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Problem 12-13A (continued)
The decrease in the long-term investments account ($20,000) equals
the cost of the long-term investment sold; therefore, Rusco did not
purchase any long-term investments during the year. The proceeds from
the sale of the long-term investment ($30,000) should be recorded as a
Problem 12-13A (continued)
Rusco Company
Statement of Cash Flows
For the Year Ended July 31, 2015
Operating activities:
Net income ......................................................
$ 30,000
Adjustments to convert net income to cash basis:
Depreciation ..................................................
$ 20,000
Increase in accounts receivable ......................
(40,000)
Increase in inventory .....................................
(50,000)
Decrease in prepaid expenses ........................
4,000
Increase in accounts payable ..........................
63,000
Decrease in accrued liabilities .........................
(9,000)
Increase in income taxes payable ...................
8,000
Loss on sale of equipment ..............................
2,000
Gain on sale of investments............................
(10,000)
(12,000)
Net cash provided by operating activities ...........
18,000
Investing activities:
Proceeds from sale of long-term investments .....
30,000
Proceeds from sale of equipment ......................
8,000
Additions to plant and equipment ......................
(150,000)
Net cash used in investing activities ..................
(112,000)
Financing activities:
Issuance of bonds payable ................................
70,000
Issuance of common stock ................................
20,000
Cash dividends .................................................
(9,000)
Net cash provided by financing activities ............
81,000
Net decrease in cash ........................................
(13,000)
Beginning cash and cash equivalents .................
21,000
Ending cash and cash equivalents .....................
$ 8,000
Problem 12-13A (continued)
3. Free cash flow computation:
Net cash provided by operating activities .................
$ 18,000
Capital expenditures ............................................
$150,000
Dividends ............................................................
9,000
159,000
Free cash flow ........................................................
$(141,000)
4. Although the company reported $30,000 of net income for the year, a
smaller amount of cash was provided by operating activities ($18,000)
due to increases in accounts receivable and inventory. The cash
Problem 12-14A (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 12-14A (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income ..............................................
$170,000
Adjustments to convert net income to cash basis:
Depreciation ..........................................
$ 95,000
Increase in accounts receivable ..............
(180,000)
Decrease in inventory ............................
12,000
Increase in prepaid expenses .................
(5,000)
Increase in accounts payable ..................
300,000
Decrease in accrued liabilities .................
(17,000)
Increase in income taxes payable ...........
15,000
Loss on sale of equipment ......................
20,000
Gain on sale of investments ....................
(60,000)
180,000
Net cash provided by operating activities ...
$350,000
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 ...............
– 570,000
Long-term investments ...........................
+ 50,000
Long-term loans to subsidiaries ...............
– 44,000
Liabilities and Stockholders’ Equity
Bonds payable .......................................
+ 220,000
Common stock .......................................
+ 90,000
Problem 12-14A (continued)
Lomax’s subsidiaries did not repay any loans during the year, therefore,
the amount in the table on the prior page (– 44,000) 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 $90,000
Problem 12-14A (continued)
Lomax Company
Statement of Cash Flows
Operating activities:
Net income .........................................................
$170,000
Adjustments to convert net income to cash basis:
Depreciation .....................................................
$ 95,000
Increase in accounts receivable .........................
(180,000)
Decrease in inventory ........................................
12,000
Increase in prepaid expenses .............................
(5,000)
Increase in accounts payable .............................
300,000
Decrease in accrued liabilities ............................
(17,000)
Increase in income taxes payable .......................
15,000
Loss on sale of equipment .................................
20,000
Gain on sale of investments ...............................
(60,000)
180,000
Net cash provided by operating activities ..............
350,000
Investing activities:
Proceeds from sale of long-term investments ......
110,000
Proceeds from sale of equipment ........................
70,000
Loans to subsidiaries .........................................
(44,000)
Additions to plant and equipment .......................
(700,000)
Net cash used in investing activities ....................
(564,000)
Financing activities:
Issuance of bonds payable .................................
570,000
Issuance of common stock .................................
90,000
Retirement of bonds payable ..............................
(350,000)
Cash dividends to stockholders ...........................
(75,000)
Net cash provided by financing activities .............
235,000
Net increase in cash and cash equivalents ...........
21,000
Beginning cash and cash equivalents ..................
40,000
Ending cash and cash equivalents.......................
