Intermediate Accounting 19th Edition Stice Solutions Manual 1

Intermediate Accounting 19th Edition
Stice Solutions Manual

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CHAPTER 5
QUESTIONS
1. Cash flow from operations can offer a 3. Operating activities include those transac-
clearer picture of a company’s performance tions and events that enter into the deter-
than does net income when: mination of net income. Cash receipts from
• A company reports large noncash ex- selling goods or from providing services are
penses, such as write-offs, deprecia- the major cash inflow for most businesses.
tion, and provisions for future obliga- Major cash outflows include payments to
tions. Earnings may give an overly purchase inventory and to pay wages,
pessimistic view of the firm. taxes, interest, utilities, rent, and similar
• A company is growing rapidly. Report- expenses.
ed earnings may be positive, but opera- Investing activities are the purchase and
tions are actually consuming rather sale of land, buildings, and equipment and
than generating cash. the purchase and sale of financial instru-
• A company badly needs to report fa- ments not intended for trading purposes.
vorable earnings, as is the case before
a major loan application or before a
stock offering. In these cases, cash
flow from operations provides an excel-
lent reality check for reported earnings.
2. To qualify as a cash equivalent when pre-
paring a statement of cash flows, an item
must be
(a) readily convertible to cash, and
(b) so near its maturity that there is insig-
nificant risk of changes in value due to
changes in interest rates.
As a general rule, only investments with
original maturities of three months or less
qualify. The original maturity is determined
from the date of acquisition of the invest-
ment by the entity, not the date of original
issuance of the security.
Financing activities include transactions easy to apply and because it helps explain or
and events whereby cash is obtained from or reconcile the differences between net cash
repaid to owners (equity financing) and flow from operations and net income.
creditors (debt financing). Because accountants already have to re-
4. The normal pattern of cash flow is port net income, it is easier for them to start
with that number and convert it to net cash
• Operating—positive
flow from operations rather than use the di-
• Investing—negative
rect method.
• Financing—either positive or negative
7. When the direct method is used, deprecia-
5. The direct method reports all operating
tion expense is omitted from the calculation
cash receipts and cash payments. The dif-
of cash from operating activities because it is
ference between cash receipts and pay-
a noncash expense. When the indirect
ments is the net cash flow from operations.
method is used, depreciation expense is
The indirect method begins with net income
added back to net income because depre-
as reported on the income statement, ad-
ciation was subtracted in the original com-
justs for any noncash items (such as de-
putation of net income.
preciation), and converts the accrual
amounts to a cash basis. The result of this 8. The statement, “Cash flow is equal to net
reconciliation process is net cash flow from income plus depreciation” is wrong be-
operations, which will be exactly the same cause it ignores the impact on cash from
amount as derived using the direct method. operating activities of all the changes in
6. Many users favor the direct method be- current operating assets and current oper-
cause it is a straightforward approach that ating liabilities.
is easy to understand. Most accountants
prefer the indirect method because it is
145
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146 Chapter 5 Chapter 5 146
9. The FASB treats interest payments as an 230 can be provided in the notes to the fi-
operating activity in order to be consistent nancial statements or in separate sched-
with the income statement presentation. ules accompanying the statement of cash
The FASB defines interest payments as flows.
operating activities because interest ex-
15. Significant noncash investing and financing
pense enters into the calculation of net in-
transactions (e.g., the purchase of land by
come. The FASB considered classifying in-
issuing capital stock) are to be reported in
terest payments as financing activities but
the notes to the financial statements or in a
ultimately decided on the operating activity
separate schedule accompanying the cash
classification.
flow statement. Because these transactions
10. The “target number” is the net change in do not affect cash, they should not be re-
the cash balance, as shown in the balance ported on the statement of cash flows itself.
sheet. The sum of cash flows from operat-
ing, investing, and financing activities 16. Under FASB ASC Topic 230, interest paid
should equal the net change in cash. is classified as an operating activity.
11. Cost of goods sold, combined with the change 17. Cash from operations is usually larger than
in the inventory balance, reveals how much net income. This is because of the large
inventory was purchased during the year. number of noncash expenses included in the
Inventory purchases, coupled with the income statement, such as depreciation,
change in the accounts payable balance write-downs, and restructuring charges.
for the year, are used to calculate the 18. When the value of a company’s cash flow
amount of cash paid for inventory pur- adequacy ratio is less than 1.0, that com-
chases. pany is not generating enough cash from
12. A loss on the sale of a long-term asset is operations to pay for all new plant and
omitted from the calculation of cash from equipment purchases. Accordingly, the
operating activities when using the direct company has no cash left over to repay
method. When the indirect method is used, loans or to distribute to investors.
the loss is added back to net income be- 19. The income statement details the transac-
cause the loss was subtracted in the origi- tions that occurred in temporary accounts
nal computation of net income. In both that are summarized in the retained earn-
cases, any effects of the sale of the long- ings account. The statement of cash flows
term asset are removed from the computa- provides information relating to transactions
tion of operating cash flow; cash received that occurred in the cash account for the
from the sale of long-term assets is report- period.
ed as an investing activity.
20. A forecasted statement of cash flows al-
13. The FASB has defined all transactions lows management to see the relationship
involving available-for-sale and held-to- between forecasted operating cash flow
maturity securities as investing activities. and the cash needed for investing activities.
Transactions involving trading securities If there is an expected shortfall in available
are usually included in the Operating Activi- cash, a company can either use the
ties section. forecasted information in obtaining ad-
14. If the direct method is used, a separate ditional financing or the company can scale
schedule must be presented to reconcile back its expansion plans in order to reduce
net income to net cash provided by (used the drain on cash.
in) operating activities. If a company elects to 21. Lenders can use a forecasted statement of
use the indirect method, the amounts paid cash flows to see whether it seems likely that
during the period for interest and income a company can continue to meet its ex- isting
taxes should be disclosed. Regard- less of debt obligations. An investor can use the
the method used for reporting operating projected cash flow statement to evalu- ate
cash flows, companies must disclose any the likelihood that a company will be able to
significant noncash investing and financing continue making dividend payments.
transactions. The supplemental disclosures
required by FASB ASC Topic
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PRACTICE EXERCISES
PRACTICE 5–1 CLASSIFYING CASH FLOWS
1. Cash flows from operating activities:

Cash receipts from:
Customers ($50,000 cash sales + $38,000 collections) ......... $ 88,000
Cash payments for:
Inventory..................................................................................... (39,000)
Interest........................................................................................ (16,000)
Operating lease.......................................................................... (19,000)
Rent............................................................................................. (11,000)
Net cash flows provided by operating activities .................... $ 3,000
2. Cash flows from investing activities:

Cash paid to purchase equipment........................................... $ (84,000)
Cash receipt from sale of machine .......................................... 12,000
Net cash flows used in investing activities............................. $ (72,000)
3. Cash flows from financing activities:

Cash receipt from sale of stock ............................................... $240,000
Cash payment for dividends .................................................... (15,000)
Net cash flows provided by financing activities..................... $225,000
PRACTICE 5–2 CASH AND CASH EQUIVALENTS
(a) Not cash equivalent because it is an equity investment; no maturity date.

(b) Cash equivalent of $5,700 because time to maturity at date of purchase was less
than three months.
(c) Cash of $3,400.
(d) Not cash equivalent because time to maturity at date of purchase was greater
than three months.
$5,700 + $3,400 = $9,100
PRACTICE 5–3 THREE CATEGORIES OF CASH FLOWS
Cash Inflow
Operating (Outflow)
(d) Cash collected from customers .................................................. $13,400
(b) Cash paid for interest................................................................... (600)
(f) Cash paid for income taxes......................................................... (1,850)
Total........................................................................................................ $10,950
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PRACTICE 5–3 (Concluded)
Investing
(a) Cash received from sale of a building ........................................ $ 4,200
Financing
(c) Cash paid to repurchase shares of stock (treasury stock) ...... $ (1,100)
(e) Cash paid for dividends ............................................................... (930)
Total ........................................................................................................ $ (2,030)
PRACTICE 5–4 CASH FLOW PATTERNS
Company A start up, high-growth

Company B cash cow
Company C steady-state
PRACTICE 5–5 NONCASH INVESTING AND FINANCING ACTIVITIES
Noncash
Investing Financing (Disclose only)
(a) $(40,000) $ 0 $ 80,000
(b) 0 0 67,000
(c) 0 0 100,000
(d) 0 56,000
(30,000)
Total $(40,000) $ 26,000
PRACTICE 5–6 GENERAL FORMAT FOR A STATEMENT OF CASH FLOWS
Cash flow from operating activities ........................................ $ 6,200

Cash flow from investing activities ......................................... (9,400)
Cash flow from financing activities......................................... 5,000
Net increase in cash.................................................................. $ 1,800
Cash balance, beginning of year ............................................. 2,800
Cash balance, end of year ........................................................ $ 4,600
PRACTICE 5–7 CASH COLLECTED FROM CUSTOMERS
Accounts receivable, beginning .............................................. $ 1,375

Plus: Sales ................................................................................. 10,000
Cash available for collection.................................................... $11,375
Less: Accounts receivable, ending ......................................... (1,400)
Cash collected from customers............................................... $ 9,975
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PRACTICE 5–8 CASH PAID FOR INVENTORY PURCHASES
Inventory, ending ....................................................................... $ 2,500

Plus: Cost of goods sold........................................................... 5,300
Required inventory .................................................................... $ 7,800
Less: Beginning inventory........................................................ (2,100)
Inventory purchased this year.................................................. $ 5,700
Accounts payable, beginning ................................................... $ 1,200

Plus: Inventory purchased this year ........................................ 5,700
Accounts to be paid................................................................... $ 6,900
Less: Accounts payable, ending .............................................. (1,350)
Cash paid for inventory purchases.......................................... $ 5,550
PRACTICE 5–9 CASH PAID FOR OPERATING EXPENSES
Prepaid operating expenses, ending ....................................... $1,000

