P4-2. Preparation of a statement of cash flows and a balance sheet
Requirement 1:
Kay Wing, Inc.
Statement of Cash Flows
For the Year Ended 12/31/2017
Cash flows from operating activities
Net income
$35,500
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation expense
12,000
Gain on retirement of bonds
(2,000)
Loss on sale of equipment
4,000
Increase in accounts receivable
($37,000 – $41,500)
(4,500)
Increase in inventory
($70,000 – $73,000)
(3,000)
Decrease in accounts payable
($33,000 – $25,500)
(7 ,500)
(1 ,000)
Cash flow provided by operating activities
34,500
Cash flows from investing activities
Purchase of land
(15,000)
Sale of equipment
10,000
Purchase of short-term investments
(8 ,300)
Net cash used in investing
(13,300)
Cash flows from financing activities
Issuance of capital stock
40,000
Retirement of bonds
(28,000)
Payment of cash dividends
(5 ,000)
Net cash provided by financing activities
7 ,000
Net increase in cash
28,200
Cash at beginning of year
65 ,000
Cash at end of year
$93
,200
Note to the instructor: The purchase of the building for $75,000
through the issuance of bonds and the purchase of land for $35,000
Requirement 2:
Kay Wing, Inc.
Balance Sheet
December 31, 2017
Cash
Accounts receivable
Short-term investments
(1)
Inventory
Long-term investments
Land
(2)
Plant and equipment (net)
(3)
Total assets
Accounts payable
Taxes payable
Notes payable
(4)
Bonds payable
(5)
Capital stock
(6)
Retained earnings
(7)
Total liabilities and stockholders’ equity $ 483 ,000
(1) $0 + $8,300
P4-3. Preparing a balance sheet
Short Erin Company
Balance Sheet
December 31, 2017
Assets
Current assets:
Cash
(1)
Accounts receivable
(2)(4)
Allowance for doubtful trade accounts
(3)
Inventory
Total current assets
Long-term investments:
Nontrade receivables
(4)
Property, plant and equipment:
Land
(5)
Accumulated depreciation—buildings
(5)
Production equipment
Accumulated depreciation—
production equipment
Total property, plant and equipment
Intangible assets:
Patents
Leasehold
Total intangible assets
Other assets:
Held for sale plant assets
(5)
Total assets
Liabilities and Stockholders’ equity
Current liabilities:
Accounts payable
(2)
Accrued salaries
Notes payable-current
(6)
Current portion of installment note payable
(8)
Total current liabilities
Long-term liabilities:
Notes payable—long-term
(6)
Deferred income taxes
(8)
Installment note payable
(7)
Bonds payable
Total liabilities
Stockholders’ equity:
Total stockholders’ equity
(1) The U.S. treasury bills are considered cash equivalents and are
properly included in the cash balance. The $8,500 stock
(4) The $15,500 receivable from the company president is a
non-trade receivable and should be listed separately from trade
(5) The land ($82,000), building ($175,000), and accumulated
depreciation ($175,000 – $110,000 = $65,000) from the Katy,
(6) The $50,000 note that matures in 2018 is a current liability; the
(7) The portion of the installment note that will be repaid within one
(8) The $61,250 in deferred taxes should be separately classified
P4-4. Preparing the income statement and statement of cash flows
Requirement 1:
Requirement 2:
Because all sales are cash sales, sales revenue equals cash
collected from customers. The adjustments made for changes in
P4-5. Analyzing common-size financial statements
We will begin with the balance sheets with extremes and identify the
Company E has no inventory, so we can immediately rule out Alcoa
and Pfizer, two manufacturing concerns, as well retailer JCPenney.
That leaves only Duke Energy and Delta Air Lines as possibilities.
However, Company E does not have significant debt, so it is unlikely
Company A has significant PP&E and debt, which is consistent with
have significant amounts of PP&E and debt, those two companies
Company D has very large inventories and no receivables. The
large inventories suggest the retailer – JCPenney. The lack of
receivables is consistent with the company not providing any credit
That leaves Companies B and C for Alcoa and Pfizer. Company B
has significantly more PP&E while Company C has far more
P4-6. Determining cash flows from operating and investing activities
(AICPA adapted)
Requirements 1 and 2:
Cash flow from operations and investing activities are computed
below.
Note that the purchase of equipment is shown at $20,000, not
$50,000. The $30,000 financed through Notes payable is excluded
P4-7. Determining cash flows from operating and investing activities
(AICPA adapted)
Requirement 1:
Cash collected during 2018 can be shown by a T-account analysis:
Accounts Receivable – Net
Requirement 2:
Cash disbursed for purchases of merchandise can be derived by
using
two T-accounts, inventory and accounts payable.
Inventory
Using the purchases on account we can analyze accounts payable
to
Accounts Payable
Solve for: Payments X
$ 98,000 Ending balance
Requirement 3:
Cash disbursed for general and administrative expenses in 2018 is
computed
below.
For expenses incurred in 2017
For expenses incurred in 2018
48,000
P4-8. Understanding the relation between the income statement,
cash flow statement, and changes in balance sheet accounts
Requirement 1:
Income statement
Sales:
Operating expenses:
Income before taxes
Income tax expense:
Net income
Requirement 2:
Cash provided by operating activities:
Net income
Plus/minus noncash items:
Plus/minus changes in current asset and liability accounts:
_(13,666)
Requirement 3:
Net income is $609, but cash used by operating activities is
$10,106. There are several causes of the difference. Accounts
inventory was purchased than is reported as cost of goods sold in
the income statement), accounts payable decreased in 2017 (i.e.,
cash paid to suppliers covered 2017 purchases as well as some
P4-9. Understanding the relation between income statement, cash
flow statement, and changes in balance sheet accounts
Requirement 1:
Requirement 2:
Cash provided by operating activities:
Plus/minus changes in current
asset and liability accounts:
– Increase in accounts receivable (1,850)
– Increase in inventory (5,299)
– Decrease in accounts payable (1,711)
+ Increase in accrued selling and
Requirement 3:
Net income is $3,728, while cash provided by operating activities is
only $372. There are several causes of the difference. First, $6,380
of depreciation expense reduced income, but it did not reduce cash
flow, so it is added back to net income to obtain cash from
operations. Accounts receivable increased during the year (i.e., not