Connect - Managerial Accounting Chapter 12

1.

The following transactions and events occurred during the year. Assuming that this company uses theindirect method to report cash provided by operating activities, indicate where each item would appear on its statement of cash flows by placing an X in the appropriate column.

Statement of Cash flows Noncash Investing & Financing Activities Not Reported on Statement or in Notes Operating Activities Investing Activities Financing Activities a. Declared and paid a cash dividend X b. Recorded depreciation expense X c. Paid cash to settle long-term note payable X d. Prepaid expenses increased in the year X e. Accounts receivable decreased in the year X f. Purchased land by issuing common stock X g. Inventory increased in the year X h. Sold equipment for cash, yielding a loss X X i. Accounts payable decreased in the year X j. Income taxes payable increased in the year X

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2.

The following income statement and information about changes in noncash current assets and current liabilities are reported.

SONAD COMPANY Income Statement For Year Ended December 31, 2015
Sales				$	1,828,000
Cost of goods sold					991,000
Gross profit					837,000
Operating expenses
Salaries expense	$	245,535
Depreciation expense		44,200
Rent expense		49,600
Amortization expenses–Patents		4,200
Utilities expense		18,125			361,660
					475,340
Gain on sale of equipment					6,200
Net income				$	481,540

  

Changes in current asset and current liability accounts for the year that relate to operations follow.

Accounts receivable	$	30,500	increase	Accounts payable	$	12,500	decrease
Inventory		25,000	increase	Salaries payable		3,500	decrease

  

Required:

Prepare only the cash flows from operating activities section of the statement of cash flows using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

Statement of Cash Flows (partial) Cash flows from operating activities Net income $481,540 Adjustments to reconcile net income to net cash provided by operating activities Income statement items not affecting cash Depreciation expense 44,200 Amortization expense—Patents 4,200 Gain on sale of equipment (6,200) Changes in current operating assets and liabilities Increase in accounts receivable (30,500) Increase in inventory (25,000) Decrease in accounts payable (12,500) Decrease in salaries payable (3,500) Net cash provided by operating activities $452,240

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3.

Salud Company reports the following information. Use the indirect method to prepare only the operating activities section of its statement of cash flows for the year ended December 31, 2015. (Amounts to be deducted should be indicated with a minus sign.)

Selected 2015 Income Statement Data			Selected Year-End 2015 Balance Sheet Data
Net income	$400,000		Accounts receivable increase	$40,000
Depreciation expense	80,000		Prepaid expenses decrease	12,000
Gain on sale of machinery	20,000		Accounts payable increase	6,000
			Wages payable decrease	2,000

	Cash flows from operating activities Net income $400,000 Adjustments to reconcile net income to operating cash flow Depreciation $80,000 Accounts receivable increase (40,000) Prepaid expense decrease 12,000 Accounts payable increase 6,000 Wages payable decrease (2,000) Gain on sale of machinery (20,000) 36,000 Net cash provided by operating activities $436,000

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4.

a.	Equipment with a book value of $65,300 and an original cost of $133,000 was sold at a loss of $14,000.
b.	Paid $89,000 cash for a new truck.
c.	Sold land costing $154,000 for $198,000 cash, yielding a gain of $44,000.
d.	Long-term investments in stock were sold for $60,800 cash, yielding a gain of $4,150.

  

Use the above information to determine this company’s cash flows from investing activities. (Amounts to be deducted should be indicated with a minus sign.)

	Cash flows from investing activities Cash received from the sale of equipment $51,300 Cash paid for new truck (89,000) Cash received from the sale of land 198,000 Cash received from the sale of long-term investments 60,800 Net cash provided by investing activities $221,100

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5.

a.	Net income was $35,000.
b.	Issued common stock for $64,000 cash.
c.	Paid cash dividend of $14,600.
d.	Paid $50,000 cash to settle a note payable at its $50,000 maturity value.
e.	Paid $12,000 cash to acquire its treasury stock.
f.	Purchased equipment for $39,000 cash.

Use the above information to determine this company’s cash flows from financing activities. (Amounts to be deducted should be indicated with a minus sign.)

	Cash flows from financing activities Cash received from issuance of common stock $64,000 Paid cash dividend (14,600) Repaid note payable (50,000) Purchased treasury stock (12,000) Net cash used in financing activities $(12,600)

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6.

The following financial statements and additional information are reported.

