To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 13 “How Well Am I Doing?” Statement of Cash Flows Solutions to Questions 13-1 The statement of cash flows highlights the major activities that have provided and used cash during a period and shows their effects on the overall cash balance 13-2 Cash equivalents are short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds They are included with cash because investments of this type are made solely for the purpose of generating a return on temporarily idle funds and they can be easily converted to cash 13-3 (1) Operating activities: Transactions that affect current assets, current liabilities, or net income (2) Investing activities: Transactions that involve the acquisition or disposition of noncurrent assets (3) Financing activities: Transactions (other than the payment of interest) involving borrowing from creditors, and any transactions involving the owners of a company 13-4 Interest is included as an operating activity since it is part of net income Financing activities are narrowly defined to include only the principal amount borrowed or repaid 13-5 Since the entire proceeds from a sale of an asset (including any gain) appear as a cash inflow from investing activities, the gain must be deducted from net income to avoid double counting 13-6 Transactions involving accounts payable are not considered to be financing activities because such transactions relate to a company’s day-to-day operating activities rather than to its financing activities 13-7 The repayment of $300,000 and the borrowing of $500,000 must both be shown ―gross‖ on the statement of cash flows That is, the company would show $500,000 of cash provided by financing activities and then show $300,000 of cash used by financing activities 13-8 The direct method reconstructs the income statement on a cash basis by restating revenues and expenses in terms of cash inflows and outflows The indirect method starts with net income and adjusts it to a cash basis to determine the cash provided by operating activities 13-9 Depreciation is not really a source of cash, even though it is listed as a ―source‖ on the statement of cash flows Adding back depreciation charges to net income to compute the amount of cash provided by operating activities creates the illusion that depreciation is a source of cash It isn’t Charges to the accumulated depreciation account are added back to net income because they are equivalent to a decrease in an asset account [See Exhibit 13-2.] 13-10 An increase in the Accounts Receivable account must be deducted from net income under the indirect method because this is an increase in a noncash asset 13-11 A sale of equipment for cash would be classified as an investing activity Any transaction involving the acquisition or disposition of noncurrent assets is classified as an investing activity 13-12 Free cash flow is net cash provided by operating activities minus capital expenditures and dividends © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 657 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Brief Exercise 13-1 (15 minutes) a b c d e f g h i j k l m Transaction Equipment was purchased Cash dividends declared and paid Accounts receivable decreased Short-term investments purchased Equipment was sold Preferred stock was sold to investors A stock dividend was declared and issued Interest was paid to long-term creditors Salaries and wages payable decreased Stock of another company was purchased Bonds were issued Rent was received from subleasing office space, reducing rents receivable Common stock was repurchased and retired Activity Operating Investing Financing X X X Not Reported Source Use X X* X X X X X X X X X X X X X X X X X X X X * This would be a cash equivalent and thus not reported separately on the statement of cash flows © The McGraw-Hill Companies, Inc., 2010 All rights reserved 658 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Brief Exercise 13-2 (15 minutes) Net income $35,000 Adjustments to convert net income to a cash basis: Depreciation charges $20,000 Increase in accounts receivable (19,000) Increase in inventory (33,000) Decrease in prepaid expenses 1,000 Increase in accounts payable 15,000 Decrease in accrued liabilities (2,000) Increase in deferred income taxes payable 4,000 (14,000) Net cash provided by operating activities $21,000 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 659 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Brief Exercise 13-3 (5 minutes) Free cash flow computation: Net cash provided by operating activities Capital expenditures Dividends Free cash flow $110,000 30,000 $34,000 140,000 $(106,000) © The McGraw-Hill Companies, Inc., 2010 All rights reserved 660 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13-4 (10 minutes) Item Amount Accounts Receivable $90,000 decrease