(
3
)
Cash
p
aid to su
pp
liers and em
p
lo
y
ees:
Cost of
g
oods sold 1,500,000$
Less: Decrease in inventor
y
30
,
000
Net
p
urchases 1,470,000$
Cash paid for purchases of merchandise:
PROBLEM 13.6B
FOXBORO TECHNOLOGIES
(continued)
22
000
p
000
9
p
842
2
$
4
23
000
$
10
000
12
$
8
160
$
b.
●
PROBLEM 13.6B
FOXBORO TECHNOLOGIES (concluded)
In addition to cost of goods sold, operating expenses required the payment of a
Cash paid to suppliers, presented in the operating activities section of the statement of cash
flows, totaled $2,334,000. Cost of goods sold, presented in the income statement, was only
$1,500,000. The primary reasons for the difference are as follows:
–Decrease in inventory
were required as a result of the following:
40 Minutes, Strong
a.
Cash flows from o
p
eratin
g
activities:
Net income 562,000$
Add: De
p
reciation ex
p
ense 125,000
Increase in accounts
p
a
y
able
3
7,
000
Subtotal 724,000$
p
y
)
66
Net cash
p
rovided b
y
financin
g
activities
2
,
1
55,
000
Net increase
(
decrease
)
in cash (3,000)$
Cash and cash e
q
uivalents, Januar
y
1, 2015
4
5,
000
Cash and cash e
q
uivalents, Dec. 31, 2015
42
,
000
$
2
000
000
$
Supplementary Schedule: Noncash Investing and Financing Activities
PROBLEM 13.7B
LGIN
For the Year Ended December 31, 2015
Statement of Cash Flows
LGIN
Hill Education.
1
000
882
b.
c. LGIN does not appear headed for insolvency. First, the company has a $4.5 million line of
credit, against which it has drawn only $1,490,000. This gives the company considerable
debt-paying ability. Next, if LGIN’s rapid growth continues, the company should not
PROBLEM 13.7B
LGIN (concluded)
LGIN’s credit sales resulted in $865,000 in new receivables, which were uncollected as of
year-end. These credit sales all were included in the computation of net income, but those
Note to instructor: It is not uncommon for cash flows to lag behind a rising net income figure in a
growing business. This is why many rapidly growing businesses find themselves “strapped for
cash” to finance their growth.
60 Minutes, Strong
a.
Balance sheet effects:
Beginning Ending
Balance Balance
Cash and cash e
q
uivalents 22,000 (x) 38,000 60,000
27,000 (8) 15,000 12,000
40,000 (4) 5,000 35,000
120,000 (5) 8,000 128,000
250,000 (9) 20,000 (3) 29,000 241,000
459,000 476,000
Liabilities & Owners’ E
q
uit
y
50,000 (6) 20,000 70,000
Accounts payabl
e
Marketable securities
Plant and equipment (net of
accumulated depreciation)
PURCELLS, INC.
PROBLEM 13.8B
Changes Changes
PURCELLS, INC.
Worksheet for a Statement of Cash Flows
Accounts receivable
Inventory
Assets
For the Year Ended December 31, 2015
Debit Credit
PROBLEM 13.8B
PURCELLS, INC.
(continued)
b
.
Cash flows from o
p
eratin
g
activities:
Net loss (34,000)$
Add: De
p
reciation ex
p
ense 29,000
Decrease in accounts receivable 5,000
Increase in accounts
p
a
y
able 20,000
Loss on sales of marketable securities
4
,
000
p
y
Cash flows from investin
g
activities:
Proceeds from sales of marketable securities 11,000$
Cash
p
aid to ac
q
uire
p
lants assets
(
see su
pp
lementar
y
schedule
)
(8
,
000)
Net cash
p
rovided b
y
investin
g
activities 3,000
Cash flows from financin
g
activities:
Dividends
p
aid (4,000)$
Pa
y
ment of note
p
a
y
able (10,000)
3
000
p
y
21
000
y
22
000
60
000
$
Purchase of
p
lant assets 20,000$
Less: Portion financed throu
g
h issuance of lon
g
-term debt
12
,
000
Cash
p
aid to ac
q
uire
p
lant assets
8
,
000
$
Supplementary Schedule: Noncash Investing and Financing Activities
PURCELLS, INC.