$ 61,000
Problem 12-14A (continued)
2. The large amount of cash provided by operating activities is traceable
for the most part to the $300,000 increase in accounts payable. If the
accounts payable had remained basically unchanged, the same as
inventory, then operating activities would have provided very little cash
and the company might have experienced serious cash problems.
Appendix 12A
The Direct Method of Determining the Net Cash
Provided by Operating Activities
Exercise 12A-1 (15 minutes)
Sales ..........................................................
$700
Adjustments to a cash basis:
Increase in accounts receivable ..............
– 110
$590
Cost of goods sold ......................................
400
Adjustments to a cash basis:
Decrease in inventory ............................
– 70
Increase in accounts payable ..................
– 35
295
Selling and administrative expenses .............
184
Adjustments to a cash basis:
Increase in prepaid expenses .................
+ 9
Decrease in accrued liabilities .................
+ 4
Depreciation charges .............................
– 60
137
Income tax expense ....................................
36
Adjustments to a cash basis:
Increase in income taxes payable ...........
– 8
28
Net cash provided by operating activities ......
$130
Note that the $130 “net cash provided” figure agrees with the indirect
method presented in Exercise 12-4.
Exercise 12A-2 (15 minutes)
1.
Sales .............................................................
$150,000
Adjustments to a cash basis:
Increase in accounts receivable ..................
– 10,000
$140,000
Cost of goods sold ..........................................
90,000
Adjustments to a cash basis:
Increase in inventory .................................
+ 9,000
Increase in accounts payable .....................
– 7,000
92,000
Selling and administrative expenses ................
40,000
Adjustments to a cash basis:
Increase in prepaid expenses .....................
+ 2,000
Decrease in accrued liabilities ....................
+ 3,000
Depreciation charges .................................
– 7,500
37,500
Income taxes .................................................
8,000
Adjustments to a cash basis:
Decrease in income taxes payable ..............
+ 500
8,500
Net cash provided by operating activities .........
$ 2,000
2. Gains and losses on the sale of assets would have no effect on the
computations in part (1). The reason is that these items are not part of
Exercise 12A-3 (15 minutes)
Sales .........................................................
$275
Adjustments to a cash basis:
Decrease in accounts receivable ............
+ 2
$277
Cost of goods sold .....................................
150
Adjustments to a cash basis:
Increase in inventory ............................
+ 10
Increase in accounts payable .................
– 4
156
Selling and administrative expenses ............
90
Adjustments to a cash basis:
Depreciation charges ............................
– 15
75
Net cash provided by operating activities .....
$ 46
Exercise 12A-4 (15 minutes)
Sales .............................................................
$ 350,000
Adjustments to a cash basis:
Less increase in accounts receivable ..........
– 19,000
$331,000
Cost of goods sold .........................................
140,000
Adjustments to a cash basis:
Plus increase in inventory ..........................
+ 33,000
Less increase in accounts payable ..............
– 15,000
158,000
Selling and administrative expenses ................
160,000
Adjustments to a cash basis:
Less decrease in prepaid expenses ............
– 1,000
Plus decrease in accrued liabilities .............
+ 2,000
Less depreciation charges .........................
– 20,000
141,000
Income taxes .................................................
15,000
Adjustments to a cash basis:
Less increase in income taxes payable .......
– 4,000
11,000
Net cash provided by operating activities .........
$ 21,000
Problem 12A-5A (45 minutes)
1.
The income statement adjusted to a cash basis:
Sales .........................................................
$500,000
Adjustments to a cash basis:
Increase in accounts receivable ..............
– 40,000
$460,000
Cost of goods sold ......................................
300,000
Adjustments to a cash basis:
Increase in inventory .............................
+ 50,000
Increase in accounts payable .................
– 63,000
287,000
Selling and administrative expenses .............
158,000
Adjustments to a cash basis:
Decrease in prepaid expenses ................
– 4,000
Decrease in accrued liabilities .................
+ 9,000
Depreciation charges .............................
– 20,000
143,000
Income taxes .............................................
20,000
Adjustments to a cash basis:
Increase in income taxes payable ...........
– 8,000
12,000
Net cash provided by operating activities .....
$ 18,000
Problem 12A-5A (continued)
2.
Rusco Company
Statement of Cash Flows
For the Year Ended July 31, 2015
Operating activities:
Cash received from customers .........................
$460,000
Less cash disbursements for:
Cost of merchandise purchased .....................
$287,000
Selling and administrative expenses ...............