Accrued Interest Receivable $4,000 increase Inventory $120,000 increase Prepaid Expenses $3,000 decrease Accounts Payable $65,000 decrease Accrued Liabilities $8,000 increase Deferred Income Taxes Payable $12,000 increase Sale of equipment $7,000 gain Sale of long-term investments $10,000 loss Add X X X X X Deduct X X X X © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 661 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13-5 (30 minutes) Carmono Company Statement of Cash Flows For the Year Ended December 31, 2009 Operating activities: Net income Adjustments to convert net income to a cash basis: Depreciation charges Decrease in accounts receivable Increase in inventory Increase in accounts payable Net cash provided by operating activities Investing activities: Increase in plant and equipment Net cash used for investing activities Financing activities: Increase in common stock Cash dividends Net cash used in financing activities $35 $15 (10) (40) (14) Net decrease in cash Cash, beginning of the year Cash, end of the year 11 46 (40) (9) (3) $ Free cash flow computation: Net cash provided by operating activities Capital expenditures Dividends Free cash flow $40 14 $ 46 54 $(8) © The McGraw-Hill Companies, Inc., 2010 All rights reserved 662 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13-5 (continued) Note to the instructor: Although it is not required for part (1) of the exercise, a worksheet may be helpful Change Source or use? –2 +10 Source Use +2 –10 +2 –10 Operating Operating +40 Use –40 –40 Investing Assets (except cash and cash equivalents) Current assets: Accounts receivable Inventory Noncurrent assets: Plant and equipment Cash Flow Effect Adjustments Adjusted Effect Classification Liabilities, Contra-assets, and Stockholders’ Equity Contra-assets: Accumulated depreciation Current liabilities: Accounts payable Stockholders’ equity: Common stock Retained earnings: Net income Dividends +15 Source +15 +15 Operating +4 Source +4 +4 Operating +5 Source +5 +5 Financing +35 –14 Source Use +35 –14 +35 –14 Operating Financing –3 –3 Additional entries None Total © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 663 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13-6 (30 minutes) Net income Adjustments to convert net income to a cash basis: Depreciation charges Increase in accounts receivable Decrease in inventory Increase in prepaid expenses Increase in accounts payable Decrease in accrued liabilities Gain on sale of long-term investments Loss on sale of land Increase in deferred income taxes Net cash provided by operating activities $ 84 $ 60 (110) 70 (9) 35 (4) (10) 46 $130 Pavolik Company Statement of Cash Flows Operating activities: Net cash provided by operating activities from part (1) above $130 Investing activities: Proceeds from sale of long-term investments $ 16 Proceeds from sale of land Additions to plant and equipment (200) Net cash used for investing activities Financing activities: Increase in bonds Decrease in common stock Cash dividends Net cash provided by financing activities Net decrease in cash (net cash flow) Cash balance, beginning of the year Cash balance, end of the year 150 (80) (30) (175) 40 (5) 90 $ 85 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 664 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13-6 (continued) Note to the instructor: Although it is not a requirement of the exercise, a worksheet may be helpful Change Source or use? +110 –70 +9 Use Source Use –110 +70 –9 –6 +200 –15 Source Use Source +6 –200 +15 Assets (except cash and cash equivalents) Current assets: Accounts receivable Inventory Prepaid expenses Noncurrent assets: Long-term investments Plant and equipment Land Cash Flow Effect Adjustments –6 –15 Adjusted Effect Classification –110 +70 –9 Operating Operating Operating –200 Investing Investing Investing Liabilities, Contra-assets, and Stockholders’ Equity Contra-assets: Accumulated depreciation Current liabilities: Accounts payable Accrued liabilities Noncurrent liabilities: Bonds payable Deferred income taxes +60 Source +60 +60 Operating +35 –4 Source Use +35 –4 +35 –4 Operating Operating +150 +8 Source Source +150 +8 +150 +8 Financing Operating © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 665 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13-6 (continued) Stockholders’ equity: Common stock Retained earnings: Net income Dividends Change Source or use? Cash Flow Effect Adjustments Adjusted Effect Classification –80 Use –80 –80 Financing +84 –30 Source Use +84 –30 +84 –30 Operating Financing +16 +16 Investing –10 +9 +6 –10 +9 +6 Operating Investing Operating Additional entries Proceeds from sale of longterm investments Gain on sale of long-term investments Proceeds from sale of land Loss on sale of land Total –5 –5 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 666 