CashFlow With Solutions

The Statement of Cash Flows (complete with solutions)

Acct 592 Spring 2005

The Statement of Cash Flows

Purpose of a statement of cash flows:To provide information about the cash inflows and outflows of an entity during a period.

To summarize the operating, investing, and financing activities of the business.

The cash flow statement helps users to assess a companys liquidity, financial flexibility, operating capabilities, and risk.

The statement of cash flows is useful because it provides answers to the following important questions:

Where did cash come from?

What was cash used for?

What was the change in the cash balance?

Specifically, the information in a statement of cash flows, if used with information in the other financial statements, helps external users to assess:

1.A companys ability to generate positive future net cash flows,

2.A companys ability to meet its obligations and pay dividends,

3.A companys need for external financing,

4.The reasons for differences between a companys net income and associated cash receipts and payments, and

5.Both the cash and noncash aspects of a companys financing and investing transactions.

What can we learn from SCF that is not already available in the other financial statements?

It provides answers to important questions like:

Where did cash come from?

What was cash used for?

What was the change in the cash balance?Couldnt we just look the balance sheet?

The change in cash could be determined, but the statement of cash flows provides detailed information about a companys cash receipts and cash payments during the period.

Many things you want to know about a company is summarized in this one statement

Operating, financing and investing cash flows

Net income does not always tell the whole story about operating performance.

A statement of cash flows is an excellent forecasting tool.Review of terms

Cash and cash equivalents

It is a short-term, highly liquid investment.It must be readily convertible to cash and it must be so near to maturity that there is insignificant risks of changes in value due to changes in interest rate.Noncash revenues and expenses

Net income includes items that were neither cash inflow nor cash outflows:

Depreciation expense

Accretion expense on asset retirement obligation

Amortization of intangibles

Impairment loss on goodwill and intangibles

Earnings of affiliated companies accounted for using the equity method

Impairment losses on other noncurrent assets

Compensation expense related to stock options

Net income also includes gains and losses from investing and financing activitiesGain cash received (unless carrying value was zero)Even when there is a loss, cash might have been receivedNet income must be adjusted for these items to get the cash provided by operations part of the reconciling schedule or indirect method

For other items, there are revenues/expenses as well as cash flows but the amounts are different:

Bond interest expense bond interest paid (if bonds were sold at premium or discount)

Sales were not all collected in cash (bad debts, other changes in Accounts Receivable)Purchases were not necessarily paid for during period (change in Accounts Payable)

Income tax expense income taxes paid due to deferred tax assets/liabilities as well as income taxes refunds receivable or unpaid taxes owed

Company, Inc.Statement of Cash Flows

For the year ended December 31, 199X

Cash Flows from Operating Activities

Cash received from customers(Cash received as interest income *

(Cash received as dividend income

(Cash paid for cost of goods sold *

(Cash paid for selling expenses

(Cash paid for general & administrative expenses

Cash paid for interest (including interest on capital leases)

Cash paid for income taxes

Cash that would have been paid for taxes except for excess tax deduction related to stock based compensation

Net cash provided by (or used by) operating activities

Cash Flows from Investing Activities

Cash received from sale of property, plant, & equipment

Cash received from sale of investments

Cash received from repayment of note receivables

Cash paid to acquire property, plant, and equipment

Cash paid to acquire investments

Cash paid out as a loan

Net cash provided by (or used by) investing activities

Cash Flows from Financing Activities

Cash received as proceeds from issuance of debt

Cash received as proceeds from issuance of stock

Cash received as proceeds from reissuance of treasury stock

Cash paid to repay debt (principal payment)

Cash paid on principal related to capital leases

Cash paid to reacquire stock (purchase treasury stock)

Cash paid as dividends

Cash retained due to excess tax deduction related to stock options

Net cash provided by (or used by) financing activities

Net increase (decrease) in cash

Beginning cash and cash equivalents balance

=Ending cash and cash equivalents balance

Schedule of Noncash Investing and Financing ActivitiesAssets for Liabilities &/or EquityLiabilities &/or Equity for AssetsLiabilities for Equity and Equity for LiabilitiesCapital lease (acquisition of asset and obligation for lessee)

A reconciliation of net income to cash provided by operations

*Brackets indicate items that are normally combined

Operating Activities

(Usually associated with working capital accounts like Accounts receivable, inventory, salaries payable, etc.)

Inflows:

From sale of goods and services

From receiving dividends investments

From receiving interest from investments or loans

From sale of trading securities

From reduced income taxes due to excess tax deduction related to stock options

Outflows:

To suppliers for inventory and other materials

To employees for services

To other entities for services (insurance, etc.)

To government for taxes

To lenders for interest

To purchase trading securities

Interest expense is an operating item! Investment earnings (dividends & interest) is an operating item! Buying and selling trading securities are operating activities! These things may not make sense to you so memorize.

Investing Activities

(Usually associated with long-term assets)

Inflows:

From sale of property, plant and equipment

From sale of debt or equity investments of other entities*

From collections of principal on loans to other entities

Outflows:

To purchase property, plant and equipment

To purchase debt or equity securities of other entities

To make loans to other entities

*except investments classified as trading securities which are included in operating activities

Financing Activities

(Usually associated with long-term liability and equity items)

Inflows:

From issuance of debt (bonds and notes)

From issuance of equity securities

Common stockPreferred stockRe-issuance of treasury stock

Outflows:

To stockholders as dividends

To repay or retire long-term debt, including capital leases for lessee (interest on leases is classified as operating)

To reacquire capital stock (treasury stock)

An anomaly on SCF

Dividends are paid to stockholders and interest is paid to bondholders.

Dividends paid are shown as outflows under financing activities

However, FASB defined interest expense to be an operating activity

Interest & dividend revenue are defined to be operating activities, too.

Direct versus Indirect PresentationsFASB Statement No. 95 allows two ways to calculate and report a companys net cash flow from operating activities on its statement of cash flows.

The Direct Method

Under the direct method, operating cash outflows are deducted from operating cash inflows to determine the net cash flow from operating activities.

If you choose the direct method, a reconciliation of cash provided by operations to net income is a required disclosure.

This is the same schedule that appears in a statement prepared using the indirect method

The required information items on a direct method statement of cash flow (per FASB)

Operating Inflows

Cash collected from customers (including lessees, tenants, licensees, and the like)

Interest and dividends received

Other operating cash receipts, if any

Operating outflows

Cash paid to employees and other suppliers of goods or services (including insurance, advertising and the like)

Interest paid

Income taxes paid

Other operating cash payments, if any

The Indirect Method

Under the indirect method, net income is adjusted for noncash items related to operations to compute the net cash flow from operating activities.

If you choose to use the indirect method, you must also disclose interest paid and income taxes paid during the year.

Other disclosures

Under both methods (direct & indirect), you must disclose noncash financing and investing activities

This can be on face of the statement or in the notes to the financial statements.

Examples:

Trade common stock for land

Convertible bonds converted to common stock

Noncash Items

Some financing and investing activities do not affect an entitys cash flow.

Examples:

Trade common stock for land

Issue bonds in exchange for a building

Convertible bonds converted to common stock

Significant transactions should be disclosed separately.

The disclosure of significant noncash financing and investing activities are required under both methods (direct & indirect)

The disclosure can be on face of the statement or in the notes to the financial statements.

Theoretical Considerations

The direct method has the advantage of reporting operating cash inflows separately from operating cash outflows, which may be useful in estimating future cash flows.

The direct method is more meaningful to most financial statement users and the tie in to net income is also provided in a separate schedule which is the same as the indirect method presentation.

Under the indirect method, adjustments are made to net income to arrive at cash flow from operating activities. Thus, cash from operating activities is tied to net income.

An advantage of the indirect method is that income flows are converted from an accrual basis to a cash flow basis. In this manner, the indirect method shows the quality of earnings by providing information about intervals of leads and lags between income flows and operating cash flows.

