CHAPTER 10 PREPARING THE STATEMENT OF CASH FLOWS

Accrual Accounting Versus Cash

T-accounts may be used to determine the amount of cash collected or paid for various items. Following the example in the text in page 387 regarding salaries payable, a T-account analysis would be as follows: Beginning salaries payable was $690, and ending was $500. Salary expense for the year totaled $75,000. Thus, in order to balance the account, salaries paid in cash during the year must have been $75,190.

Salaries payable $690 BB 75,000 Salaries expense

Cash payments 75,190 75,690 500 EB

Robo Company began the year with $25,000 in accounts receivable. During the year, sales totaled $50,000. The year- end accounts receivable balance was $15,000. Using a T-account, determine the amount of cash collected from customers during the year.

STUDY BREAK 10-2 (p. 387) SEE HOW YOU’RE DOING

Preparing the Statement of Cash Flows

Direct Method of Computing Cash from Operations (pp. 388-90) The direct method starts with an analysis of the income statement and the related balance sheet accounts. Sales revenue was $2,000, but you need to know how much cash was collected from customers. You can compute cash collected from customers by analyzing what happened to accounts receivable. Using the T-account approach, accounts receivable had a beginning balance of $150 and an ending balance of $2,000. During the month $2,000 of credit sales were made. Thus total cash collected must have been $150:

Accounts receivable

BB $150 Credit sales 2,000

$2,150 150 Cash collections EB 2,000

Cost of goods sold was $800. To calculate cash paid for inventory purchases, you must analyze the changes in the Inventory and Accounts payable accounts. If inventory had a beginning balance of $100 and an ending balance of $300, $1,000 of inventory must have been purchased:

Inventory BB $100 $800 Cost of goods sold

Purchases 1,000 EB 300

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Since purchases are not always made for cash, you must also analyze the Accounts payable account. The beginning balance of accounts payable was $800 and purchases (calculated above) totaled $1,000. The ending balance was $0. Thus the total paid to vendors was $1,800.

Accounts payable $800 BB 1,000 Purchases

Cash paid 1,800 1,800 0 EB

Insurance expense was $50. To determine how much cash was paid for insurance requires an analysis of the Prepaid insurance account. The account started with a balance of $125 and ended with a balance of $75. Thus, no cash was paid for insurance during the month.

Prepaid

insurance BB $125 $75 Insurance expense

Cash paid 0 EB 50

Interest expense for the month was $30. The interest payable account shows a beginning balance of $0 and an ending balance of $30. Thus, no cash was paid for interest.

One other item must be accounted for – Other payables. The beginning balance was $50 and the ending balance was $0. No expense was recorded for the month. Thus, cash paid must have been $50.

Interest payable $0 BB 30 Interest expense

Cash paid 0 30 EB

Other payable $50 BBCash paid 50

0 EB

Flex Company began the year 2003 with $350 in prepaid insurance. For 2003, the company’s income statement showed insurance expense of $400. Flex Company ended the year with $250 of prepaid insurance. Using a T-account, determine the amount of cash paid for insurance during the year.

STUDY BREAK 10-3 (p. 390) SEE HOW YOU’RE DOING

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Indirect Method of Computing Cash from Operations (pp. 390-2) Following the example in the text, the indirect method of preparing a statement of cash flows may be done using a spreadsheet as follows:

Summary Problem: Tom's Wear for April 2001 Revisited The spreadsheet for the summary problem is on the next page.

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T-accounts for Study Break Questions

Accounts receivable BB $25,000 Study Break 10-2 Sales 50,000 75,000

$60,000 Cash collected

EB $15,000 Prepaid insurance Study Break 10-3 BB $350 Cash paid 300

650 $400Insurance expense

EB $250

Short Exercises

SE10-5 Jill Corporation reported credit sales of $950,000 for 2001. Jill's accounts receivable from sales were $40,000 at the beginning of 2001 and $50,000 at the end of 2001. Use the T-account approach to determine the amount of cash from sales collected in 2001.

Accounts receivable

SE10-11 During 2003, Cable Direct Inc. incurred salary expense of $37,500. The January 1 balance in Salaries payable was $10,450 and the December 31 balance was $15,200. Use the T-account approach to determine the amount of cash paid to employees during 2003.

