978-1260153132 Chapter 14 Part 3

Solutions Manual, Chapter 14 21

Problem 14-8 (20 minutes)

Transaction Operating Investing Financing

Cash

Inflow

Cash

Outflow

a. Paid suppliers for inventory purchases….. X X

b. Bou

g

ht equipment for cash ……………….. X X

22 Managerial Accounting, 16th Edition

Problem 14-9 (60 minutes)

The forthcoming explanation is broken down into eight steps.

1. The statement of cash flows summarizes all of a company’s cash inflows

2. The statement is divided into three sections—operating activities,

investing activities, and financing activities. The operating activities

3. The indirect method of preparing the operating activities section of the

statement of cash flows begins with net income and adjusts it to a cash

4. The second step is to analyze net changes in noncash balance sheet

accounts that impact the computation of net income. For Brock, this

cash collections from customers, $24 must be subtracted from net

income to translate it to a cash basis.

Solutions Manual, Chapter 14 23

Problem 14-9 (continued)

The inventory balance decreased by $39. This means that Brock’s

inventory purchases were less than its cost of goods sold by $39.

The accrued liabilities balance decreased by $5. This means that Brock’s

The income taxes payable balance increased by $6. This means that

5. The third step of the indirect method is to adjust for gains/losses

included in the income statement. This adjustment is necessary because

24 Managerial Accounting, 16th Edition

Problem 14-9 (continued)

6. The investing activities section of Brock’s statement of cash flows

records the gross cash flows related to its property, plant, and

7. The financing activities section of Brock’s statement of cash flows

records the gross cash flows related to its bonds payable, common

dividends.

Solutions Manual, Chapter 14 25

Problem 14-10 (45 minutes)

1. Net cash provided by (used in) operating activities:

Step 1: The following equation can be applied to the Accumulated

Depreciation account to compute the depreciation to add back to net

income:

Beginning balance – Debits + Credits = Ending balance

Step 2: The guidelines from Exhibit 14-2 can be used to analyze the

changes in noncash balance sheet accounts that impact net income as

follows:

Increase

in Account

Balance

Decrease

in Account

Balance

Current Assets

Step 3: The gain on sale of equipment ($8,000) is subtracted from net

income.

26 Managerial Accounting, 16th Edition

Problem 14-10 (continued)

The net cash provided by (used in) operating activities is computed as

follows:

Net income ………………………………………………….. $56,000

A

d

j

ustments to convert net income to cash basis:

Depreciation …………………………………………..…. $ 42,000

2. Prepare a statement of cash flows.

Investing and Financing activities:

The guidelines from Exhibit 14-3 can be used to analyze the changes in

noncash balance sheet accounts that impact investing and financing

cash flows as follows:

Increase

in Account

Balance

Decrease

in Account

Balance

Noncurrent Assets

Solutions Manual, Chapter 14 27

Problem 14-10 (continued)

The loan to Hymans ($40,000) is recorded as a cash outflow in the

investing activities section of the statement. Because Joyner did not

retire any bonds during the year, the corresponding amount in the table

on the prior page (+120,000) represents a cash inflow pertaining to a

bond issuance. Joyner did not repurchase any of its own stock during

the year, so the increase in common stock (+30,000) is reported as a

cash inflow in the financing activities section of the statement. Property,

plant, and equipment and retained earnings require further analysis as

follows:

Property, plant, and equipment:

Beginning balance + Debits – Credits = Ending balance

The additions to property, plant, and equipment ($150,000) are

recorded as a cash outflow and the proceeds from the sale of equipment

($18,000) are recorded as a cash inflow.

Retained earnings:

Beginning balance – Debits + Credits = Ending balance

The dividend payment ($15,000) should be recorded as a cash outflow

in the financing activities section of the statement.

28 Managerial Accounting, 16th Edition

Problem 14-10 (continued)

Joyner Company

Statement of Cash Flows

For Year 2

Operatin

g

activities

:

Net income ……………………………………………… $ 56,000

A

d

j

ustments to convert net income to cash basis:

Depreciation ………………………………………….. $ 42,000

Increase in accounts receivable ………………….. (80,000)

Investin

g

activities

:

Proceeds from sale of equipment ………………….. 18,000

A

Be

g

innin

g

cash and cash equivalents……………… 21,000

Endin

g

cash and cash equivalents …………………. $ 4,000

Solutions Manual, Chapter 14 29

Problem 14-10 (continued)

3. Free cash flow computation:

Net cash provided by operatin

g

activities ….. $ 20,000

Less:

4. The relatively small amount of net cash provided by operating activities

during the year was largely the result of a large increase in accounts

30 Managerial Accounting, 16th Edition

Problem 14-11 (45 minutes)

To begin the problem, fill in the question mark pertaining to item “a”

using the following T-account:

Retained Earnin

g

s

Dividends 20,000 Net income 70,000

Chan

g

e 50,000

The change in the retained earnings balance is $50,000 and the cash

dividends are $20,000; therefore, the net income must be $70,000.

Step 1: The following equation can be applied to the Accumulated

Depreciation account to compute the depreciation to add back to net

income:

Beginning balance – Debits + Credits = Ending balance

Step 2: The guidelines from Exhibit 14-2 can be used to analyze the

changes in noncash balance sheet accounts that impact net income as

follows:

Increase in

Account Balance

Decrease in

Account Balance

Current Assets