23–21
EXERCISE 23-9 (20–30 minutes)
(a)
Sales ……………………………………………………………………
$538,800
Deduct: Increase in accounts receivable,
net of write-offs
[$33,000 – ($30,000 – $3,800)] ……………………
6,800
Cash collected from customers ……………………………..
$532,000
(c)
Interest expense ……………………………………………………
$ 4,300
Deduct: Decrease in unamortized bond discount
($5,000 – $4,500) ………………………………………
500
Cash paid for interest ……………………………………………
$ 3,800
(d)
Income tax expense ………………………………………………
$ 20,400
Add: Decrease in income taxes payable
Deduct: Increase in deferred income taxes
Cash paid for income taxes ……………………………………
$ 27,800
(e)
Selling expenses …………………………………………………..
$141,500
Deduct: Depreciation ($3,000* X 1/3) ………………………
$1,000
Bad debts expense …………………………..………
5,000
6,000
Cash paid for selling expenses ………………………………
$135,500
(b)
Cost of goods sold ………………………………………………..
$250,000
Deduct: Decrease in inventory ($47,000 – $31,000) …
16,000
Purchases …………………………………………………………….
Deduct: Increase in accounts payable
($25,000 – $17,000) …………………………………..
8,000
Cash payments to suppliers ………………………………….
$226,000
EXERCISE 23-10 (25–35 minutes)
(a) The solution can be determined through use of a T-account for prop-
erty, plant, and equipment.
Payments = $277,000 + $45,000 – $247,000 – $25,000
= $50,000
(b) The solution can be determined through use of a T-account for accu-
mulated depreciation.
Accumulated Depreciation
167,000
12/31/11
Equipment sold
178,000
12/31/12
Accumulated Depreciation
27,000
23–23
EXERCISE 23-10 (Continued)
The proceeds from the sale of equipment of $32,500 are considered
an investing activity. Investing activities include the acquisition and
disposition of long-term productive assets.
Dividends Payable
5,000
12/31/11
18,000
Dividends declared
Cash dividends paid
?
8,000
12/31/12
Cash dividends paid = $5,000 + $18,000 – $8,000
= $15,000
(d) The redemption of bonds payable amount is determined by setting up
a T-account for Bonds Payable.
12/31/11
Issuance of B/P for PP&E
12/31/12
12/31/11
Dividends declared
Net income
12/31/12
EXERCISE 23-10 (Continued)
Redemption of bonds payable = $46,000 + $25,000 – $49,000
= $22,000
EXERCISE 23-11 (30–35 minutes)
FAIRCHILD COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2012
(Indirect Method)
Net income ……………………………………………………………
$ 810
Adjustments to reconcile net income to net cash
Depreciation expense ($1,200 – $1,170) ……………
Gain on sale of investments …………………………….
Decrease in inventory ……………………………………..
Increase in accounts payable …………………………..
Increase in receivables ……………………………………
Decrease in accrued liabilities …………………………
(50)
150
Net cash provided by operating activities ………………..
960
Cash flows from investing activities
Sale of held-to-maturity investments
[($1,470 – $1,300) + $80] ……………………………………..
250
Purchase of plant assets [($1,900 – $1,700) – $70] ……
(130)
Net cash provided by investing activities ………………..
120
Cash flows from financing activities
Issuance of capital stock [($1,900 – $1,700) – $70] …….
Retirement of bonds payable …………………………………..
Payment of cash dividends ……………………………………..
(260)
Net cash used by financing activities ……………………….
(380)
23–25
EXERCISE 23-11 (Continued)
EXERCISE 23-12 (20–30 minutes)
FAIRCHILD COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2012
(Direct Method)
Cash flows from operating activities
Cash collections from customers …………………………
Cash paid for merchandise ……………………………..
Cash paid for selling/administrative
expenses ……………………………………………………
Cash paid for income taxes …………………………….
Cash flows from investing activities
Sale of held-to-maturity investments
[($1,470 – $1,300) + $80] …………………………………..
250
Purchase of plant assets [($1,900 – $1,700) – $70] …
(130)
Net cash provided by investing activities ……………..
120
Cash flows from financing activities
Issuance of capital stock [($1,900 – $1,700) – $70] ..
Retirement of bonds payable ……………………………….
Payment of cash dividends ………………………………….
Net cash used by financing activities …………………..
Net increase in cash ……………………………………………………..
700
Cash, January 1, 2012 …………………………………………………..
EXERCISE 23-12 (Continued)
Noncash investing and financing activities
Issuance of common stock for plant assets ………….
$ 70
*$6,900 – ($1,750 – $1,300)
***($930 – $30) + ($250 – $200)
EXERCISE 23-13 (30–40 minutes)
ANDREWS INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Cash received from customers ……………………..
$325,150a
Cash paid to suppliers ……………………………..
Cash paid for operating expenses …………….
Cash paid for interest……………………………….
Cash paid for income taxes ………………………
Net cash provided by operating activities ………
Cash flows from investing activities
Sale of equipment
[$30,000 – ($30,000 X .7)] + $2,000 ……………….