Plus: Operating expenses......................................................... 3,800
Required cash outlay for operating expenses........................ $4,800
Less: Prepaid operating expenses, beginning ....................... (700)
Cash paid for operating expenses this year ........................... $ 4,100
PRACTICE 5–10 DIRECT METHOD

Statement of
Income Statement Adjustments Cash Flows
Sales $7,800 + 320 $8,120

Cost of goods sold (3,100) + 180 (3,130)
– 210
Interest expense (450) + 80 (370)
Depreciation expense (600) + 600 0
Net income $ 3,650 $ 4,620
Direct Method:
Cash collected from customers ............................................... $ 8,120
Cash paid for inventory purchases.......................................... (3,130)
Cash paid for interest ................................................................ (370)
Net cash flow from operating activities ................................... $ 4,620
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PRACTICE 5–11 INDIRECT METHOD

Statement of
Sales $7,800 + 320 $8,120

Cost of goods sold (3,100) + 180 (3,130)
– 210
Interest expense (450) + 80 (370)
Depreciation expense (600) + 600 0
Net income $ 3,650 $ 4,620
Indirect Method:
Net income ................................................................................. $3,650
Plus: Depreciation.................................................................... 600
Plus: Decrease in accounts receivable.................................. 320
Plus: Decrease in inventory .................................................... 180
Less: Decrease in accounts payable ...................................... (210)
Plus: Increase in interest payable .......................................... 80
Net cash flow from operating activities .................................. $4,620
PRACTICE 5–12 COMPLETE STATEMENT OF CASH FLOWS FROM DETAILED

DATA
Operating activities:
(f) Cash collected from customers ....................................................... $10,000
(b) Cash paid to purchase inventory ..................................................... (7,800)
(d) Cash paid for interest ........................................................................ (450)
(j) Cash paid for income taxes .............................................................. (1,320)
Net cash flow from operating activities ................................................... $ 430
Investing activities:
(c) Cash received from sale of a building ............................................. $ 5,600
(k) Cash paid to purchase machinery ................................................... (1,950)
Net cash flow from investing activities.................................................... $ 3,650
Financing activities:
(e) Cash paid to repay a loan ................................................................. $ (1,000)
(h) Cash received from issuance of new shares of common stock ... 1,200
(i) Cash paid for dividends .................................................................... (780)
Net cash flow from financing activities.................................................... $ (580)
Net increase in cash................................................................................... $ 3,500
Cash balance, beginning of year .............................................................. 1,500
Cash balance, end of year ......................................................................... $ 5,000
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PRACTICE 5–13 OPERATING CASH FLOW: GAINS AND LOSSES
Net income.................................................................................. $ 250

Plus: Depreciation ..................................................................... 1,000
Less: Gain on sale of equipment.............................................. (440)
Plus: Loss on sale of building .................................................. 210
Less: Increase in accounts receivable .................................... (300)
Less: Decrease in income taxes payable ................................ (170)
Net cash flow from operating activities ................................... $ 550
PRACTICE 5–14 OPERATING CASH FLOW: RESTRUCTURING CHARGES
Net income.................................................................................. $ 500

Plus: Depreciation ..................................................................... 1,000
Plus: Restructuring charge....................................................... 2,300
Plus: Decrease in inventory...................................................... 300
Plus: Increase in wages payable .............................................. 170
Net cash flow from operating activities ................................... $4,270
PRACTICE 5–15 OPERATING CASH FLOW: DEFERRED INCOME TAXES
Reported income tax expense ................................................................... $32,000

Less: Increase in deferred tax liability...................................................... (3,500)
Taxes owed for current year operations................................................... $28,500
Less: Increase in income taxes payable .................................................. (390)
Cash paid for income taxes ....................................................................... $28,110
PRACTICE 5–16 OPERATING CASH FLOW: DEFERRED, OR UNEARNED, SALES

REVENUE
Sales............................................................................................................. $10,000
Plus: Accounts receivable, beginning ...................................................... 1,430
Less: Deferred sales revenue, beginning (cash already collected)....... (750)
Cash available for collection this year ..................................................... $10,680
Less: Accounts receivable, ending........................................................... (1,250)
Plus: Deferred sales revenue, ending (collected for future years) ........ 1,000
Total cash collections from customers .................................................... $10,430
PRACTICE 5–17 OPERATING CASH FLOW: PREPAID OPERATING EXPENSES
Cash paid for depreciation......................................................................... $ 0
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Cash paid for insurance:

Prepaid insurance, ending................................................................ $ 1,500
Plus: Insurance expense................................................................... 7,500
Required cash outlay for insurance................................................. $ 9,000
Less: Prepaid insurance, beginning ................................................ (1,430)
Cash paid for insurance this year .................................................... $ 7,570
Cash paid for wages:

Wages payable, beginning................................................................ $ 750
Plus: Wage expense this year .......................................................... 14,600
Wages to be paid ............................................................................... $15,350
Less: Wages payable, ending........................................................... (600)
Cash paid for wages this year .......................................................... $14,750
Cash paid for operating expenses: $0 + $7,570 + $14,750 = $22,320
PRACTICE 5–18 COMPUTING CASH PAID TO PURCHASE PROPERTY, PLANT,

AND EQUIPMENT
PPE, beginning ......................................................................... $124,000

Less: PPE sold during the year .............................................. 28,000
Ending PPE without purchase of new PPE ........................... $ 96,000
PPE, ending .............................................................................. $134,000

Less: Ending PPE without purchase of new PPE ................. 96,000
Cash paid to purchase new PPE ............................................ $ 38,000
This assumes that all PPE purchases were for cash.
PRACTICE 5–19 COMPUTING CASH RECEIVED FROM THE SALE OF PROPERTY,

PLANT, AND EQUIPMENT
Accumulated depreciation, beginning ................................... $41,000

Plus: Depreciation expense .................................................... 13,000
Ending accumulated depreciation without PPE sale............ $54,000
Less: Actual ending accumulated depreciation.................... 32,000
Accumulated depreciation associated with PPE sold.......... $22,000
Original cost of PPE sold ........................................................ $28,000

Accumulated depreciation associated with PPE sold.......... 22,000
Book value of PPE sold ........................................................... $ 6,000
Book value of PPE sold ........................................................... $ 6,000

Plus: Gain on sale of PPE........................................................ 6,500
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Cash received from sale of PPE ............................................. $12,500
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PRACTICE 5–20 COMPUTING CASH PAID FOR DIVIDENDS
Retained earnings, beginning................................................. $106,000

Plus: Net income ...................................................................... 10,000
Ending retained earnings without dividend declarations.... $116,000
Less: Actual ending retained earnings.................................. 112,000
Dividends declared during the year ....................................... $ 4,000
Dividends declared during the year ....................................... $ 4,000

Plus: Decrease in dividends payable..................................... 250
Cash paid for dividends this year .......................................... $ 4,250
PR CTICE 5–21 COMPUTING CASH FLOW RATIOS
1. Cash-flow-to-net-income
Cash flow from operating activities............................... $ 21,000
Net income ....................................................................... ÷ $18,000
Cash-flow-to-net-income ratio ....................................... 1.17
2. Cash flow adequacy

Cash paid for capital expenditures................................ $ 23,500
Cash paid for acquisitions.............................................. 11,000
Cash required for investing activities ........................... $ 34,500
Cash required for investing activities ........................... ÷ $34,500
Cash flow adequacy ratio ............................................... 0.61
3. Cash times interest earned

Cash paid for interest...................................................... 3,800
Cash paid for income taxes............................................ 6,700
Operating cash flow before interest and taxes ............ $ 31,500
Cash paid for interest...................................................... ÷ $3,800
Cash times interest earned ratio.................................... 8.29
PRACTICE 5–22 ARTICULATION
a. Cash increased by $9,000 during the year ($21,000 – $12,000)

Cash from operating activities ....................................... $ ?
Cash from investing activities ....................................... (25,000)
Cash from financing activities ....................................... (8,000)
Increase in cash............................................................... $ 9,000
Cash from operating activities = $42,000
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b. At the beginning of the year: Assets = Liabilities + Owners’ equity

$239,000 = $117,000 + ?
Owners’ equity at the start of the year = $122,000 of which $21,000 represents
common stock and $101,000 represents retained earnings.
Dec. 31 Retained earnings = Jan. 1 Retained earnings + Net income – Dividends
$105,000 = $101,000 + Net income – $8,000
Net income = $12,000
PRACTICE 5–23 PREPARING A FORECASTED STATEMENT OF CASH FLOWS
Operating activities:
Net income........................................................................ $ 2,275
Plus: Depreciation.......................................................... 1,200
Less: Increase in accounts receivable ......................... (180)
Less: Increase in inventory ........................................... (390)
Plus: Increase in accounts payable ............................. 150
Net cash flow from operating activities ................................. $3,055
Investing activities:
Cash paid for PPE purchases
($1,300 PPE increase
+ $1,200 depreciation replacement)............................... (2,500)
Financing activities:
New long-term debt ......................................................... $ 1,000
New paid-in capital .......................................................... 400
Cash paid for dividends
($1,500 + $2,275 − $1,850 = $1,925) ................................ (1,925)
Net cash flow from financing activities.................................. (525)
Net increase in cash................................................................. $ 30
Cash, beginning ....................................................................... 100
Cash, ending............................................................................. $ 130
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EXERCISES
5–24. (a) Operating activity
(b) Operating activity
(c) Operating activity
(d) Financing activity
(e) Financing activity
(f) Financing activity
(g) Operating activity
(h) Financing activity
(i) Investing activity
(j) Investing activity
(k) Operating activity
(l) Operating activity
(m) Operating activity
(n) Operating activity
(o) Noncash transaction; report separately
(p) Noncash item; ignore under direct method; add back to net income un-
der indirect method
(q) Investing activity
(r) Investing activity
5–25. (a) The purchase of securities classified as available-for-sale is reported as

