associated with operating activities. Similarly, the company will recognize expenses when it has an
outflow of assets or an inflow of liabilities associated with operating activities.
E4–16 Concluded
Consider the revenues being generated when the company is entitled to cash. The company could
collect the cash at the exact same time it becomes entitled to the cash (which is an asset account), the
company could expect to collect the cash after it has become entitled to the cash (which would give
rise to a receivable, an asset account) or the company could become entitled to cash after it had
accounting is due to expenses being defined differently under the two approaches.
b. Insurance:
Ending balance = Beginning balance + Insurance purchased – Insurance expense
= $ 0 + $29,000 – $20,000
= $9,000
Rent:
Ending balance = Beginning balance + Cash disbursed for rent – Rent expense
= $0 + $8,000 – $14,000
= $(6,000)
Since the company incurred more expense than it disbursed in cash for rent, the company expects to
E4–17
a.
Lauren Retailing
Income Statement
For the Month Ended July 31
Sales ……………………………………………………………………………………………………….. $ 8,000
Lauren Retailing
Statement of Cash Flows from Operating Activities
For the Month Ended July 31
Cash flows from operating activities:
Cash collections from customers …………………………………………………………….. $ 7,000
b. Cash flows from operating activities are based on the inflow and outflow of cash. Net income is based
on the accrual method of accounting. Under accrual accounting, revenue is recognized when it is
earned, and expenses are recognized when incurred. This means that cash flows do not trigger the
recognition of revenues and expenses. Rather, the inflow or outflow of operating assets, which includes
more than just cash, triggers revenues and expenses. Consequently, cash flows from operating
activities and net income will be equal only by coincidence. The difference between the cash flows from
operating activities and net income can be explained as follows:
Net income ………………………………………………………………….. $ 1,800
Adjustments:
Collections on accounts receivable …………………………….. $ 2,000
Excess of cost of goods sold over cash
E4–18
a. (1) Cash (+A) …………………………..…………………………………………….. 24,000
Common Stock (+SE) ……………………………………………………. 24,000
Issued common stock.
(3) Wage Expense (E, –SE) ……………………………………………………… 1,530
Cash (–A)…………………………………………………………………….. 1,530
(5) Dividends (–SE) ………………………………………………………………… 6,000
Cash (–A)…………………………………………………………………….. 6,000
(7) Interest Expense (E, –SE) …………………………………………………… 1,100
(8) Miscellaneous Expense (E, –SE) ………………………………………….. 5,000
Cash (–A)…………………………………………………………………….. 5,000
Incurred and paid miscellaneous expenses.
b.
Cash
Beginning balance 4,000
Issued common stock 24,000 Paid wages 1,530
Collected from customer 3,900 Purchased land 12,000
E4–18 Concluded
c.
Rahal and Watson
Statement of Cash Flows
For the Month Ended January 31, 2015
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 3,900
Payments for wages …………………………………………………. (1,530)
Purchase of land ………………………………………………………. (12,000)
Net cash increase (decrease) due to
investing activities…………………………………………….. (5,000)
Cash flows from financing activities:
Proceeds from issuance of common stock …………………… $ 24,000
Dividend payment ……………………………………………………. (6,000)
Ending cash balance ……………………………………………………… $ 12,370
E4–19
a.
Peters Company
Income Statement
For the Years Ended December 31, 20X1 and 20X2
Year 1 Year 2
Sales …………………………………………………………….. $ 24,000 $30,000
Cost of goods sold …………………………………………… (5,000) (5,000)
E4–19 Concluded
Peters Company
Statement of Cash Flows
For the Year Ended December 31, 20X1
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 20,000
Cash flows from financing activities:
Proceeds from stockholders ………………………………………. $ 24,000
Net cash increase (decrease) due to
Peters Company
Statement of Cash Flows
For the Year Ended December 31, 20X2
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 34,000
Payment for wages …………………………………………………… (16,000)
Cash flows from financing activities:
Payment to stockholders …………………………………………… $ (34,000)*
Net cash increase (decrease) due to financing
activities ………………………………………………………….. (34,000)
b. Performance Measure Year 1 Year 2 Total
Net income $3,000 $7,000 $10,000
Net cash from operating activities 2,000 8,000 10,000
E4–20
a. Prior to the 5 transactions mentioned in the Exercise, Goodyear’s current ratio and debt/equity ratios
are as follows:
Effect of Transaction Effect on Effect on
on Accounts Current Ratio Debt/Equity Ratio
2. Increases Cash and
Stockholders’ Equity will go up will go down
4. Fixed assets will increase
and Long-term liability will increase will stay the same will go up
b. Prior to any of the 5 independent transactions mentioned in the problem, Goodyear’s current ratio is
