P4–17 Continued
e. Closing entries are posted to the T–accounts in Part (a).
(A) Sales ………………………………………………………………………………. 1,700,000
Interest Revenue …………………………………………………………….. 1,620
Gain on Sale of Investment ……………………………………………….. 7,000
Depreciation Expense—Machinery ……………………………….. 47,500
Closed revenues and expenses into Income Summary.
(B) Income Summary ……………………………………………………………… 243,859
Retained Earnings ………………………………………………………… 243,859
Closed Income Summary into Retained Earnings.
a. J.D.F. Company
Income Statement
For the Year Ended December 31, 2015
Revenues:
Sales ……………………………………………………… $ 1,700,000
Interest revenue …………………………………….. 1,620
Gain on sale of investment ………………………. 7,000
Total revenues …………………………………… $1,708,620
Operating expenses:
Cost of goods sold ………………………………….. $700,000
Wage expense ……………………………………….. 370,000
Operating expense …………………………………. 42,000
P4–17 Continued
J.D.F. Company
Statement of Retained Earnings
For the Year Ended December 31, 2015
Retained earnings balance, January 1, 2015 ………………………………………………. $ 416,000
J.D.F. Company
Balance Sheet
December 31, 2015
Assets
Current assets:
Cash ……………………………………………………… $ 9,000
Prepaid insurance …………………………………… 29,600
Prepaid advertising expenses …………………… 25,000
Notes receivable …………………………………….. 72,000
Total current assets ……………………………. $1,113,220
Long-term investments ……………………………….. 180,000
Fixed assets:
Net book value of machinery …………………… 672,500
Total fixed assets ……………………………….. 1,006,500
Patent ……………………………………………………….. 62,500
Total assets ………………………………………………… $ 2,362,220
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable …………………………………… $ 170,000
Wages payable ………………………………………. 43,000
P4–17 Continued
J.D.F. Company
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2015
Cash flows from operating activities:
Collections from customers on cash sales……………………. $ 350,000
Collection from customers on open accounts ………………. 850,000
Cash flows from investing activities:
Proceeds from sale of investment ………………………………. $ 37,000
Purchase of investment …………………………………………….. (50,000)
Net cash increase (decrease) due to
investing activities…………………………………………….. (13,000)
Cash flows from financing activities:
P4–17 Concluded
b. J.D.F. Company
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income …………………………..……………………… $ 243,859
Adjustments:
Depreciation expense—Equipment ……………. $ 48,000
Increase in merchandise inventory …………….. (120,000)
Increase in prepaid advertising ………………….. (25,000)
Increase in notes receivable ………………………. (72,000)
Decrease in prepaid insurance …………………… 44,400
Decrease in accounts payable ……………………. (50,000)
Decrease in wages payable ……………………….. (30,000)
Increase in operating exp. payable …………….. 6,000
Cash flows from financing activities:
Proceeds from issuance of common stock ……….. $ 120,000
Payment of dividends ……………………………………. (50,000)
Net cash increase (decrease) due to
financing activities……………………………….. 70,000
P4–18
For 2015 the net cash flow from operations is $62,400 which is composed of:
(1) cash collections from services rendered, and
(2) cash payments due to operating activities.
Let us compute the cash collections from services rendered for 2015:
Cash Collections Revenue from Services
from Services per Income Statement Decrease in
P4–19
In order to answer this question, we need to know how much total revenue is generated by Mayberry from
each of its 2 sources: (1) advertising display sales; and (2) consulting services. We are given the total
revenues as reported on the Income Statement, and selected activity of cash receipts and changes in
Accounts Receivable account for the advertising display sales.
For 2014
$41,500 = X + $2,800
X = $38,700
P4–19 Concluded
Second, based on the above information and the total revenue as reported in the 2014 and 2015 income
statements, we can compute the amount of revenue generated by Mayberry Enterprises from its consulting
services.
For 2014
$76,000 – $38,700 = $37,300
For 2015
P4–20
Cash Account …………………………………………………………………………. 23,400
Accumulated Depreciation ………………………………………………………. 6,600a
Equipment ………………………………………………………………………. 24,400b
Gain on Sale of Equipment ………………………………………………… 5,600
ISSUES FOR DISCUSSION
ID4–1
a. The amount at which MCI would report the SBS system on its balance sheet is the amount MCI gave up
to receive it. Since MCI “paid” $376 million in stock and took on a note for $104 million (with the
proceeds going to IBM), MCI would report the SBS system at $428 million (i.e., $480 million less $52
million of miscellaneous assets received).
d. Account Effect Dollar Value
Miscellaneous Assets (asset) Increase $ 52 million
e. Miscellaneous Assets (+A) ……………………………………………………….. 52,000,000
Investment in SBS (+A) ……………………………………………………………. 428,000,000
ID4–2
a. From Campbell Soup’s perspective, assets increased (inventory, fixed assets, intangible
assets—less the decrease in cash) and liabilities increased (short-term notes payable).
d. Fixed Assets and Inventory (+A) 100
ID4–3
a. Issuing stock increases stockholders’ equity and assets (for the cash raised) by the value of the stock
issued. If the proceeds were then used to reduce debt, liabilities would decrease by the amount of
liabilities paid off and assets would decrease for the cash used to retire the debt. If the proceeds from
b. A ratio that is often used to assess the riskiness of a company is the debt/equity ratio. This ratio is
calculated as a company’s total liabilities divided by the company‘s total stockholders’ equity. The
higher the ratio is, the less the stockholders have at stake in the company relative to the debtholders.
