PROBLEM 10-3

a. BBB Company
Statement of Cash Flows
For the Year Ended December 31, 2005

Cash flows from operating activities:

Net income $ 500

Noncash expenses, revenues, losses, and
gains included in income:
Depreciation $2,800
Gain on sale of land (800)
Decrease in accounts receivable 400
Decrease in inventory 500
Increase in accounts payable 800
Increase in wages payable 50
Decrease in taxes payable (1,000) 2,750

Net cash flow from operating activities 3,250

Cash flows from investing activities:

Land was sold for 1,800
Equipment was purchased for (3,500)
Net cash used for investing activities (1,700)

Cash flows from financing activities:

Dividends declared and paid (4,350)
Common stock was sold for 3,800
Net cash used for financing activities (550)

Net increase in cash and marketable securities $ 1,000

b. Net cash flow from operating activities was substantially

more than the net income. Cash dividends were greater than
the net cash flow from operating activities.

The cash from issuing the common stock was sufficient to

cover the net cash used for investing activities, increase
the cash and marketable securities accounts, and partially
cover the large cash dividend.

The fact that a long-term source of funds (common stock) was

used to cover part of the cash dividends is a negative
observation. The large cash dividend in relation to net
cash flow from operating activities would also be considered
a negative situation.

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PROBLEM 10-4
Frish Company
a. Schedule of Change From Accrual To
Cash Basis Income Statement

Accrual Basis Adjustments Add(Subtract) Cash

Basis

Net sales $640,000 Increase in accounts

receivable ($27,000) $613,000

Less expenses:
Cost of goods
sold 360,000 Increase in accounts
payable (15,000)
Increase in inven-
tories 35,000
Depreciation expense (15,000) 365,000

Selling and
administrative
expense 43,000 Decrease in prepaid
expenses (1,000)
Increase in accrued
liabilities (3,000)
Depreciation expense (5,000) 34,000

Other expense 2,000 Amortization of

patent (3,000)
Amortization of bond
premium 1,000 -0-
Income before _______
income
taxes 235,000 214,000

Income tax 92,000 Decrease in income

taxes payable 10,000 102,000

Net income $143,000 $112,000

b. (1) Direct Approach

Receipts from customers $613,000

Payments to suppliers (365,000)

Selling and administrative expenses ( 34,000)
Income taxes paid (102,000)
Cash flows from operating activities $112,000
(2) Indirect Approach
Net income $143,000
Add (deduct) items not affecting cash
Depreciation 20,000
Amortization of patent 3,000
Amortization of bond premium (1,000)
Increase in accounts receivable (27,000)
Increase in accounts payable 15,000
Increase in inventories (35,000)
Decrease in prepaid expenses 1,000
Increase in accrued liabilities 3,000
Decrease in income taxes payable (10,000)

Cash flow from operating activities $ 112,00

PROBLEM 10-5

a. The income statement and other selected data for the Boyer
Company is shown below.

Boyer Company
Schedule of Change From Accrual To
Cash Basis Income Statement
For Year Ended December 31, 2005

Add Cash
(Subtract)
Accrual Basis Adjustments Basis

Sales $19,0 Increase in (400) $18,6

00 receivables 00
Less operating
expenses: 2,300 Depreciation (2,300) -0-
Depreciation expense

Increase in
inventories 800
Other operating Increase in
expenses 12,00 accounts (500) 12,30
0 payable 0
Operating income 4,700 6,300

Loss on sale of 1,500 Loss on sale of (1,500) __-0-

land land

Income before tax

expense 3,200 6,300
 Decrease in
Tax expense 1,000 income 400 1,400
taxes payable
Net income $2,20 $4,90
0 0
b. (1) Direct Approach
Receipts from customers $18,600
Payments to suppliers (12,300)
Income taxes paid (1,400)
Cash flow from operating activities $ 4,900

(2)Indirect Approach
Net income $ 2,200
Add (deduct) items not
affecting cash:
Depreciation $2,300
Increase in receivables (400)
Increase in inventories (800)
Increase in accounts payable 500
Loss on sale of land 1,500
Decrease in income taxes payable (400) 2,700
Cash flow from operating activities $ 4,900

PROBLEM 10-6

a. Sampson Company
Statement of Cash Flows
For the Year Ended December 31, 2005

Net cash flow from operating activities:

Net income $19,000

Noncash expenses, revenues, losses, and
gains included in income:
Depreciation expense $10,000
Increase in net receivables ( 7,000)
Increase in inventory (13,000)
Increase in accounts payable 5,000
Decrease in accrued liabilities (17,000)
Net cash outflow from operating
activities (3,000)

Cash flows from investing activities:

Plant assets increase (15,000)

Cash flows from financing activities:

Mortgage payable increase $11,000
Common stock increase 6,000
Dividends paid (21,000)
Net cash flows from financing
activities $( 4,000)

Net decrease in cash $(22,000)

b. Sampson Company
Statement of Cash Flows
For the Year Ended December 31, 2005

Cash flow from customers $138,000

($145,000 - $7,000)

Cash payments to suppliers (123,000)

($108,000 - $10,000 + $13,000 - $5,000 +
$17,000)

Cash outflow for other expenses (6,000)

Tax payments (12,000)

Net cash outflow from operating activities ($

3,000)

Cash flows from investing activities:

Plant assets increase
(15,000)

Cash flows from financing activities:

Mortgage payable increase $11,000
Common stock increase 6,000
Dividends paid (21,000)
Net cash outflow from financing activities
(4,000)

Net decrease in cash

$(22,000)

c. All major segments of cash flows were negative. Net cash

outflow from operating activities was negative by $3,000,
and yet dividends were paid in the amount of $21,000. Also,
the company had a negative cash flow from investing
activities. These negative cash flows were partially made
up for by issuing a mortgage payable ($11,000) and common
stock ($6,000).

PROBLEM 10-7

a. Comment
The usual guideline for the current ratio is two to one.
Arrowbell Company had a 1.14 to 1 ratio in 2004 and a .85 to
1 ratio in 2005. The usual guideline for the acid-test
ratio is one to one. Arrowbell Company had a .68 to 1 ratio
in 2004 and a .49 to 1 ratio in 2005.