1.60. As mentioned in (a) above, only transaction (1) will lead to a decrease in the current ratio.
E4–21
a. Wages Payable Wages Payable Wage Expense Cash Paid for Wages
as of 12/31/15 = as of 12/31/14 + on 2015 Inc. St. – during 2015
$17,000 = X + $39,000 – $35,000
X = $13,000
E4–22
a. Hamilton Watson
Direct method
Cash collections from customers $ 900,000 $ 900,000
Cash paid for inventory (400,000) (400,000)
Cash paid for other expenses (200,000) (200,000)
Net cash flow from operating activities $ 300,000 $ 300,000
Indirect method
b. Cash flows from operating activities measures all the cash inflows and cash outflows associated with a
company’s operating assets and liabilities. Alternatively, net income measures the inflows and outflows
of operating assets and liabilities, not just the cash associated with operating assets and liabilities. Thus,
c. Disagree. Many people think that depreciation expense represents a fund established to finance future
acquisitions of fixed assets. If this were true, it would follow that companies using accelerated
E4–23
a. 1. Cash (+A) ……………………………………………………………………………. 20,000
Contributed Capital (+SE)……………………………………………….. 20,000
Owner contributed capital.
2. Cash (+A) ……………………………………………………………………………. 60,000
Payable to Bank (+L) ……………………………………………………… 60,000
Borrowed money from the bank.
5. Cash (+A) ……………………………………………………………………………. 20,000
Accounts Receivable (+A) …………………………………………………….. 60,000
Sales (R, +SE) ………………………………………………………………… 80,000
Made sale.
6. Operating Expenses (E, –SE) …………………………..…………………….. 18,000
Payable to Bank (–L) ……………………………………………………………. 5,000
7. Operating Expenses (E, –SE) …………………………..…………………….. 15,000
Operating Expenses Payable (+L) …………………………………….. 15,000
E4–23 Continued
b.
Tony’s Business
Income Statement
For the Year Ended December 31, 2015
Sales …………………………………………………………………………………………….. $ 80,000
Tony’s Business
Statement of Shareholders’ Equity
For the Year Ended December 31, 2015
Retained Contributed
Earnings Capital
Beginning balance:1/1/2015 $ 0 $ 0
Tony’s Business
Balance Sheet
December 31, 2015
Assets Liabilities & Stockholders’ Equity
Cash ………………………………………………. $ 25,000 Accounts payable …………………. $ 15,000
Accounts receivable ………………………… 60,000 Operating expenses payable .. 15,000
Inventory ……………………………………….. 15,000 Payable to bank …………………… 55,000
c. Cash
Beginning balance 0
Owner’s contribution 20,000 Purchase of fixed assets 25,000
Proceeds from bank loan 60,000 Purchase of inventory 25,000
E4–23 Continued
Tony’s Business
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash from operating activities:
Cash collections from sales …………………………………………….. $ 20,000
Cash paid for inventory ………………………………………………….. (25,000)
Cash paid for expenses …………………………………………………… (18,000)
Cash from financing activities:
Proceeds from owner’s contribution ……………………………….. $ 20,000
Proceeds from bank loan………………………………………………… 60,000
Principal repayment on debt …………………………………………… (5,000)
E4–23 Concluded
d.
Tony’s Business
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash from operating activities:
Net income ………………………………………………………. $ 21,000
Depreciation Expense …………………………… ……………… 1,000
Adjustments:
Increase in accounts receivable ……………………… $ (60,000)
Cash from investing activities:
Purchase of fixed assets …………………………………….. (25,000)
Cash from financing activities:
Proceeds from owner’s contribution …………………… $ 20,000
Proceeds from bank loan……………………………………. 60,000
PROBLEMS
P4–1
(2) Wage Expense (E, –SE) ……………………………………………………… 30,000
Cash (–A)…………………………………………………………………….. 30,000
Incurred and paid wages.
(5) Interest Expense (E, –SE) …………………………………………………… 10,000
(6) Advertising Expense (E, –SE)………………………………………………. 5,000
Cash (–A)…………………………………………………………………….. 5,000
Purchased advertising.
P4–2
a. Sold services worth $28,000; received $7,000 cash and an account receivable for the balance of
$21,000. Assets Increased by $28,000 and Owners’ Equity increased by $28,000 via increase in Retained
Earnings.