IKIBAN INC. Comparative Balance Sheets June 30, 2015 and 2014
	2015				2014
Assets
Cash	$	87,500			$	44,000
Accounts receivable, net		65,000				51,000
Inventory		63,800				86,500
Prepaid expenses		4,400				5,400
Total current assets		220,700				186,900
Equipment		124,000				115,000
Accum. depreciation—Equipment		(27,000	)			(9,000	)
Total assets	$	317,700			$	292,900
Liabilities and Equity
Accounts payable	$	25,000			$	30,000
Wages payable		6,000				15,000
Income taxes payable		3,400				3,800
Total current liabilities		34,400				48,800
Notes payable (long term)		30,000				60,000
Total liabilities		64,400				108,800
Equity
Common stock, $5 par value		220,000				160,000
Retained earnings		33,300				24,100
Total liabilities and equity	$	317,700			$	292,900

  

IKIBAN INC. Income Statement For Year Ended June 30, 2015
Sales				$	678,000
Cost of goods sold					411,000
Gross profit					267,000
Operating expenses
Depreciation expense	$	58,600
Other expenses		67,000
Total operating expenses					125,600
					141,400
Other gains (losses)
Gain on sale of equipment					2,000
Income before taxes					143,400
Income taxes expense					43,890
Net income				$	99,510

  

Additional Information

a.	A $30,000 note payable is retired at its $30,000 carrying (book) value in exchange for cash.
b.	The only changes affecting retained earnings are net income and cash dividends paid.
c.	New equipment is acquired for $57,600 cash.
d.	Received cash for the sale of equipment that had cost $48,600, yielding a $2,000 gain.
e.	Prepaid Expenses and Wages Payable relate to Other Expenses on the income statement.
f.	All purchases and sales of inventory are on credit.

Required:

(1)	Prepare a statement of cash flows for the year ended June 30, 2015, using the indirect method.(Amounts to be deducted should be indicated with a minus sign.)

IKIBAN, INC. Statement of Cash Flows (Indirect Method) For Year Ended June 30, 2015 Cash flows from operating activities Net income $99,510 Adjustments to reconcile net income to net cash provided by operating activities Income statement items not affecting cash Depreciation expense 58,600 Gain on sale of plant assets (2,000) Changes in current operating assets and liabilities Increase in accounts receivable (14,000) Decrease in inventory 22,700 Decrease in prepaid expenses 1,000 Decrease in accounts payable (5,000) Decrease in wages payable (9,000) Decrease in income taxes payable (400) Net cash provided by operating activities $151,410 Cash flows from investing activities Cash received from sale of equipment 10,000 Cash paid for equipment (57,600) Net cash used in investing activities (47,600) Cash flows from financing activities Cash received from stock issuance 60,000 Cash paid to retire notes (30,000) Cash paid for dividends (90,310) Net cash used in financing activities (60,310) Net increase (decrease) in cash $43,500 Cash balance at prior year-end 44,000 Cash balance at current year-end $87,500

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7.

Forten Company, a merchandiser, recently completed its calendar-year 2015 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY Comparative Balance Sheets December 31, 2015 and 2014
	2015			2014
Assets
Cash	$	49,800		$	73,500
Accounts receivable		65,810			50,625
Inventory		275,656			251,800
Prepaid expenses		1,250			1,875
Total current assets		392,516			377,800
Equipment		157,500			108,000
Accum. depreciation—Equipment		(36,625)			(46,000)
Total assets	$	513,391		$	439,800
Liabilities and Equity
Accounts payable	$	53,141		$	114,675
Short-term notes payable		10,000			6,000
Total current liabilities		63,141			120,675
Long-term notes payable		65,000			48,750
Total liabilities		128,141			169,425
Equity
Common stock, $5 par value		162,750			150,250
Paid-in capital in excess of par, common stock		37,500			0
Retained earnings		185,000			120,125
Total liabilities and equity	$	513,391		$	439,800

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2015
Sales				$	582,500
Cost of goods sold					285,000
Gross profit					297,500
Operating expenses
Depreciation expense	$	20,750
Other expenses		132,400			153,150
Other gains (losses)
Loss on sale of equipment					(5,125)
Income before taxes					139,225
Income taxes expense					24,250
Net income				$	114,975

Additional Information on Year 2015 Transactions
a.	The loss on the cash sale of equipment was $5,125 (details in b).
b.	Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash.
c.	Purchased equipment costing $96,375 by paying $30,000 cash and signing a long-term note payable for the balance.
d.	Borrowed $4,000 cash by signing a short-term note payable.
e.	Paid $50,125 cash to reduce the long-term notes payable.
f.	Issued 2,500 shares of common stock for $20 cash per share.
g.	Declared and paid cash dividends of $50,100.

