Problem 12-7B (30 minutes)
1. Net cash provided by operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Beginning balance – Debits + Credits = Ending balance
$71 – $10 + Credits = $85
income.
Problem 12-7B (continued)
The net cash provided by operating activities is computed as follows:
Net income …………………………………………………
$ 65
Adjustments to convert net income to cash basis:
Depreciation …………………………………………..
24
Increase in accounts receivable …………………..
(77)
Decrease in inventory ……………………………….
38
Increase in prepaid expenses ……………………..
(2)
Increase in accounts payable ……………………..
76
Decrease in accrued liabilities …………………….
(10)
Increase in income taxes payable ………………..
9
Gain on sale of investments ……………………….
(6)
Loss on sale of equipment …………………………
2
54
Net cash provided by operating activities …………..
$119
2. Prepare a statement of cash flows.
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
Problem 12-7B (continued)
The decrease in the long-term investments account ($7) equals the cost
of the long-term investment sold; therefore, the company did not
purchase any long-term investments during the year. The proceeds from
the sale of a long-term investment ($13) should be recorded as a cash
Problem 12-7B (continued)
Groton Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Operating activities:
Net income ………………………………………………….
$ 65
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$ 24
Increase in accounts receivable …………………..
(77)
Decrease in inventory ……………………………….
38
Increase in prepaid expenses ……………………..
(2)
Increase in accounts payable ………………………
76
Decrease in accrued liabilities ……………………..
(10)
Increase in income taxes payable ………………..
9
Gain on sale of investments ……………………….
(6)
Loss on sale of equipment ………………………….
2
54
Net cash provided by operating activities …………..
119
Investing activities:
Proceeds from sale of long-term investments ……..
13
Proceeds from sale of equipment ……………………..
19
Additions to plant and equipment …………………….
(110)
Net cash used in investing activities ………………….
(78)
Financing activities:
Issuance of bonds payable ……………………………..
26
Decrease in common stock ……………………………..
(39)
Cash dividends …………………………………………….
(39)
Net cash used in financing activities ………………….
(52)
Net decrease in cash ……………………………………..
(11)
Cash balance, January 1, 2011 ………………………..
12
Cash balance, December 31, 2011 ……………………
$ 1
Problem 12-8B (45 minutes)
1. Net cash provided by operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Beginning balance – Debits + Credits = Ending balance
$130,900 – $11,100 + Credits = $166,300
income.
Problem 12-8B (continued)
The net cash provided by operating activities is computed as follows:
Net income …………………………..………………………
$114,000
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………….
$ 46,500
Increase in accounts receivable ………………………
(157,000)
Increase in inventory ……………………………………
(45,000)
Decrease in prepaid expenses …………………………
8,500
Increase in accounts payable ………………………….
65,000
Decrease in accrued liabilities …………………………
(7,000)
Increase in income taxes payable ……………………
3,900
Gain on sale of equipment ……………………………..
(6,000)
(91,100)
Net cash provided by operating activities …………….
$22,900
2. Prepare a statement of cash flows.
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
Problem 12-8B (continued)
The loan to Puffington ($44,000) is recorded as a cash outflow in the
investing activities section of the statement. Because Pillsberry did not
retire any bonds during the year, the corresponding amount in the table
on the prior page (+101,000) represents a cash inflow pertaining to a
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12-8 Introduction to Managerial Accounting, 1st Edition
Problem 12-8B (continued)
Pillsberry Company
Statement of Cash Flows
For Year 2
Operating activities:
Net income ……………………………………………….
$114,000
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$ 46,500
Increase in accounts receivable …………………..
(157,000)
Increase in inventory ………………………………..
(45,000)
Decrease in prepaid expenses …………………….
8,500
Increase in accounts payable ………………………
65,000
Decrease in accrued liabilities ……………………..
(7,000)
Increase in income taxes payable ………………..
3,900
Gain on sale of equipment …………………………
(6,000)
(91,100)
Net cash provided by operating activities …………
22,900
Investing activities:
Proceeds from sale of equipment …………………..
26,200
Loan to Puffington Company …………………………
(44,000)
Additions to plant and equipment …………………..
(160,300)
Net cash used in investing activities ……………….