P4–2 Concluded
d. Purchased equipment worth $50,000 by paying $20,000 cash and signing a note payable for the
balance of $30,000. Assets and Liabilities would go up by $30,000 each.
g. Issued common stock for $25,000 cash. Assets and Owners’ Equity both would go up by $25,000.
P4–3
(2) Rent Expense (E, –SE) …………………………..…………………………... 31,200
Cash (–A)…………………………………………………………………….. 31,200
Incurred and paid rent ($2,600 per month for 12 months).
(3) Cash (+A) …………………………..…………………………………………….. 65,000
(6) Salary Expense (E, –SE) ……………………………………………………… 80,000
(7) Other Expenses (E, –SE) …………………………………………………….. 40,000
Cash (–A)…………………………………………………………………….. 40,000
(9) Dividends (–SE) ………………………………………………………………… 26,000
P4–3 Continued
b.
Cash Accounts Receivable
B.B. 0 B.B. 0
(1) 95,000 (2) 31,200 (3) 125,000 (8) 56,000
(5) 75,000 (6) 80,000 E.B. 69,000
(9) 26,000
_____________________________________
E.B. 81,800
Land Notes Payable
B.B. 0 B.B. 0
Common Stock Dividends
B.B. 0 B.B. 0
Fees Earned Rent Expense
B.B. 0 B.B. 0
E.B. 190,000 E.B. 31,200
Salary Expense Other Expense
B.B. 0 B.B. 0
(6) 80,000 (7) 40,000
_____________________________________ _________________________________
P4–3 Continued
c.
Hope, Inc.
Income Statement
For the Year Ended December 31, 2015
Fees earned …………………………………………………………………. $ 190,000
Operating expenses:
Salary expense …………………………..…………………………….. $ 80,000
Hope, Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2015
Common Retained
Stock Earnings
Beginning Balance, January 1, 2015 $ 0 $ 0
Hope, Inc.
Balance Sheet
As of December 31, 2015
Assets Liabilities and Stockholders’ Equity
Cash …………………………………. $ 81,800 Long-term notes payable ………… $ 75,000
Accounts receivable……………… 69,000 Common stock ………………………. 95,000
P4–3 Concluded
Hope, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 121,000
Cash paid for rent …………………………………………………….. (31,200)
Cash flows from financing activities:
Proceeds from stock issuance ……………………………………. $ 95,000
Proceeds from debt issuance …………………………………….. 75,000
P4–4
a. (1) Cash (+A) …………………………..…………………………………………….. 7,000
Fees Earned (R, +SE) …………………………………………………….. 7,000
Rendered services.
(3) Liabilities (–L) …………………………………………………………………… 3,000
Cash (–A)…………………………………………………………………….. 3,000
Made payment on outstanding liabilities.
Purchased long–lived assets.
(5) Miscellaneous Expenses (E, –SE) ………………………………………… 4,000
Cash (–A)…………………………………………………………………….. 4,000
Incurred and paid miscellaneous expenses.
P4–4 Continued
b. Current Return Debt/Equity
Transaction Ratio on Equity Ratio
1. Increase Increase Decrease
3. Increasea No Effect Decrease
a Assuming that liabilities on balance sheet are current.
c.
Morrison Home Services
Income Statement
For the Month Ended January 31, 2015
Revenues ………………………………………………………………………………………………. $ 7,000
Morrison Home Services
Statement of Stockholders’ Equity
For the Month Ended January 31, 2015
Common Retained
Stock Earnings
Beginning balance $ 10,000 $ 8,000
Morrison Home Services
Balance Sheet
January 31, 2015
Assets Liabilities and Stockholders’ Equity
Cash …………………………………. $ 12,200 Liabilities ………………………………. $ 3,000*
Receivables …………………………. 1,000 Notes payable ……………………….. 6,000
P4–4 Concluded
Morrison Home Services
Statement of Cash Flows
For the Month Ended January 31, 2015
Cash flows from operating activities:
Cash collections from customers ……………………………….. $ 10,000
Payment of expenses ……………………………………………….. (4,000)
Net cash increase due to operating activities ………….. $ 6,000
Cash flows from investing activities ………………………………… 0
d.
Morrison Home Services
Statement of Cash Flows
For the Month Ended January 31, 2015
Cash from operating activities:
Net income ………………………………………………………. $ 3,000
Adjustments:
P4-5
(1) Wage Expense (E, -SE) ………………………………………………………. 5
Cash (-A) …………………………………………………………………….. 5
Paid employee wages.