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Salaries payable

SE10-13 Beta Company spent $40,000 for a new delivery truck during the year. Depreciation expense of $2,000 related to the truck was shown on the income statement. Give the journal entries to record the purchase of the asset and the depreciation expense. What effect do these transactions have on the statement of cash flows?

Date Account Debit Credit

Exercises

E10-2 For each transaction, give the appropriate journal entry. In place of the explanation for each, give the section of the statement of cash flows prepared using the direct method in which the item would be found.

(a) Issued 100 shares of $2 par common stock for $12 per share. (b) Borrowed $5,000 from a local bank to expand the business. (c) Purchased supplies for $400 cash. (d) Hired a carpenter to build some bookcases for the office for $500 cash. (e) Earned revenue of $9,000 cash. (f) Hired a student to do some typing and paid him $300 cash. (g) Repaid $1,000 of the bank loan along with $150 interest. (h) Paid dividends of $400.

Date Account Debit Credit (a)

(b)

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Date Account Debit Credit (c)

(d)

(e)

(f)

(g)

(h)

E10-3 Given the income statement for Clark Corporation for last year and selected information from the comparative balance sheets shown for the beginning and the end of the year, give a journal entry that would explain the change in each balance sheet account balance. The first one is done as an example.

Sales $ 100,000 Cost of goods sold 35,000 Gross margin $ 65,000 Operating expenses Wages 2,500 Rent 1,200 Utilities 980 Insurance 320 5,000 Net Income $ 60,000

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Account Beginning of the year

End of the Year

Accounts receivable $10,000 $12,000 Inventory 21,000 18,500 Prepaid insurance 575 400 Accounts payable 9,000 10,400 Wages payable 850 600 Utilities payable 150 -0-

Item Accounts Debit Credit

Change in AR Accounts receivable 2,000 Sales revenue 2,000 Change in inventory Change in prepaid insurance Change in accounts payable Change in wages payable Change in utilities payable

E10-7 The following events occurred at Gadgets, Inc., during 2004:

January Issued bonds for $250,000 February Purchased new machinery for $80,000 March Sold old machinery for $30,000, resulting in a $10,000 loss April Paid interest of $20,000 on the bonds May Borrowed $5,000 from a local bank June Purchased a new computer for $3,000 July Paid cash dividends of $4,600

Required: Give the journal entry for each transaction. In place of the explanation, give the section of the statement of cash flows in which each would appear.

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Date Account Debit Credit January

February

March

April

May

June

July

Problems – Set A

P10-1A Given the following income statement for the year ending December 31, 2005 and the balance sheets at December 31, 2004 and December 31, 2005, prepare a statement of cash flows for the year ending December 31, 2005 using the indirect method and a spreadsheet analysis.

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Samsula Service Company Income Statement

For the Year Ended December 31, 2005 (in thousands except Earnings per Share)

Service revenue $ 92,000 Expenses:

Wages and salaries $ 60,000

Advertising 10,000

Rent 4,800

Depreciation 3,600

Miscellaneous 5,200

Total expenses 83,600 Income before taxes $ 8,400 Income taxes 2,940 Net income $ 5,460 Earnings per share 0.55

Samsula Service Company Comparative Balance Sheets

($ in Thousands) December 31, December 31, 2005 2004 Assets

urrent assets sh $ 6,910 $ 3,500 counts receivable 12,000 14,000 pplies 200 370 epaid advertising 800 660

Total current assets $19,910 $18,530 Property, plant, and equipment Equipment $ 44,000 $ 40,000 Less: Accumulated depreciation (21,600) (18,000) Total property, plant and equipment 22,400 22,000 Total assets $42,310 $40,530

CCaAcSuPr

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December 31, December 31, 2005 2004

Liabilities and stockholders’ equity urrent liabilities

ages and salaries payable $ 2,700 $ 3,300 xes payable 1,900 1,780

Total current liabilities 4,600 5,080 Stockholders' equity Common stock $30,000 $30,000 Retained earnings 7,710 5,450 37,710 35,450 Total liabilities and stockholders' equity $42,310 $40,530

CWTa

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