ALTERNATE PROBLEMS
AP12–1.
Req. 1
Related
Cash
Balance sheet at December 31
Flow
Section
Current
Year
Prior
Year
Δ in Cash
Cash
$34,000
$29,000
+5,000
10
Net increase in cash
O
Accounts receivable
45,000
28,000
+17,000
3
Subtract from net income the increase in A/R
O
Merchandise inventory
32,000
38,000
–6,000
4
Add to net income the decrease in Inventory
I
Property and equipment
121,000
100,000
+21,000
7
Payment in cash for equipment
O
Less: Accumulated
depreciation
(30,000)
(25,000)
–5,000
2
Add back to NI because depreciation expense does not
affect cash
$202,000
$170,000
O
Accounts payable
$36,000
$27,000
+9,000
5
Add to net income the increase in Accounts payable
Add to net income the increase in Wages payable
Note payable, long-term
46,000
–6,000
8
Cash used for repayment of note principal
Contributed capital
86,600
70,600
+16,000
9
Issuance of stock for cash
$202,000
$170,000
Income statement for current year
Sales
$135,000
Cost of goods sold
70,000
Other expenses
37,800
Net Income
AP12–1. (continued)
Ingersol Construction Supply Company
Statement of Cash Flows
For the Year Ended December 31, Current Year
Cash flows from operating activities:
Net income
$27,200 1
Adjustments to reconcile net income to net
cash provided by operating activities:
(17,000)
Net cash provided by operating activities
31,000
Cash flows from investing activities:
Cash payments to purchase fixed assets
(21,000) 7
Cash flows from financing activities:
Cash payments for dividends
(15,000)
1
Cash payments on long-term note
Cash receipts from issuing stock
Net increase in cash during the year
Req. 2
There was an increase in cash for Ingersol Construction Supply Company this year of
$5,000. Operating activities provided a positive cash flow of $31,000. This inflow of
AP12–2.
Req.1
Related Cash
Balance sheet at December 31
Flow Section
Current
Year
Prior
Year
Change
Δ in Cash
Cash
$64,000
$65,000
-1,000
10
Net decrease in cash
O
Accounts receivable
15,000
20,000
–5,000
3
Add to net income the decrease in A/R
O
Inventory
22,000
20,000
+2,000
4
Subtract from net income the increase in Inventory
Property and equipment
150,000
+60,000
7
Payment in cash for equipment
$251,000
$210,000
O
Accounts payable
$8,000
$19,000
-11,000
5
Subtract from net income the decrease in Accounts
payable
O
Taxes payable
2,000
1,000
+1,000
6
Add to net income the increase in Taxes payable
F
Note payable, long-term
86,000
75,000
+11,000
8
Borrow additional note principal
F
Contributed capital
75,000
70,000
+5,000
9
Issuance of stock for cash
Retained earnings
80,000
45,000
+35,000
1
Increased for net income ($40,000) / decreased for
dividends ($5,000)
$251,000
$210,000
Income statement for current year
Sales
$190,000
Cost of goods sold
Other expenses
Net Income
Financial Accounting, 8e 12-39
AP12–2. (continued)
Audio House Inc.
Statement of Cash Flows
For the Year Ended December 31, Current Year
Cash flows from operating activities:
Net income
$40,000
1
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in taxes payable
1,000
6
8,000
Net cash provided by operating activities
48,000
Cash flows from investing activities:
Cash payments to purchase fixed assets
(60,000)
7
Cash flows from financing activities:
Cash receipts from borrowing on long-term
note
11,000
8
Cash dividends paid
( 5,000)
1
Net decrease in cash during the year
Req. 2
There was an overall decrease in cash of $1,000. This resulted from an inflow of
$48,000 from operating activities, borrowing on a long-term note of $11,000, and a
Depreciation expense
2
Decrease in accounts receivable
5,000
Increase in inventory
4
Decrease in accounts payable
(11,000)
5
AP12–3.
