E12–14 (continued)
Req. 5
Under the indirect method, to convert from the cash basis to the accrual basis, you must
make the following adjustments to net income: subtract increases in inventory (a current
asset) and add increases in accounts payable (a current liability).
Aztec Corporation
Bikes Unlimited
Campus Cycles
Subtract inventory
increase
$ (25)
$ (25)
$ (50)
Add accounts
payable increase
0
40
40
Total
$ (25)
$ 15
$ (10)
Req. 6
Answers to requirements 3 and 5 should be identical for each company. The reason
they should be the same is that requirement 3 identifies the differences between accrual
and cash based amounts by examining amounts that were recorded during the year,
whereas requirement 5 identifies these differences by examining the changes in year-
end balances of accounts affected by inventory purchases. The two requirements
approach the same goal (i.e., the adjustment needed to convert accrual to cash basis)
from different directions.
E12–15
The investing and financing sections of the statement of cash flows for Rowe Furniture:
Cash flows from investing activities:
Purchase of equipment ……………………………………………….
(871)
Sale of investments …………………………………………………
134
Proceeds from sale of equipment ………………………………..
6,594
Net cash provided by investing activities …………………
5,857
Cash flows from financing activities:
Borrowings under line of credit …………………………………….
1,417
Proceeds from issuance of common stock …………………..
11
Payments on notes payable (long-term) ………………………
(46)
Payment of dividends ………………………………………………….
(277)
Net cash provided by financing activities…………………
1,105
E12–16
The investing and financing sections of the statement of cash flows for Gibraltar
Industries, Inc.:
Cash flows from investing activities:
Purchase of equipment ……………………………………………….
Proceeds from sale of equipment ………………………………..
Net cash provided by (used in) investing activities …..
Cash flows from financing activities:
Proceeds from notes payable (bank) …………………………...
Net proceeds from stock issuance ……………………………….
Payments on notes payable (bank) ……………………………..
Net cash provided by (used in) financing activities ….
E12–17
Req. 1
Disney’s cash from operations was greater than its net income in each of the three
years. This difference occurs because Disney’s large investment in capital assets
E12–18
E12–19
Req. 1
Cash flows from operating activities—direct method
Cash collected from customers1
$78,000
Cash payments to employees2
(33,000
)
Cash paid for other expenses3
(11,950
)
Net cash provided by operating activities …………………………………….
$33,050
E12–20
Req. 1
Cash flows from operating activities—direct method
Cash collected from customers1
$136,330
Cash payments to suppliers2
(47,139)
Cash payments to employees
(56,835)
Cash payments for other expenses3
(9,164)
Cash payments for income tax4
(700)
Net cash provided by operating activities
$22,492
1 Cash collected from customers: $136,500 – $170 = $136,330
2 Cash payments to suppliers: $45,500 – $643 + $2,282 = $47,139
3 Cash payments for office expenses: $7,781 + $664 + $719 = $9,164
4 Cash payments for income taxes: $2,561 – $1,861 = $700
Req. 2
The primary reason for the net loss was the depreciation expense. Depreciation
expense is a noncash expense so it is excluded when computing cash flow from
operating activities (when using the direct method).
E12–21
Equipment
Accumulated Depreciation–Equipment
Beg. Bal.
1,450
1,160
Beg. Bal.
Purchase
120
3
67*
Impair.
Sold
Sold
35*
125
Dep. Exp.
End. Bal.
1,500
1,250
End. Bal.
Gain on sale (given) …………………………………
Cash received from sale …………………………..
Equipment
Accumulated Depreciation–Equipment
Beg. Bal.
2,000
Beg. Bal.
Sold
Dep. Exp.
End. Bal.
End. Bal.
Loss on sale (given) …………………………………
(4,000
)
Cash received from sale …………………………..