cash used to acquire those securities, an investing activity.
(b) The acquisition of buildings for $60,000 should be reported as a use of
cash from investing activities. The balance ($150,000) is a significant
noncash transaction that should be reported separately in the notes or
an accompanying schedule to the statement of cash flows.
(c) The purchase of business assets is reported as an investing activity as
follows:
Cash was used to:
Purchase inventory .............................................. $16,700
Purchase furniture and fixtures .......................... 8,400
Purchase land and buildings............................... 20,100
Purchase goodwill................................................ 9,000 $54,200
Note that the entire amount of the business purchase is reported as a
cash outflow from investing activities even though some of the assets
($16,700 in inventory) are operating assets.
(d) The declaration of dividends is not reported as a use of cash because
this had no effect on cash. When the dividend payable is paid, the cash
outflow will be shown as a financing activity.
(e) The decrease in Accounts Payable is reported as an item to be deduct- ed
in computing net cash flow provided by (used in) operations. Cash
payments for purchases includes payment for purchases of the previ- ous
period.
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5–26. (a) $14,000 of cash used to purchase equipment; $16,000 of cash provided
from sale of equipment. Both are investing activities. (Note: The $2,000
loss on sale would be added to net income when using the indirect
method.)
Equipment
Beginning balance 62,000 Sale of equipment 21,000
Purchase of equipment 14,000
Ending balance 55,000
(b) No cash is provided or used by depreciation; however, $4,100 is added

to net income for yearly depreciation in showing net cash flow provided
by operations when using the indirect method.
Accumulated Depreciation
Sale of equipment 3,000 Beginning balance 12,800
Depreciation for year 4,100
Ending balance 13,900
(c) $5,000 ($25,000 – $20,000) of cash used to pay off a portion of long-term
debt, a financing activity.
(d) $4,000 ($16,000 – $12,000) of cash provided from issuance of common

stock, a financing activity.
5–27.
Statement of
Sales $ 278,700 – 3,200 $ 275,500
Cost of goods sold (197,000) + 1,760 (195,990)
– 750
Depreciation expense (16,700) + 16,700 0
Salaries expense (35,200) + 150 (35,050)
Other expenses (24,300) No adjustment (24,300)
Net income $ 5,500 $ 20,160
(a) Operating activities:

Cash collected from customers $275,500
Cash paid for inventory $195,990
Cash paid for salaries 35,050
Cash paid for other expenses 24,300 255,340
Net cash provided by operating activities $ 20,160
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5–27. (Concluded)
(b) Operating activities:

Net income $ 5,500
Adjustments:
Depreciation $16,700
Decrease in inventory 1,760
Increase in salaries payable 150
Increase in accounts receivable (3,200)
Decrease in accounts payable (750) 14,660
Net cash provided by operating activities $20,160
5–28.
Statement of
Sales $ 675,400 – 5,000 $ 670,400

Cost of goods sold (243,500) – 5,800 (248,000)
+ 1,300

Salaries expense (124,600) No adjustment (124,600)
Interest expense (11,300) – 400 (11,700)
Income taxes expense (44,000) + 1,800 (42,200)
Other expenses (98,700) + 1,100 (97,600)
Net income $ 102,300 $ 146,300
(a) Operating activities:

Cash collected from customers $670,400
Cash paid for inventory $248,000
Cash paid for salaries 124,600
Cash paid for interest 11,700
Cash paid for income taxes 42,200
Cash paid for other expenses 97,600 (524,100)
(b) Operating activities:

Net income $102,300
Adjustments:
Depreciation $ 51,000
Increase in accounts payable 1,300
Increase in income taxes payable 1,800
Decrease in prepaid expenses 1,100
Increase in accounts receivable (5,000)
Increase in inventory (5,800)
Decrease in interest payable (400) 44,000
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5–29.
Carter Corporation
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income ................................................................... $ 55,000
Adjustments:
Depreciation expense .............................................. $ 7,000
Amortization of patent.............................................. 4,000
Gain on sale of land.................................................. (6,000)
Decrease in accounts receivable ............................ 2,100
Increase in inventory................................................ (1,200)
Increase in accounts payable.................................. 1,500 7,400
Net cash provided by operating activities ................ $ 62,400
Cash flows from investing activities:
Proceeds from sale of land......................................... $ 35,000
Purchase of equipment............................................... (33,200)
Net cash provided by investing activities................. 1,800
Cash flows from financing activities:
Retirement of long-term debt ..................................... $(40,000)
Issuance of bonds ....................................................... 30,000
Issuance of common stock ........................................ 25,000
Payment of dividends ................................................. (22,500)
Net cash used in financing activities ........................ (7,500)
Net increase in cash....................................................... $ 56,700
Cash balance at beginning of year ............................... 82,800
Cash balance at end of year.......................................... $139,500
5–30.

Net income .................................................................. $35,500
Adjustments:
Depreciation expense ............................................. $ 7,000
Increase in accounts receivable ............................ (2,150)
Decrease in accounts payable ............................... (2,500)
Increase in inventories............................................ (4,500)
Increase in other current liabilities ........................ 2,000
Decrease in prepaid insurance .............................. 800 650
Net cash provided by operating activities ............... $36,150
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5–31.

Sales $ 7,200,000 $(420,000) $ 6,780,000 Increase in receiva-
bles
Cost of goods (3,500,000) 110,000 (2,764,000) Decrease in
sold inventories
170,000 Increase in trade
payables
420,000 Amount of deprecia-
tion related to
manufacturing
36,000 Increase in accrued
expenses related to
manufacturing
Selling, general, (2,300,000) 12,000 (2,023,000) Increase in accrued
and administra- expenses related to
tive expenses selling
(15,000) Increase in prepaid
selling expense
280,000 Amount of deprecia-
tion related to selling
Income taxes (500,000) 54,000 (446,000) Increase in taxes
payable
Net income $ 900,000 $ 1,547,000 Cash from operating
activities
5–32.

Net income ............................................................... $ 75,000
Adjustments:
Depreciation ........................................................ $50,000
Amortization ........................................................ 20,000
Decrease in accounts receivable ...................... 7,000
Increase in inventory .......................................... (5,000)
Increase in accounts payable ............................ 4,500
Decrease in interest payable ............................. (800) 75,700
Net cash provided by operating activities ............ $150,700
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5–33.

Cash receipts from customers........................... $457,000 (a)
Cash payments for:
Inventory............................................................ $275,500 (b)
Operating expenses ......................................... 24,800 (c)
Interest............................................................... 6,000 (d) 306,300
Net cash provided by operating activities ........ $150,700
COMPUTATIONS:
(a) Sales .................................................................. $450,000
+ Beginning accounts receivable .................. 22,000
– Ending accounts receivable........................ (15,000)
= Cash receipts from customers.................... $457,000
(b) Cost of goods sold (except depreciation)...... $275,000
+ Ending inventory .......................................... 40,000
– Beginning inventory..................................... (35,000)
= Purchases ..................................................... $280,000
+ Beginning accounts payable....................... 47,500
– Ending accounts payable ............................ (52,000)
= Cash paid for inventory ............................... $275,500
(c) Sales .................................................................. $450,000
Cost of goods sold (except depreciation)...... 275,000
Gross margin .................................................... $175,000
Less expenses .................................................. 100,000*
Net income ........................................................ $ 75,000
*$175,000 gross margin – $75,000 net income = $100,000
Expenses ........................................................... $100,000
Less noncash items:
Depreciation expense.................................... $ 50,000
Amortization expense ................................... 20,000 70,000
$ 30,000
Less: Interest expense ..................................... (5,200)
Cash paid for operating expenses.................. $ 24,800
(d) Interest expense on short-term debt for year $ 5,200
+ Beginning interest payable ......................... 1,200
– Ending interest payable ............................... (400)
= Cash paid for interest .................................. $ 6,000
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5–34.
1. Cash collected from accounts receivable:

Accounts receivable, beginning balance............................. $ 372,000
Sales in 2015 ........................................................................... 3,946,000
Total collectible accounts...................................................... $4,318,000
Less: Accounts receivable, ending balance........................ 409,000
Cash collected in 2015 ........................................................... $ 3,909,000
2. Cash paid on accounts payable:
Inventory, ending balance ..................................................... $ 289,000
Add: Cost of goods sold in 2015 .......................................... 2,385,000
Total goods available in 2015................................................ $2,674,000
Less: Inventory, beginning balance ..................................... 304,000
Inventory purchases in 2015 ................................................. $ 2,370,000
Accounts payable, beginning balance ................................. $ 174,000
Add: Inventory purchases in 2015 ........................................ 2,370,000
Total accounts to be paid in 2015 ......................................... $2,544,000
Less: Accounts payable, ending balance ............................ 191,000
Total cash paid on accounts payable in 2015 ..................... $ 2,353,000
3. Cash dividend payment:
Retained earnings, beginning balance................................. $ 211,000
Add: Net income, 2015 ........................................................... 769,000
$ 980,000
Less: Retained earnings, ending balance............................ 525,000
Total dividends declared ....................................................... $ 455,000
Less: Increase in dividends payable .................................... 65,000
Total cash dividend payment in 2015................................... $ 390,000
4. Cash receipts not provided by operations:
Cash provided from financing:
Notes payable* ($210,000 – $106,000) .................................. $ 104,000
Common stock ($625,000 – $600,000) .................................. 25,000
Cash receipts not provided by operations .......................... $ 129,000
5. Cash payments for assets not reflected in operations:
Available-for-sale securities.................................................. $ 400,000
Property, plant, and equipment* ($656,000 – $541,000) ..... 115,000
Cash payments for assets not reflected in operations ...... $ 515,000
*If the notes payable mentioned in (4) were issued as direct payment for the
property, plant, and equipment in (5), this transaction would be a noncash
transaction and would be disclosed separately from the cash flow statement.
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5–35.
Goulding Manufacturing Company