ID4–4
a. There are a number of items that could explain why cash flows from operations would be less than net
income. These items fall into two general classes: (1) items that affect net income but not cash flows
from operating activities and (2) items that affect cash flows from operating activities but not net
b. There are four places in the financial statements that would probably be particularly informative about
cash flow problems. First, a big increase in the balance of Accounts Receivable, particularly if the
balance in Sales has not increased, could indicate that the company is having trouble collecting on
credit sales. This would imply that the company has less cash flowing in. Second, a big increase in the
company’s payables could signal cash flow problems. That is, if a company is having cash flow
ID4–5
a. When WorldCom capitalized an expenditure as an asset, it did not show that dollar
amount as an expense and therefore underreported expenses and overstated earnings.
For example, if the company spent $10 million on its telecommunications lines and should
have recorded a $10 million expense, it actually put the $10 million on the balance sheet
b. If management feels pressure from public investors and Wall Street analysts, it may be
tempted to employ techniques to defer expenses so that current earnings are higher than
c. Given the size of publicly-traded companies, auditors cannot look at each and every
transaction. Employing the materiality exception, auditors will focus their time on larger
d. Internal controls are designed to act as a “check-and-balance” mechanism so that the
decisions of one manager are subject to review by an independent party. Had the audit
committees of the Boards of Directors of WorldCom, Tyco and HealthSouth been truly
situation.
ID4–6
Mr. Bailey is drawing a distinction between cash flows from operating activities and net income, and
stressing how cash flows are more important for the company’s solvency. Net income is a measure of
the net assets the company generated during the year from operating activities, whereas cash flows
ID4–7
A. Net income would not be affected. BMW’s change moves items from one part of the income
statement (operating) to another (non-operating), but the items are still deducted as expenses when
the final net income is calculated. The change will be to a line item within the income statement called
“operating income”.
C. An investment bank such as Goldman Sachs has significant business relationships with companies all
across the globe and in all different industries. Goldman Sachs would ideally like to compare
companies, using the same set of standards and measures. If a European company uses one set of
ID4–8
The military has many users of its financial statements; these users need to be able to rely upon the
integrity of the financial information in order to make good decisions. While these decisions are of a
different nature than the typical commercial enterprise, they have significant financial impact on the
enterprise. There are a couple of systematic errors that could develop from having to use poor
ID4–9
Borrowing money to pay dividends affects the right side of the accounting equation. Liabilities increase
(Notes Payable, for example) while Stockholders’ Equity (through Retained Earnings) decreases. The
combined effect is to leverage up a company’s balance sheet, causing it to finance assets with relatively
ID4–10
The consolidation process of Umbro’s statements with those of Nike, Inc. had two major obstacles: 1)
the conversion of pounds to U.S. dollars so that the statements can be presented in a common
denomination; and 2) the conversion of Umbro’s IFRS-based statements (with its principles-based
ID4-11
Information obtained on a real-time basis is information that is available as soon as the underlying
transaction has taken place. In the past financial systems might update once a week or once a month.
In that environment managers were only able to see what sales were after the system was updated at
the end of the month. Today, however, managers are able to access financial systems to see what sales
are so far today.
ID4–12
a. According to the first footnote Google’s prepaid expenses also include amounts for revenue that
will be shared with content providers. If Google pays the provider its share of advertising prior to
the display of the content, the amount is held in prepaid until delivery of the content. Prepaid
expenses, including these other amounts, totaled $1,710 and $2,132 million as of 12/31/11 and
12/31/12, respectively.
d. The Balance Sheet shows $2,012 million of accounts payable as of 12/31/2012. If Google
purchases inventory without paying cash at the time of the purchase, a trade accounts payable is
created. The large increase in payables from 2011 to 2012 is related to the Motorola acquisition;
the cell phone manufacturing operation requires more inventory (purchased on account).
f. The statement of cash flows represents the in- and out-flows of cash during a period of time. The
indirect presentation of the statement of cash flows begins with net income (a number based on
accrual accounting that does not have anything to do with cash) and, through a series of steps,
converts this number to cash from operating activities. The first step to convert net income to cash
from operations is to add back depreciation expense (and any other non-cash charges).