Req. 1
Related
Cash
Balance sheet at December 31
Flow
Section
Current
Year
Prior
Year
Δ in Cash
Cash
$34,000
$29,000
+5,000
10
Net increase in cash
O
Accounts receivable
45,000
28,000
+17,000
3
Subtract from sales to compute collections from
customers
O
Merchandise inventory
32,000
38,000
-6,000
4
Subtract from CGS to compute payments to suppliers
I
Property and equipment
121,000
100,000
+21,000
7
Payment in cash for equipment
O
Less: Accumulated
depreciation
(30,000)
(25,000)
-5,000
2
Depreciation expense does not affect cash
$202,000
$170,000
O
Accounts payable
$36,000
$27,000
+9,000
5
Subtract from CGS to compute payments to suppliers
Note payable, long-term
40,000
46,000
-6,000
8
Cash used for repayment of note principal
Contributed capital
86,600
70,600
+16,000
9
Issuance of stock for cash
Retained earnings
37,200
25,000
+12,200
1
for dividends declared and paid of $15,000
$202,000
$170,000
Sales
$135,000
Cost of goods sold
Other expenses
Net Income
AP12–3. (continued)
Ingersol Construction Supply Company
Statement of Cash Flows
For the Year Ended December 31, current year
Cash flows from operating activities:
Collections from customers ($135,000 –
$17,000)
$118,000
3
Payments to suppliers ($70,000 – $6,000 –
4,5
Net cash provided by operating activities
31,000
Cash flows from investing activities:
Cash payments to purchase fixed assets
(21,000) 7
Cash flows from financing activities:
Cash payments for dividends
(15,000)
1
Cash payments on long-term note
Cash receipts from issuing stock
Req. 2
There was an increase in cash for Ingersol Construction Supply Company this year of
$5,000. Operating activities provided a positive cash flow of $31,000. This inflow of
CONTINUING PROBLEM
CON12-1.
Operating activities
Net income 71,993$
Adjustments to reconcile net income to net cash provided by
operating activitites:
Prepaid expenses (2,951)
Other operating assets 8,635
Accounts payable 6,402
Accrued expenses and other current liabilities 20,682
Net cash provided by operating activities 75,103
Investing activities
Acquisition of businesses (5,934)
Purchases of property and equipment (19,844)
Sale of property and equipment 200
Net cash used in investing activities (25,578)
Financing activities
Proceeds from revolving line of bank credit 749,349
Consolidated Statements of Cash Flows
(In thousands)
for the year ended December 31
POOL CORPORATION
Financial Accounting, 9/e 12-43
CASES AND PROJECTS
ANNUAL REPORT CASES
CP12–1.
Req. 1:
Depreciation and amortization was the largest item. The $142,351 expense was
added to net income in the reconciliation because it is a noncurrent deferred
expense which does not cause a cash outflow when it is recorded.
Req. 2
The increase in accrued income and other taxes was the largest change in operating
Req. 3:
American Eagle Outfitters’ three largest investing and financing uses of cash over
the past three years have been investment purchases (available-for-sale securities),
CP12–2.
Req. 1 The company uses the indirect method.
Req. 2 Tax payments of $144,892 thousand were made (located near the bottom of
the Statement of Cash Flows).
Req. 3 “Share–based compensation” is an expense paid with common stock rather
than cash. Since it does not use cash, it is added back to net income to
Req. 4 The company has not paid cash dividends during the last three years, or in any
year since its initial public offering. (Any dividends paid would be a financing
Req. 5 Free Cash Flow was $92,692 thousand, calculated as (in thousands):
Cash Flows from Operating Activities
less Dividends
less Capital Expenditures
Free Cash Flow
Financial Accounting, 9/e 12-45
CP12–3.
Req. 1
American Eagle
Outfitters
Urban Outfitters
Quality of
=
Cash flow from operations
$338,426
=
4.21
$322,321
=
1.39
income ratio
Net income
$80,322
$232,428
American Eagle Outfitters has a higher, and therefore better, quality of income ratio
than does Urban Outfitters.