Statement of Cash Flows (Indirect method)
Net income .................................................................. $450,700
Adjustments:
Depreciation expense ............................................. $ 70,000
Intangible assets amortization ............................... 10,000
Increase in accounts receivable ............................ (19,000)
Increase in inventory............................................... (18,000)
Decrease in accounts payable ............................... (23,400)
Increase in interest payable ................................... 5,900
Increase in wages payable ..................................... 7,000 32,500
Net cash provided by operating activities ............... $483,200
Purchase of machinery .............................................. $ (62,000)
Net cash used in investing activities........................ (62,000)
Retirement of long-term debt .................................... $(500,000)
Sale of common stock ............................................... 160,000
Payment of dividends ................................................ (22,000)
Net cash used in financing activities ....................... (362,000)
Net increase in cash and cash equivalents ................ $ 59,200
Cash and cash equivalents at beginning of year....... 130,000
Cash and cash equivalents at end of year.................. $189,200
5–36.
1. Dec. 31 Accounts receivable = Jan. 1 Accounts receivable + Sales on

account – Cash collections
Dec. 31 Accounts receivable = $75,000 + $540,000 – $551,000
Dec. 31 Accounts receivable = $64,000
2. Dec. 31 Accounts payable = Jan. 1 Accounts payable + Inventory pur-

chased on account – Cash paid for inventory
$56,000 = $44,000 + $279,000 – Cash paid for inventory
Cash paid for inventory = $267,000
3. Dec. 31 Inventory = Jan. 1 Inventory + Inventory purchased on account

– Cost of goods sold
$72,000 = $83,000 + $279,000 – Cost of goods sold
Cost of goods sold = $290,000
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5–37.
1. Dec. 31 Retained earnings = Jan. 1 Retained earnings + Net income – Dividends

$665,000 = $543,000 + Net income – $47,000
2. Dec. 31 Cash = Jan. 1 Cash + Cash from operating activities + Cash from invest-
ing activities + Cash from financing activities
$141,000 = $97,000 + Cash from operating activities – $483,000 – $287,000
Cash from operating activities = $814,000
5–38.
2015 2014
1. Cash-flow-to-net-income ratio 0.85 2.43
(Cash from operations ÷ Net income)
2. Cash flow adequacy ratio 0.69 1.01
(Cash from operations ÷ Cash paid for purchase of fixed assets)
3. Cash times interest earned ratio 2.69 8.66
[(Cash from operations + Cash paid for interest and taxes) ÷
Cash paid for interest]
5–39.
1.
2016
Income Statement 2015 Forecasted
Sales $3,000 $3,600 given
Cost of goods sold 1,200 1,440 40% of sales,
same as last year
Gross profit $1,800 $2,160
Depreciation expense 100 140 20% of PP&E,
same as last year
Other operating expenses 1,440 1,728 48% of sales,
same as last year
Operating profit $ 260 $ 292
Interest expense 50 40 10% of bank loan,
same as last year
Income before taxes $ 210 $ 252
Income taxes 84 101 40% of pretax,
same as last year
Net income $ 126 $ 151
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5–39. (Concluded)
2.

Net income .................................................................. $ 151
Adjustments:
Depreciation ............................................................. $ 140
Increase in other current assets ............................ (90)
Increase in accounts payable................................. 38 88
Net cash provided by operating activities ............... $ 239
Purchase of property, plant, and equipment ........... $(340) (a)

Cash flowsused
Net cash from in
investing activities:
investing activities........................ (340)
Repayment of bank loans payable ........................... $(100) (b)

Cash flows of
Issuance from financing
common activities:
stock ....................................... 209 (c)
Net cash provided by financing activities................ 109
Net increase in cash and cash equivalents ................ $ 8
Cash and cash equivalents at beginning of year....... 40
Cash and cash equivalents at end of year.................. $ 48
COMPUTATIONS:
(a) Beginning property, plant, and equipment ........... $500
Less: Depreciation expense ................................... 140
$360
Ending property, plant, and equipment................. 700
Difference (assets purchased) ............................... $340
(b) Beginning bank loans payable ............................... $500
Ending bank loans payable .................................... 400
Decrease (bank loans repaid)................................. $100
(c) Beginning stockholders’ equity ............................. $300
Plus: Increase from forecasted net income .......... 151
Less: Decrease from forecasted cash dividends (0)
Total stockholders’ equity with no new stock ...... $451
Ending stockholders’ equity .................................. 660
Increase (common stock issued)........................... $209
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5–40.
1.
2016
Balance Sheet 2015 Forecasted
Cash $ 10 $ 15 50% natural increase
Other current assets 250 375 50% natural increase
Property, plant, and equipment, net 800 800 more efficient, item (b)
Total assets $1,060 $1,190
Accounts payable $ 100 $ 150 50% natural increase

Bank loans payable 700 900 New loan of $200, item (c)
Total stockholders’ equity 260 140 To balance
Total liabilities and stockholders’ equity $1,060 $1,190
2.
2016
Sales $1,000 $1,500 Given, item (a)
Cost of goods sold 750 1,125 75% of sales,
same as last year
Gross profit $ 250 $ 375
Depreciation expense 40 40 5% of PP&E,
same as last year
Other operating expenses 80 120 8% of sales,
same as last year
same as last year
Income taxes 20 42 33.3% of pretax,
same as last year
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5–40. (Concluded)
3.
Net income .................................................................. $ 83
Adjustments:
Depreciation expense ............................................. $ 40
Increase in other current assets ............................ (125)
Increase in accounts payable................................. 50 (35)
Net cash provided by operating activities ............... $ 48
Purchase of property, plant, and equipment ........... $ (40) (a)

Cash flowsused
Net cash from in
investing activities:
investing activities........................ (40)
New bank loans payable ............................................ $ 200 (b)

Cash flows from
Repurchase of financing activities:
common stock .................................. (203) (c)
Payment of cash dividends ....................................... (0)
Net cash used by financing activities ...................... (3)
COMPUTATIONS:
(a) Beginning property, plant, and equipment ........... $ 800
$ 760
Ending property, plant, and equipment................. 800
Difference (assets purchased) ............................... $ 40
(b) Beginning bank loans payable ............................... $ 700

Ending bank loans payable .................................... 900
Increase (new bank loans) ...................................... $ 200
(c) Beginning stockholders’ equity ............................. $ 260

Plus: Increase from forecasted net income .......... 83
Less: Decrease from forecasted cash dividends (0)
Total stockholders’ equity with no new stock ...... $ 343
Ending stockholders’ equity .................................. 140
Decrease (common stock repurchased) ............... $(203)
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PROBLEMS
5–41.
Statement of
Sales $1,530,600 – 25,000 $1,505,600

Interest revenue 17,250 + 150 17,400
Cost of goods sold (895,400) – 14,750 (916,950)
– 6,800
General expenses (255,400) – 3,600 (261,250)
– 2,250
Salaries expense (114,300) + 4,450 (109,850)
Interest expense (12,500) – 200 (12,700)
Income tax expense (85,500) + 1,750 (83,750)
Loss on sale of equipment (9,500) + 9,500 0
Net income $ 151,750 $ 138,500

Cash collected from customers ...................... $1,505,600
Cash received for interest ............................... 17,400 $1,523,000
Cash paid for inventory ................................... $ 916,950
Cash paid for general expenses ..................... 261,250
Cash paid for salaries ...................................... 109,850
Cash paid for interest....................................... 12,700
Cash paid for income taxes............................. 83,750 1,384,500
Net cash provided by operating activities ..... $ 138,500

Net income ............................................................... $ 151,750
Add: Depreciation expense .................................. $23,500
Loss on sale of equipment.......................... 9,500
Decrease in interest receivable .................. 150
Increase in salaries payable........................ 4,450
Increase in income taxes payable .............. 1,750 39,350
Less: Increase in accounts receivable ................. $25,000
Increase in inventory ................................... 14,750
Decrease in accounts payable.................... 6,800
Decrease in interest payable....................... 200
Increase in prepaid general expenses ....... 3,600
Decrease in accrued general expenses ..... 2,250 (52,600)
Net cash provided by operating activities ............ $ 138,500
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5–42.
Tanzanite Imporium
Statement of Cash Flows (Indirect Method)
Net income ................................................................................... $ 92,200
Adjustments:
Depreciation .............................................................................. $ 21,500
Increase in accounts receivable ............................................. (7,000)
Decrease in inventory .............................................................. 35,300
Decrease in supplier short-term notes payable .................... (30,000)
Increase in accounts payable.................................................. 12,000 31,800
Net cash provided by operating activities ................................ $124,000
Purchase of equipment* ............................................................. $(40,000)
Net cash used in investing activities......................................... (40,000)
Retirement of bonds.................................................................... $(60,000)
Payment of dividends ................................................................. (15,000)
Net cash used in financing activities ........................................ (75,000)
Net increase in cash and cash equivalents ................................. $ 9,000
Cash and cash equivalents at beginning of year........................ 33,000
Cash and cash equivalents at end of year................................... $ 42,000
*An additional $20,000 of equipment was purchased with a long-term note.
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5–43.
1.
Glassett Produce Company Statement of
Cash Flows (Indirect Method) For the Year
Ended June 30, 2015
Net income ................................................................................... $ 32,000
Adjustments:
Depreciation expense .............................................................. $ 21,000
Amortization of patent ............................................................. 3,000
Decrease in inventories ........................................................... 6,300
Increase in accounts payable ................................................. 10,000 31,100
Net cash provided by operating activities ................................ $ 63,100
Proceeds from sale of investment............................................. $ 7,200
Purchase of equipment .............................................................. (18,000)
Net cash used in investing activities ........................................ (10,800)
Retirement of bonds payable..................................................... $(65,000)
Borrowed on long-term notes.................................................... 15,000
Issuance of capital stock............................................................ 45,000
Purchase of treasury stock ........................................................ (5,000)
Net increase in cash ...................................................................... $ 13,300
Cash balance at beginning of year............................................... 22,000
Cash balance at end of year ......................................................... $ 35,300
2. Apparently, Glassett tried to restructure its financing mix by issuing capital stock
and by borrowing on long-term notes. The proceeds from these transactions were
used to retire outstanding bonds payable. Glassett’s cash from operations was
sufficient to cover both expenditures for long-term assets and cash dividend
payments. This excess is a good indication to anyone considering lending money
to, or investing in, Glassett.
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5–44.
Orlando Company
Net income ................................................................................. $375,000
Adjustments:
Depreciation and amortization .............................................. $ 197,000
Gain on sale of equipment..................................................... (6,000)
Increase in accounts receivable ........................................... (229,000)
Increase in inventories........................................................... (275,000)
Increase in trade notes payable ............................................ 167,000
Increase in accounts payable................................................ 124,000
Decrease in income taxes payable ....................................... (34,000) (56,000)
Net cash provided by operating activities ........................... $319,000
Proceeds from sale of equipment............................................ $ 20,000
Purchase of equipment............................................................. (434,000)
Net cash used in investing activities....................................... (414,000)
Increase in long-term debt ....................................................... $ 57,000
Issuance of common stock ...................................................... 184,000
Payment of dividends ............................................................... (49,000)
Purchase of treasury stock ...................................................... (52,000)
Net cash provided by financing activities............................... 140,000
Net increase in cash..................................................................... $ 45,000
Cash balance at beginning of year ............................................. 120,000
Cash balance at end of year........................................................ $165,000
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5–45.
Black Iron, Inc.