Example 1 - Statement of Cash Flow DIRECT METHOD

Year endingYear ending

Palouse Pottery12/31/06 RefDebitRefCredit12/31/07 Target

Cash15,000 X27,00042,000 27,000

Accounts Receivable40,000 37,500 (2,500)

Allowance for doubtful accounts(3,000)(4,500)(1,500)

Merchandise Inventory25,000 43,000 18,000

Prepaid Expenses3,000 6,000 3,000

Plant, property & equipment215,000 236,000 21,000

Accumulated Depreciation(80,000)(82,000)(2,000)

215,000 278,000

Accounts Payable(23,000)(31,000)(8,000)

Salaries Payable(2,000)(9,000)(7,000)

Interest payable(2,000)(1,500)500

Income Taxes Payable(1,500)(5,500)(4,000)

Dividends Payable0 (8,000)(8,000)

Long term liabilities(25,000)(15,000)10,000

Common stock, $1 par(100,000)(145,000)(45,000)

Retained Earnings(61,500)(63,000)(1,500)

(215,000)(278,000)0

1997 1997

Closing entry forRev/(Exp)Rec/(Disb)

Sales93,000

Gain/(loss) on sale of PP&E(4,000)

Realized gain/(loss) - land20,000

Cost of goods sold(35,000)

Salaries & other operating expenses(37,000)

Bad debt expense(2,000)

Depreciation & amortization(11,000)

Interest expense(2,500)

Income taxes expense(7,000)

Net income (accrual basis)14,500

Statement of Cash Flows(INFLOWS)(OUTFLOWS)




Noncash Financing/Investing

CHANGE IN CASH X27,000

Totals

Additional information:

a. Wrote off $500 accounts receivable as uncollectibled. Sold land for $30,000 that had been acquired for $10,000

b. Sold operational assets for $4,000 cash that had cost $17,000 and had a book value of $8,000e. Paid a $10,000 long-term note installment

f. Purchase plant, property & equipment for $48,000 cash.

c. Declared a cash dividend of $13,000g. Issued common stock for $45,000 cash.

Example 1 - Statement of Cash Flow INDIRECT METHOD



Cash15,000 X27,00042,000 27,000




Prepaid Expenses3,000 6,000 3,000



215,000 278,000



Interest payable(2,000)(1,500)500


Dividends Payable0 (8,000)(8,000)


Common stock, $1 par(100,000)(145,000)(45,000)


(215,000)(278,000)0







Totals


a. Wrote off $500 accounts receivable as uncollectibled. Sold land for $30,000 that had been acquired for $10,000

b. Sold operational assets for $4,000 cash that had cost $17,000 and had a book value of $8,000e. Paid a $10,000 long-term note installment

f. Purchase plant, property & equipment for $48,000 cash.

c. Declared a cash dividend of $13,000g. Issued common stock for $45,000 cash.

Example 2 - Statement of Cash Flow


Moscow Moving & Storage12/31/06 RefDebitRefCredit12/31/07 Target

Cash15,000 5,000 (10,000)


Allowance for doubtful accounts(1,500)(2,000)(500)


Prepaid Expenses4,500 500 (4,000)


Accumulated Depreciation(20,000)(16,000)4,000

258,100 322,100


Salaries Payable(3,000)(1,000)2,000

Interest payable0 (1,000)(1,000)


Common stock, $1 par(100,000)(181,000)(81,000)


(258,100)(322,100)0

1997 1997

Closing entry forRev/(Exp)Receipt/(Disb)

Sales80,000














CHANGE IN CASH

Totals

Additional Information

a. Wrote off $500 accounts receivable as uncollectibled. Issued common stock for $36,000 cash

b. Sold operational assets for $4,000 cash e. Paid a $20,000 long-term note installment

(cost $15,000, acc'd depreciation $9,000) f. Purchased operational assets, $39,000 cash

c. Declared and paid a cash dividend, $5,000 g. Acquired land in exchange for 1,000 shares of common stock worth $45 each

Reconciliation of Net Income to Cash Provided by Operationsor the Indirect Method

Example 2

Moscow Moving & Storage

Statement of Cash Flow Worksheet

Reconciliation Schedule (Indirect method)Ref

Net income

Cash provided by operations

Example 3Avery Slings & Arrows, Inc.

Avery Slings & Arrows

Income Statement

For year ending12/31/04

Sales6,600,000

Earnings of affiliates (equity method)150,000

Realized loss on sale of equipment(65,000)

Realized gain on sale of investments53,000

Interest and dividend revenue15,000

Total revenues6,753,000

Cost of goods sold3,490,000

Salaries and wages632,000

Other operating expenses421,000

Bad debt expense45,000

Depreciation expense757,000

Amortization of intangibles5,000

Accretion expense25,000

Interest expense935,000

Income tax expense177,000 6,487,000

Net income266,000

Prepare a statement of cash flows (direct method) including the required reconciling schedule and any other required disclosures for Avery Slings & Arrows, Inc. Information from the balance sheet and income statement have been entered into a worksheet for your convenience. In addition to completing the worksheet, you MUST prepare a formal statement with headings, subtotals, etc. for full credit.

ADDITIONAL INFORMATION

a.During the year, ASA paid $2,767,000 in cash for land, building, and equipment.

b.On August 5, 2004, ASA issued 25,000 shares of common stock for $42 per share.

c.ASA purchased $273,000 in marketable securities during the year.

d.Equipment costing $500,000 was sold during the year for $59,000. The book value was $124,000.

e.During the year, AAS declared cash dividends in the amount of $203,000.

f.On April 1, 2004, the holders of $1,500,000 in convertible bonds elected to convert their bonds to common stock. The conversion ratio was 25 shares of common stock for each share $1,000 face value bond.

g.The noncurrent investment represents 30% of the outstanding securities of the investee. This investment is accounted for on the equity method. During 2004, ASA received $29,000 in dividends from the investment.

h.On May 1, 2004, ASA acquired equipment under a capital lease. At the inception of the lease, the present value of the minimum lease payments was $648,000.

i.ASA acquired a patent on a new process for $500,000 on October 15, 2004.

j.During 2004, ASA sold marketable securities which it had acquired for $222,000 for $275,000.

k.In February, ASA issued 150,000 shares of common stock in a 50% stock dividend.

l.ASA issued $3,000,000 in bonds at face value on August 1, 2004.

m.ASA sold 500 shares of treasury stock which it had acquired for $20 per share for $46 per share on January 18, 2004.

n.In October, ASA acquired 1,000 shares of treasury stock at $38 per share.

o.Bad debts in the amount of $33,000 were written off during the year.


Balance Sheet

12/31/04 12/31/03

Current Assets

Cash2,261,000 2,850,000

Securities Available for Sale (at market)258,000 100,000

Accounts Receivable (net)1,947,000 1,900,000

Merchandise Inventory602,000 900,000

Prepaid Expenses4,000 50,000

5,072,000 5,800,000

Noncurrent Assets

Investments in affiliated companies (equity method)2,121,000 2,000,000

Land, building & equipment20,715,000 17,800,000

Less Accumulated Depreciation(2,181,000)(1,800,000)

Intangible Assets568,000 73,000

Total assets26,295,000 23,873,000

Current Liabilities

Accounts Payable347,000 650,000

Salaries Payable18,000 21,000

Interest payable156,000 55,000

Income Taxes Payable45,000 32,000

Dividends Payable128,000 60,000

694,000 818,000

Noncurrent Liabilities

Bonds Payable7,000,000 4,000,000

Premium/Discount on Bonds Payable642,000 656,000

Convertible Bonds Payable1,500,000 3,000,000

Lease obligation2,108,000 1,825,000

Asset retirement obligation275,000 250,000

Deferred Income Taxes122,000 75,000

Other long term liabilities590,000 2,590,000

12,237,000 12,396,000

Stockholder's Equity

Common stock, $10 par5,125,000 3,000,000

Additional paid in capital - common3,525,000 1,600,000

Other paid in capital13,000 0

Unrealized (gain)/loss AFS invest27,000 (80,000)

Treasury stock (at cost)(38,000)(10,000)

Retained Earnings4,712,000 6,149,000

13,364,000 10,659,000

Total liabilities and equity26,295,000 23,873,000

Avery Slings & ArrowsYear endingYear ending

12/31/03 RefDebitRefCredit12/30/04 Target

Cash2,850,000 x 589,000 2,261,000 (589,000)

Securities Available for Sale180,000 231,000 51,000

Allowance to adjust to market(80,000)27,000 107,000

Accounts receivable (net)1,900,000 1,947,000 47,000

Merchandise Inventory900,000 602,000 (298,000)

Prepaid Expenses50,000 4,000 (46,000)

Investments in affiliated companies (equity method)2,000,000 2,121,000 121,000

Land, building & equipment

17,800,000 20,715,000 2,915,000

Accumulated Depreciation(1,800,000)(2,181,000)(381,000)

Intangible Assets73,000 568,000 495,000

Total assets23,873,000 26,295,000

Accounts Payable(650,000)(347,000)303,000


Interest payable(55,000)(156,000)(101,000)


Dividends Payable(60,000)(128,000)(68,000)

Bonds Payable(4,000,000)(7,000,000)(3,000,000)

(Premium)/Discount on Bonds Payable(656,000)(642,000)14,000

Convertible Bonds Payable(3,000,000)(1,500,000)1,500,000

Lease obligation(1,825,000)(2,108,000)(283,000)

Asset retirement obligation(250,000)(275,000)(25,000)

Deferred Income Taxes(75,000)(122,000)(47,000)

