978-0133058789 Chapter 16 Part 2

16-52 (10-20 min.)

DENALI ALE COMPANY

Supporting Schedule to Statement of Cash Flows

Reconciliation of Net Income to Net Cash Provided by

16-53 (10 min.)

1. Income Statement:

Sales $203

Non-depreciation expenses ($169 – $17) $152

2. An increase in depreciation does not affect net cash flow from operating

activities. The $10 million increase in depreciation decreases net income by $10

16-54 (20-30 min.)

1. O’TOOLE COMPANY

Statement of Cash Flows

For the Year Ended December 31, 20X2

(in millions)

Cash flows from operating activities:

2. Dear Mr. O’Toole:

Severe shortages of cash commonly accompany rapid corporate growth.

Profitable operations usually produce heavy supplies of cash. But the insatiable

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16-55 (30-40 min.)

1. SOUTH AFRICAN IMPORTS COMPANY

Statement of Cash Flows

For the Year Ended December 31, 20X1

(in millions)

Cash flows from operating activities:

2. Reconciliation of Net Income to Net Cash

Provided by Operating Activities

Net income R 26

3. Botha’s stress may be reduced but not eliminated. The statement of cash flows

shows why cash has fallen by R20 million. Operating activities provided R31

million, and financing activities provided an additional R46 million, a total of

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Severe crunches on cash commonly accompany quick corporate growth. There

may be large net income and working capital provided by operations, but heavy

demands for cash to expand receivables, inventories, and plant assets diminish

the cash on hand despite profitable operations. Hence, most “growth” companies

pay skimpy or no dividends.

16-56 (15 min.)

1. a. FIFO Method:

Inventory shows: 600 tons on hand.

Costs: 300 tons @ $69.00 $20,700

250 tons @ $66.00 16,500

50 tons @ $64.00 3,200

2. FIFO LIFO

16-57 (5-10 min.)

The inventory would be written down from $200,000 to $170,000 on March 31,

16-58 (5-10 min.)

The inventory would be written down from $200,000 to $170,000 on March 31,

1. Units LIFO FIFO

Sales 30,000 $710,000 $710,000

Cost of goods sold:

Inventory, December 31, 20X1 15,000 180,000 180,000

2. Gross margin is higher under FIFO. However, cash will be higher under LIFO

by .40 × ($320,000 – $230,000) = .45 × $90,000 = $40,500.

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16-60 (20-30 min.)

1. and 2. Requirement 1 Requirement 2

(1) (2) (3) (4)

FIFO LIFO FIFO LIFO

Sales, 28,000 @ $17 $476,000 $476,000 $476,000 $476,000

Deduct cost of goods sold:

16-61 (10-15 min.)

1. (a) Operating income was lower by the $1,646 million, because R&D must be

charged to expense.

(b) Operating income would be $3,601 + $1,646 = $5,247 million.

3. $13 billion – $2 billion = $11 billion of goodwill

zero).

16-62 (15-20 min.)

1. Sales and either cash or accounts receivable (or a combination of both) would

increase by $1,000 million.

2. Cash and the liability account called Deposits on Bottles would be increased by

April 1. On June 30, Interest Expense and Deposits would be increased by 3/12

4. (a) Cash and the liability, Unearned Sales Revenue, would be increased by

$320,000 on December 31 for the ticket sales.

16-63 (15 min.) Amounts are in millions.

1. 2011 accounts receivable was:

3. 2011 retained earnings were:

$32,695 + $7,074 – $834 – $3,669 = $35,266.

16-64 (10-15 min.) The following income statement and balance sheet contain the most

common subtotals, which are underlined:

MICROSOFT CORPORATION

Income Statement for the Three Months Ended March 31, 2012

Revenue $17,407

Provision for income taxes 1,255

Net income $ 5,108

MICROSOFT CORPORATION

Balance Sheet as of March 31, 2012

Assets

Long-term assets:

Property and equipment, net of accumulated

depreciation of $10,952 8,225

Equity and other investments 9,068

Goodwill 19,698

700

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable $ 3,790

Accrued compensation 3,272

Income taxes 958

Short-term unearned revenue 13,929

Securities lending payable 1,210

Other current liabilities 3,011

Total current liabilities 26,170

Long-term liabilities:

Long-term debt 11,938

16-65 (10-15 min.)

