Problem 12-11B (45 minutes)
To begin the problem, fill in the question mark pertaining to item “a”
using the following T-account:
Retained Earnings
Dividends
10,800
Net income
86,100
Change
75,300
Problem 12-11B (continued)
Step 3: The company had a $1,500 gain on the sale of equipment. The
book value of the equipment was $33,600 (= $160,000 – $126,400).
The company sold the equipment for $35,100, so its gain on the sale of
$1,500 (= $35,100 – $33,600) is subtracted from net income.
Problem 12-11B (continued)
As stated in item “f” in the problem, it is reasonable to assume that the
$97,000 increase in long-term investments corresponds with a cash
outflow that needs to be recorded in the investing section of the
statement. The $84,000 repayment of loan received from a subsidiary
Problem 12-11B (continued)
Given the amounts above, the statement of cash flows would be as follows:
Gurley Company
Statement of Cash Flows
Operating activities:
Net income ………………………………………………….
$ 86,100
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………..
$191,400
Increase in accounts receivable ……………………..
(170,100)
Decrease in inventory ………………………………….
64,800
Increase in prepaid expenses ………………………..
(4,200)
Increase in accounts payable ………………………..
49,900
Decrease in accrued liabilities ……………………….
(5,700)
Increase in income taxes payable …………………..
9,600
Gain on sale of equipment …………………………...
(1,500)
134,200
Net cash provided by operating activities ……………
220,300
Investing activities:
Decrease in long-term loan to subsidiary ……………
84,000
Proceeds from sale of equipment ……………………..
35,100
Additions to long-term investments …………………..
(97,000)
Additions to plant and equipment …………………….
(475,000)
Net cash used in investing activities ………………….
(452,900)
Financing activities:
Issuance of bonds payable ……………………………..
203,000
Issuance of common stock ……………………………..
122,000
Cash dividends …………………………………………….
(10,800)
Net cash provided by financing activities ……………
314,200
Net increase in cash ………………………………………
81,600
Cash balance, beginning ………………………………..
109,200
Cash balance, ending …………………………………….
$190,800
Problem 12-12B (45 minutes)
1. Prepare a statement of cash flows.
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
income.
Problem 12-12B (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income ……………………………………….
$214,100
Adjustments to convert net income to cash basis:
Depreciation ……………………………………
$126,500
Decrease in accounts receivable ………….
30,500
Increase in inventory ………………………..
(192,200)
Increase in prepaid expenses ……………..
(11,300)
Increase in accounts payable ………………
312,600
Decrease in accrued liabilities ……………..
(23,300)
Increase in income taxes payable ………..
25,500
Loss on sale of equipment ………………….
26,300
Gain on sale of investments ………………..
(83,100)
211,500
Net cash provided by operating activities …
$425,600
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 ……………
– 591,000
Long-term investments ………………………
+ 68,900
Long-term loans to subsidiaries ……………
– 60,500
Liabilities and Stockholders’ Equity
Bonds payable …………………………………
+ 262,000
Common stock …………………………………
+ 111,000
Problem 12-12B (continued)
Riabko’s subsidiaries did not repay any loans during the year, therefore,
the amount in the table on the prior page (–60,500) represents a cash
outflow pertaining to a new loan. The company did not repurchase any
of its own stock, so the amount on the prior page represents a $111,000
Problem 12-12B (continued)
Riabko Company
Statement of Cash Flows
Operating activities:
Net income …………………………………………………
$214,100
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………..
$126,500
Decrease in accounts receivable …………………….
30,500
Increase in inventory …………………………………..
(192,200)
Increase in prepaid expenses ………………………..
(11,300)
Increase in accounts payable ………………………..
312,600
Decrease in accrued liabilities ……………………….
(23,300)
Increase in income taxes payable …………………..
25,500
Loss on sale of equipment …………………………...
26,300
Gain on sale of investments ………………………….
(83,100)
211,500
Net cash provided by operating activities …………..
425,600
Investing activities:
Proceeds from sale of long-term investments ……
152,000
Proceeds from sale of equipment ……………………
80,500
Loans to subsidiaries …………………………………..
(60,500)
Additions to plant and equipment …………………..
(763,000)
Net cash used in investing activities ………………..
(591,000)
Financing activities:
Issuance of bonds payable …………………………...
663,000
Issuance of common stock …………………………...
111,000
Retirement of bonds payable …………………………
(401,000)
Cash dividends to stockholders ………………………
(182,400)
Net cash provided by financing activities ………….
190,600
Net increase in cash and cash equivalents ………..
25,200
Cash balance, beginning ………………………………
66,800
Cash balance, ending …………………………………..
$ 92,000
Problem 12-12B (continued)
2. The company has had a huge buildup of inventory. In an effort to
overcome the cash flow impact of this build up, it has delayed payments
to suppliers. The corresponding $312,600 increase in accounts payable
largely explains the company’s net cash provided by operating activities
burden.
Problem 12-13B (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
$191,500 – $45,000 + Credits = $212,500
income.
Problem 12-13B (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income ……………………………………….
$78,600
Adjustments to convert net income to cash basis:
Depreciation ……………………………………
$66,000
Decrease in accounts receivable ………….
10,500
Increase in inventory ………………………..
(55,500)
Decrease in prepaid expenses …………….
10,500
Decrease in accounts payable ……………..
(56,000)
Decrease in accrued liabilities ……………..
(7,500)
Increase in income taxes payable ………..
4,500
Loss on sale of equipment ………………….
7,000
Gain on sale of investments ………………..
(22,500)
(43,000)
Net cash provided by operating activities …
$35,600
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 12-13B (continued)
The decrease in the long-term investments account ($40,000) equals
the cost of the long-term investment sold; therefore, Rivers did not
purchase any long-term investments during the year. The proceeds from
the sale of the long-term investment ($62,500) should be recorded as a
Problem 12-13B (continued)
Rivers Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Operating activities:
Net income ………………………………………………
$ 78,600
Adjustments to convert net income to cash basis:
Depreciation …………………………………………..
$66,000
Decrease in accounts receivable …………………
10,500
Increase in inventory ……………………………….
(55,500)
Decrease in prepaid expenses ……………………
10,500
Decrease in accounts payable …………………….
(56,000)
Decrease in accrued liabilities …………………….
(7,500)
Increase in income taxes payable ……………….
4,500
Loss on sale of equipment …………………………
7,000
Gain on sale of investments……………………….
(22,500)
(43,000)
Net cash provided by operating activities ………..
35,600
Investing activities:
Proceeds from sale of long-term investments …..
62,500
Proceeds from sale of equipment ………………….
48,000
Additions to plant and equipment ………………….
(215,000)
Net cash used in investing activities ………………
(104,500)
Financing activities:
Issuance of bonds payable …………………………..
105,000
Decrease in common stock ………………………….
(17,500)
Cash dividends ………………………………………….
(37,600)
Net cash provided by financing activities …………
49,900
Net decrease in cash ………………………………….
(19,000)
Cash balance, beginning ……………………………..
39,000
Cash balance, ending …………………………………
$ 20,000
Problem 12-13B (continued)
3. Free cash flow computation:
Net cash provided by operating activities ……………..
$ 35,600
Capital expenditures ……………………………………..
$215,000
Dividends ……………………………………………………
37,600
252,600
Free cash flow ………………………………………………..
$(217,000)
4. Although the company reported a large net income for the year, a
relatively small amount of cash was provided by operating activities due