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Research and Application (continued) The change in the DVD Library, Net account on the balance sheet is accounted for in the operating and investing activities sections of the statement of cash flows The reconciliation is as follows: Balance Sheet: DVD library, net (Use) Statement of Cash Flows: Adjustment to net income—amortization of DVD library (Source) Adjustment to net income—gain on disposal of DVDs (Use) Acquisitions of DVD library (Use) Proceeds from sale of DVDs (Source) Use of cash $(14,874) $96,883 (3,588) (113,950) 5,781 $(14,874) The change in the Intangible Assets, Net account on the balance sheet is accounted for in the operating and investing activities sections of the statement of cash flows The reconciliation is as follows: Balance Sheet: Intangible assets, net (Source) $504 Adjustments to net income—amortization of intangible assets (Source) Acquisition of intangible asset (Use) Source of cash $985 (481) $504 Statement of Cash Flows: The change in the Property and Equipment, Net account on the balance sheet is accounted for in the operating and investing activities sections of the statement of cash flows The reconciliation is as follows: Balance Sheet: Property and equipment, net (Use) $(21,485) Adjustments to net income—depreciation of property and equipment (Source) Purchases of property and equipment (Use) Use of cash $ 9,134 Statement of Cash Flows: (30,619) $(21,485) © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 691 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Research and Application (continued) The changes in the Deposits and Other Assets balance sheet accounts are accounted for in the investing activities section of the statement of cash flows The reconciliation is as follows: Balance Sheet: Deposits (Source) Other assets (Source) Source of cash $351 200 $551 Deposits and other assets $551 Statement of Cash Flows: The changes in the Accounts Payable ($13,716), Accrued Expenses ($12,432), Deferred Revenue ($16,597), and Deferred Rent ($242) balance sheet accounts are directly recorded in the operating activities section of the statement of cash flows The change in the Current Portion of Capital Leases account on the balance sheet is accounted for in the operating and financing activities sections of the balance sheet The reconciliation is as follows: Balance Sheet: Current portion of capital leases (Use) $(68) Adjustments to net income—non-cash interest expense (Source) Principal payments on notes payable and capital lease obligations (Use) Use of cash $11 Statement of Cash Flows: (79) $68 The Common Stock, Additional Paid-In Capital, and Deferred StockBased Compensation balance sheet accounts are recorded in the operating and financing activities sections of the statement of cash flows The reconciliation is as follows: © The McGraw-Hill Companies, Inc., 2010 All rights reserved 692 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Research and Application (continued) Balance Sheet: Common stock (Source) Additional paid-in capital (Source) Deferred stock-based compensation (Source) Source of cash Statement of Cash Flows: Adjustments to net income—stock-based compensation expense (Source) Proceeds from issuance of commons stock (Source) Source of cash $ 24,351 3,367 $27,720 $14,327 13,393 $27,720 The change in the Accumulated Other Comprehensive Income balance sheet account ($222) is directly accounted for in the financing activities section of the statement of cash flows The change in the Accumulated Deficit balance sheet account ($42,027) corresponds with the net income reported in the statement of cash flows © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 693 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Appendix 13A The Direct Method of Determining the Net Cash Provided by Operating Activities Brief Exercise 13A-1 (15 minutes) Sales Adjustments to a cash basis: Less increase in accounts receivable $ 350,000 Cost of goods sold Adjustments to a cash basis: Plus increase in inventory Less increase in accounts payable 140,000 Selling and administrative expenses Adjustments to a cash basis: Less decrease in prepaid expenses Plus decrease in accrued liabilities Less depreciation charges Income taxes Adjustments to a cash basis: Less increase in deferred income taxes Net cash provided by operating activities – 19,000 $331,000 + 33,000 – 15,000 158,000 160,000 – 1,000 + 2,000 – 20,000 141,000 15,000 – 4,000 11,000 $ 21,000 Note that the $21,000 above agrees with the amount provided by operating activities under the indirect method in the previous exercise © The McGraw-Hill Companies, Inc., 2010 All rights reserved 694 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13A-2 (15 minutes) Sales Adjustments to a cash basis: Decrease in accounts receivable $275 Cost of goods sold Adjustments to a cash basis: Increase in inventory Increase in accounts payable 150 Selling and administrative expenses Adjustments to a cash basis: Depreciation charges Net cash provided by operating activities + $277 + 10 – 156 90 – 15 75 $ 46 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 13A 695 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13A-3 (15 minutes) Sales $150,000 Adjustments to a cash basis: Increase in accounts receivable –10,000 $140,000 Cost of goods sold Adjustments to a cash basis: Increase in inventory Increase in accounts payable Selling and administrative expenses Adjustments to a cash basis: Increase in prepaid expenses Decrease in accrued liabilities Depreciation charges Income taxes Adjustments to a cash basis: Decrease in income taxes payable Increase in deferred income taxes Net cash provided by operating activities 90,000 +9,000 –7,000 92,000 40,000 +2,000 +3,000 –7,500 37,500 8,000 +500 –2,000 6,500 $ 4,000 Gains and losses on the sale of assets would have no effect on the computations in (1) The reason is that these items are not part of sales, cost of goods sold, selling and administrative expenses, or income taxes Thus, gains and losses on the income statement are ignored under the direct method © The McGraw-Hill Companies, Inc., 2010 All rights reserved 696 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13A-4 (15 minutes) Sales Adjustments to a cash basis: Increase in accounts receivable $700 Cost of goods sold Adjustments to a cash basis: Decrease in inventory Increase in accounts payable 400 Selling and administrative expenses Adjustments to a cash basis: Increase in prepaid expenses Decrease in accrued liabilities Depreciation charges 184 Income tax expense Adjustments to a cash basis: Increase in deferred income taxes 36 Net cash provided by operating activities –110 $590 –70 –35 +9 +4 –60 –8 295 137 28 $130 Note that the $130 ―net cash provided‖ figure agrees with the indirect method in the previous exercise © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 13A 697 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-5A (30 minutes) Sales Adjustments to a cash basis: Increase in accounts receivable $800 Cost of goods sold Adjustments to a cash basis: Decrease in inventory Increase in accounts payable 500 Selling and administrative expenses Adjustments to a cash basis: Increase in prepaid expenses Decrease in accrued liabilities Depreciation charges 213 Income taxes Adjustments to a cash basis: Increase in deferred income taxes Net cash provided by operating activities –100 $700 –50 –80 +4 +12 –24 370 205 27 –6 21 $104 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 698 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-5A (continued) Weaver Company Statement of Cash Flows For the Year Ended December 31, 2009 Operating activities: Cash received from customers $700 Less cash disbursements for: Cost of merchandise purchased $370 Selling and administrative expenses 205 Income taxes 21 Total cash disbursements 596 Net cash provided by operating activities 104 Investing activities: Proceeds from sale of long-term investments 10 Proceeds from sale of equipment 20 Additions to plant and equipment (180) Net cash used for investing activities (150) Financing activities: Increase in bonds payable 110 Decrease in common stock (40) Cash dividends (30) Net cash provided by financing activities Net decrease in cash Cash balance, beginning of the year Cash balance, end of the year 40 (6) 15 $ © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 13A 699 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-6A (45 minutes) Sales $900,000 Adjustments to a cash basis: Increase in accounts receivable –80,000 $820,000 Cost of goods sold Adjustments to a cash basis: Increase in inventory Increase in accounts payable Selling and administrative expenses Adjustments to a cash basis: Decrease in prepaid expenses Decrease in accrued liabilities Depreciation charges Income taxes Adjustments to a cash basis: Increase in deferred income taxes Net cash provided by operating activities 500,000 +50,000 –60,000 490,000 328,000 – 7,000 +10,000 –42,000 289,000 24,000 – 3,000 21,000 $ 20,000 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 700 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-6A (continued) Joyner Company Statement of Cash Flows For Year Operating activities: Cash received from customers Less cash disbursements for: Cost of merchandise purchased $490,000 Selling and administrative expenses 289,000 Income taxes 21,000 Total cash disbursements Net cash provided by operating activities $820,000 800,000 20,000 Investing activities: Proceeds from sale of equipment 18,000 Loan to Hymas Company (40,000) Additions to plant and equipment (150,000) Net cash used for investing activities Financing activities: Increase in bonds payable Increase in common stock Cash dividends Net cash provided by financing activities Net decrease in cash Cash balance, beginning of year Cash balance, end of year 120,000 30,000 (15,000) (172,000) 135,000 (17,000) 21,000 $ 4,000 The decline in cash is explainable largely by the company’s inability to generate a significant amount of cash from operating activities Note that the company generated only $20,000 from operating activities, although net income was $56,000 for the year This small amount of cash generated is due primarily to the buildup of accounts receivable Even though an additional $150,000 was obtained from an issue of bonds and an issue of common stock ($120,000 + $30,000 = $150,000), the cash available was not sufficient to expand the plant, make a substantial loan to another company, and pay a large cash dividend As a result, cash declined during the year © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 13A 701 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-7A (45 minutes) The income statement adjusted to a cash basis: Sales $500,000 Adjustments to a cash basis: Increase in accounts receivable –40,000 $460,000 Cost of goods sold Adjustments to a cash basis: Increase in inventory Increase in accounts payable Selling and administrative expenses Adjustments to a cash basis: Decrease in prepaid expenses Decrease in accrued liabilities Depreciation charges Income taxes Adjustments to a cash basis: Increase in deferred income taxes Net cash provided by operating activities 300,000 +50,000 –63,000 287,000 158,000 – 4,000 + 9,000 –20,000 143,000 20,000 – 8,000 12,000 $ 18,000 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 702 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-7A (continued) Rusco Products Statement of Cash Flows For the Year Ended July 31, 2009 Operating activities: Cash received from customers Less cash disbursements for: Cost of merchandise purchased Selling and administrative expenses Income taxes Total cash disbursements Net cash provided by operating activities Investing activities: Proceeds from sale of investments Proceeds from sale of equipment Additions to plant and equipment Net cash used for investing activities Financing activities: Increase in bonds payable Increase in common stock Cash dividends Net cash provided by financing activities $460,000 $287,000 143,000 12,000 30,000 8,000 (150,000) 70,000 20,000 (9,000) 442,000 18,000 (112,000) 81,000 Net decrease in cash Cash balance, beginning of the year Cash balance, end of the year (13,000) 21,000 $ 8,000 Schedule of noncash investing and financing activities: Preferred stock converted into common stock $ 16,000 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 13A 703 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 13A-7A (continued) There are two reasons for the sharp decline in cash First, note that a relatively small amount of cash was provided by operations during the year This is due to a build-up in accounts receivable and inventory, which together have grown by $90,000; the build-up of receivables reduced the amount of cash received from customers, and the build-up of inventory increased the amount of cash required to purchase goods Second, the company paid out in dividends half of the cash provided by operations, while at the same time increasing its investment in plant and equipment by almost 50% These uses of cash far outstripped the amount of cash available through operations and the sale of bonds, common stock, and investments, resulting in a sharp decrease in the amount of cash available © The McGraw-Hill Companies, Inc., 2010 All rights reserved 704 Introduction to Managerial Accounting, 5th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Appendix 13B The T-Account Approach to Preparing the Statement of Cash Flows Brief Exercise 13B-1 (30 minutes) Cash Provided Used Increase in accounts re(1) 35 ceivable Net income Decrease in prepaid expenses (4) Increase in accounts payable (5) Increase in deferred income taxes (given) Depreciation expense (given) Net cash provided by operating activities Increase in inventory Decrease in accrued liabili15 ties Bal Bal (6) Accrued Liabilities Bal Bal (3) 33 (6) 20 21 Accounts Receivable Bal 106 (2) 19 Bal 125 Prepaid Expenses (4) (2) 19 Bal (3) Bal Inventory 180 33 213 Accounts Payable Bal (5) Bal 195 15 210 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 13B 705 ... Net cash provided by operating activities $21,000 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 13 659 To download more slides, ebook, solutions and test... Inc., 2010 All rights reserved Solutions Manual, Chapter 13 661 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13- 5 (30 minutes) Carmono... Inc., 2010 All rights reserved Solutions Manual, Chapter 13 663 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 13- 6 (30 minutes) Net income