Other long term liabilities(2,590,000)(590,000)2,000,000


12/31/03 RefDebitRefCredit12/30/04 Target

Common stock, $10 par(3,000,000)(5,125,000)(2,125,000)

Additional paid in capital common(1,600,000)(3,525,000)(1,925,000)

Unrealized (gain)/loss AFS invest80,000 (27,000)(107,000)

Treasury stock (at cost)10,000 38,000 28,000

Other paid in capital0 (13,000)(13,000)

Retained Earnings(6,149,000)(4,712,000)1,437,000

(23,873,000)(26,295,000)

Closing entry for2004 2004

Revenue/ (Expense)RefRefOperating Cash Inflows/(Outflows)

Sales6,600,000

Earnings of affiliated companies 150,000

Gain/(loss) on sale of equipment(65,000)

Gain/(loss) sale of patent 0

Realized gain/(loss) sale of land0

Realized gain/(loss) on investments53,000


Cost of goods sold(3,490,000)

Salaries and wages(632,000)

Other operating expenses(421,000)


Depreciation expense(757,000)

Amortization of intangibles(5,000)

Accretion expense(25,000)


Income taxes expense (177,000)


Avery Slings & ArrowsINFLOWSOUTFLOWS

Cash provided by operations:

Reconciling schedule:

Net income266,000


Investing Activities0

Avery Slings & ArrowsINFLOWSOUTFLOWS

Financing Activities0


CHANGE IN CASH589,000 x

Totals0

Avery Slings & ArrowsStatement of Cash Flows

For year ended December 31, 2004

InflowsOutflowsNet


Cash collected from customers6,508,000

Interest & dividends received44,000

Cash paid for merchandise(3,495,000)

Cash paid to employees(635,000)

Other operating disbursements(375,000)

Interest paid(848,000)

Income taxes paid(117,000)

6,552,000 (5,470,000)1,082,000

Cash provided by investing activities

Proceeds from sale of equipment59,000

Cash outlay to acquire equipment(2,767,000)

Cash outlay to acquire patent(500,000)

Proceeds from sale of securities275,000

Cash outlay to buy securities(273,000)

334,000 (3,540,000)(3,206,000)

Cash provided by financing activities

Dividends paid (135,000)

Sold treasury stock23,000

Purchased treasury stock(38,000)

Payments on long term debt (2,000,000)

Payments on capital leases(365,000)

Common stock issued1,050,000

Proceeds from issuing nonconvertible bonds3,000,000

4,073,000 (2,538,000)1,535,000

Change in cash(589,000)

Beginning balance - Cash2,850,000

Ending balance - Cash2,261,000

Avery Slings & ArrowsStatement of Cash Flows


Non-cash financing and investing activities

Capital lease648,000

Preferred bonds converted to common stock1,500,000

Schedule to reconcile net income to cash provided by operations

Net Income266,000

Depreciation757,000

Amortization & impairment of intangibles5,000


Amortization of bond premium(14,000)

Realized loss on sale of equipment65,000

Realized gain on sale of investments(53,000)

Equity method investments earnings in excess of dividends(121,000)

Increase in deferred income taxes47,000

Change in working capital accounts:

Net accounts receivable(47,000)

Merchandise Inventory298,000

Prepaid Expenses46,000

Accounts Payable(303,000)

Salaries Payable(3,000)

Interest Payable101,000

Income Taxes Payable13,000

Cash provided by operations:1,082,000

Acct. 301 - Statement of Cash Flows - Homework 4Wenatchee Whirlpool WorldBalance Sheet12/31/96 12/31/95

Current Assets

Cash2,837,600 2,000,000

Securities Available for Sale (at market)390,000 150,000

Accounts Receivable1,752,000 1,900,000

Allowance for doubtful accounts(120,500)(110,000)

Merchandise Inventory1,145,000 875,000

Prepaid Operating Expenses84,000 62,000

6,088,100 4,877,000

Noncurrent Assets

Investments (equity method)3,097,000 3,000,000

Plant, property & equipment16,420,000 10,800,000

Accumulated Depreciation(829,000)(600,000)


TOTAL ASSETS24,847,600 18,205,000

Current Liabilities





Current portion long term debt29,000 21,000

977,400 873,000


Bonds Payable10,000,000 5,000,000

Discount on Bonds(247,000)(270,000)



10,495,000 7,818,000


Convertible preferred, $100 par500,000 2,000,000

Common stock, $10 par3,100,000 1,500,000

Additional paid in capital3,950,000 1,200,000

Unrealized (gain)/loss investments27,000 78,000


13,375,200 9,514,000


Wenatchee Whirlpool World

Income Statement

For year ending 12/31/96

Sales6,200,000

Earnings of affiliated company (equity method)115,000



Realized gain on sale of patent950,000







Depreciation & amortization expense250,500


Income taxes expense740,400 6,233,800

Net income1,112,200


a.On February 25, WWW sold an internally developed patent for $1,000,000. The patent was carried on the books at unamortized legal fees amounting to $50,000 at date of sale.

b.On March 31, WWW issued $5,000,000 in bonds at face value. The semi-annual bonds have a coupon rate of 10% per annum.

c.During the year, WWW disposed of various items of equipment with a total book value of $65,000 and original cost of $80,000. The amount received was $25,000 in cash.

d.During the third quarter, shareholders holding 15,000 shares of the preferred stock converted them into common stock. The conversion ratio was 6 shares of common for each share of preferred.

e.On July 20, WWW sold 50,000 shares of its common stock for $41 per share.

f.By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.

g.An existing factory with equipment was acquired during the year. The acquisition cost was allocated as follows: $772,000 to land, $3,450,000 to building and 678,000 to equipment.

h.WWW acquired a parcel of land adjoining the new factory by giving the owner 20,000 shares of its common stock. At the date of the transaction, the market value of the stock was $40 per share.

i.During the year WWW purchased $875,000 in marketable securities and sold securities which had cost $584,000. The market value of the portfolio at the end of the year was $390,000.

j.WWW owns 30% of a company which manufactures parts that WWW uses in its production process. WWW received $18,000 in dividends from this partially owned company during 1996.

k.Dividends declared during the year totaled $50,000.

Homework 4 - Acct 315

WorksheetYear endingYear ending

Wenatchee Whirlpool World12/31/95 RefDebitRefCredit12/31/96 Target

Cash2,000,000 837,600 2,837,600 837,600

Securities Available for Sale (at market)150,000 390,000 240,000

Accounts Receivable1,900,000 1,752,000 (148,000)


Merchandise Inventory875,000 1,145,000 270,000

Prepaid Operating Expenses62,000 84,000 22,000

Investments in affiliated companies (equity method)3,000,000 3,097,000 97,000

Plant, property & equipment10,800,000 16,420,000 5,620,000


Intangible Assets128,000 71,500 (56,500)

18,205,000 24,847,600



Income Taxes Payable(27,000)(13,400)13,600

Dividends Payable(60,000)(35,000)25,000

Current portion long term debt(21,000)(29,000)(8,000)

Bonds Payable(5,000,000)(10,000,000)(5,000,000)

Premium/Discount on Bonds Payable270,000 247,000 (23,000)




12/31/95 refDebitrefCredit12/31/96 Target

Convertible preferred, $100 par(2,000,000)(500,000)1,500,000

Common stock, $10 par(1,500,000)(3,100,000)(1,600,000)

Additional paid in capital(1,200,000)(3,950,000)(2,750,000)

Unrealized (gain)/loss investments(78,000)(27,000)51,000

Retained Earnings(4,736,000)(5,798,200)(1,062,200)

0 (18,205,000)(24,847,600)


Rev/(Exp)Receipt/(Disb)

Sales6,200,000

Earnings of affiliated companies (equity method)115,000










Amortization of intangible assets(6,500)



Net income (accrual basis)1,112,200


Statement of Cash FlowsINFLOWSOUTFLOWS(Subtotals)





CHANGE IN CASH 837,600

Totals

Statement of Cash Flow Easy Practice Problems 5 & 6

5.Ulliman CompanyPrepare a statement of cash flow direct method including the reconciliation schedule. Most information is provided on the attached workpaper.


a.Dividends declared and paid totaled $700.

b.On January 1, 1999 the 10% convertible bonds that had originally been issued at face value were converted into 500 shares of common stock. The book value method was used to account for the conversion.

c.Long-term nonmarketable investments that cost $1,600 were sold for $2,300.

d.The long-term note payable was paid by issuing 250 shares of common stock at the beginning of the year.

e.Equipment with a cost of $2,000 and a book value of $300 was sold for $100.

f.Equipment was purchased at a cost of $16,200.

g.The 12% bonds payable were issued on September 1, 1999 at 97. They mature on September 1, 2009. The company uses the straight-line method to amortize the discount.

h.Taxable income was less than pretax accounting income, resulting in a $396 increase in deferred taxes payable.

i.Short-term marketable securities were purchased at a cost of $1,300. The portfolio was increased by $300 to a $3,800 fair value at year end by adjusting the related allowance account.