11,000
Purchase of equipment
Purchase of available-for-sale investments ……
Net cash used by investing activities …………….
Cash flows from financing activities
Principal payment on short-term loan ……………
(2,000)
Principal payment on long-term loan …………….
(7,000)
Dividend payments ………………………………………
(6,000)
Net cash used by financing activities …………….
(15,000)
Net decrease in cash ……………………………………………..
Cash, January 1, 2012 ……………………………………………
23–27
EXERCISE 23-13 (Continued)
aSales …………………………………………………………………..
$338,150
– Increase in accounts receivable …………………………..
(13,000)
Cash received from customers ………………………………
$325,150
cOperating expenses ………………………………………………
$120,000
+ Increase in prepaid rent ……………………………………….
1,000
– Depreciation expense
$35,000 – [$25,000 – ($30,000 X .70)] …………………
(31,000)
$ 82,000
$ 6,750
2,000
$ 8,750
$175,000
– Increase in accounts payable ………………………………
Cash paid to suppliers …………………………………………..
EXERCISE 23-14 (30–40 minutes)
ANDREWS INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ………………………………………………………
$27,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ………………………………..
$31,000*
Amortization of copyright …………………………..
Gain on sale of equipment …………………………
Decrease in inventories ……………………………..
Increase in salaries and wages payable ………
Increase in accounts payable ……………………..
Increase in prepaid rent ……………………………..
Increase in accounts receivable …………………
Decrease in income taxes payable ……………..
(2,000)
Net cash provided by operating activities …………..
Cash flows from investing activities
Sale of equipment [($30,000 X 30%) + $2,000] ……
11,000
Purchase of equipment
[$154,000 – ($130,000 – $30,000)] …………………..
(54,000)
Purchase of available-for-sale investments ……….
(17,000)
Net cash used by investing activities ………………..
(60,000)
Cash flows from financing activities
Principal payment on short-term loan ……………….
Principal payment on long-term loan ………………..
Dividend payments ………………………………………….
(6,000)
Net cash used by financing activities ………………..
Net decrease in cash ……………………………………………….
(3,000)
Cash, January 1, 2012 ………………………………………………
9,000
Cash, December 31, 2012 …………………………………………
$ 6,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
$ 8,750*
23–29
EXERCISE 23-15 (25–35 minutes)
MORGANSTERN COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ……………………………………………………..
$ 46,000*
Adjustments to reconcile net income to net
Cash flows from investing activities
Sale of plant assets …………………………………………
8,000
Sale of held-to-maturity investments ………………..
34,000
Purchase of plant assets …………………………..……..
(180,000)**
Net cash used by investing activities ………………..
(138,000)
Cash flows from financing activities
Issuance of bonds payable ………………………………
Payment of dividends ………………………………………
(10,000)
Net cash provided by financing activities ………….
65,000
Net increase in cash …………………………………………………
Cash balance, January 1, 2012 ………………………………….
10,000
Cash balance, December 31, 2012 …………………………..
$ 15,000
*Net income $59,000 – $9,000 – $4,000 = $46,000
**Supporting computation
(purchase of plant assets)
Plant assets, December 31, 2011 ……………………….
$215,000
Less: Plant assets sold ……………………………………
(60,000)
155,000
Plant assets, December 31, 2012 ……………………….
cash provided by operating activities:
Depreciation expense …………………………………
$ 28,000
Loss on sale of investments ……………………….
9,000
Increase in current liabilities ……………………….
18,000
32,000
Net cash provided by operating activities …………
EXERCISE 23-16 (30–40 minutes)
(a) Computation of net cash provided by operating activities:
Net income ($8,000 + $9,000) – $5,000 ……………….
$12,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ………………………………
Loss on sale of equipment
($6,000 – $3,000) …………………………………..
Increase in accounts receivable
($45,000 – $55,000) ……………………………….
($45,000 – $65,000) ……………………………….
(20,000)
Decrease in prepaid expenses
($25,000 – $15,000) ………………………………
10,000
Increase in accounts payable
($65,000 – $52,000) ……………………………….
13,000
Decrease in accrued expenses
Net cash provided by operating activities ………….
$22,000
(b)
Computation of net cash provided (used) by investing activities:
Sale of equipment ………………………………………………
$ 3,000
Purchase of equipment
[$90,000 – ($75,000 – $13,000)] …………………………
(28,000)
Net cash used by investing activities …………………..
$(25,000)
(c)
Computation of net cash provided (used) by financing activities:
Cash dividends paid …………………………………………..
$ (9,000)
Payment of notes payable …………………………………..
Issuance of bonds payable ………………………………….
Net cash used by financing activities …………………..
$ (2,000)
23–31
EXERCISE 23-17 (30–40 minutes)
(a) OCHOA INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ………………………………………………………
$30,250
Cash flows from investing activities
Purchase of land ……………………………………………..
(11,000)
Sale of available-for-sale investments ……………….
12,875
Net cash provided by investing activities ………….