E12–23
Req. 1
E12-23
Panel A: Changes in Cash Account
Operating
(1) Net Income
20,200 7,000 (3) Inventory
(2) Depreciation Expense
3,000 3,000 (4) Accounts Payable
(6) Income Taxes Payable
1,500 1,000 (5) Salaries and Wages Payable
13,700
Investing
(7) Sale of Equipment
6,000 15,000 (8) Purchased Investment
9,000
Financing
6,000 12,000
(10) Payment of
dividends
6,000
20,500 1,300
End. bal. 19,200
Panel B: Changes in Non-cash Accounts
Beg. bal. 22,000 Beg. bal. 68,000 Beg. bal. 17,000
No change (3) Increase 7,000 (4) Decrease 3,000
End. bal. 22,000 End. bal. 75,000 End. bal. 14,000
Beg. bal. 2,500 Beg. bal. 3,000 Beg. bal. 114,500
(5) Decrease 1,000 (6) Increase 1,500 Purchases 0 (7) Disposals 21,000
End. bal. 1,500 End. bal. 4,500 End. bal. 93,500
Beg. bal. 32,000 Beg. bal. 0 Beg. bal. 100,000
(7) Disposals 15,000 (2) Depreciation 3,000 (8) Purchases 15,000 Disposals 0 Stock repurchased 0 (9) Stock issued 6,000
End. bal. 20,000 End. bal. 15,000 End. bal. 106,000
Beg. bal. 54,000 Beg. bal. 16,500
(10) Dividends 12,000 (1) Net income 20,200
End. bal. 54,000 End. bal. 24,700
Investments (A)
Common Stock (SE)
Notes Payable (long-term) (L)
Retained Earnings (SE)
Accumulated Depreciation-Equipment (xA)
Cash (A)
Net cash flow provided by
operating activities
Net cash used in investing
activities
(9) Proceeds from stock
issuance
Net cash used by financing
activities
Beg. bal.
Accounts Receivable (A)
Inventory (A)
Accounts Payable (L)
Salaries and Wages Payable (L)
Income Taxes Payable (L)
Equipment (A)
Net decrease in cash and
cash equivalents
E12–23 (continued)
Req. 2
GOLF UNIVERSE STORE
Statement of Cash Flows
For the Year Ended December 31
Cash flows from operating activities:
Net income
$ 20,200
Depreciation expense
3,000
Changes in current assets and current liabilities
Inventory
(7,000
)
Accounts payable
(3,000
)
Salaries and wages payable
(1,000
)
Income taxes payable
1,500
Cash flows provided by operating activities
13,700
Cash flows from investing activities:
Purchase of investment
(15,000
)
Proceeds from sale of equipment
6,000
Cash flows provided by (used in) investing activities
(9,000
)
Cash flows from financing activities:
Issuance of common stock
6,000
Dividends paid
(12,000
)
Cash flows provided by (used in) financing activities
(6,000
)
Net increase (decrease) in cash
(1,300
)
Cash, beginning of year
20,500
Cash, end of year
$ 19,200
Fundamentals of Financial Accounting, 5/e 12-29
© 2016 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
ANSWERS TO COACHED PROBLEMS
CP12–1
Activity
Cash
Flow
I
–
1
Purchased new equipment with cash.
O
–
2
Recorded and paid income taxes to the federal government.
F
+
3
Issued shares of stock for cash.
O
–
4
Prepaid rent for the following period.
I
–
5
Paid cash to purchase new equipment.
F
+
6
Issued long-term promissory notes for cash.
O
+
7
Collected payments on account from customers.
O
–
8
Recorded and paid salaries and wages to employees.
CP12–2
HAMBURGER HEAVEN
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income…………………………………………………………….
$ 20
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense …………………………………………….
$200
Decrease in accounts receivable ……………………………..
70
Increase in inventory …………………………..………………….
(22
)
Decrease in prepaid rent…………………………………………
8
Increase in prepaid insurance ………………………………….
(9
)
Decrease in accounts payable …………………………..…….
(10)
Increase in salaries and wages payable ……………………
9
Decrease in utilities payable ……………………………………
(40
)
Total adjustments …………………………………………………
206
Net cash provided by operating activities ………………
$226
CP12–3
Req.1
Related
Cash
Balance Sheet at December 31
Flow
Section
2015
2014
Change
Cash
Cash
$ 44,000
$ 18,000
+26,000
11
Net increase in cash
O
Accounts receivable
27,000
29,000
-2,000
3
Add to net income the decrease in A/R
O
Inventory
30,000
36,000
-6,000
4
Add to net income the decrease in Inventory
I
Equipment
111,000
102,000
+9,000
7
Payment in cash for equipment
O
Accumulated
Depreciation–
Equipment
(36,000)
(30,000)
-6,000
2
Add to net income because depreciation expense does not
affect cash
$176,000
$155,000
O
Accounts payable
$ 25,000
$ 22,000
+3,000
5
Add to net income the increase in Accounts Payable
O
Salaries and wages
payable
800
1,000
–200
6
Subtract from net income the decrease in Wages Payable
F
Note payable (long-term)
38,000
48,000
-10,000
8
Cash used in repayment of note principal
F
Common Stock
80,000
60,000
+20,000
9
Issuance of stock for cash
O,F
Retained earnings
32,200
24,000
+8,200
1,10
Increased for net income +12,000 (see income statement
below) and decreased by cash dividends paid -3,800
$176,000
$155,000
Income Statement for 2015
Sales revenue
$100,000
Cost of goods sold
61,000
Other expenses
27,000
Net Income
$12,000