6.Driskoll CompanyPrepare a statement of cash flow direct method including the reconciliation schedule. Most information is provided on the attached workpaper.


a.Dividends were declared in the amount of $2,100.

b.Bonds payable with a face value, book value, and market value of $14,000 were retired on June 30, 1999.

c.Bonds payable with a face value of $8,000 were issued at 90.25 on July 31, 1999, They mature on July 31, 2004. The company uses the straight-line method to amortize the bond discount.

d.Equipment with a cost of $4,000 and a book value of $1,400 was exchanged for an acre of land valued at $2,700. No cash was exchanged. The transaction was properly considered to be a dissimilar asset exchange.

e.Long-term investments in bonds being held to maturity with a cost of $1,000 were sold for $800.

f.Sixty-five shares of common stock were exchanged for a patent. The common stock was selling for $20 per share at the time of the exchange.

g.A tornado completely destroyed a small building that had an original cost of $8,000 and a book value of $4,800. Settlement with the insurance company resulted in after-tax proceeds of $2,200 and an extraordinary loss (net of income taxes) of $2,600.

5.Homework Assignment Ulliman Company

Uliman CompanyYear endingWorksheetYear ending

01/01/99RefDebitRefCredit12/31/99Target

Cash1,400 2,400 1,000

Accounts receivable (net)2,800 2,690 (110)

Marketable securities (at cost)1,700 3,000 1,300

Allowance for change in value500 800 300

Merchandise Inventory8,100 7,910 (190)

Prepaid Expenses1,300 1,710 410

Investments (long-term)7,000 5,400 (1,600)

Land15,000 15,000 0

Buildings and equipment32,000 46,200 14,200

Accumulated depreciation(16,000)(16,400)(400)

0 0 0

53,800 68,710

Accounts Payable(3,800)(4,150)(350)

Income Taxes Payable(2,400)(2,504)(104)

Wages payable(1,100)(650)450

Interest payable0 (400)(400)

12% bonds payable0 (10,000)(10,000)

Premium/Discount on Bonds Payable0 290 290

Notes payable (long term)(3,500)0 3,500

10% Convertible bonds(9,000)0 9,000

Deferred Income Taxes(800)(1,196)(396)

Convertible preferred, $100 par0 0 0

Common stock, $10 par(14,000)(21,500)(7,500)

Additional paid in capital(8,700)(13,700)(5,000)

Unrealized (gain)/loss investments(500)(800)(300)


(53,800)(68,710)


Rev/ (Exp)Receipt/(Disb)

Sales39,930

Other revenue0

Gain/(loss) on sale of PP&E(200)

Realized gain/(loss) on investments700

Interest and dividend revenue820



Other operating expense(1,000)


Interest expense(410)



(53,800)

5.Ulliman Company, continued

Statement of Cash FlowsINFLOWSOUTFLOWSSubtotals


Reconciliation Schedule:




CHANGE IN CASH

Totals

6.Homework Problem Driskoll Company

Driskoll CompanyYear endingWorksheetYear ending


Cash2,700 3,520 820

Accounts receivable (net)5,900 6,215 315

Inventories15,300 15,530 230

Prepaid Expenses1,400 1,000 (400)

Investments (long-term)8,300 7,300 (1,000)

Land16,300 19,000 2,700

Buildings68,700 60,700 (8,000)

Acc'd depreciation - Bldg(35,000)(34,500)500

Equipment29,600 25,600 (4,000)

Acc'd depreciation - Equip(14,200)(14,700)(500)

Patents8,700 9,185 485

107,700 98,850

Accounts Payable(8,900)(9,195)(295)

Interest payable(630)(300)330

Wages payable(2,500)(2,600)(100)

Bonds payable(23,000)(17,000)6,000

Discount on bonds0 715 715

Common stock, $10 par(22,000)(22,650)(650)

Additional paid in capital(15,320)(15,970)(650)

Unrealized (gain)/loss investments0 0 0

Retained Earnings(35,350)(31,850)3,500

(107,700)(98,850)

okok



Sales49,550

Gain/(loss) on exchange of assets1,300

Realized gain/(loss) on investments(200)

Interest and dividend revenue790



Other operating expense(1,100)

Depreciation - buildings(2,700)

Depreciation - equipment(3,100)

Patent amortization(815)


Income taxes expense(500)

Extraordinary loss (net of taxes)(2,600)

Net income (accrual basis)(1,400)

6.Driskoll Company, continued







CHANGE IN CASH

Totals

7.Statement of Cash Flow Problem from final exam, Spring 1998

Albion Altimeters Inc.

Balance Sheet12/31/97 12/31/96

Current Assets

Cash310,200 400,000

Securities Available for Sale (at market)1,112,000 500,000

Accounts Receivable781,000 900,000


Merchandise Inventory829,000 850,000


3,037,800 2,648,000

Noncurrent Assets



TOTAL ASSETS6,244,800 4,178,000

Current Liabilities




Dividends Payable0 25,000

443,700 410,500


Bonds Payable1,000,000 1,000,000

Premium/Discount on Bonds Payable118,000 124,000


1,221,700 1,212,000


Common stock, $10 par1,510,000 1,000,000

Additional paid in capital1,972,000 700,000

Acc'd other comprehensive income*13,000 (14,000)

Retained Earnings1,084,400 869,500

4,579,400 2,555,500


* Other comprehensive income is composed of the holding gains/losses related to available for sale securities.


Income Statement

For year ending12/31/97

Sales3,600,000











Net income289,900

Required:

Use the additional information (below) and the worksheet provided to prepare the statement of cash flow using the direct method. For full credit, use the pages provided to prepare the formal statement in addition to the worksheet.


a. AA declared dividends of $75,000 on June 30, 1997.

b. On Sept. 3, AA sold equipment with a book value of $65,000 for $35,000 in cash. The original cost of the item was $90,000.

c. AA purchased for cash plant, property & equipment for $1,740,000.

d. On May 15, AA issued 50,000 shares of common stock at $35 each.

e. AA wrote off $11,000 of bad debts during 1997.

f. AA purchased for cash $585,000 in marketable securities on Apr. 1.

g. On Oct. 10, AA issued 1,000 shares of stock in exchange for a parcel of land. At that date, the market price of the stock was $32.

7. Statement of Cash Flow Problem


Albion Altimeters Inc.12/31/96 RefDebitRefCredit12/31/97 Target

Cash400,000 89,800 310,200 (89,800)

Securities Available for Sale (at market)

500,000 1,112,000 612,000

Accounts Receivable

900,000 781,000 (119,000)


Merchandise Inventory850,000 829,000 (21,000)


Plant, property & equipment

1,880,000 3,562,000 1,682,000

Accumulated Depreciation

(350,000)(355,000)(5,000)

4,178,000 6,244,800




Dividends Payable(25,000)0 25,000

Bonds Payable(1,000,000)(1,000,000)0

Premium/Discount on Bonds Payable(124,000)(118,000)6,000


Common stock, $10 par

(1,000,000)(1,510,000)(510,000)

Additional paid in capital

(700,000)(1,972,000)(1,272,000)

Acc'd other comprehensive income14,000 (13,000)(27,000)

Retained Earnings(869,500)(1,084,400)(214,900)

0 (4,178,000)(6,244,800)(2,066,800)

Closing entry for 1997Rev/(Exp)RefDebitRefCreditReceipt/(Disb)

Sales3,600,000



Cost of goods sold

(2,100,000)






Income taxes expense

(180,200)


7. Albion Altimeters






CHANGE IN CASH89,800

Totals

Albion Altimeters

Statement of Cash Flow

For year ended 12-31-97




Albion Altimeters

Statement of Cash Flow

For year ended 12-31-97

Reconciling schedule

Notes:

Acct 315 - Statement of Cash FlowHomework Problem # 8

Instructions:

Prepare the statement of cash flow for Endicott Engines Inc. (attached) using the direct method. Show all your work on clearly labeled and well-organized worksheet (provided) or equivalent printout. Label your work and answers clearly. You must submit a worksheet if you want me to be able to follow your thought process (in case your answer is wrong). If the problem doesnt balance, you may plug something (clearly labeled as a plug) and still obtain most of the available points. If you are using spreadsheet software, please explain your computations since I cannot tell what formulas you incorporated into the cells from looking at the printout. The Excel worksheet is available on the course web page: http://www.academic.uidaho.edu/Acct301.