Req. 3
American Eagle
Outfitters
Urban Outfitters
Capital
=
Cash flow from operations
$338,426
=
1.38
$322,321
=
1.40
acquisitions
ratio
Cash paid for plant &
equipment
$245,002
$229,804
Urban Outfitters has a higher capital acquisitions ratio than does American Eagle
Req. 4
Capital Acquisitions =
2.46
1.38
1.40
Quality of Income =
2.01
4.21
1.39
FINANCIAL REPORTING AND ANALYSIS CASES
CP12–4.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
Statement of Cash Flows
For the Quarter Ended May 31
Cash flows from operating activities:
Net income ……………………………………………………………..
$ 163,837
Add (deduct) to reconcile net income to net cash flow:
Depreciation expense …………………………………………………..
276,304
Amortization expense …………………………………………………..
5,901
Accounts receivable increase ………………………….. ………….
(138,681)
Inventories increase ……………………………………………………..
(243,880)
Other current assets increase ………………………………………
(357,507)
Accounts payable increase …………………………………………..
280,935
Accrued liabilities increase …………………………………………..
164,087
Income taxes payable decrease …………………………………..
Long-term accounts receivable decrease …………………….
11,382
Net cash inflow from operating activities ………………..
$ 119,347
Cash flows from investing activities:
Fixed assets purchased ………………………………………….
(1,081,121)
Other assets decrease …………………………………………………
50,055
Net cash outflow from investing activities
(1,031,066)
Cash flows from financing activities:
Repayment of short-term debt …………………………………
(1,000,000)
Repayment of long-term debt ……………………………………….
(2,355,029)
Issuance of long-term debt ………………………………………
4,659,466
Net cash inflow from financing activities …………………
1,304,437
Net increase in cash during the quarter …………………………..
392,718
Cash, February 29 ……………………………………………………….
528,787
Cash, May 31 ………………………………………………………………
$ 921,505
Financial Accounting, 9/e 12-47
CP12–5.
Date: (today’s date)
To: Supervising Analyst
From: (your name)
Re: Evaluation of Carlyle Golf, Inc.’s Planned Expansion
While many companies experience losses and negative cash flows during the early
years of their operations, the cash situation for Carlyle Golf is a major concern. The
company has announced plans to increase inventory by $2.2 million but there is no
obvious source to finance the acquisition of this inventory. The statement of cash flows
shows that the company has to make cash deposits with its suppliers. It is unlikely that
these suppliers will be a major source of financing for Carlyle’s inventory. The company
obviously does not have enough cash on hand to finance its expansion of inventory.
12-48 Solutions Manual
CRITICAL THINKING CASES
CP12–6.
Req. 1
The payment from Merrill Lynch to Enron does not automatically make the Nigerian
barge transaction a sale. When a loan is established between a lender and borrower, a
similar cash payment is made between the two parties. Two other features of the
The four revenue recognition criteria discussed in Chapter 3 are:
1) delivery has occurred or services have been rendered,
2) there is persuasive evidence of an arrangement for customer payment,
3) the price is fixed or determinable, and
4) collection is reasonably assured.
Without knowing about the secret side deal, it’s not obvious which of the four criteria
promised to Merrill Lynch.
Req. 2
By recording the transaction as a regular sale, Enron reports the cash received as a
cash inflow from an operating activity. Had the transaction been recorded as a loan,
Enron would have reported the cash received as a cash inflow from a financing activity.
Req. 3
Most financial statement users view cash flows from operating activities as recurring
sources of cash into the future. If $100,000 of cash is generated from operations this
year, it’s often reasonable to expect that a similar amount will be generated next year
Financial Accounting, 9/e 12-49
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP12–7.
The solutions to this case will depend on the company and/or accounting period
selected for analysis.