25 minutes) Balance Sheet Cash Transaction Asset Cash NP CS Income Statement Noncash LiabilContrib.000 note payable -10.000 common +155.000 + +50.000 Sales 100.000 CS cash = +55.

000 Wages Payable Retained Earnings +1.000 in wages not yet paid WE 1.000 cash +10. 3rd Edition .000 1.000 PPE 2.000 Retained Earnings +2.500 = Retained Earnings +7.000 -1.500 Prepaid Advertising -7.000 = -2.000 DE PPE 2.000 PPDA 10. WE 15.000 h.000 PPE = -2.000 Cash cash in wages -15.000 -10.500 AE 7.P2-45—continued.000 for future + Prepaid Cash Advertising advertising time = – = f.000 DE 2.000 1.500 e.000 = Retained Earnings – +15. PPDA 10. gross less Accumulated Depreciation.000 -15.000 i.500 of the advertising time in e is aired -7.000 g. $7. ©Cambridge Business Publishers.000 on equipment* -2.000 Cash 10.500 PPDA 7.000 WE WP Employees paid $15. Record depreciation of $2.000 WP = +1.000 Wages Expense = -15.000 Cash 10.500 – Advertising Expense = -7.500 WE 15.500 PPDA 7.000 Cash 15.000 * Property and Equipment.000 2.000 – Wages Expense – Depreciation Expense = -1. Employees earn $1.000 1.000 AE 7. 2008 2-30 Financial Accounting for MBAs.000 Cash 15. Paid $10.

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