NOTE: For full credit, you must prepare the statement of cash flow in good form (direct method) with all necessary disclosures including a reconciling schedule and disclosures about noncash financing and investing activities.

Endicott Engines Inc.

Income Statement

For year ending 12/31/02

Sales6,500,000

Earnings of affiliated companies (equity method)125,000











692,100


Net income915,000



a.On February 19, EEI sold an internally developed patent for $500,000.

b.On April 3, EEI issued $6,000,000 in bonds at face value. The semi-annual bonds have a coupon rate of 10% per annum.

c.During the year, EEI disposed of various items of equipment with a total book value of $60,000 and original cost of $80,000. The amount received was $30,000 in cash.

d.During the third quarter, shareholders holding 10,000 shares of the preferred stock converted them into common stock. The conversion ratio was 8 shares of common for each share of preferred.

e.On July 20, EEI sold 25,000 shares of its common stock for $43 per share.

f.By the end of the year, EEI had written off as uncollectible a total of $35,000 in accounts receivable.

g.An existing factory with equipment was acquired during the year. The acquisition cost was allocated as follows: $750,000 to land, $4,000,000 to building and 600,000 to equipment.

h.EEI acquired a parcel of land adjoining the new factory by giving the owner 10,000 shares of its common stock. At the date of the transaction, the market value of the stock was $45 per share.

i.New equipment for the factory was obtained under a capital lease. The present value of the minimum lease payments was $722,000.

j.During the year EEI purchased $900,000 in marketable securities and sold securities which had cost $600,000. The market value of the portfolio at the end of the year was $536,000.

k.EEI owns 40% of a company that manufactures parts that EEI uses in its production process. EEI received $20,000 in dividends from this partially owned company during 2002.

l.Dividends declared during the year totaled $100,000.


Balance Sheet12/31/02 12/31/01

Current Assets

Cash1,308,200 1,500,000

Securities Available for Sale536,000 300,000

Accounts Receivable2,145,000 2,000,000


Merchandise Inventory1,165,000 975,000


5,095,000 4,715,000

Noncurrent Assets

Investments (partially owned companies)2,605,000 2,500,000




TOTAL ASSETS24,001,000 17,365,000

Current Liabilities

Accounts Payable1,050,000 800,000




1,202,000 913,000


Bonds Payable11,000,000 5,000,000

Discount on Bonds(277,000)(300,000)


Lease obligations749,000 323,000


12,184,000 8,113,000


Convertible preferred, $100 par1,000,000 2,000,000

Common stock, $10 par2,150,000 1,000,000

Additional paid in capital2,575,000 1,200,000

Unrealized (gain)/loss investments27,000 91,000


10,615,000 8,339,000




Endicott Engines Inc.12/31/01 RefDebitRefCredit12/31/02 Target

Cash1,500,000 191,800 1,308,200 (191,800)

Securities Available for Sale300,000 536,000 236,000

Accounts Receivable2,000,000 2,145,000 145,000


Merchandise Inventory975,000 1,165,000 190,000


Investments (equity method)2,500,000 2,605,000 105,000

Plant, property & equipment10,700,000 17,142,000 6,442,000


Intangible Assets150,000 93,000 (57,000)

17,365,000 24,001,000

Accounts Payable(800,000)(1,050,000)(250,000)



Dividends Payable(60,000)(85,000)(25,000)

Bonds Payable(5,000,000)(11,000,000)(6,000,000)

Premium/Discount on Bonds Payable300,000 277,000 (23,000)


Lease obligations(323,000)(749,000)(426,000)


12/31/01 Ref DebitRefCredit12/31/02 Target


Convertible preferred, $100 par(2,000,000)(1,000,000)1,000,000

Common stock, $10 par(1,000,000)(2,150,000)(1,150,000)

Additional paid in capital(1,200,000)(2,575,000)(1,375,000)

Unrealized (gain)/loss investments(91,000)(27,000)64,000

Retained Earnings(4,048,000)(4,863,000)(815,000)

0 (17,365,000)(24,001,000)

Closing entry for 2002:Rev/(Exp)Receipt/(Disb)

Sales6,500,000

Earnings of affiliated company (equity method)125,000










Amortization of intangible assets(7,000)





Statement of Cash FlowsINFLOWSOUTFLOWS






CHANGE IN CASH191,800

Totals

Statement of Cash Flow Examples - Solutions

Example 1 - completed worksheetYear endingYear ending


Cash15,000 x27,000 42,000 27,000

i2,000

Accounts Receivable40,000 a500 37,500 (2,500)

Allowance for doubtful accounts(3,000)a500 j2,000 (4,500)(1,500)

Merchandise Inventory25,000 k18,000 43,000 18,000

Prepaid Expenses3,000 L3,000 6,000 3,000

d10,000

Plant, property & equipment215,000 f48,000 b17,000 236,000 21,000

Accumulated Depreciation(80,000)b9,000 m11,000 (82,000)(2,000)

215,000 278,000

Accounts Payable(23,000)n8,000 (31,000)(8,000)

Salaries Payable(2,000)o7,000 (9,000)(7,000)

Interest payable(2,000)p500 (1,500)500

Income Taxes Payable(1,500)q4,000 (5,500)(4,000)

Dividends Payable0 h5,000 c13,000 (8,000)(8,000)

Long term liabilities(25,000)e10,000 (15,000)10,000

Common stock, $1 par(100,000)g45,000 (145,000)(45,000)

Retained Earnings(61,500)c13,000 x14,500 (63,000)(1,500)

(215,000)x(278,000)0

1997 1997

Closing entry forRev/(Exp)Receipt/(Disb)

Sales93,000 i2,000 95,000

Gain/(loss) on sale of PP&E(4,000)b4,000 0

Realized gain/(loss) - land20,000 d20,000 0

Cost of goods sold(35,000)n8,000 k18,000 (45,000)

Salaries & other operating expenses(37,000)o7,000 L3,000 (33,000)

Bad debt expense(2,000)j2,000 0

Depreciation & amortization(11,000)m11,000 0

Interest expense(2,500)p500 (3,000)

Income taxes expense(7,000)q4,000 (3,000)

Net income (accrual basis)14,500 X14,500 X11,000 11,000 Operating Cash


Operating ActivitiesX11,000 11,000

Investing Activities(14,000)

Sold operational assetb4,000

Sold landd30,000

Purchased Plant, Property & Equipmentf48,000

Financing Activities30,000

Paid long-term debte10,000

Issued common stockg45,000

Paid cash dividendh5,000


CHANGE IN CASH X27,000 27,000

Totals276,500 276,500

Solutions for Example ProblemsExample 1 for Acct 301

Solution:

Palouse Pottery

Statement of Cash Flows

For year ended31-Dec-97

InflowsOutflowsNet


Cash collected from customers95,000

Interest & dividends received0

Cash paid for merchandise(45,000)





Subtotals95,000 (84,000)11,000


Purchase plant, property & equipment (48,000)

Sale of plant, property & equipment4,000

Sale of land30,000

Subtotals34,000 (48,000)(14,000)



Long-term debt retired (10,000)

Common stock issued45,000

Subtotals45,000 (15,000)30,000

Change in cash27,000

Beginning balance - Cash15,000

Ending balance - Cash42,000


Net Income14,500

Depreciation & amortization11,000

Realized gains/losses PP&E4,000

Realized gain/loss - land sale(20,000)


Net accounts receivable4,000

Merchandise Inventory(18,000)

Prepaid Expenses(3,000)

Accounts Payable8,000

Salaries Payable7,000


Interest Payable(500)

Cash provided by operations:11,000


None

Example 1 for Acct 301 INDIRECT METHOD SOLUTION Statement of Cash Flow WorksheetYear endingYear ending


Cash15,000 x27,000 42,000 27,000

Accounts Receivable40,000 2,500 37,500 (2,500)

Allowance for doubtful accounts(3,000)1,500 (4,500)(1,500)

Merchandise Inventory25,000 18,000 43,000 18,000

Prepaid Expenses3,000 3,000 6,000 3,000

Plant, property & equipment215,000 f48,000 b,d27,000 236,000 21,000

Accumulated Depreciation(80,000)b9,000 11,000 (82,000)(2,000)

215,000 278,000

Accounts Payable(23,000)8,000 (31,000)(8,000)

Salaries Payable(2,000)7,000 (9,000)(7,000)

Interest payable(2,000)500 (1,500)500

Income Taxes Payable(1,500)4,000 (5,500)(4,000)

Dividends Payable0 c5,000 c13,000 (8,000)(8,000)

Long term liabilities(25,000)e10,000 (15,000)10,000

Common stock, $1 par(100,000)g45,000 (145,000)(45,000)

Retained Earnings(61,500)c13,000 h14,500 (63,000)(1,500)

(215,000)(278,000)0


Operating Activities11,000

Net incomeh14,500

Add back loss on sale of equipmentb4,000

Minus gain on sale of landd20,000

depreciation11,000


A/R (net)4,000

Inventory18,000

Prepaid expenses3,000

A/P8,000

Salaries payable7,000

Interest payable500

Income taxes payable4,000


Sold equipmentb4,000

Sold landd30,000

Purchase PP&Ef48,000


Dividends paidc5,000

Payment on LT debte10,000

Issued common stockg45,000



Totals

265,000 265,000

Example 2 for Acct 301 - Solution:

Moscow Moving & Storage


For year ended31-Dec-97

InflowsOutflowsNet


Cash collected from customers81,000

Interest & dividends received0

Cash paid for merchandise(39,000)





Subtotals81,000 (67,000)14,000


Purchase plant, property & equipment (39,000)


Sale of land

Subtotals4,000 (39,000)(35,000)



Long-term debt retired (20,000)

Common stock issued36,000

Subtotals36,000 (25,000)11,000


Beginning balance Cash15,000

Ending balance Cash5,000


Net Income6,000









Interest Payable1,000



Acquired land in exchange for common stock

Example 3 workpaper solution


0 12/31/03 RefDebitRefCredit12/30/04 Target

Cash2,850,000 x 589,000 2,261,000 (589,000)

Securities Available for Sale180,000 c273,000 J222,000 231,000 51,000

Allowance to adjust to market(80,000)r 107,000 27,000 107,000

Accounts Receivable2,000,000 s92,000 o33,000 2,059,000 59,000

Allowance for doubtful accounts(100,000)o33,000 o45,000 (112,000)(12,000)

Merchandise Inventory900,000 s298,000 602,000 (298,000)

Prepaid Expenses50,000 s46,000 4,000 (46,000)

Investments in affiliated companies (equity method)2,000,000 g150,000 g29,000 2,121,000 121,000

Land, building & equipment17,800,000 a2,767,000 d500,000 20,715,000 2,915,000

g648,000

Accumulated Depreciation(1,800,000)d376,000 p757,000 (2,181,000)(381,000)

Intangible Assets73,000 I500,000 p5,000 568,000 495,000

Total assets23,873,000 26,295,000

Accounts Payable(650,000)t303,000 (347,000)303,000

Salaries Payable(21,000)t3,000 (18,000)3,000

Interest payable(55,000)t101,000 (156,000)(101,000)

Income Taxes Payable(32,000)t13,000 (45,000)(13,000)

Dividends Payable(60,000)e135,000 e203,000 (128,000)(68,000)

Bonds Payable(4,000,000)L3,000,000 (7,000,000)(3,000,000)

Premium/Discount on Bonds Payable(656,000)u14,000 (642,000)14,000

Convertible Bonds Payable(3,000,000)f1,500,000 (1,500,000)1,500,000

Lease obligation(1,825,000)v365,000 g648,000 (2,108,000)(283,000)

Asset retirement obligation(250,000)q25,000 (275,000)(25,000)

Deferred Income Taxes(75,000)w47,000 (122,000)(47,000)

Other long term liabilities(2,590,000)y2,000,000 (590,000)2,000,000


Common stock, $10 par(3,000,000)b250,000 (5,125,000)(2,125,000)

f375,000

k1,500,000

Additional paid in capital - common(1,600,000)b800,000 (3,525,000)(1,925,000)

f1,125,000

Unrealized (gain)/loss AFS invest80,000 r107,000 (27,000)(107,000)

Treasury stock (at cost)10,000 n38,000 m10,000 38,000 28,000

Other paid in capital0 m13,000 (13,000)(13,000)

k1,500,000

Retained Earnings(6,149,000)e203,000 X266,000 (4,712,000)1,437,000

(23,873,000)(26,295,000)


Closing entry for2004 RefDebitsRefCredits2004

Rev/(Exp)Receipt/ (Disb)

Sales6,600,000 s92,000 6,508,000

Earnings of affiliates (equity method)150,000 g150,000 0

Gain/(loss) on sale of PP&E(65,000)d65,000 0

Realized gain/(loss) on investments53,000 J53,000 0

Interest and dividend revenue15,000 g29,000 44,000

Cost of goods sold(3,490,000)s298,000 t303,000 (3,495,000)

Salaries and wages(632,000)t3,000 (635,000)

Other operating expenses(421,000)s46,000 (375,000)

Bad debt expense(45,000)o45,000 0

Depreciation expense(757,000)p757,000 0

Amortization of intangibles(5,000)p5,000 0

Accretion expense(25,000)q25,000 0

Interest expense(935,000)t101,000 u14,000 (848,000)

w47,000

Income taxes expense (177,000)t13,000 (117,000)

Net income (accrual basis)266,000 X266,000 X1,082,000 1,082,000

INFLOWSOUTFLOWS

Cash provided by operations:X1,082,000 1,082,000


Net income266,000

Depreciation757,000

Amortization & impairment of intangibles5,000


Bond premiums/discounts(14,000)


Realized gain/loss investments(53,000)

Equity method investments(121,000)

Deferred income taxes47,000

Change in working capital:

Net accounts receivable(47,000)

Merchandise Inventory298,000


Accounts Payable(303,000)


Interest payable101,000


Cash provided by operations1,082,000

off by0

Avery Slings & ArrowsRefInflowsRefOutflows

Investing Activities(3,206,000)

Purchased PP&Ea2,767,000

Purchased marketable securitiesc273,000

Sold equipmentd59,000

Purchased patentI500,000

Sold investmentsJ275,000

Financing Activities1,535,000

Issued common stockb1,050,000

Paid dividendse135,000

Issued bondsL3,000,000

Sold treasury stockm23,000

Purchased treasury stockn38,000

Payments on capital leasesv365,000

Payments on long-term debty2,000,000


Bonds converted into stockf1,500,000 f1,500,000

Capital leaseh648,000 648,000

Stock dividendK

CHANGE IN CASH589,000 x

Totals20,930,000 20,930,000 (589,000)Change in Cash

ok0 0 half

0 double

0 divide by 9

Solution

Example 4- Acct 315


Wenatchee Whirlpool World12/31/95 RefDebitRefCredit12/31/96 Target

Cash2,000,000 X837,600 2,837,600 837,600

o51,000

Securities Available for Sale (at market)150,000 I875,000 I584,000 390,000 240,000

p120,000

Accounts Receivable1,900,000 f28,000 1,752,000 (148,000)

Allowance for doubtful accounts(110,000)f28,000 m38,500 (120,500)(10,500)

Merchandise Inventory875,000 p270,000 1,145,000 270,000

Prepaid Operating Expenses62,000 p22,000 84,000 22,000

Investments (equity method)3,000,000 l115,000 j18,000 3,097,000 97,000

h800,000

Plant, property & equipment10,800,000 g4,900,000 c80,000 16,420,000 5,620,000

Accumulated Depreciation(600,000)c15,000 n244,000 (829,000)(229,000)

n6,500

Intangible Assets128,000 a50,000 71,500 (56,500)

18,205,000 24,847,600

Accounts Payable(750,000)p130,000 (880,000)(130,000)

Salaries Payable(15,000)p5,000 (20,000)(5,000)

Income Taxes Payable(27,000)q13,600 (13,400)13,600

Dividends Payable(60,000)k75,000 k50,000 (35,000)25,000

Current portion long term debt(21,000)s8,000 (29,000)(8,000)

Bonds Payable(5,000,000)b5,000,000 (10,000,000)(5,000,000)

Premium/Discount on Bonds Payable270,000 r 23,000 247,000 (23,000)

Deferred Income Taxes(88,000)q92,000 (180,000)(92,000)

s2,430,000

Other long term liabilities(3,000,000)s8,000 (562,000)2,438,000

12/31/95 refDebitrefCredit12/31/96 Target

Convertible preferred, $100 par(2,000,000)d1,500,000 (500,000)1,500,000

h200,000

e500,000

Common stock, $10 par(1,500,000)d900,000 (3,100,000)(1,600,000)

h600,000

e1,550,000

Additional paid in capital(1,200,000)d600,000 (3,950,000)(2,750,000)

Unrealized (gain)/loss investments(78,000)o51,000 (27,000)51,000

Retained Earnings(4,736,000)k50,000 X1,112,200 (5,798,200)(1,062,200)

0 (18,205,000)(24,847,600)




Sales6,200,000 p120,000 6,320,000

Earnings of affiliated company (equity method)115,000 l115,000 0

Gain/(loss) on sale of PP&E(40,000)c40,000 0

Realized gain/(loss) on investments108,000 I108,000 0

Realized gain on sale of patent950,000 a950,000 0

Interest and dividend revenue13,000 j18,000 31,000

Cost of goods sold(3,600,000)p130,000 p270,000 (3,740,000)

Salaries and wages(590,000)p5,000 (585,000)

Other operating expenses(345,000)p22,000 (367,000)

Bad debt expense(38,500)m38,500 0

Depreciation expense(244,000)n244,000 0

Amortization of intangible assets(6,500)n6,500 0

Interest expense(669,400)r 23,000 (646,400)

Income taxes expense(740,400)q92,000 q13,600 (662,000)

Net income (accrual basis)1,112,200 X1,112,200 X350,600 350,600


Operating ActivitiesX350,600


Net Income1,112,200


Bond premiums/discounts23,000



Gain on sale of patent(950,000)

Undistributed Earnings of Investees(97,000)





Prepaid Operating Expenses(22,000)



Income Taxes Payable(13,600)



Sale of patenta1,000,000

Sale of equipmentc25,000

Purchase factoryg4,900,000

Purchase investment securitiesI875,000

Sold investment securitiesI692,000


Issued bondsb5,000,000

Issued common stocke2,050,000

Dividends paidk75,000

Long-term debt repaids2,430,000


Preferred converted to common stockd1,500,000 d1,500,000

Swap common stock for landh800,000 h800,000


Totals25,237,000 25,237,000

Solution

Working through the additional items of information:

a.On February 25, WWW sold an internally developed patent for $1,000,000. The patent was carried on the books at unamortized legal fees amounting to $50,000 at date of sale.

Cash [Investing - inflow]1,000,000

Intangible Assets

50,000

Realized gain on sale of patent

950,000

b.On March 31, WWW issued $5,000,000 in bonds at face value. The semi-annual bonds have a coupon rate of 10% per annum.

Cash [Financing - inflow]5,000,000

Bonds payable

5,000,000

c.During the year, WWW disposed of various items of equipment with a total book value of $65,000 and original cost of $80,000. The amount received was $25,000 in cash. Accumulated depreciation would be $15,000 (80,000 - 65,000)

Cash [Investing - inflow]25,000Accumulated depreciation15,000Loss on sale of plant, property & equipment40,000

Plant, property and equipment

80,000

d.During the third quarter, shareholders holding 15,000 shares of the preferred stock converted them into common stock. The conversion ratio was 6 shares of common for each share of preferred. Therefore 90,000 shares of common stock would be issues (6 * 15,000) with a par value of $900,000 ($10 par each). The book value of the preferred was 1,500,000. Therefore, additional paid in capital to balance the journal entry would be 600,000.

Convertible Preferred Stock, $100 par1,500,000


900,000

Additional paid-in capital

600,000

e.On July 20, WWW sold 50,000 shares of its common stock for $41 per share. The proceeds would be $2,050,000 (41 * 50,000) and the par value portion would be $500,000 with the rest as additional paid in capital.

Cash [Financing - inflow]2,050,000


500,000


1,550,000

f.By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.

Allowance for doubtful accounts28,000

Accounts receivable

28,000

g.An existing factory with equipment was acquired during the year. The acquisition cost was allocated as follows: $772,000 to land, $3,450,000 to building and 678,000 to equipment. This totals to $4,900,000.Plant, property and equipment4,900,000

Cash [Investing outflow]

4,900,000

h.WWW acquired a parcel of land adjoining the new factory by giving the owner 20,000 shares of its common stock. At the date of the transaction, the market value of the stock was $40 per share. The value of the land is $800,000 (20,000 * 40).Plant, property and equipment800,000


200,000


600,000

i.During the year WWW purchased $875,000 in marketable securities and sold securities which had cost $584,000. The market value of the portfolio at the end of the year was $390,000. From the income statement, the gain on sale was 108,000. Therefore, the cash received from the sale of securities was 584+108 = $692,000

Investments - Securities available for sale875,000

Cash [Investing outflow]

875,000Cash [Investing inflow]692,000

Investments - Securities available for sale

584,000

Gain on sale of investments

108,000

j.WWW owns 30% of a company which manufactures parts that WWW uses in its production process. WWW received $18,000 in dividends from this partially owned company during 1996. Dividends received from equity-method investments reduce the investment account and do NOT appear on the income statement.

Cash [Operating - dividends received]18,000

Investments (partially-owned companies)

18,000

k.Dividends declared during the year totaled $50,000. Dividends declared reduce retained earnings and increase dividends payable. The balancing number in dividends payable (if this account exists) will be the dividends paid. If there is no dividends payable account, then the dividends declared = the dividends paid.

Retained earnings50,000

Dividends payable

50,000Dividends payable75,000

Cash [Financing - outflow]

75,000

Starting through the income statement, looking for noncash items:

l.No deposit was made for share of earnings of partially owned companies. Therefore, this account needs to be zeroed out by re-constructing the entry that recorded the share of earnings.

Investments in partially owned company115,000

Earnings of partially-owned company

115,000

m.No check was written for bad debt expense. Therefore, this account needs to be zeroed out by re-constructing the entry that recorded bad debt expense for the year (the credit is always to allowance for doubtful accounts.


Allowance for doubtful accounts

38,500

n.No checks are written to record depreciation expense and amortization of intangibles. Therefore, these accounts need to be zeroed out by reconstructing the entry that recorded the expenses.

Depreciation expense244,000Amortization of intangible assets6,500

Accumulated depreciation

244,000

Intangible assets

6,500

Starting through the balance sheet to investigate accounts not yet balanced:

o.Securities available for sale (at market) doesnt balance by $51,000. However, this amount appears in the owners equity section as the change in Unrealized (gain)/loss on investments. Therefore, this amount must have been the adjusting entry for the allowance for change in value account.

Unrealized gain/loss on investments51,000

Investments in AFS securities (allowance)

51,000

p.The remaining difference in accounts receivable ($120,000) is the adjustment to sales to get from accrual basis to cash basis. The difference in Merchandise Inventory is an adjustment to cost of goods sold. The difference in prepaid operating expenses is an adjustment to other operating expenses. The change in accounts payable would mostly be related to cost of goods sold. The change in salaries payable affects salaries and wages expense.

Sales120,000

Accounts receivable

120,000Merchandise inventory270,000

Cost of goods sold

270,000Prepaid operating expenses22,000

Other operating expenses

22,000

Accounts payable

130,000Cost of goods sold130,000

Salaries payable

5,000Salaries and wages5,000

q.Income tax expense is affected by two accounts on the balance sheet - income taxes payable and deferred income taxes.

Income taxes payable13,600

Income tax expense

13,600

Deferred income taxes

92,000Income tax expense92,000

r.Amortization of premiums and discounts on bonds payable impacts interest expense.


Discount on bonds payable

23,000

s.Long-term debt is presented in two numbers on balance sheet - current and noncurrent. These accounts need to be combined to find out how much was borrowed or repaid during the year. Take the change in one account to the other. The remaining amount to balance will be the cash inflow or outflow.

Other long-term debt8,000

Current portion of long-term debt

8,000

After this entry, the number necessary to balance other long-term debt is $2,430,000 which must be the amount of long-term debt repaid during the year.

Other long-term debt2,430,000

Cash [Financing - outflow]

2,430,000

Example 4 - Acct 301

Solution

Wenatchee Whirlpool WorldStatement of Cash FlowsFor year ended 12/31/96

InflowsOutflowsNet









Subtotals6,351,000 (6,000,400)350,600


Purchase plant, property & equipment (4,900,000)


Sale of patent1,000,000

Marketable securities purchased (875,000)

Marketable securities sold692,000

Subtotals1,717,000 (5,775,000)(4,058,000)



Long-term debt retired (2,430,000)

Bonds issued5,000,000


Subtotals7,050,000 (2,505,000)4,545,000

Change in cash837,600

Beginning balance - Cash2,000,000

Ending balance - Cash2,837,600


Preferred stock converted to common

1,500,000

Land obtained by issue of common stock800,000

Example 3 - Acct 301Solution


For year ended 12/31/96


Net Income1,112,200


Bond premiums/discounts23,000



Gain on sale of patent(950,000)

Undistributed Earnings of Affiliates(97,000) *



Net accounts receivable158,500 **


Prepaid Operating Expenses(22,000)



Income Taxes Payable(13,600)


The following notes are explanations and not part of a formal statement of cash flow

* Earnings of affiliates (equity method)(115,000)

Dividends received (equity method affiliates)18,000

(97,000)

** This is the easiest way to handle bad debts: just enter change in NET A/R:

Change in Accounts Receivable148,000

Change in Allowance for Doubtful Accounts10,500

158,500

This is the more difficult alternate:

Adjustment to sales (to get cash collected from customers)120,000


158,500

What does not work is to include bad debt expense + change in Accounts Receivable and change in Allowance!

1. Homework AssignmentSolution

Ulliman CompanyYear endingWorksheetYear ending

0 01/01/99RefDebitRefCredit12/31/99Target

Cash1,400 x1,000 2,400 1,000

Accounts receivable (net)2,800 L110 2,690 (110)

Marketable securities (at cost)1,700 j1,300 3,000 1,300

Allowance for change in value500 j300 800 300

Merchandise Inventory8,100 M190 7,910 (190)

Prepaid Expenses1,300 N410 1,710 410

Investments (long-term)7,000 d1,600 5,400 (1,600)

Land15,000 15,000 0

Buildings and equipment32,000 g16,200 f2,000 46,200 14,200

Accumulated depreciation(16,000)f1,700 k2,100 (16,400)(400)

Total assets53,800 68,710

Accounts Payable(3,800)O350 (4,150)(350)

Income Taxes Payable(2,400)p104 (2,504)(104)

Wages payable(1,100)q450 (650)450

Interest payable0 r400 (400)(400)

12% bonds payable0 h10,000 (10,000)(10,000)

Premium/Discount on Bonds Payable0 h300 s10 290 290

Notes payable (long term)(3,500)e3,500 0 3,500

10% Convertible bonds(9,000)c9,000 0 9,000

Deferred Income Taxes(800)i396 (1,196)(396)


Common stock, $10 par(14,000)c & e7,500 (21,500)(7,500)

Additional paid in capital(8,700)c & e5,000 (13,700)(5,000)

Unrealized (gain)/loss investments(500)j300 (800)(300)

Retained Earnings(10,000)b700 XX4,800 (14,100)(4,100)

Total liab & equity(53,800)(68,710)

okok



Sales39,930 L110 40,040

Other revenue0 0

Gain/(loss) on sale of PP&E(200)f200 0

Realized gain/(loss) on investments700 d700 0

Interest and dividend revenue820 820

Cost of goods sold(19,890)m&o540 (19,350)

Salaries & other operating expenses(11,000)q450 (11,450)

Other operating expense(1,000)N410 (1,410)

Depreciation & amortization(2,100)k2,100 0

Interest expense(410)r & s410 0

Income taxes expense(2,050)i & p500 (1,550)

Net income (accrual basis)4,800 XX4,800 xx7,100 7,100

Ulliman Company


Operating Activitiesxx7,100 7,100


Net Income4,800

Loss on sale of equipment200 f

Gain on sale of investments(700)d

Depreciation expense2,100 k

Bond discount amortization10 s

Deferred income taxes396 i

Change in WC accounts:

Accounts receivable (net)110

Merchandise Inventory190

Prepaid Expenses(410)

Accounts Payable350

Income Taxes Payable104

Wages payable(450)

Interest payable400

7,100

Investing Activities(15,100)

Investments soldd2,300

sold equipmentf100

Purchased equipmentg16,200

Purchase mkt securitiesj1,300

Financing Activities9,000

Dividends paidb700

Issued bonds at a discounth9,700


LT debt retired by issue of common stocke

conversion of bonds to stockc

CHANGE IN CASH x1,000 1,000

Totals62,720 62,720

Ulliman Company



Cash flows from operating activities

Collections from customers40,040

Payments to suppliers(19,350)

Payments to employees(11,450)

Other operating payments(1,410)


Dividends collected820

Cash provided by operations7,100

Cash flows from investing activities

Purchase of marketable securities(1,300)

Proceeds from sale of long-term investments2,300

Disbursements to acquire equipment(16,200)

Proceeds from sale of equipment100

Cash used by investing activities(15,100)

Cash flows from financing activities

Proceeds from issuance of bonds9,700

Payment of dividends(700)

Cash provided by financing activities9,000

Net increase in cash1,000

Beginning balance in cash1,400

Cash balance at 12-31-972,400

Noncash investing and financing activities

LT debt retired by issue of common stock3,500

conversion of bonds to stock9,000

Reconcilation of net income to cash provided by operations

Net income4,800

Loss on sale of equipment200

Gain on sale of investments(700)

Depreciation expense2,100

Bond discount amortization10

Deferred income taxes396

Change in WC accounts:

Accounts receivable (net)110

Merchandise Inventory190

Prepaid Expenses(410)

Accounts Payable350

Income Taxes Payable104

Wages payable(450)

Interest payable400

7,100

2. Homework AssignmentSolution

Driskoll CompanyYear endingWorksheetYear ending


Cash2,700 x820 3,520 820

Accounts receivable (net)5,900 i315 6,215 315

Inventories15,300 j230 15,530 230

Prepaid Expenses1,400 k400 1,000 (400)

Investments (long-term)8,300 e1,000 7,300 (1,000)

Land16,300 d2,700 19,000 2,700

Buildings68,700 c8,000 60,700 (8,000)

Acc'd depreciation - Bldg(35,000)c3,200 g2,700 (34,500)500

Equipment29,600 d4,000 25,600 (4,000)

Acc'd depreciation - Equip(14,200)d2,600 g3,100 (14,700)(500)

Patents8,700 f1,300 h815 9,185 485

107,700 98,850

Accounts Payable(8,900)L295 (9,195)(295)

Interest payable(630)m330 (300)330

Wages payable(2,500)n100 (2,600)(100)

Bonds payable(23,000)a14,000 b8,000 (17,000)6,000

Discount on bonds0 b780 o65 715 715

Common stock, $10 par(22,000)f650 (22,650)(650)

Additional paid in capital(15,320)f650 (15,970)(650)

Unrealized (gain)/loss investments0 0 0

Retained Earnings(35,350)p2,100 xx(1,400)(31,850)3,500

(107,700)(98,850)

okok



Sales49,550 i315 49,235

Gain/(loss) on exchange of assets1,300 d1,300 0

Realized gain/(loss) on investments(200)e200 0

Interest and dividend revenue790 790

Cost of goods sold(23,800)L295 j230 (23,735)

Salaries & other operating expenses(16,510)n100 (16,410)

Other operating expense(1,100)k400 (700)

Depreciation - buildings(2,700)g2,700 0

Depreciation - equipment(3,100)g3,100 0

Patent amortization(815)h815 0

Interest expense(1,715)o65 m330 (1,980)

Income taxes expense(500)(500)

Extraordinary loss (net of taxes)(2,600)c2,600 0

Net income (accrual basis)(1,400)xx(1,400)xx6,700 6,700

Driskoll Company


Operating Activitiesxx6,700 6,700


Net income(1,400)

Depreciation5,800 g

amortization815 h

Extraordinary loss (net of taxes)2,600

Gain/(loss) on exchange of assets(1,300)


Amort of Bond Discount65 o

change in WC accounts:

Accounts receivable (net)(315)i

Inventories(230)j

Prepaid Expenses400 k

Accounts Payable295 L

Interest payable(330)m

Wages payable100 n

6,700

Investing Activities3,000

Proceeds from insurance companyc2,200

Sale of long-term investmente800

Financing Activities(8,880)

Retired bonds payablea14,000

Proceeds of bond issueb7,220

dividends paidp2,100


Exchanged equipment for landd

Exchanged stock for patentf

CHANGE IN CASH x820 820

Totals54,170 54,170

Driskoll Company



Cash flows from operating activities

Collections from customers49,235

Payments to suppliers(23,735)

Payments to employees(16,410)

Other operating payments(700)

Income taxes paid(500)


Dividends collected790

Cash provided by operations6,700

Cash flows from investing activities

Proceeds from insurance company2,200

Proceeds from sale of long-term investments800

Cash provided by investing activities3,000

Cash flows from financing activities

Proceeds from issuance of bonds7,220

Retire bonds payable(14,000)

Payment of dividends(2,100)

Cash used by financing activities(8,880)

Net increase in cash820

Beginning balance in cash2,700

Cash balance at 12-31-973,520

Noncash investing and financing activities

Exchanged stock for patent

Exchanged equipment for land

Reconcilation of net income to cash provided by operations

Net income(1,400)

Depreciation5,800

amortization815

Extraordinary loss (net of taxes)2,600

Gain/(loss) on exchange of assets(1,300)


Amort of Bond Discount65


Accounts receivable (net)(315)

Inventories(230)

Prepaid Expenses400

Accounts Payable295

Interest payable(330)

Wages payable100

6,700



For year ended 12/31/97

InflowsOutflowsNet









Subtotals3,723,000 (3,172,800)550,200


Purchase plant, property & equipment (1,740,000)


Marketable securities purchased (585,000)

Marketable securities sold

Subtotals35,000 (2,325,000)(2,290,000)




Subtotals1,750,000 (100,000)1,650,000


Beginning balance - Cash400,000

Ending balance

CashFlow With Solutions

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