EXERCISE 5.18 (25–35 minutes)
(a) MENACHEM NV
Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income ……………………………………………………….
€34,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation …………………………………………………….
Increase in accounts payable …………………………..
Increase in accounts receivable …………………………
Net cash provided by operating activities …………..
Cash flows from investing activities
Purchase of equipment ……………………………………..
Cash flows from financing activities
Issuance of ordinary shares …………………………..
20,000
Payment of dividends ……………………………………….
(23,000)
Net cash used by financing activities …………………
Net increase in cash ……………………………………………….
Cash at beginning of year ……………………………………….
Cash at end of year ………………………………………………..
2019
2018
(b) Current ratio
€128,000*
= 6.4
€101,000**
= 6.73
€ 20,000
€ 15,000
*(€106,000 + €22,000) ** *(€88,000 + €13,000)
Free Cash Flow Analysis
Net cash provided by operating activities ………………………..
€ 27,000
TIME AND PURPOSE OF PROBLEMS
Problem 5.1 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to prepare a statement of financial position, given a
set of accounts. No monetary amounts are to be reported.
Problem 5.2 (Time 35–40 minutes)
Problem 5.3 (Time 40–45 minutes)
Purpose—to provide an opportunity for the student to prepare a statement of financial position in good
Problem 5.4 (Time 40–45 minutes)
Problem 5.5 (Time 40–50 minutes)
Purpose—to provide the student with the opportunity to prepare a statement of financial position in good
the statement of financial position. A challenging problem.
Problem 5.6 (Time 35–45 minutes)
Purpose—to provide the student with an opportunity to prepare a complete statement of cash flows. A
condensed statement of financial position is also required. The student is also required to explain the
Problem 5.7 (Time 40–50 minutes)
Purpose—to provide the student with an opportunity to prepare a statement of financial position in good
form and a more complex cash flow statement.
SOLUTIONS TO PROBLEMS
PROBLEM 5.1
COMPANY NAME
Statement of Financial Position
December 31, 20XX
Assets
Non-current assets
Long-term investments
Bond sinking fund …………………………………….
$XXX
Land for future plant site …………………………..
XXX
$XXX
Property, plant, and equipment
Land ………………………………………………………..
$XXX
Less: Accum. depreciation—buildings ……….
XXX
Equipment ………………………………………………..
Less: Accum. depreciation—equipment ………
Total property, plant, and equipment …….
XXX
Intangible assets
Copyrights ……………………………………………….
XXX
Patents …………………………………………………….
XXX
XXX
Current assets
Inventory (ending) …………………………………….
XXX
Prepaid rent ……………………………………………..
XXX
Accounts receivable …………………………………
Interest receivable …………………………………….
XXX
Advances to employees …………………………….
XXX
XXX
XXX
Total current assets …………………………….
Total assets …………………………………………
PROBLEM 5.1 (Continued)
Equity and Liabilities
Equity
Share capital
Preference shares (description) …………………..
$XXX
Ordinary shares (description) ………………………
Share premium—ordinary …………………………………
XXX
Retained earnings ……………………………………………
Less: Treasury shares ……………………………………..
Equity attributable to controlling shareholders ….
Non-controlling interest ……………………………………
Total equity ………………………………………………..
Non-current liabilities
Bonds payable …………………………..………………………….
$XXX
Pension liability …………………………………………………….
XXX
Total non-current liabilities …………………………...
XXX
Current liabilities
Notes payable ………………………………………………….
XXX
Payroll taxes payable ……………………………………….
XXX
Salaries and wages payable ……………………………..
Dividends payable ……………………………………………
XXX
Unearned service revenue ………………………………..
XXX
Total current liabilities ………………………………..
Total liabilities …………………………………………….
PROBLEM 5.2
MONTOYA SA
Statement of Financial Position
December 31, 2019
Assets
Non-current assets
Property, plant, and equipment
Land …………………………………………….
€ 480,000
Buildings ………………………………………
buildings ………………………………….
Equipment …………………………………….
Intangible assets
Goodwill ……………………………………….
125,000
Current assets
Inventory ………………………………………
239,800
Prepaid expenses ………………………….
87,920
Notes receivable …………………………..
Income taxes receivable ………………..