  

Required:
1.	Prepare a complete statement of cash flows; report its operating activities using the indirect method.(Amounts to be deducted should be indicated with a minus sign.)

FORTEN COMPANY Statement of Cash Flows For Year Ended December 31, 2015 Cash flows from operating activities Net Income $114,975 Adjustments to reconcile net income to net cash provided by operations: Depreciation expense 20,750 Accounts receivable increase (15,185) Inventory increase (23,856) Prepaid expense decrease 625 Accounts payable decrease (61,534) Loss on disposal of equipment 5,125 Net cash provided by operating activities $40,900 Cash flows from investing activities Cash paid for equipment (30,000) Cash received from sale of equipment 11,625 Net cash used in investing activities (18,375) Cash flows from financing activities: Cash borrowed on short-term note 4,000 Cash paid on long-term note (50,125) Cash received from issuing stock 50,000 Cash paid for dividends (50,100) Net cash used in financing activities (46,225) Net increase (decrease) in cash $(23,700) Cash balance at beginning of year 73,500 Cash balance at end of year $49,800

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The primary purpose of the statement of cash flows is to report all major cash receipts (inflows) and cash payments (outflows) during a period.
True

Cash flows from selling trading securities are usually reported in the statement of cash flows as part of:
Operating activities.

The indirect method separately lists each major item of operating cash receipts and cash payments.
False

When preparing a statement of cash flows using the indirect method, each of the following should be classified as an operating cash flow except:
Proceeds from the disposal of a long-term asset with no gain or loss.

The cash flow on total assets ratio compared to the total assets ratio can be used as an indicator of earnings quality.
True

A machine with a cost of $130,000, accumulated depreciation of $85,000, and current year depreciation expense of $17,000 is sold for $40,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:
$40,000.

Business activities that generate or use cash are classified as operating, investing, or financing activities on the statement of cash flows.
True

The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.
True

The appropriate section in the statement of cash flows for reporting the purchase of equipment for cash is:
Investing activities.

Use the following information to calculate cash received from dividends:

Dividends revenue	$29,800
Dividends receivable, January 1	2,600
Dividends receivable, December 31	3,400

$29,000.

The reporting of net cash provided or used by operating activities that lists the major items of operating cash receipts, such as receipts from customers, and subtracts the major items of operating cash disbursements, such as cash paid for merchandise, is referred to as the:
Direct method of reporting net cash provided or used by operating activities.

Marshland Company is preparing the company's statement of cash flows for the fiscal year just ended. The following information is available:

Cash dividends declared for the year	$40,000
Cash dividends payable at the beginning of the year	$17,000
Cash dividends payable at the end of the year	$13,000

The amount of cash paid for dividends was:
$44,000

Conversion of preferred stock to common stock is disclosed in the financing section of the statement of cash flows.
False

The direct method of reporting operating cash flows:
Is recommended but not required by the FASB.

Jeffreys Company reports depreciation expense of $40,000 for Year 2. Also, equipment costing $240,000 was sold for a $10,000 loss in Year 2. The following selected information is available for Jeffreys Company from its comparative balance sheet. Compute the cash received from the sale of the equipment.

At December 31	Year 2	Year 1
Equipment	$510,000,000	$750,000
Accumulated Depreciation-Equipment	328,000	500,000

$18,000

To be classified as a cash equivalent, the only criterion an item must meet is that it must be readily convertible to a known amount of cash.
False

A cash equivalent is:
An investment readily convertible to a known amount of cash.

In preparing a company's statement of cash flows for the most recent year, the following information is available:

Loss on the sale of equipment	$14,000
Purchase of equipment	$225,000
Proceeds from the sale of equipment	$106,000
Repayment of outstanding bonds	$87,000
Purchase of treasury stock	$25,000
Issuance of common stock	$96,000
Purchase of land	$115,000
Increase in accounts receivable during the year	$33,000
Decrease in accounts payable during the year	$75,000
Payment of cash dividends	$35,000

Net cash flows from investing activities for the year were:

$234,000 of net cash used.