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P14B-38A, cont.
Panel B – Statement of Cash Flows:
Cash Flows from Operating Activities:
Net Income
(a)
62,500
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation Expense—Plant Assets
(b)
15,600
Problems (Group B)
P14-39B Identifying the purpose and preparing the statement of cash flows— indirect method
Learning Objectives 1, 2
2. Net Income $521,400
3. Total Assets $1,038,400
4. Net Cash Prov. by Op. Act. $376,000
Frank Rare Coins (FRC) was formed on January 1, 2016. Additional data for the
year follow:
a. On January 1, 2016, FRC issued no par common stock for $450,000.
b. Early in January, FRC made the following cash payments:
1. For store fixtures, $48,000
2. For merchandise inventory, $260,000
3. For rent expense on a store building, $14,000
c. Later in the year, FRC purchased merchandise inventory on account for $237,000. Before year-end,
FRC paid $137,000 of this accounts payable.
d. During 2016, FRC sold 2,500 units of merchandise inventory for $400 each. Before year-end, the
company collected 90% of this amount. Cost of goods sold for the year was $340,000, and ending
merchandise inventory totaled $157,000.
e. The store employs three people. The combined annual payroll is $92,000, of which FRC still owes
$2,000 at year-end.
f. At the end of the year, FRC paid income tax of $23,000. There was no income taxes payable.
g. Late in 2016, FRC paid cash dividends of $35,000.
h. For store fixtures, FRC uses the straight-line depreciation method, over five years, with zero residual
value.
Requirements
1. What is the purpose of the statement of cash flows?
2. Prepare FRC’s income statement for the year ended December 31, 2016. Use the single-step format,
with all revenues listed together and all expenses listed together.
3. Prepare FRC’s balance sheet at December 31, 2016.
4. Prepare FRC’s statement of cash flows using the indirect method for the year ended December 31,
2016.
SOLUTION
Requirement 1
The purpose of the statement of cash flow is to report on the cash receipts and cash payments for
Requirement 2
FRANK RARE COINS
Income Statement
Year Ended December 31, 2016
Revenue:
Sales (2,500 × $400)
$ 1,000,000
P14-39B, cont.
Requirement 3
FRANK RARE COINS
Balance Sheet
December 31, 2016
Assets
Current Assets:
Cash
$ 743,000
Liabilities
Current Liabilities:
Accounts Payable ($237,000 − $137,000)
$ 100,000
P14-39B, cont.
Requirement 4
FRANK RARE COINS
Statement of Cash Flows
Year Ended December 31, 2016
Cash Flows from Operating Activities:
Net Income
$ 521,400
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation Expense
$ 9,600
P14-40B Preparing the statement of cash flows—indirect method
Learning Objective 2
Net Cash Prov. by Op. Act. $85,300
Accountants for Carlson, Inc. have assembled the following data for the year ended December 31, 2016:
SOLUTION
ACCOUNTANTS FOR CARLSON, INC.
Statement of Cash Flows
Year Ended December 31, 2016
Cash Flows from Operating Activities:
Net Income
$ 69,500
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cash Flows from Investing Activities:
Acquisition of Equipment for Cash
(73,000)
Cash Receipt from Sale of Building
57,000
Net Cash Used for Investing Activities
(16,000)
Cash Flows from Financing Activities:
P14-41B Preparing the statement of cash flows—indirect method with non-cash transactions
Learning Objective 2
1. Net Cash Prov. by Op. Act. $132,000
The 2016 income statement and comparative balance sheet of McDonald, Inc. follow:
Additionally, McDonald purchased land of $20,500 by financing it 100% with long- term notes payable
during 2016. During the year, there were no sales of land, no retirements of stock, and no treasury stock
transactions. A plant asset was disposed of for $0. The cost and the accumulated depreciation of the
disposed asset was $13,240. Plant asset was acquired for cash.
Requirements
1. Prepare the 2016 statement of cash flows, formatting operating activities by the indirect method.
2. How will what you learned in this problem help you evaluate an investment?
SOLUTION
Requirement 1
MCDONALD, INC.
Statement of Cash Flows
Year Ended December 31, 2016
Cash Flows from Operating Activities:
Net Income
$ 103,600
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation Expense—Plant Assets
$ 14,800
P14-41B, cont.
Requirement 1, cont.
Plant Assets
12/31/2015
109,480
Acquisitions
21,000
13,240
Disposed of
12/31/2016
117,240
Retained Earnings
6,100
12/31/2015
103,600
Net Income
Dividend
73,900
35,800
12/31/2016
Requirement 2
I will be able to evaluate an investment with this information because I can see the business’s cash
P14-42B Preparing the statement of cash flows—indirect method, evaluating cash flows, and
measuring free cash flows
Learning Objectives 2, 3
1. Net Cash Used for Inv. Act. $(156,000)
The comparative balance sheet of Morris Educational Supply at December 31, 2016, reported the
following:
Morris’s transactions during 2016 included the following:
Requirements
1. Prepare the statement of cash flows of Morris Educational Supply for the year ended December 31,
2016. Use the indirect method to report cash flows from operating activities.
2. Evaluate Morris’s cash flows for the year. Mention all three categories of cash flows, and give the
reason for your evaluation.
3. If Morris plans similar activity for 2017, what is its expected free cash flow?
SOLUTION
Requirement 1
MORRIS EDUCATIONAL SUPPLY
Statement of Cash Flows
Year Ended December 31, 2016
Cash Flows from Operating Activities:
Net Income
$ 64,600
Requirement 2
The company shows a strong cash flow. They are generating cash from their operations due primarily to
Requirement 3
Net Cash provided by Operating Activities
$ 83,300
P14A-43B Preparing the statement of cash flows—direct method
Learning Objective 4
Appendix 14A
1. Net Income $115,200
2. Total Assets $612,200
3. Collections from Cust. $464,000
Official Reserve Rare Coins (ORRC) was formed on January 1, 2016. Additional data for the year
follow:
a. On January 1, 2016, ORRC issued no par common stock for $450,000.
b. Early in January, ORRC made the following cash payments:
1. For store fixtures, $49,000
2. For merchandise inventory, $280,000
3. For rent expense on a store building, $10,000
c. Later in the year, ORRC purchased merchandise inventory on account for $238,000. Before year-end,
ORRC paid $158,000 of this accounts payable.
d. During 2016, ORRC sold 2,900 units of merchandise inventory for $200 each. Before year-end, the
company collected 80% of this amount. Cost of goods sold for the year was $340,000, and ending
merchandise inventory totaled $178,000.
e. The store employs three people. The combined annual payroll is $88,000, of which ORRC still owes
$5,000 at year-end.
f. At the end of the year, ORRC paid income tax of $17,000. There was no income taxes payable.
g. Late in 2016, ORRC paid cash dividends of $38,000.
h. For store fixtures, ORRC uses the straight-line depreciation method, over five years, with zero
residual value.
Requirements
1. Prepare ORRC’s income statement for the year ended December 31, 2016. Use the single-step
format, with all revenues listed together and all expenses listed together.
2. Prepare ORRC’s balance sheet at December 31, 2016.
3. Prepare ORRC’s statement of cash flows for the year ended December 31, 2016. Format cash flows
from operating activities by the direct method.
SOLUTION
Requirement 1
OFFICIAL RESERVE RARE COINS
Income Statement
Year Ended December 31, 2016
Revenue:
Sales (2,900 × $200)
$ 580,000
Expenses:
