Solution manual managerial accounting by garrison noreen 13th chap015

Chapter 15 “How Well Am I Doing?” Statement of Cash Flows Solutions to Questions 15-1 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 15-2 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 15-3 (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 15-4 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 15-5 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 15-6 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 15-7 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 15-8 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 15-9 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 15-2.] 15-10 An increase in the Accounts Receivable account must be deducted from net income under the indirect © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 15 89 method because this is an increase in a noncash asset 15-11 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 15-12 Free cash flow is net cash provided by operating activities minus capital expenditures and dividends © The McGraw-Hill Companies, Inc., 2010 90 Managerial Accounting, 13th Edition Exercise 15-1 (15 minutes) Activity Operatin Investin Transaction g g a Equipment was purchased X b Cash dividends declared and paid c Accounts receivable decreased X d Short-term investments purchased e Equipment was sold X f Preferred stock was sold to investors g A stock dividend was declared and issued h Interest was paid to long-term creditors X i Salaries and wages payable decreased X j Stock of another company was purchased X k Bonds were issued l Rent was received from subleasing office space, reducing rents receivable X m Common stock was repurchased and retired Financin g Not Reporte Sourc d e X Use 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 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 15 91 cash flows © The McGraw-Hill Companies, Inc., 2010 All rights reserved 92 Managerial Accounting, 13th Edition Exercise 15-2 (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 15 93 Exercise 15-3 (5 minutes) Free cash flow computation: Net cash provided by operating activities Capital expenditures $110,000 Dividends Free cash flow $34,000 140,00 30,000 $(106,000 ) © The McGraw-Hill Companies, Inc., 2010 All rights reserved 94 Managerial Accounting, 13th Edition Exercise 15-4 (10 minutes) Item Accounts Receivable Accrued Interest Receivable Deduc Amount Add t $90,000 decrease X $4,000 increase X $120,00 increase X $3,000 decrease X $65,000 decrease X $8,000 increase X Inventory Prepaid Expenses Accounts Payable Accrued Liabilities Deferred Income Taxes Payable $12,000 increase Sale of equipment $7,000 gain Sale of long-term investments $10,000 loss X X X © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 15 95 Exercise 15-5 (30 minutes) Carmono Company Statement of Cash Flows For the Year Ended December 31, 2009 Operating activities: Net income $35 Adjustments to convert net income to a cash basis: Depreciation charges $15 Decrease in accounts receivable Increase in inventory (10) Increase in accounts payable 11 Net cash provided by operating activities 46 Investing activities: Increase in plant and equipment (40) Net cash used for investing activities (40) Financing activities: Increase in common stock Cash dividends (14) Net cash used in financing activities (9) Net decrease in cash Cash, beginning of the year Cash, end of the year (3) $ 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 96 Managerial Accounting, 13th Edition Exercise 15-5 (continued) Note to the instructor: Although it is not required for part (1) of the exercise, a worksheet may be helpful Source Chang e or use? Assets (except cash and cash equivalents) Current assets: Accounts receivable –2 Source Inventory +10 Use Noncurrent assets: Plant and equipment +40 Use Cash Flow Adjust- Adjusted Classi- Effect ments Effect fication +2 –10 +2 –10 Operating Operating –40 –40 Investing +15 Operating +4 Operating +5 Financing +35 –14 Operating Financing Liabilities, Contra-assets, and Stockholders’ Equity Contra-assets: Accumulated depreciation +15 Source +15 Current liabilities: Accounts payable +4 Source +4 Stockholders’ equity: Common stock +5 Source +5 Retained earnings: Net income +35 Source +35 Dividends –14 Use –14 Additional entries None © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Chapter 15 97 Total  –3  –3 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 98 Managerial Accounting, 13th Edition Adjustments to net income—depreciation of property and equipment (Source) Purchases of property and equipment (Use) Use of cash $ 9,134 (30,619) $(21,485 ) © The McGraw-Hill Companies, Inc., 2010 All rights reserved 134 Managerial Accounting, 13th Edition Research and Application 15-13 (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 Statement of Cash Flows: Deposits and other assets $351 200 $551 $551  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) Statement of Cash Flows: Adjustments to net income—non-cash interest expense (Source) Principal payments on notes payable and capital lease obligations (Use) Use of cash $(68) $11 (79) $68  The Common Stock, Additional Paid-In Capital, and Deferred Stock-Based 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 Solutions Manual, Chapter 15 135 Research and Application 15-13 (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 $27,72 $14,32 13,393 $27,72  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 136 Managerial Accounting, 13th Edition Appendix 15A The Direct Method of Determining the Net Cash Provided by Operating Activities Exercise 15A-1 (15 minutes) Sales $ 350,000 Adjustments to a cash basis: $331,00 Less increase in accounts receivable – 19,000 Cost of goods sold 140,000 Adjustments to a cash basis: Plus increase in inventory + 33,000 Less increase in accounts payable – 15,000 158,000 Selling and administrative expenses 160,000 Adjustments to a cash basis: Less decrease in prepaid expenses –  1,000 Plus decrease in accrued liabilities +  2,000 Less depreciation charges – 20,000 141,000 Income taxes Adjustments to a cash basis: Less increase in deferred income taxes Net cash provided by operating activities 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 Solutions Manual, Appendix 15A 137 Exercise 15A-2 (15 minutes) Sales $275 Adjustments to a cash basis: Decrease in accounts receivable +  2 $277 Cost of goods sold 150 Adjustments to a cash basis: Increase in inventory + 10 Increase in accounts payable –  4 Selling and administrative expenses Adjustments to a cash basis: Depreciation charges 156 90 – 15 Net cash provided by operating activities 75 $ 46 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 138 Managerial Accounting, 13th Edition Exercise 15A-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 Solutions Manual, Appendix 15A 139 Exercise 15A-4 (15 minutes) Sales $700 Adjustments to a cash basis: Increase in accounts receivable –110 $590 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 –70 –35 +9 +4 –60 –8 Net cash provided by operating activities 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 140 Managerial Accounting, 13th Edition Problem 15A-5 (30 minutes) Sales $800 Adjustments to a cash basis: Increase in accounts receivable –100 $700 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 –50 –80 +4 +12 –24 370 205 27 –6 21 $104 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 15A 141 Problem 15A-5 (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 (180 Additions to plant and equipment ) 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 $  9 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 142 Managerial Accounting, 13th Edition Problem 15A-6 (45 minutes) Sales $900,000 Adjustments to a cash basis: Increase in accounts receivable –80,000 $820,000 Cost of goods sold 500,000 Adjustments to a cash basis: Increase in inventory +50,000 Increase in accounts payable –60,000 490,000 Selling and administrative expenses 328,000 Adjustments to a cash basis: Decrease in prepaid expenses – 7,000 Decrease in accrued liabilities +10,000 Depreciation charges –42,000 289,000 Income taxes Adjustments to a cash basis: Increase in deferred income taxes Net cash provided by operating activities 24,000 – 3,000 21,000 $ 20,000 © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual, Appendix 15A 143 Problem 15A-6 (continued) Joyner Company Statement of Cash Flows For Year Operating activities: Cash received from customers $820,000 Less cash disbursements for: Cost of merchandise purchased .$490,000 Selling and administrative expenses 289,000 Income taxes 21,000 Total cash disbursements 800,000 Net cash provided by operating activities 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 (172,000) Financing activities: Increase in bonds payable 120,000 Increase in common stock 30,000 Cash dividends (15,000) Net cash provided by financing activities 135,000 Net decrease in cash Cash balance, beginning of year Cash balance, end of year (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 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 144 Managerial Accounting, 13th Edition 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 15A 145 Problem 15A-7 (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 300,000 +50,000 –63,000 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 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 146 Managerial Accounting, 13th Edition Problem 15A-7 (continued) Rusco Products Statement of Cash Flows For the Year Ended July 31, 2009 Operating activities: Cash received from customers $460,000 Less cash disbursements for: Cost of merchandise purchased $287,000 Selling and administrative expenses 143,000 Income taxes 12,000 Total cash disbursements 442,000 Net cash provided by operating activities 18,000 Investing activities: Proceeds from sale of investments 30,000 Proceeds from sale of equipment 8,000 Additions to plant and equipment (150,000) Net cash used for investing activities (112,000) Financing activities: Increase in bonds payable Increase in common stock Cash dividends Net cash provided by financing activities 70,000 20,000 (9,000) 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 15A 147 Problem 15A-7 (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 148 Managerial Accounting, 13th Edition ... Inc., 2010 All rights reserved Solutions Manual, Chapter 15 91 cash flows © The McGraw-Hill Companies, Inc., 2010 All rights reserved 92 Managerial Accounting, 13th Edition Exercise 15-2 (15... Inc., 2010 All rights reserved Solutions Manual, Chapter 15 97 Total  –3  –3 © The McGraw-Hill Companies, Inc., 2010 All rights reserved 98 Managerial Accounting, 13th Edition Exercise 15-6 (30... 102 Managerial Accounting, 13th Edition declared and paid k Preferred stock was converted into common stock Neither X © The McGraw-Hill Companies, Inc., 2010 All rights reserved Solutions Manual,