Problem 14-13 (continued)
2. The company has had a huge buildup of inventory. In an effort to
overcome the cash flow impact of this build up, it has delayed payments
to suppliers. The corresponding $300,000 increase in accounts payable
largely explains the company’s net cash provided by operating activities
of $350,000. If accounts payable had remained unchanged, the net cash
provided by operating activities would have been only $50,000. This
Problem 14-14 (45 minutes)
1. Net cash provided by 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
Current Assets
Accounts receivable …..
+ 10,000
Inventory ……………….
– 54,000
Prepaid expenses ……..
+ 8,000
Current Liabilities
Accounts payable ……..
– 55,000
Accrued liabilities ……..
– 7,000
Income taxes payable .
+ 3,000
Problem 14-14 (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income ……………………………………….
$70,000
Adjustments to convert net income to cash basis:
Net cash provided by operating activities …
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
Problem 14-14 (continued)
The decrease in the long-term investments account ($30,000) equals
the cost of the long-term investment sold; therefore, Allied did not
purchase any long-term investments during the year. The proceeds from
the sale of the long-term investment ($50,000) should be recorded as a
cash inflow in the investing activities section of the statement.
The company did not retire any bonds during the year, so the amount
on the prior page (+100,000) represents a cash inflow from a bond
issuance. The company did not issue any stock, so the amount on the
prior page (–5,000) represents a cash outflow to repurchase shares of
stock. Property, plant, and equipment and retained earnings require
further analysis as follows:
Property, plant, and equipment:
Problem 14-14 (continued)
Allied Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Operating activities:
Net income ………………………………………………
Adjustments to convert net income to cash basis:
Depreciation …………………………………………..
Increase in inventory ……………………………….
(54,000)
Decrease in prepaid expenses ……………………
Decrease in accrued liabilities …………………….
Increase in income taxes payable ……………….
Loss on sale of equipment …………………………
Gain on sale of investments……………………….
(20,000)
(49,000)
Net cash provided by operating activities ………..
21,000
Investing activities:
Proceeds from sale of long-term investments …..
50,000
Proceeds from sale of equipment ………………….
44,000
Additions to plant and equipment ………………….
(200,000)
Net cash used in investing activities ………………
(106,000)
Financing activities:
Issuance of bonds payable …………………………..
100,000
Decrease in common stock ………………………….
Cash dividends ………………………………………….
Net cash provided by financing activities …………
67,000
Net decrease in cash ………………………………….
(18,000)
Cash balance, beginning ……………………………..
33,000
Cash balance, ending …………………………………
Problem 14-14 (continued)
3. Free cash flow computation:
Net cash provided by operating activities ……………..
$ 21,000
4. Although the company reported a large net income for the year, a
relatively small amount of cash was provided by operating activities due
to increases in both accounts payable and inventory. Note particularly
Appendix 14A
The Direct Method of Determining the Net Cash
Provided by Operating Activities
Exercise 14A-1 (15 minutes)
Sales ……………………………………………………..
$1,000,000
Adjustments to a cash basis:
Plus decrease in accounts receivable ………..
+ 25,000
$1,025,000
Cost of goods sold ……………………………………
580,000
Adjustments to a cash basis:
Plus increase in inventory ………………………
+ 77,000
Plus decrease in accounts payable …………..
677,000
Selling and administrative expenses ……………..
300,000
Adjustments to a cash basis:
Less decrease in prepaid expenses ………….
Plus decrease in accrued liabilities …………..
Less depreciation …………………………………
Less increase in deferred income taxes …….
Net cash provided by operating activities ……….
Exercise 14A-2 (15 minutes)
Sales ………………………………………………..
$500
Adjustments to a cash basis:
Increase in accounts receivable …………
–7
$493
Cost of goods sold ………………………………
Adjustments to a cash basis:
Selling and administrative expenses ………..
Adjustments to a cash basis:
Depreciation ………………………………….
Net cash provided by operating activities ….
Exercise 14A-3 (15 minutes)
Sales ………………………………………………….
$600
Adjustments to a cash basis:
Decrease in accounts receivable ………….
+10
$610
Cost of goods sold ………………………………..
250
Adjustments to a cash basis:
Increase in inventory ………………………..
+30
Increase in accounts payable ………………
–20
260
Selling and administrative expenses ………….
280
Adjustments to a cash basis:
Decrease in prepaid expenses …………….
Decrease in accrued liabilities ……………..
Depreciation ……………………………………
–40
245
Increase in income taxes payable ………..
Net cash provided by operating activities ……
Exercise 14A-4 (15 minutes)
1.
Sales …………………………………………………….
$2,000
Adjustments to a cash basis:
Decrease in accounts receivable ……………..
+30
$2,030
Cost of goods sold ……………………………………
1,200
Adjustments to a cash basis:
Decrease in inventory …………………………..
–20
Increase in accounts payable …………………
–20
1,160
Selling and administrative expenses …………….