Statement of Cash Flows (Direct Method)
Cash receipts from customers .............................................. $ 308,000 (a)
Cash payments for:
Inventory ............................................................................... $(123,000)
Rent........................................................................................ (42,000) (165,000)
Net cash provided by operating activities ............................ $ 143,000
Purchase of equipment .......................................................... $(287,000)
Sale of machine....................................................................... 26,000
Net cash used in investing activities .................................... (261,000)
Issuance of stock .................................................................... $ 580,000
Payment of dividends ............................................................. (52,000)
Net cash provided by financing activities ............................ 528,000 (b)
Net increase in cash .................................................................. $ 410,000
Cash balance at beginning of year........................................... 79,000
Cash balance at end of year ..................................................... $ 489,000
(a) Cash sales of $210,000; collection of accounts receivable, $98,000.

(b) Land valued at $425,000 was acquired by issuing a $400,000 bond at a premium of
$25,000. Because this is a noncash transaction, it is not reported on the cash flow
statement.
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5–46.
Bond and Wallin

Net income ................................................................................... $ 22,000
Adjustments:
Decrease in accounts receivable ............................................ 2,800
Increase in inventory................................................................ (14,400)
Decrease in prepaid expenses ................................................ 1,250
Increase in accrued expenses................................................. 2,300
Decrease in accounts payable ................................................ (10,450) (3,500)
Net cash flow provided by operating activities ........................ $ 18,500
Purchase of furniture*................................................................. $ (3,200)
Net cash used in investing activities......................................... (3,200)
Investment by Ryan Bond .......................................................... $ 2,200
Withdrawal by Trent Wallin ........................................................ (15,000)
Net increase in cash and cash equivalents ................................. $ 2,500
Cash and cash equivalents at beginning of year........................ 12,500
Cash and cash equivalents at end of year................................... $ 15,000
* Total cost of furniture was $24,500; a long-term note for $21,300 was issued for the
balance.
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5–47.
Sparkling Cleaner Company Statement of

Cash Flows (Indirect Method) For the Year
Ended December 31, 2015
Net income ................................................................................... $ 7,450
Adjustments:
Gain on sale of equipment ...................................................... (900)
Increase in inventory ............................................................... (2,100)
Decrease in prepaid insurance ............................................... 120
Increase in accounts payable ................................................. 800
Decrease in income taxes payable ......................................... (900)
Decrease in wages payable..................................................... (1,050) 870
Net cash provided by operating activities ................................ $ 8,320
Sale of equipment ....................................................................... $ 1,700
Purchase of equipment .............................................................. (7,200)
Net cash used in investing activities ........................................ (5,500)
Issuance of capital stock............................................................ $ 1,500
Payment of notes payable.......................................................... (4,500)
Net decrease in cash and cash equivalents................................ $(5,050)
Cash and cash equivalents at beginning of year ....................... 3,950
Cash and cash equivalents at end of year .................................. $(1,100)
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5–48.
1. Novations, Inc.
Statement of Cash Flows (Direct Method)
Cash receipts from customers............................................ $698,600(a)
Cash payments for:
Inventory............................................................................. $367,800 (b)
Operating expenses .......................................................... 176,800 (c)
Interest expense ................................................................ 3,800 (d)
Income taxes ...................................................................... 33,600 (e) 582,000
Net cash provided by operating activities ......................... $116,600
Sale of long-term investments ............................................ $ 12,800 (f)
Sale of equipment................................................................. 3,000 (g)
Purchase of equipment........................................................ (12,000)(h)
Net cash provided by investing activities.......................... 3,800
Sale of treasury stock .......................................................... $ 6,000 (i)
Long-term note principal payment ..................................... (8,000)(j)
Net cash used by financing activities ................................ (2,000)
Net increase in cash and cash equivalents .......................... $118,400
Cash and cash equivalents at beginning of year................. 58,000
Cash and cash equivalents at end of year............................ $176,400
COMPUTATIONS:
(a) Cash receipts from customers:
Accounts receivable at beginning of year ......................................... $ 26,600
Add: Sales on account ......................................................................... 704,000
Total accounts to be collected ............................................................ $730,600
Less: Accounts receivable at the end of year ................................... 32,000
Total cash received from customers .................................................. $698,600
(b) Cash payments for inventory:
Inventory at end of year ....................................................................... $ 21,000
Add: Cost of goods sold ...................................................................... 368,000
Total goods available for sale ............................................................. $389,000
Less: Inventory at beginning of year .................................................. 25,400
Purchases for the year on account..................................................... $363,600
Add: Accounts payable at the beginning of year .............................. 11,200
Total accounts to be paid .................................................................... $374,800
Less: Accounts payable at the end of year........................................ 7,000
Total cash paid for inventory............................................................... $367,800
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5–48. (Continued)
(c) Cash payments for operating expenses:

Operating expenses .................................................................................. $185,000
Less: Noncash item: Depreciation expense ........................................... (7,000)
Less: Interest expense reported separately ........................................... (2,800)
Add: Prepaid insurance at the end of year ............................................. 5,600
Less: Prepaid insurance at beginning of year........................................ (4,000)
Total cash paid for operating expenses.................................................. $176,800
(d) Cash payments for interest:
Interest expense ........................................................................................ $ 2,800
Add: Interest payable at beginning of year............................................. 2,000
Less: Interest payable at end of year ...................................................... (1,000)
Total cash paid for interest....................................................................... $ 3,800
(e) Cash payments for income taxes:
Income tax expense .................................................................................. $ 37,600
Add: Income taxes payable at beginning of year................................... 8,000
Less: Income taxes payable at end of year ............................................ (12,000)
Total cash paid for income taxes............................................................. $ 33,600
(f) Cash receipts from sale of long-term investments:
Long-term investments at beginning of year ......................................... $ 16,800
Less: Long-term investments at end of year.......................................... 6,000
Long-term investments sold during year................................................ $ 10,800
Add: Gain on sale of long-term investments.......................................... 2,000
Total cash receipts on sale of long-term investments .......................... $ 12,800
(g) Cash receipts from sale of equipment ....................................................... $ 3,000
[As given in problem, loss on sale ($1,000) would affect net
income but not cash flow from sale.]
(h) Cash payments to purchase equipment:
Equipment at beginning of year............................................................... $ 66,000
Less: Equipment sold ............................................................................... 10,000
Total ............................................................................................................ $ 56,000
Equipment at end of year.......................................................................... 80,000
Difference is amount of equipment purchased ...................................... $ 24,000
Paid for by issuing common stock ($10,000 + $2,000) .......................... 12,000*
Total cash paid to purchase equipment.................................................. $ 12,000
*The issuance of common stock (including the increase in Paid-ln Capital) is a

significant financing activity but does not involve cash, and so it is not reported
directly on the cash flow statement.
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5–48. (Concluded)
(i) Cash receipts from sale of treasury stock:

Treasury stock (at cost) at beginning of year ........................................ $20,000
Less: Treasury stock (at cost) at end of year ........................................ 10,000
Treasury stock sold during year ............................................................. $10,000
Less: Reduction in retained earnings since treasury stock sold
at less than cost ..................................................................................... 4,000
Total cash receipts from sale of treasury stock .................................... $ 6,000
(j) Cash payments to reduce long-term notes payable:
Long-term notes payable at beginning of year...................................... $24,000
Long-term notes payable at end of year................................................. 16,000
Total cash payments to reduce principal amounts of long-term
notes........................................................................................................ $ 8,000
2. The lack of dividend payment may not seem appropriate under the current cir-
cumstances for Novations, Inc. The cash balance has increased to more than
three times the beginning-of-the-year balance. Furthermore, this increase has
resulted primarily from operating activities, and the receivable and payable
balances seem reasonable. It appears that Novations has the necessary cash
and is in a good cash flow position to consider paying a cash dividend. It may be,
however, that the company is planning other future activities, such as plant ex-
pansion, that would require considerable cash. Under those circumstances, the
company may not wish to pay cash dividends this year.
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5–49.
1. Novations, Inc.
Income Statement
Sales..................................................................................................................... $704,000
Cost of goods sold ............................................................................................. 368,000
Gross profit.......................................................................................................... $336,000
Operating expenses............................................................................................ 185,000
Operating income ............................................................................................... $151,000
Gains and losses:
Loss on sale of equipment.............................................................................. (1,000)
Gain on sale of long-term investments.......................................................... 2,000
Income before income taxes.............................................................................. $152,000
Income tax expense............................................................................................ 37,600
Net income........................................................................................................... $114,400
2. Novations, Inc.
Net income .................................................................................. $114,400
Adjustments:
Depreciation expense ............................................................. $ 7,000
Loss on sale of equipment ..................................................... 1,000
Gain on sale of long-term investments................................. (2,000)
Increase in accounts receivable ............................................ (5,400)
Decrease in inventory ............................................................. 4,400
Increase in prepaid insurance................................................ (1,600)
Decrease in accounts payable ............................................... (4,200)
Decrease in interest payable.................................................. (1,000)
Increase in income taxes payable ......................................... 4,000 2,200
Net cash provided by operating activities ............................... $116,600
Sale of long-term investments.................................................. $12,800 (a)
Sale of equipment ...................................................................... 3,000 (b)
Purchase of equipment ............................................................. (12,000) (c)
Net cash provided by investing activities ............................... 3,800
Sale of treasury stock................................................................ $ 6,000 (d)
Long-term note principal payment ........................................... (8,000) (e)
Net cash used in financing activities ....................................... (2,000)
Net increase in cash and cash equivalents................................ $118,400
Cash and cash equivalents at beginning of year ...................... 58,000
Cash and cash equivalents at end of year ................................. $176,400
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5–49. (Concluded)
COMPUTATIONS:
(a) Cash receipts from sale of long-term investments:
Long-term investments at beginning of year........................................... $16,800
Less: Long-term investments at end of year ........................................... 6,000
Long-term investments sold during year ................................................. $10,800
Add: Gain on sale of long-term investments ........................................... 2,000
Total cash receipts on sale of long-term investments............................ $12,800
(b) Cash receipts from sale of equipment* ....................................................... $ 3,000
*As given in problem, loss on sale ($1,000) would affect net income but not cash
flow from sale.
(c) Cash payments to purchase equipment:
Equipment at beginning of year ................................................................ $66,000
Less: Equipment sold ................................................................................ 10,000
Total ............................................................................................................. $56,000
Equipment at end of year........................................................................... 80,000
Difference is amount of equipment purchased ....................................... $24,000
Paid for by issuing common stock ($10,000 + $2,000)............................ 12,000*
Total cash paid to purchase equipment ................................................... $12,000
*Note: The issuance of common stock (including the increase in Paid-ln Capital)
is a significant financing activity but does not involve cash, and so it is not re-
ported directly on the cash flow statement.
(d) Cash receipts from sale of treasury stock:
Treasury stock (at cost) at beginning of year .......................................... $20,000
Less: Treasury stock (at cost) at end of year .......................................... 10,000
Treasury stock sold during year ............................................................... $10,000
Less: Reduction in retained earnings because treasury stock sold at
less than cost ........................................................................................... 4,000
Total cash receipts from sale of treasury stock ...................................... $ 6,000
(e) Cash payments to reduce long-term notes payable:
Long-term notes payable at beginning of year........................................ $24,000
Long-term notes payable at end of year................................................... 16,000
Total cash payments to reduce principal amounts of long-term notes $ 8,000
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5–50.
1. Dec. 31 Prepaid rent = Jan. 1 Prepaid rent + Cash paid for rent – Rent expense
Dec. 31 Prepaid rent = $8,000 + $27,000 – $22,000
Dec. 31 Prepaid rent = $13,000
2. Note that wages payable increased by $6,000 during the year. This is evidenced
by the addition of the change in wages payable. As a result, the beginning bal-
ance in the wages payable account was $17,000 ($23,000 – $6,000).
3. Dec. 31 Inventory = Jan. 1 Inventory + Inventory purchased on account – Cost of

goods sold
$54,000 = $41,000 + $230,000 – Cost of goods sold
Cost of goods sold = $217,000
4. Dec. 31 Wages payable = Jan. 1 Wages payable + Wages expense – Cash paid
for wages
$23,000 = $17,000 + Wages expense – $81,000
Wages expense = $87,000
5. Net income = Sales – Cost of goods sold – Wages expense – Rent expense –
Other expenses
Net income = $485,000 – $217,000 [from part (3)] – $87,000 [from part (4)] –
$22,000 – $121,000
6. Dec. 31 Accounts receivable = Jan. 1 Accounts receivable + Sales on account –

Cash collected from customers
$72,000 = $65,000 + $485,000 – Cash collected from customers
Cash collected from customers = $478,000
7. Dec. 31 Accounts payable = Jan. 1 Accounts payable + Inventory purchased on

account – Cash paid for inventory
$44,000 = $52,000 + $230,000 – Cash paid for inventory
Cash paid for inventory = $238,000
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5–51.
1. 2015 2014
Net income......................................................... $ 59,000 $ 50,000
+ Depreciation expense ................................. 57,000 51,000
– Increase in other current assets/
+ Decrease in other current assets .............. (60,000) (30,000)
+ Increase in current liabilities/
– Decrease in current liabilities .................... 55,000 (20,000)
Net cash from operating activities .................. $ 111,000 $ 51,000
2. 2015 2014
Cash ................................................................... $ 85,000 $115,000
Other current assets......................................... 480,000 420,000
Current liabilities............................................... 325,000 310,000
2015 2014
Net income......................................................... $ 59,000 $ 50,000
+ Decrease in other current assets .............. (60,000) (30,000)
– Decrease in current liabilities .................... 15,000 20,000
3. 2015 2014
Cash ................................................................... $ 85,000 $115,000
Other current assets ........................................ 480,000 380,000
Current liabilities............................................... 325,000 270,000
2015 2014
Net income......................................................... $ 59,000 $ 50,000
+ Decrease in other current assets ............. (100,000) 10,000
– Decrease in current liabilities .................... 55,000 (20,000)
4. As these examples illustrate, cash from operations can be manipulated easily by

delaying payments or purchases until after the end of the period. However, the
examples also illustrate that total cash flow cannot be manipulated—total cash
flow for the years 2015 and 2014 is $162,000 in all three examples. The manipu-
lations only have the effect of shifting cash flow from one period to another.
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5–52.
1. 2015 2014 2013 2012

Net income.......................................................... $ 90 $ 90 $ 90 $ 90
+ Depreciation expense .................................. 40 40 40 40
± Change in accounts receivable .................. (15) 30 0 (20)
± Change in inventory..................................... (10) 25 (15) 5
± Change in accounts payable....................... 30 0 (20) 15
Net cash from operating activities ................... $135 $185 $ 95 $130
2. “Cash flow” (net income + depreciation) is $130 each year.
3. When working capital (current assets – current liabilities) is relatively constant,

the net cash from operations is about the same as the cash flow measure. This is
the case in 2015 and 2012 in the example. Firms that are not growing would ex-
pect to have a stable level of working capital. For such firms, “net income + de-
preciation” is a reasonable approximation for cash flow from operations.
If working capital is increasing, part of the cash generated by operations must be
used to finance the additional working capital. This will cause cash flow from op-
erations to be less than “net income + depreciation.” This is the case in 2013 in the
example. Working capital is often increasing in high-growth firms and in firms
that are having trouble collecting receivables or moving inventory.
If working capital is decreasing, extra cash is freed up in addition to the cash
generated by operations. This will cause cash flow from operations to be greater
than “net income + depreciation.” This is the case in 2014 in the example. Work-
ing capital can be decreased by any combination of the following actions:
increase receivable collection efforts, reduce inventory levels, allow payable
levels to increase.
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5–53.
1. 2015 2014
a. Return on sales 10.2% 10.0%
b. Return on assets 8.8% 8.7%
c. Return on equity 27.1% 26.6%
d. Cash-flow-to-net-income ratio 1.34 2.33
e. Cash flow adequacy ratio 0.77 1.43
f. Cash times interest earned ratio 9.7 16.2
2. According to the traditional accrual accounting measures, Drury Lane per-

formed better in 2015—return on sales, assets, and equity are all higher in 2015
than in 2014. However, using the cash flow ratios, Drury Lane performed better
in 2014. From an operating cash flow perspective, Drury Lane’s performance de-
teriorated significantly in 2015.
3. When companies are preparing to issue stock or apply for new loans, they have
an incentive to bias the financial statements to look as good as possible. One way
to detect this bias is to examine the relationship between net income, which can
be influenced by accrual accounting assumptions, and cash from operating
activities, which is not affected by accrual accounting assumptions. It appears
that Drury Lane’s net income increased in 2015 even while cash from operating
activities was decreasing. It is important that Drury Lane be able to explain this
divergence to potential investors.
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5–54.
1.
2016
Balance Sheet 2015 Forecasted
Cash $ 40 $ 48 20% natural increase

Other current assets 350 420 20% natural increase
Property, plant, and equipment, net 1,000 800 $1,000 – $200;
no replacements
Total assets $1,390 $1,268
Accounts payable $ 100 $ 120 20% natural increase

Bank loans payable 1,000 1,000 no new loans, item (c)
Paid-in capital 100 (147) to balance
Retained earnings 190 295 $190 + $120 – $15
Total liabilities and stockholders’ equity $1,390 $1,268
2016
Sales $1,000 $1,200 given, item (a)
Cost of goods sold 350 420 35% of sales,
same as last year
Gross profit $ 650 $ 780
Depreciation expense 200 200* same as last year;
no replacements
Other operating expenses 250 300 25% of sales,
same as last year
same as last year
Income taxes 20 40 25% of pretax,
same as last year
*One could also argue that depreciation expense will be lower in 2016 because the net
amount of property, plant, and equipment will decline.
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5–54. (Concluded)