Trading securities …………………………
Cash …………………………………………….
360,000
Total current assets …………………
Total assets ……………………………..
PROBLEM 5.2 (Continued)
Equity and Liabilities
Equity
Share capital
shares issued …………………………..
(€1,063,897 – €350,000) ………………..
(€4,504,850 – €3,440,953) …………
Share capital—preference
Non-current liabilities
Unsecured notes payable
(long-term) …………………………………
Bonds payable ……………………………….
285,000
Long-term rental obligations …………..
480,000
Total non-current liabilities ……….
Current liabilities
Notes payable to banks …………………..
265,000
Accounts payable …………………………..
490,000
Payroll taxes payable ……………………..
177,591
Income taxes payable……………………..
Rent payable ………………………………….
45,000
Total current liabilities ………………
Total liabilities …………………………..
PROBLEM 5.3
ASIAN-PACIFIC LTD
Statement of Financial Position
December 31, 2019
Assets
Non-current assets
Long-term investments
Investments in shares and,
Property, plant, and equipment
Cost of uncompleted plant facilities
Land …………………………..……………………
construction …………………………….
Equipment ……………………………………….
equipment ………………………………..
Intangible assets
Patents (at cost less amortization) …….
36,000
Current assets
Inventory (Average cost) …………………..
208,500
Prepaid insurance …………………………….
Accounts receivable …………………………
accounts ……………………………….
154,800
Cash ………………………………………………..
Total current assets …………………….
Total assets ………………………………..
¥1,154,200
PROBLEM 5.3 (Continued)
Equity and Liabilities
Equity
Share capital—ordinary
par value; issued and
outstanding, 500,000 shares ……..
Share premium—ordinary ……………….
Retained earnings ………………………….
Total equity ………………………………
Non-current liabilities
8% bonds payable, due
January 1, 2030 …………………………...
Authorized 600,000 shares of ¥1
Current liabilities
Notes payable, secured by
investments of ¥120,000 ………………..
¥ 94,000
Accounts payable …………………………..
Accrued expenses ………………………….
Total current liabilities ………………
Total liabilities …………………………..
PROBLEM 5.4
KISHWAUKEE LTD
Statement of Financial Position
December 31, 2019
Assets
Non-current assets
Long-term investments
Cash in bank ……………………………………
Treasury notes, at fair value …………….
Assets allocated to trustee for
Property, plant, and equipment
Land ……………………………………………….
950,000
Buildings …………………………..…………….
Current assets
Inventory …………………………………………
312,100
Accounts receivable ………………………..
170,000
Cash ……………………………………………….
Total current assets ……………………
Total assets ………………………………..
PROBLEM 5.4 (Continued)
Equity and Liabilities
Equity
issued; 950,000 shares outstanding …..
Retained earnings ……………………………..
Less: Treasury shares, at cost
(50,000 shares) …………………………
Non-controlling interest ………………..
Total equity ………………………………….
Share capital—ordinary, no par;
1,000,000 shares authorized and
Non-current liabilities
Notes payable …………………………………..
500,000a
Current liabilities
Notes payable—current installment ……
£100,000
75,000
Total liabilities ………………………………
b£858,000 – £120,000 (to remove the value of goodwill from retained earnings.
Note 2 indicates that retained earnings was credited. Note that the goodwill
account is also deleted.)
PROBLEM 5.5
SARGENT CORPORATION
Statement of Financial Position
December 31, 2019
Assets
Non-current assets
Long-term investments
Bond sinking fund …………………………..
250,000
Land held for speculation …………………
Land held for future use …………………..
270,000
$ 830,000
Investments in shares
Property, plant, and equipment
Land ……………………………………………….
500,000
Buildings …………………………………………
$1,040,000
Equipment ……………………………………….
equipment ……………………………..
180,000
270,000
Intangible assets
Franchise …………………………..……………
165,000
Goodwill ………………………………………….
100,000
265,000
Current assets
Inventory, at lower of cost
(determined using FIFO) or NRV ………..
180,000
Accounts receivable ………………………..
170,000
Less: Allowance for doubtful
Trading securities (at fair value) ……….
Cash ……………………………………………….
150,000
Total current assets ……………………
570,000
PROBLEM 5.5 (Continued)
Equity and Liabilities
Equity
Share capital
Retained earnings …………………………..