For the Year Ended December 31, 2015
Statement of Cash Flows
Hill Education.
2
000
10
000
c.
d.
e.
f.
PROBLEM 13.8B
PURCELLS, INC. (continued)
Purcells, Inc. achieved its positive cash flow from operating activities basically by
liquidating assets and by not paying its bills. It has converted most of its accounts
receivable into cash, which probably means that credit sales have declined substantially
used to. While this conserves cash, the “savings” are temporary. Also, if the company’s
credit rating is damaged, this strategy may reduce both earnings and cash flows in the
near future.
company as a going concern or whether management should sell the assets individually. In
either event, management should stop purchasing Pulsas. Assuming that sales continue to
decline, the company’s current inventory appears to be approximately a one-year supply.
This company is contracting its operations (or collapsing). Its investment in marketable
securities, receivables, and plant assets all are declining. Further, the income statement
shows that operations are eroding the owners’ equity in the business. The decline in
The company’s principal revenue source—sales of Pulsas—is declining. If nothing is done,
Purcells, Inc. has substantially more cash than it did a year ago. Nonetheless, the
company’s financial position appears to be deteriorating. Its marketable securities—a
questionable in light of the declining sales.
Hill Education.
•
•Develop forecasts of future operations and cash flows. If a turnaround does not appear
PROBLEM 13.8B
PURCELLS, INC. (concluded)
If management decides to continue business operations, it should take the following actions:
Expand the company’s product lines! The Pulsas alone can no longer support profitable
operations. Also, dependency upon a single product—especially a faddish product with a
receivables and letting payables go unpaid can only bolster net cash flow for a limited
period of time.
Hill Education.
25 Minutes, Strong
a.
SOLUTIONS TO CASES
ANOTHER LOOK AT ALLISON CORPORATION
CASE 13.1
Based on past performance, it does not appear that Allison Corporation can continue to pay
annual dividends of $40,000 without straining the cash position of the company. In a typical
year, Allison generates a positive cash flow from operating activities of approximately
Hill Education.
a.
b.
Ending cash balances:
Week 2: $20 [$(20) + $100 − $30 − $20 − $10]
CASH BUDGETING FOR YOU AS A STUDEN
T
In Week 1 you have two problems. The first is that you do not have enough cash to pay your
rent on Wednesday. But you will by Friday, so your payment may be a couple of days late.
(But what’s going to happen next month? Is there some “handwriting on the wall”?)
Your second problem is that if you spend in your normal pattern, you will overdraw your
Hill Education.
Cash
Increase No effect No effect
Increase No effect No effect
Increase Increase Increase
b. (1)
(2)
(3)
(4)
If the costs of producing inventory are rising, use of the FIFO (first-in, first-out)
method assigns older and lower costs to the cost of goods sold. FIFO results in higher
reported profits (but also in higher income taxes) than does the LIFO method. The
Changing from an accelerated method to the straight-line method of depreciation will
(generally) reduce the amount of depreciation expense included in the income
statement, increasing reported net income. Lengthening estimates of useful lives has a
Requiring dealers to pay more quickly will speed up cash collections from customers,
increasing operating cash flows and total cash. The timing of these collections has no
Pressuring dealers (customers) to increase their inventories will increase General
*Either “no effect” or “decrease” is an acceptable answer to the probable effect of this
proposal upon net income; see discussion in paragraph (4), part b.
(3)
Net Cash Flows from
Operating Activities
Net Income
CASE 13.3
LOOKIN’ GOOD?
45 Minutes, Medium
a.
(1)
(2)
Proposals
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