Net income................................................................. $ 120
Adjustments:
Depreciation expense........................................... $ 200
Increase in other current assets ......................... (70)
Increase in accounts payable.............................. 20 150
Net cash provided by operating activities.............. $ 270
Purchase of property, plant, and equipment.......... $ (0) (a)
Net cash used in investing activities ...................... (0)
New bank loans payable........................................... $ 0
Repurchase of common stock................................. (247) (b)
Payment of cash dividends...................................... (15)
Net cash used in financing activities ...................... (262)
COMPUTATIONS:
(a) Beginning property, plant, and equipment ........... $1,000
$ 800
Less: Ending property, plant, and equipment ...... 800
Difference (assets purchased) ............................... $ 0
(b) Beginning paid-in capital ........................................ $ 100
Ending paid-in capital ............................................. (147)
Change (common stock repurchased) .................. $ (247)
2. Payment of cash dividends involves distributing an equal amount of cash for each
share owned. Repurchase of shares of stock channels the cash to shareholders
who are the least optimistic about the prospects of the company. Because they are
the least optimistic, they are the shareholders who offer their shares for sale when
the company announces a stock repurchase.
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5–55.
1. The correct answer is c. Because accounts receivable increased during the peri-
od, that indicates that the amount collected was less than the amount sold during
the period—in this case, by $12,000.
Ending accounts receivable = Beginning accounts receivable + Sales – Cash col-
lected from customers
$437,000 = $425,000 + Sales – $1,263,000
Sales = $1,275,000
2. The correct answer is b. A decrease in accounts receivable is added to net in-

come indicating that more cash was collected than was reported on the income
statement. An increase in inventory is subtracted from net income indicating that
more inventory was purchased than was reported as Cost of Goods Sold on the
income statement. An increase in Accounts Payable is added to net income indi-
cating that less inventory was paid for than was reported on the income state-
ment.
Net income + Decrease in A/R – Increase in inventory + Increase in A/P = Cash
from operations
$174,000 + $2,000 – $16,000 + $10,000 = $170,000
3. The correct answer is b. An increase in interest payable indicates that less inter-
est was paid during the period than was reported as interest expense on the in-
come statement. Interest expense was determined by the FASB to be an operat-
ing activity.
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CASES
Discussion Case 5–56
This case provides an opportunity to clarify several points with respect to the preparation of a statement
of cash flows. First, no cash is associated with depreciation if taxes are ignored. Depreciation is the write-
off of the cost of a depreciable asset. The entry debiting Depreciation Expense and crediting Accumulated
Depreciation does not involve cash. Cash was involved when the asset was acquired and will be if the asset
is later sold, but the entry to record depreciation is a noncash item. Second, depreciation must be added
back to cash from operations if net income is used as a beginning point because it has been subtracted
as an expense in deriving net income. If only expenses involving cash have been subtracted from revenues,
depreciation would not need to be considered at all. This is also true for other noncash items, such as a
restructuring charge.
The finance professor is probably thinking of depreciation as a source of cash in the sense that deprecia-
tion expense reduces taxable income, which conserves cash because less taxes are paid. However, even
when taxes are considered, depreciation is not a source of cash. It may be considered a “conserver” of
cash, but the source of cash is revenues from operations. Otherwise, if there were no revenues, there would
not be any taxable income and, thus, no taxes to be paid.
The finance professor might also be confused because depreciation is added to net income in calculating
cash flow from operations when using the indirect method. This would not be the first time that accounting
has confused a finance professor.
This case provides an opportunity to contrast income with cash flows and to discuss the importance of the
cash flow statement. Even if a company is profitable, if it is investing its cash in additional inventory, build-
ings, and so on, it could find itself in a tight cash position.
Several factors would have to be examined, especially those dealing with the major inflows and outflows
of cash. For example, what obligations are outstanding? Is equity financing being used? Has the cash
balance increased or decreased significantly during the last year? How was the new store financed? Can
profit distributions to the owners be postponed? Also, the timing of cash flows would be important.
Two specific recommendations might deal with the need for a periodic statement of cash flows and per-
haps a cash flow projection statement. Such statements are likely to be needed more than annually, es-
pecially if the business activity is seasonal.
The accumulation of cash despite paying dividends equal to earnings, could be explained by two factors:
1. Cash from operations and net income will differ to the extent that revenues are not received in cash
or expenses are not paid in cash. For example, the existence of a large amount of depreciation ex-
pense causes cash from operations to be greater than net income.
2. Other activities in addition to operations can affect the Cash balance. For example, cash is in-
creased by borrowing, issuing stock, and selling assets. Cash can be decreased by debt repayment,
distributions to owners, and purchase of assets. This is the reason that a statement of cash flows
shows cash inflows and outflows classified by operating, investing, and financing activities.
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This case focuses on the most controversial issue the FASB faced when it issued pre-Codification State-
ment No. 95 (now FASB ASC Topic 230): whether to require the direct method or the indirect method in
determining net cash flow from operations. The FASB finally decided, by a 4–3 vote, to allow either meth-
od. In making that decision, the FASB disappointed some financial statement users who argued
strongly that the direct method should be required because it is more easily understood. Company man-
agement, accountants, and other preparers, on the other hand, argued that the indirect method is easier
to apply and that it helps explain or reconcile the differences between net income and net cash flow from
operations.
In discussing the case, students should recognize both the pros and cons of the two alternative methods.
They should also recognize that the two methods produce the same result: the same amount of net cash
flow from operations. Another point to be made is that the rest of the statement of cash flows, other than
the Operations section, will be identical regardless of which method is selected.
A final point to be made is that certain disclosures are required, depending on which method is selected.
If the direct method is used, a separate schedule must be provided that reconciles net income to net cash
flow from operations. In effect, this is what the indirect method does. If the indirect method is used, the
amount of interest and income taxes paid must be disclosed. This information is supplied directly when
the direct method is used.
Most preparers would recommend the indirect method because it is easier (and probably less costly) to
apply. By choosing the indirect method, the reconciliation schedule is already prepared and the additional
required disclosures for interest and taxes paid can be supplied without much additional effort. In the United
States, approximately 95% of large corporations use the indirect method.
Roberts should explain to Dennis that net income and cash flow are not the same thing. Net income is
measured on an accrual basis, not a cash basis. Roberts could prepare a statement of cash flows to sup-
port the explanation.
As shown in the statement, depreciation of $5,000 did not require a cash outlay and is thus added back to
net income in determining operating cash flows. Changes in the current operating accounts, however,
must be subtracted in deriving the amount of cash from operations. The increase in receivables indicates
that collections from customers were $10,000 less than sales reported in the income statement. The
$5,000 increase in inventory and the $5,000 decrease in accounts payable indicate that the amount paid
to suppliers during the year was $10,000 more than cost of goods sold on the income statement. The net
effect of depreciation and changes in current operating accounts is net cash provided by operating activi-
ties of $5,000.
The statement of cash flows also shows that while Dennis obtained $40,000 from borrowing, $32,000 was
paid to purchase equipment and $15,000 was used to pay dividends to stockholders. When cash flows from
operating, investing, and financing activities are combined, the $2,000 net decrease in cash is fully
explained.
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Discussion Case 5–60 (Concluded)
Dennis, Inc. Statement of

Cash Flows
Net income ................................................................................................... $ 20,000
Adjustments:
Depreciation expense ............................................................................... $ 5,000
Increase in accounts receivable................................................................ (10,000)
Increase in inventory ................................................................................. (5,000)
Decrease in accounts payable .................................................................. (5,000) (15,000)
Net cash provided by operating activities..................................................... $ 5,000
Purchase of equipment ................................................................................ $(32,000)
Net cash used in investing activities ............................................................ (32,000)
Issuance of long-term note........................................................................... $ 40,000
Payment of dividends ................................................................................... (15,000)
Net cash provided by financing activities ..................................................... 25,000
Net decrease in cash ..................................................................................... $ (2,000)
Cash at beginning of year................................................................................ 5,000
Cash at end of year........................................................................................ $ 3,000
Atlas Security has gone from a company producing positive cash flows to one using cash to operate the
company. The negative cash flows from operations preceded the reporting of negative income by one year.
This indicates that perhaps current noncash operating assets, such as accounts receivable, were increasing
and producing net income but not producing cash.
The positive financing cash flows mean that Atlas Security is either borrowing or selling stock to provide
cash to run the business. Financing inflows can continue only so long. If the inflows are from debt, the
source of debt will diminish. If the inflows are from stock, the decline in income will make the sale of stock
less desirable.
The positive investing cash flows mean that the financing inflows are not being used to make additional
investments. Instead, the investment assets are being liquidated to provide operating cash.
In summary, Atlas Security seems to be heading into difficult financial times. Cash is being obtained from
whatever sources possible to meet operating needs. To completely analyze the company, Kara should
obtain and review the balance sheet and the income statement. These statements can be used to deter-
mine the reasonableness of the assumptions made earlier. All three statements are useful for analyzing a
company. Each one provides information that can be used to analyze the health of an organization.
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The “net income + depreciation” definition of cash flow has been widely used. The W. T. Grant case illus-
trates that, in some circumstances, this “cash flow” measure can be very misleading. For the fiscal year
ended January 31, 1973, W. T. Grant experienced sharp increases in receivables and inventory. These
increases combined to cause Grant’s cash flow from operations to be negative even though “net income
+ depreciation” was positive. In general, defining cash flow as “net income + depreciation” ignores the
important impact that changes in current operating assets and current operating liabilities can have on cash
flow generated by operations.
When working capital (current assets – current liabilities) is relatively constant, cash from operations is
about the same as “net income + depreciation.” Firms that are not growing would be expected to have a
stable level of working capital. If working capital is increasing, part of the cash generated by operations
must be used to finance the additional working capital. This will cause cash flow from operations to be
less than “net income + depreciation.” Working capital is usually increasing in high-growth firms and in firms,
such as W. T. Grant, that are having trouble collecting receivables or moving inventory.
If working capital is decreasing, extra cash is freed up in addition to the cash generated by operations.
This will cause cash flow from operations to be higher than “net income + depreciation.”
Case 5–63
1. Disney uses the indirect method. The statement begins with net income and then makes adjust-
ments for noncash items and for changes in balance sheet accounts related to operations.
2. Disney has the normal pattern of positive cash from operations and negative cash from investing
activities in each of the three years. In all three years, Disney’s cash from operations was large enough
to pay for all investing activities. However, for the year 2010, Disney’s cash from operations was not
large enough to pay for all investing AND financing activities. As a result, Disney has a net decrease
in cash and cash equivalents for 2010.
3. In Note 2 to the financial statements, Disney reports that cash and cash equivalents “consist of cash
on hand and marketable securities with original maturities of three months or less.”
4. The largest dollar item in the Operating Activities section of Disney’s 2011 statement of cash flows is
the $1.841 billion addition labeled “depreciation and amortization.” This represents the expensing of
property, plant, and equipment and intangible assets over their useful lives for the current year, but it
does not involve any outflow of cash.
5. Operating cash flow for 2011 would have been $9.712 billion ($6.994 + $0.377 + $2.341) if interest
and taxes paid were not classified as operating items.
6. EBITDA can be computed as follows (in billions):
Income from continuing operations before income taxes
(from the income statement) $ 8.043
Add back net interest expense (from the income statement) 0.343
Add back depreciation and amortization (from the cash flow statement) 1.841
EBITDA $10.227
The EBITDA of $10.227 billion differs from the $9.712 billion answer in (5) because the computation of
EBITDA does not take into consideration many of the accruals associated with the computation of net
income. Changes in receivables, inventories, and payables are ignored in the computation of EBITDA.
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Case 5–64
2011 2010 2009

