406 Financial Statement Analysis

Exhibit 7.1

G O U LD C O R P O R ATI O N
Comparative Balance Sheets
December 31, Year 2 and Year 1

Absolute Value
Year 2 Year 1 of Change
Cash ....................................... $ 75,000 $ 51,000 $ 24,000
Receivables ............................ 48,000 39,000 9,000
Inventory ................................. 54,000 60,000 6,000
Prepaid expenses .................... 6,000 9,000 3,000
Plant assets............................ 440,000 350,000 90,000
Accumulated depreciation ...... (145,000) (125,000) 20,000
Intangible assets .................... 51,000 58,000 7,000
Total assets ............................ $529,000 $442,000

Accounts payable ................... $ 51,000 $ 56,000 5,000

Accrued expenses ................... 18,000 14,000 4,000
Long-term note payable .......... 30,000 0 30,000
Mortgage payable ................... 0 150,000 150,000
Preferred stock........................ 175,000 0 175,000
Common stock ........................ 200,000 200,000 0
Retained earnings................... 55,000 22,000 33,000
Total liabilities and equity....... $529,000 $442,000

Gould’s statement of cash flows is presented in Exhibit 7.3. The operating section begins
with net income of $84,000, which is then adjusted for noncash depreciation and amor-
tization expense. Next, the gain on sale of assets is subtracted to zero it out (the proceeds
will be reflected in net cash flows from investing activities). Finally, changes in current

Exhibit 7.2

G O U LD C O R P O R ATI O N
Income Statement
For Year Ended December 31, Year 2

Sales .................................................. $660,000

Cost of sales ........................................ (363,000)
Gross profit........................................... 297,000
Operating expenses .............................. (183,000)
Depreciation & amortization ................. (35,000)
Gain on sale of asset ............................ 5,000
Net income............................................ $ 84,000
 Chapter Seven | Cash Flow Analysis 407

Exhibit 7.3

G O U LD C O R P O R ATI O N
Statement of Cash Flows
For Year Ended December 31, Year 2

Net income .................................................................. $ 84,000

Add (deduct)
Depreciation and amortization expense....................... 35,000
Gain on sale of assets ................................................. (5,000)
Accounts receivable..................................................... (9,000)
Inventories................................................................... 6,000
Prepaid expenses......................................................... 3,000
Accounts payable ........................................................ (5,000)
Accrued expenses ........................................................ 4,000
Net cash flow from operating activities....................... $113,000
Purchase of equipment................................................ (70,000)
Sale of equipment ....................................................... 7,000
Net cash flows from investing activities...................... (63,000)
Mortgage payable ........................................................ (150,000)
Preferred stock ............................................................ 175,000
Dividends .................................................................... (51,000)
Net cash flows from financing activities ..................... (26,000)
Net increase in cash .................................................... 24,000
Beginning cash ........................................................... 51,000
Ending cash ................................................................ $ 75,000

Note: Assets costing $30,000 were purchased during Year 2 and were
financed in whole by the manufacturer.

assets and liabilities are reflected as cash inflows (outflows) using the matrix presented
above. Gould realized $113,000 in net cash flow from operations in Year 2.
Net cash flows from investing activities include purchases (p) and sales (s) of plant
assets. Purchases can be inferred from the T-account for plant assets (PP&E):

Plant Assets
350,000
(p) 100,000 10,000 (s)
440,000

Beginning with a balance of $350,000, PP&E was reduced by the cost of the asset
sold (s). Net purchases (p), then, can be inferred as the amount necessary to yield the
ending balance of $440,000. Of the $100,000 increase in PP&E, only $70,000 was paid
in cash as the remainder was financed by the manufacturer. Thus, the $70,000 cash pay-
ment appears as purchases in the statement of cash flows. The $30,000 equipment pur-
chase is a noncash investing and financing activity and is not reflected in the body of the
statement of cash flows. Instead, it is referenced in an explanatory footnote.