143,000
Income taxes ...............................................
12,000
Total cash disbursements .................................
442,000
Net cash provided by operating activities ..........
18,000
Investing activities:
Proceeds from sale of investments ...................
30,000
Proceeds from sale of equipment .....................
8,000
Additions to plant and equipment .....................
(150,000)
Net cash used for investing activities ................
(112,000)
Financing activities:
Increase in bonds payable ...............................
70,000
Increase in common stock ...............................
20,000
Cash dividends ................................................
(9,000)
Net cash provided by financing activities ...........
81,000
Net decrease in cash .......................................
(13,000)
Beginning cash and cash equivalents ................
21,000
Ending cash and cash equivalents ....................
$ 8,000
Problem 12A-5A (continued)
3. There are two reasons for the sharp decline in cash. First, note that a
relatively small amount of cash was provided by operations during the
year. This is due to a build-up in accounts receivable and inventory,
Problem 12A-6A (30 minutes)
1.
Sales ....................................................................
$800
Adjustments to a cash basis:
Increase in accounts receivable .........................
– 100
$700
Cost of goods sold .................................................
500
Adjustments to a cash basis:
Decrease in inventory .......................................
– 50
Increase in accounts payable ............................
– 80
370
Selling and administrative expenses .......................
213
Adjustments to a cash basis:
Increase in prepaid expenses ............................
+ 4
Decrease in accrued liabilities ...........................
+ 12
Depreciation charges ........................................
– 24
205
Income taxes ........................................................
27
Adjustments to a cash basis:
Increase in income taxes payable ......................
– 6
21
Net cash provided by operating activities ................
$104
Problem 12A-6A (continued)
2.
Weaver Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Operating activities:
Cash received from customers ...................................
$700
Less cash disbursements for:
Cost of merchandise purchased ...............................
$370
Selling and administrative expenses .........................
205
Income taxes .........................................................
21
Total cash disbursements ...........................................
596
Net cash provided by operating activities ....................
104
Investing activities:
Proceeds from sale of long-term investments ..............
10
Proceeds from sale of equipment ...............................
20
Additions to plant and equipment ...............................
(180)
Net cash used for investing activities ..........................
(150)
Financing activities:
Increase in bonds payable .........................................
110
Decrease in common stock ........................................
(40)
Cash dividends ..........................................................
(30)
Net cash provided by financing activities .....................
40
Net decrease in cash .................................................
(6)
Beginning cash and cash equivalents ..........................
15
Ending cash and cash equivalents ..............................
$ 9
Problem 12A-7A (45 minutes)
1.
Sales .............................................................
$900,000
Adjustments to a cash basis:
Increase in accounts receivable ..................
– 80,000
$820,000
Cost of goods sold ..........................................
500,000
Adjustments to a cash basis:
Increase in inventory .................................
+ 50,000
Increase in accounts payable .....................
– 60,000
490,000
Selling and administrative expenses ................
328,000
Adjustments to a cash basis:
Decrease in prepaid expenses ....................
– 7,000
Decrease in accrued liabilities ....................
+ 10,000
Depreciation charges .................................
– 42,000
289,000
Income taxes .................................................
24,000
Adjustments to a cash basis:
Increase in income taxes payable ...............
– 3,000
21,000
Net cash provided by operating activities .........
$ 20,000
Problem 12A-7A (continued)
2.
Joyner Company
Statement of Cash Flows
For Year 2
Operating activities:
Cash received from customers ..........................
$820,000
Less cash disbursements for:
Cost of merchandise purchased ......................
$490,000
Selling and administrative expenses ................
289,000
Income taxes ................................................
21,000
Total cash disbursements ..................................
800,000
Net cash provided by operating activities ...........
20,000
Investing activities:
Proceeds from sale of equipment ......................
18,000
Loan to Hymans Company ................................
(40,000)
Additions to plant and equipment ......................
(150,000)
Net cash used for investing activities .................
(172,000)
Financing activities:
Increase in bonds payable ................................
120,000
Increase in common stock ................................
30,000
Cash dividends .................................................
(15,000)
Net cash provided by financing activities ............
135,000
Net decrease in cash ........................................
(17,000)
Beginning cash and cash equivalents .................
21,000
Ending cash and cash equivalents .....................
$ 4,000
3. The decline in cash is explainable largely by the company’s inability to
generate a significant amount of cash from operating activities. Note
that the company generated only $20,000 from operating activities,
