P14–14 Concluded
c. Working capital = Current assets – Current liabilities
= ($25,000 + $23,200 + $11,200 + $4,000) – ($10,000 +
d. Working capital = ($63,400 – $10,000 cash) – ($14,000 – $10,000 accounts
payable)
P14–15
a. Marketing revenue
2015 Ending accounts receivable = 2015 Beginning accounts receivable + 2015
Marketing revenue – Cash collections during 2015
$150,000 = $105,000 + $1,000,000 – Cash collections
P14–15 Concluded
Rent Expense
2015 Ending rent payable = 2015 Beginning rent payable + 2015 Rent expense – Rent
paid during 2015
b. Net income ……………………………………………………………………….. $ 295,000
Adjustments:
Depreciation expense …………………………………………………….. $ 100,000
Decrease in office supplies inventory……………………………….. 10,000
Increase in rent payable …………………………………………………. 12,000
activities.
c. Operating Cash Flows
Income Statement Adjustments Direct Method
Marketing revenue $ 1,000,000 Increase in accts. receivable $(45,000) $ 955,000
Salary expense (250,000) None 0 (250,000)
Office supplies exp. (175,000) Decrease in office supplies
P14–16
Direct method
Bower Manufacturing Industries
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collections from sales and accounts receivable………….. $ 90,000a
Cash paid to suppliers for inventory ………………………………… (90,000)
Cash paid for wages ……………………………………………………….. (12,000)
Net cash flow from financing activities …………………………………. 0
Net increase in cash …………………………………………………………… $ 154,000
Beginning cash balance, January 1, 2015 ………………………………. 593,000
P14–16 Concluded
Indirect method
Bower Manufacturing Industries
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income …………………………………………………………… $ 37,000
Adjustments:
Decrease in inventory …………………………..………….. $ 25,000
Depreciation …………………………………………………… 30,000
Decrease in discount on bonds payable ……………… 5,000
Decrease in supplies inventory ………………………….. 2,000
Loss on sale of fixed assets ……………………………….. 10,000
Loss on sale of marketable securities …………………. 4,000
P14–17
Direct method
Price Restaurant Supply Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collections from customers …………………………………….. $ 165,000
Cash paid to suppliers for inventory ………………………………… (199,000)
Cash paid for interest …………………………………………………….. (13,000)
Net cash decrease due to operating activities ………………. $ (47,000)
Cash flows from investing activities:
Proceeds from sale of plant equipment ………………………….... $ 90,000a
a Explanation of activity involving plant equipment:
Ending plant equipment = Beginning plant equipment + Equipment purchased –
Equipment sold
$275,000 = $350,000 + Equipment purchased – $100,000
Equipment purchased = $25,000
Proceeds from sale of equipment = Book value of assets sold + Gain on the sale
= [(Asset cost – Accumulated depreciation on asset
P14–17 Concluded
Indirect method
Price Restaurant Supply Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income …………………………..……………………… $ 37,000
Adjustments:
Depreciation …………………………..……………….. $ 12,000
Decrease in accounts receivable ………………… 5,000
Decrease in prepaid insurance …………………… 10,000
Net cash increase due to
investing activities ………………………………… 65,000
Cash flows from financing activities:
Proceeds from common stock issue ………………… $ 65,000
P14–18
a. 2014
Cash collections from customers:
Sales for cash ………………………………………………………….. $ 3,633,500a
Cash collections from accounts receivable …………………. 4,936,500b
Total cash collections from customers …………………. $ 8,570,000c
Cash payments for:
Salary …………………………………………………………………….. $ 1,649,000d
a $3,633,500 = 2014 sales of $5,590,000 65%
2015
Cash collections from customers:
Sales for cash ………………………………………………………………. $ 1,491,750a
Cash collections from accounts receivable ……………………… 2,803,500b
Total cash collections from customers ……………………… $ 4,295,250c
Cash payments for:
Salary …………………………………………………………………………. $ 2,145,000d
Advertising ………………………………………………………………….. 705,000e
P14–18 Concluded
b. The first thing that must be explained to the stockholders is the nature of dividends. Dividends are paid
out of assets, not out of net income. If a company has insufficient assets or has alternative uses for its
assets, it will be unable to declare a cash dividend. Although net income is a measure of the net assets
that have flowed into the company during the year from operations, these net assets may be in a form,
P14–19
a. Original entries
1a. Cash (+A) …………………………..……………………………………………… 1,500,000
Common Stock (+SE) ……………………………………………………. 750,000
Additional Paid-In Capital, Common Stock (+SE) ……………… 750,000
Issued common stock.
1b. Cash (+A) ………………………………………………………………………….. 102,000
4. Land (+A) ………………………………………………………………………….. 40,000
Common Stock (+SE) ……………………………………………………. 15,000
P14–19 Continued
5a. Inventory (+A) …………………………………………………………………… 2,000,000
Accounts Payable (+L) ………………………………………………….. 2,000,000
Purchased inventory on account.
5b. Accounts Payable (–L) ………………………………………………………… 1,075,000
8. Marketable Securities (+A) …………………………………………………. 250,000
Cash (–A) ……………………………………………………………………. 250,000
Purchased marketable securities.
9a. Accounts Receivable (+A) …………………………………………………… 880,000
Sales (R, +SE) ………………………………………………………………. 880,000
Made sales on account.
Declared dividends.
12. Interest Expense (E, –SE) ……………………………………………………. 1,460a
Premium on Bonds Payable (–L) ………………………………………….. 140
P14–19 Continued
Adjusting entries
(a) Depreciation Expense (E, –SE) …………………………………………….. 140,000*
Accumulated Depreciation (–A) …………………………………….. 140,000
Depreciated fixed assets.
* $140,000 = ($750,000 Cost – $50,000 Salvage value) ÷ 5 year useful life
(b) Insurance Expense (E, –SE) …………………………………………………. 20,000
Allowance for Doubtful Accounts (–A) …………………………... 70,400
Estimated bad debts.
* $70,400 = Credit sales of $880,000 Uncollectible percentage of 8%
(f) Loss on Inventory Write-down (Lo, –SE)……………………………….. 5,000
Inventory (–A) …………………………………………………………….. 5,000
Adjusted inventory to LCM.
Cash Marketable Securities Allow. for Unr. Loss on M. S.
B.B. 0 B.B. 0 B.B. 0
(1a) 1,500,000 (2) 750,000 (8) 250,000 (c) 25,000
(1b) 102,000 (5b) 1,075,000
(3) 29,200 (7) 80,000