Adjustments to a cash basis:
Depreciation ………………………………………
–80
Income taxes ………………………………………….
Adjustments to a cash basis:
Net cash provided by operating activities ………
2. Gains and losses on the sale of assets would have no effect on the
computations in (1). The reason is that these items are not part of
Problem 14A-5 (30 minutes)
1.
Sales ……………………………………………….
$750
Adjustments to a cash basis:
Increase in accounts receivable …………
–80
$670
Cost of goods sold ………………………………
450
Adjustments to a cash basis:
Decrease in inventory ……………………..
–35
Increase in accounts payable ……………
–75
340
Selling and administrative expenses ……….
223
Adjustments to a cash basis:
Increase in prepaid expenses ……………
Decrease in accrued liabilities …………..
Depreciation …………………………………
–25
210
Income taxes …………………………………….
Increase in income taxes payable ………
Net cash provided by operating activities …
$104
Problem 14A-5 (continued)
2.
Eaton Company
Statement of Cash Flows
For the Year ended December 31, 2011
Operating activities:
Cash received from customers ……………………
$670
Less cash disbursements for:
Total cash disbursements ………………………….
Net cash provided by operating activities ……..
Investing activities:
Proceeds from sale of long-term investments ..
12
Proceeds from sale of equipment ………………..
18
Additions to plant and equipment ……………….
(110)
Net cash used in investing activities …………….
(80)
Financing activities:
Issuance of bonds payable ………………………..
25
Decrease in common stock ………………………..
Cash dividends ……………………………………….
Net cash used in financing activities ……………
Net decrease in cash ……………………………….
Cash balance, beginning …………………………..
Cash balance, ending ……………………………….
Problem 14A-6 (45 minutes)
1.
Sales ……………………………………………….
$700,000
Adjustments to a cash basis:
Increase in accounts receivable …………
–70,000
$630,000
Cost of goods sold ………………………………
400,000
Adjustments to a cash basis:
Increase in inventory ………………………
+48,000
Increase in accounts payable ……………
–50,000
398,000
Selling and administrative expenses ……….
216,000
Adjustments to a cash basis:
Decrease in prepaid expenses …………..
Decrease in accrued liabilities …………..
Depreciation …………………………………
–45,000
170,000
Income taxes …………………………………….
Increase in income taxes payable ………
Net cash provided by operating activities …
$ 39,000
Problem 14A-6 (continued)
2.
Foxboro Company
Statement of Cash Flows
For Year 2
Operating activities:
Cash received from customers ……………..
$630,000
Less cash disbursements for:
Cost of merchandise purchased …………
$398,000
Total cash disbursements ……………………
Net cash provided by operating activities .
Proceeds from sale of equipment ………….
26,000
Loan to Harker Company ……………………
Additions to plant and equipment …………
Net cash used in investing activities ………
Financing activities:
Issuance of bonds payable ………………….
90,000
Issuance of common stock ………………….
60,000
Cash dividends …………………………………
(33,000)
Net cash provided by financing activities ..
117,000
Net decrease in cash …………………………
Cash balance, beginning of year …………..
Cash balance, end of year …………………..
$ 11,000
Problem 14A-6 (continued)
3. The decline in cash is explainable largely by the company’s inability to
generate a significant amount of cash from operating activities. Note
that the company generated only $39,000 from operating activities,
although net income was $63,000 for the year. This small amount of
Problem 14A-7 (30 minutes)
1.
Sales ……………………………………………….
$800,000
Adjustments to a cash basis:
Decrease in accounts receivable ………..
+10,000
$810,000
Cost of goods sold ………………………………
500,000
Adjustments to a cash basis:
Increase in inventory ………………………
+54,000
Decrease in accounts payable …………..
+55,000
609,000
Selling and administrative expenses ……….
214,000
Adjustments to a cash basis:
Depreciation …………………………………
153,000
Income taxes …………………………………….
Net cash provided by operating activities …
$ 21,000
Problem 14A-7 (continued)
2.
Allied Company
Statement of Cash Flows
For the Year Ended December 31, 2011
Operating activities:
Cash received from customers ……………………
$810,000
Less cash disbursements for:
Cost of merchandise purchased ……………….
$609,000
Selling and administrative expenses ………….
153,000
Income taxes ……………………………………….
27,000
Total cash disbursements ………………………….
789,000
Net cash provided by operating activities ……..
Proceeds from sale of long-term investments ..
Proceeds from sale of equipment ………………..
Additions to plant and equipment ……………….
Net cash used in investing activities …………….
Financing activities:
Issuance of bonds payable ………………………..
100,000
Decrease in common stock ………………………..
Cash dividends ……………………………………….
Net cash provided by financing activities ………
67,000
Net decrease in cash ……………………………….
Cash balance, beginning …………………………..
Cash balance, ending ……………………………….
$ 15,000