(178,100)
Financing activities:
Issuance of bonds payable …………………………...
101,000
Issuance of common stock…………………………...
46,000
Cash dividends …………………………………………..
(32,900)
Net cash provided by financing activities ………….
114,100
Net decrease in cash …………………………………..
(41,100)
Cash balance, beginning of year …………………….
88,500
Cash balance, end of year …………………………...
$ 47,400
Problem 12-8B (continued)
3. Free cash flow computation:
Net cash provided by operating activities ……………..
$ 22,900
Capital expenditures ……………………………………..
$160,300
Dividends ……………………………………………………
32,900
193,200
Free cash flow ………………………………………………..
$(170,300)
4. The relatively small amount of net cash provided by operating activities
during the year was largely the result of a large increase in accounts
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12–10 Introduction to Managerial Accounting, 1st Edition
Problem 12-9B (30 minutes)
Activity
Cash
Cash
Transaction
Operating
Investing
Financing
Inflow
Outflow
a.
Common stock was sold for cash
X
X
b.
Equipment was sold for cash
X
X
c.
A long-term loan was made to a
subsidiary
X
X
d.
Interest was received on loan to
subsidiary
X
X
e.
Interest Payable, a current liability, was
reduced.
X
X
f.
A stock dividend was declared and
issued on common stock
g.
A building was acquired by issuing
shares of common stock
h.
Accrued Income Taxes, a current
liability account, was reduced
X
X
i.
Long-term investments were sold
X
X
j.
Cash dividends were declared and paid
X
X
k.
Preferred stock was sold for cash
X
X
l.
Bonds were retired
X
X
m.
Dividends were received on an
investment
X
X
n.
Equipment was purchased by giving a
long-term note to the seller
Problem 12-10B (45 minutes)
1 Prepare a statement of cash flows (all numbers in millions).
Operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
income.
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12–12 Introduction to Managerial Accounting, 1st Edition
Problem 12-10B (continued)
As an intermediate step, the net cash provided by operating activities
can now be calculated as follows:
Net income ……………………………………………….
$206
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$150
Increase in accounts receivable …………………..
(58)
Increase in inventory ………………………………..
(46)
Increase in accounts payable ………………………
106
Increase in accrued liabilities ………………………
22
Increase in income taxes payable ………………..
11
Gain on sale of equipment …………………………
(2)
183
Net cash provided by operating activities …………
$389
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
cash flows as follows:
Increase
in Account
Balance
Decrease
in Account
Balance
Noncurrent Assets
Property, plant, and equipment ………………
– 27
Liabilities and Stockholders’ Equity
Bonds payable ……………………………………
– 215
Problem 12-10B (continued)
Kars did not issue any bonds during the year; therefore, the amount in
the table on the prior page (–215) represents a cash outflow pertaining
to a bond retirement. Property, plant, and equipment and retained
earnings require further analysis as follows:
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12–14 Introduction to Managerial Accounting, 1st Edition
Problem 12-10B (continued)
Kars Company
Statement of Cash Flows
Operating activities:
Net income ……………………………………………….
$ 206
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$150
Increase in accounts receivable …………………..
(58)
Increase in inventory ………………………………..
(46)
Increase in accounts payable ………………………
106
Increase in accrued liabilities ………………………
22
Increase in income taxes payable ………………..
11
Gain on sale of equipment …………………………
(2)
183
Net cash provided by operating activities …………
389
Investing activities:
Proceeds from sale of equipment …………………..
13
Additions to plant and equipment …………………..
(51)
Net cash used in investing activities ……………….
(38)
Financing activities:
Retirement of bonds payable ………………………..
(215)
Cash dividends …………………………………………..
(184)
Net cash used in financing activities ……………….
(399)
Net decrease in cash …………………………………..
(48)
Cash balance, beginning of year …………………….
93
Cash balance, end of year …………………………...
$ 45
Problem 12-10B (continued)
2. Kars’ net income decreased by $16 million (= $206 million – $190
million); however, its net cash provided by operating activities increased
by $229 million (= $389 million – $160 million) over the prior year.
When net income and net cash provided by operating activities move in
opposite directions, it warrants further inquiry. It appears that Kars has