320,000
Total equity ………………………………….
Preference shares, $5 par value;
Non-current liabilities
Notes payable …………………………………..
$120,000
7% bonds payable, due 2027 ……………..
960,000
Total non–current liabilities ………………
1,080,000
Current liabilities
Notes payable …………………………………..
80,000
Accounts payable …………………………..
Income taxes payable………………………..
40,000
Unearned service revenue …………………
5,000
Total current liabilities ………………….
PROBLEM 5.6
(a) LANSBURY INC.
Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income …………………………………………………..
$32,000
net cash provided by operating activities
Depreciation expense ……………………………..
Gain on sale of investments …………………….
Increase in account receivable
($41,600 – $21,200) ……………………………….
(20,400)
(12,800)
Net cash provided by operating activities ………
Adjustments to reconcile net income to
Cash flows from investing activities
Sale of investments ………………………………………
15,000
Purchase of land ………………………………………….
(18,000)
Net cash used by investing activities …………….
(3,000)
Cash flows from financing activities
Issuance of ordinary shares ………………………….
20,000
Retirement of notes payable ………………………….
Payment of cash dividends …………………………..
(8,200)
Net cash used by financing activities …………….
(4,200)
Net increase in cash …………………………………………..
12,000
Cash at beginning of year …………………………………..
20,000
Cash at end of year ……………………………………………
$32,000
PROBLEM 5.6 (Continued)
(b) LANSBURY INC.
Statement of Financial Position
December 31, 2019
Assets
Equity and Liabilities
Investments
$ 20,400
(1)
Share capital—ordinary
$120,000
(6)
Plant assets (net)
70,000
(2)
Retained earnings
47,000
(7)
Land
88,000
(3)
Long-term notes payable
25,000
(4)
Accounts receivable
41,600
Bonds payable
30,000
(5)
Cash
32,000
Accounts payable
30,000
$252,000
$252,000
(1) $32,000 – ($15,000 – $3,400)
(c) Cash flow information is useful for assessing the amount, timing, and
uncertainty of future cash flows. For example, by showing the specific
inflows and outflows from operating activities, investing activities,
PROBLEM 5.6 (Continued)
An analysis of Lansbury’s free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities …………………………
$19,200
Less: Purchase of land ………………………………………………….
Dividends …………………………………………………………….
PROBLEM 5.7
(a) LUO LTD
Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income ……………………………………………………
¥35,000
net cash provided by operating activities
Depreciation expense ……………………………….
Loss on sale of investments ……………………..
Increase in accounts payable
(¥40,000 – ¥30,000) ……………………………..
10,000
Increase in accounts receivable
(¥42,000 – ¥21,200) ……………………………..
(20,800)
6,200
Net cash provided by operating activities ……….
Adjustments to reconcile net income to
Cash flows from investing activities
Sale of investments (¥32,000 – ¥5,000) …………..
27,000
Purchase of land ……………………………………………
(38,000)
Net cash used by investing activities ……………..
(11,000)
Cash flows from financing activities
Issuance of ordinary shares …………………………..
30,000
Payment of cash dividends …………………………...
(10,000)
Net cash provided by financing activities………..
Net increase in cash …………………………..……………….
Cash at beginning of year ……………………………………
PROBLEM 5.7 (Continued)
(b) LUO LTD
Statement of Financial Position
December 31, 2019
Assets
Equity and Liabilities
Plant assets (net)
¥ 69,000
(1)
Share capital—ordinary
¥130,000
(4)
Land
108,000
(2)
Retained earnings
48,200
(5)
(1) ¥81,000 – ¥12,000
(c) An analysis of Luo’s free cash flow indicates it is negative as shown
below:
Free Cash Flow Analysis
Net cash provided by operating activities …………………………
¥ 41,200
Less: Purchase of land ……………………………………………………
Dividends ……………………………………………………….
PROBLEM 5.7 (Continued)
(d) This type of information is useful for assessing the amount, timing, and
uncertainty of future cash flows. For example, by showing the specific
inflows and outflows from operating activities, investing activities, and
financing activities, the user has a better understanding of the liquidity
and financial flexibility of the enterprise. Similarly, these reports are