1. a. Net income plus depreciation.................................................... $3,663 $3,930 $3,987
b. Cash flow from operating activities ........................................... 4,253 3,801 3,487
c. Cash flow from operating activities
Plus cash paid for interest
Plus cash paid for income taxes ............................................... 5,301 4,944 4,759
d. Cash flow from operating activities
Less capital expenditures
Less dividends .......................................................................... 2,344 2,012 1,727
2. In order to maintain its long-run potential, a company must consistently replace property, plant, and
equipment and maintain a stable cash dividend level for investors. The cash flow number computed
in part (1)(d)—cash flow from operating activities – capital expenditures – dividends—is a measure
of how much free cash flow Lockheed generates after maintaining its long-run potential.
3. Someone considering a leveraged buyout (LBO) is interested in the cash flow from the operations of
the business before payment of financing costs. This is the cash flow before payments for interest
and income taxes are subtracted. So, an LBO candidate would be particularly interested in the cash
flow numbers calculated in part (1)(c)—cash flow from operating activities + cash paid for interest +
cash paid for income taxes.
Case 5–65
1. a. Increases and decreases in Cash for each year are as follows:

2011 2010 2009 2008
Cash from operating activities...................... $ 9,474 $ 9,532 $ 8,186 $ 7,571
Cash from investing activities ...................... (2,524) (4,405) (4,149) (2,363)
Cash from financing activities ...................... (2,279) (3,515) (2,293) (3,985)
Net increase (decrease) in cash ............... $ 4,671 $ 1,612 $ 1,744 $ 1,223
Cash balance at December 31, 2011, approximately equals the balance at January 1, 2008, plus
the four yearly changes:
$4,093 + $1,223 + $1,744 + $1,612 + $4,671 = $13,343
b. Paid-In Capital from Common Stock at December 31, 2011, approximately equals the balance at
January 1, 2008, plus the four yearly amounts of common stock issued:
$8,258 + $586 + $662 + $1,666 + $1,569 = $12,741
c. Retained Earnings at December 31, 2011, equals the balance at January 1, 2008, plus the four
yearly net income amounts less the four yearly cash dividend amounts:
Four-year net income: $5,874 + $6,906 + $11,859 + $8,634 = $33,273
Four-year dividends: $3,521 + $3,800 + $4,068 + $4,300 = $15,689
December 31, 2011, retained earnings: $36,235 + $33,273 – $15,689 = $53,819
d. Treasury Stock at December 31, 2011, approximately equals the balance at January 1, 2008,
plus the four yearly amounts of treasury stock purchases:
$23,375 + $1,079 + $1,518 + $2,961 + $4,513 = $33,446
2. The December 31, 2011, balance in the treasury stock account exceeds the total paid-in capital from
common stock account by approximately $20.7 billion. This means that the amount used to repur-
chase Coca-Cola shares is almost three times the amount that Coca-Cola shareholders invested in
the first place. And this is in addition to the cash dividends received by shareholders. Another way to
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think of this is that net Paid-In Capital from Common Stock (Paid-In Capital from Common Stock less
Treasury Stock) is a negative $20.7 billion.
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Case 5–66
TO: President, Moran Auto Sales

FROM: Senior Credit Analyst, Far West Bank
RE: Need for Statement of Cash Flows
Your loan application is being held up while we await the arrival of your statement of cash flows. A modern
set of financial statements is not complete without a statement of cash flows. And, in your case, the
statement of cash flows is particularly important because it will reveal exactly why you have been profitable
in recent years but are currently running short of cash.
In a recent memo, your accountant reminded me that most of the information for the statement of cash flows
can be deduced from the income statement and from changes in the balance sheet accounts. I be- lieve we
would all be better off if you were to prepare the statement and send me a copy instead of having me
figure out the information from your balance sheet and income statement. My reasons for thinking this are
as follows:
1. You have access to the raw data and can prepare a much more complete statement of cash flows.
Offsetting events can hide some cash flows, and the cash flow effects of some complex transactions
are difficult to deduce.
2. If I am asked to prepare your statement of cash flows myself, I will bill you at my normal consulting
rate, which is $500 per hour.
Case 5–67
This is an ethical dilemma with no neat or tidy solution. It seems clear that you cannot give the presenta-
tion to the investment bankers. Your analysis strongly suggests that the earnings numbers have been
manipulated, so you cannot in good conscience present the proposal to the investment bankers without
voicing your concerns. You should notify the board of directors immediately, so that they can have suffi-
cient time to find someone else to make the presentation. You should offer to brief the new presenter on
the results of your analysis.
Before rendering a harsh judgment against the board for engaging in earnings manipulation, realize that
earnings numbers in an IPO serve much the same purpose as advertising does in the selling of cars. Every-
one knows that the numbers have been puffed up and beautified as much as possible. The investment bank-
ers, if they are experienced, will look at all of the financial statement numbers with healthy skepticism.
Case 5–68
Solutions to this problem can be found on the Instructor’s Resource CD-ROM or downloaded from the
Web at www.cengagebrain.com.
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Intermediate Accounting 19th Edition

Stice Solutions Manual

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Test Bank: https://testbankpack.com/p/test-bank-for-intermediate-

PRACTICE 5–1 CLASSIFYING CASH FLOWS

1. Cash flows from operating activities:

2. Cash flows from investing activities:

3. Cash flows from financing activities:

PRACTICE 5–2 CASH AND CASH EQUIVALENTS

(a) Not cash equivalent because it is an equity investment; no maturity date.

PRACTICE 5–3 THREE CATEGORIES OF CASH FLOWS

PRACTICE 5–3 (Concluded)

PRACTICE 5–4 CASH FLOW PATTERNS

Company A start up, high-growth

PRACTICE 5–5 NONCASH INVESTING AND FINANCING ACTIVITIES

PRACTICE 5–6 GENERAL FORMAT FOR A STATEMENT OF CASH FLOWS

Cash flow from operating activities ........................................ $ 6,200

PRACTICE 5–7 CASH COLLECTED FROM CUSTOMERS

Accounts receivable, beginning .............................................. $ 1,375

PRACTICE 5–8 CASH PAID FOR INVENTORY PURCHASES

Inventory, ending ....................................................................... $ 2,500

Accounts payable, beginning ................................................... $ 1,200

PRACTICE 5–9 CASH PAID FOR OPERATING EXPENSES

Prepaid operating expenses, ending ....................................... $1,000

PRACTICE 5–10 DIRECT METHOD

Sales $7,800 + 320 $8,120

PRACTICE 5–11 INDIRECT METHOD

Sales $7,800 + 320 $8,120

PRACTICE 5–12 COMPLETE STATEMENT OF CASH FLOWS FROM DETAILED

PRACTICE 5–13 OPERATING CASH FLOW: GAINS AND LOSSES

Net income.................................................................................. $ 250

PRACTICE 5–14 OPERATING CASH FLOW: RESTRUCTURING CHARGES

Net income.................................................................................. $ 500

PRACTICE 5–15 OPERATING CASH FLOW: DEFERRED INCOME TAXES

Reported income tax expense ................................................................... $32,000

PRACTICE 5–16 OPERATING CASH FLOW: DEFERRED, OR UNEARNED, SALES

PRACTICE 5–17 OPERATING CASH FLOW: PREPAID OPERATING EXPENSES

Cash paid for depreciation......................................................................... $ 0

PRACTICE 5–17 (Concluded)

Cash paid for insurance:

Cash paid for wages:

Cash paid for operating expenses: $0 + $7,570 + $14,750 = $22,320

PRACTICE 5–18 COMPUTING CASH PAID TO PURCHASE PROPERTY, PLANT,

PPE, beginning ......................................................................... $124,000

PPE, ending .............................................................................. $134,000

This assumes that all PPE purchases were for cash.

PRACTICE 5–19 COMPUTING CASH RECEIVED FROM THE SALE OF PROPERTY,

Accumulated depreciation, beginning ................................... $41,000

Original cost of PPE sold ........................................................ $28,000

Book value of PPE sold ........................................................... $ 6,000

Cash received from sale of PPE ............................................. $12,500

PRACTICE 5–20 COMPUTING CASH PAID FOR DIVIDENDS

Retained earnings, beginning................................................. $106,000

Dividends declared during the year ....................................... $ 4,000

PR CTICE 5–21 COMPUTING CASH FLOW RATIOS

2. Cash flow adequacy

3. Cash times interest earned

PRACTICE 5–22 ARTICULATION

a. Cash increased by $9,000 during the year ($21,000 – $12,000)

PRACTICE 5–22 (Concluded)

b. At the beginning of the year: Assets = Liabilities + Owners’ equity

PRACTICE 5–23 PREPARING A FORECASTED STATEMENT OF CASH FLOWS

5–25. (a) The purchase of securities classified as available-for-sale is reported as

(b) No cash is provided or used by depreciation; however, $4,100 is added