A framework for the balance sheet equation that is popular in Europe and other

parts of the world is:

non–current assets – working capital – non-current liabilities = stockholders’ equity

In contrast, the U.S. framework is:

1. There would be a “gain from insurance on crashed airplane” recognized on the

income statement:

Insurance payments received $6,500,000

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crash, except that a 727 with a book value of $6.5 million has replaced a similar

727 with a book value of only $962,000.

2. Accounting for casualties is very controversial. It gets to the heart of the

question of what is income and what is capital. Does the $6.5 million represent a

return of capital or a payment of both capital and income?

the $6.5 million is really a return of capital (where capital is thought of in

16-67 (5-10 min.)

a. Investing e. Financing h. Financing

16-68 (10-15 min.)

1. The only line for interest on the statement of cash flows will be under operating

2. The increase of $69,594,000 – $62,075,000 = $7,519,000 in interest payable

would be added to net income in computing net cash provided by operating

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16-69 (30 min.)

1. COSTCO WHOLESALE CORPORATION

Statement of Cash Flows From Operating Activities

(Indirect Method)

For the Year Ended August 28, 2011

2. COSTCO WHOLESALE CORPORATION

Statement of Cash Flows From Operating Activities

(Direct Method)

16-70 (25-35 min.)

1. NORDSTROM, INC.

Cash Flows from Operating Activities

For the Year Ended January 28, 2012

(in millions)

1. Specific

Weighted Identifi-

FIFO LIFO Average cation

Revenue (150 @ $15 + 160 @ $15) $4,650 $4,650 $4,650 $4,650

Deduct cost of revenue:

16-72 (20-30 min.)

This problem explores the effects of LIFO layers.

There would be no effect on gross margin, income taxes, or net income under

FIFO. The balance sheet would show a higher inventory by $900. A detailed income

statement would show both purchases and ending inventory as higher by $900, so the net

Purchases, 340 units, as before, 3,820

and 400 units 4,720*

Available for sale $4,620 $5,520

Ending inventory:

First layer ,100 @ $8 $800

To see this another way, compare the ending inventories:

Late purchase added to cost of goods available for

sale: 60 @ $15 $900

Deduct 60-unit increase in ending inventory:

Second layer is 90 – 30 = 60 units higher @ $10 600

16-73 (15 min.)

1. Inventory would have decreased by $.8 billion, from 10.6 billion to $9.8 billion,

under LIFO compared to $.3 billion, from 10.6 billion to 10.3 billion, under

FIFO. Therefore, cost of merchandise sold would have been $.5 billion higher,

and operating income would have been $.5 billion lower under LIFO.

3. Prices were rising during fiscal 2012. The most recent prices must be higher

than the beginning prices because the ending inventory under FIFO (which

16-74 (20 min.)

The inventory method determines how costs will be divided between ending

inventory and cost of goods sold. Under the FIFO method, inventory would have

increased by $26 million (that is, $291 million – $265 million) more than it did under

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under FIFO.

16-75 (25-30 min.)

1. Nike’s principal business activity is “the design, development and worldwide

2. Nike’s gross margin increased from $8,800 million in fiscal 2010 to $9,509

4. Nike generated $1,812 million from its operating activities, but it used $1,021

million for investing activities and $1,972 million for financing activities. A little

5. Nike declared dividends on common stock of $1.20 per share or $569 million.

16-76 (30-40 min.) For the solution to this Excel Application Exercise, follow the

step-by-step instructions provided in the textbook chapter.

3. LIFO has the highest cost of goods sold only when prices are rising; when prices

are falling, FIFO has a higher cost of goods sold.

16-77 (30 min.)

The purpose of this exercise is to learn which accounts belong to the income

account.

16-78 (15-25 min.) NOTE TO INSTRUCTOR: This solution is based on the web site

1. Lowe’s calls its income statement a “Consolidated Statement of Earnings.” It

uses a multiple-step format, with subtotals for gross margin, total expenses, and

2. Lowe’s largest current asset is merchandise inventory at $8,355 million, and its

largest current liability is accounts payable at $4,352 million. This is a common

3. Lowe’s retained earnings is its largest stockholders’ equity account, comprising

4. Lowe’s cash flow from operations is $4,349 million – $1,839 million = $2,510

million more than its net income. The main factor explaining this is the add-back

5. Lowe’s spent more ($1,829 million) for fixed assets than it charged in