1,875
Cash flows from financing activities
Payment of dividends ………………………………………
Retirement of bonds payable …………………………...
(20,000)
Issuance of capital stock …………………………..……..
10,000
Net cash used by financing activities ………………..
Cash, January 1, 2012 ………………………………………………
8,500
Noncash investing and financing activities
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ……………………………….
Gain on sale of investment ………………………..
Net cash provided by operating activities ………….
EXERCISE 23-17 (Continued)
(b) OCHOA INC.
Balance Sheet
December 31, 2012
Assets
Equities
Cash
$ 32,750
Current liabilities
$ 15,000
Current assets
Long-term notes
other than cash
payable
Investments
Bonds payable
Plant assets (net)
Common stock
Land
Retained earnings
a$20,000 – ($12,875 – $2,000)
*$40,000 + $11,000 + $22,500
***$24,500 + $30,250 – $ 9,375
23–33
EXERCISE 23-18 (25–30 minutes)
POPOVICH COMPANY
Statement of Cash Flows (partial)
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ………………………………………………………
$ 50,000
Adjustments to reconcile net income to net
Cash flows from investing activities
Purchase of machinery …………………………………….
(62,000)
Sale of machinery
[($66,000 – $25,200) – $5,800] ………………………..
35,000
Extraordinary repairs on machinery …………………..
(21,000)
Cost of machinery constructed …………………………
Net cash used by investing activities …………………
(96,000)
Cash flows from financing activities
Payment of cash dividends ……………………………….
Decrease in cash ……………………………………………………….
(38,400)
Cash, January 1, 2012 ………………………………………………..
xxx
Cash, December 31, 2012 …………………………..………………
$ xxx
EXERCISE 23-19 (20–25 minutes)
cash provided by operating activities:
Depreciation expense ………………………………..
Net cash provided by operating activities ………….
EXERCISE 23-19 (Continued)
Machinery ……………………………………………………………….
110,000
Investing—Purchase of Machinery ……………………
62,000
Investing—Construction of Machinery ………………
48,000
Accumulated Depreciation—Machinery …………………….
Investing—Extraordinary Repairs to Machinery …
21,000
Accumulated Depreciation—Machinery …………………….
Machinery ……………………………………………………….
66,000
EXERCISE 23-20 (20–25 minutes)
1.
Bonds Payable …………………………………………………
300,000
Common Stock ………………………………………..
300,000
(Noncash financing activity)
2.
Operating—Net income …………………………………….
360,000
Retained Earnings ……………………………………
360,000
3.
Operating—Depreciation Expense …………………….
90,000
Accumulated Depreciation—Building ………..
90,000
4.
Accumulated Depreciation—Office Equipment ….
Office Equipment ……………………………………………..
Investing—Purchase of Equipment …………..
34,000
5.
Retained Earnings ……………………………………………
123,000
Dividends Payable ……………………………………
23–35
EXERCISE 23-21 (45–55 minutes)
LOWENSTEIN CORPORATION
Worksheet for Preparation of Statement of Cash Flows
For the Year Ended December 31, 2012
Balance at
12/31/11
2012
Reconciling Items
Balance at
12/31/12
Debits
Debit
Credit
Cash
$ 24,000
(17)
$ 7,500
$ 16,500
Short-term
Equipment
46,000
(11)
7,000
53,000
Delivery equipment
39,000
39,000
Patents
(12)
15,000
15,000
Total debits
$361,000
$452,200
Credits
Accounts payable
$ 16,000
(6)
$10,000
$ 26,000
Short-term notes
payable (trade)
(7)
Accrued payables
(8)
Allowance for doubtful
accounts
(3)
Accum. depr.—bldg.
23,000
(13)
7,000
30,000
Accum. depr.—equip.
15,500
(13)
19,000
Accum. depr.—del.
equip.
20,500
(13)
1,500
22,000
Mortgage payable
53,400
(14)
19,600
73,000
Bonds payable
62,500
(16)
12,500
50,000
Common stock
(15)
38,000
Paid-in capital in excess
(15)
10,000
Retained earnings
51,500
(9)
10,000
(1)
31,900
73,400
Total credits
$452,200
investments
19,000
(2)
25,000
Accounts receivable
45,000
(3)
43,000
Prepaid expenses
(4)
Inventory
57,000
(5)
24,500
81,500
Land
50,000
50,000
Buildings
78,500
(10)
46,500
EXERCISE 23-21 (Continued)
Statement of Cash Flows Effects
Operating activities
Net income
(1)
31,900
Depreciation
(13)
12,000
Dec. in accounts
receivable (net)
(3)
Inc. in prepaid expenses
(4)
Inc. in inventory
(5)
24,500
Inc. in accounts payable
(6)
10,000
Dec. in notes payable
(7)
Dec. in accrued payables
(8)
1,600
Investing activities
Purchase of available-for-sale investments
(2)
6,000
Purchase of building
(10)
Purchase of equipment
(11)
Purchase of patents
(12)
15,000
Financing activities
Payment of cash dividends
(9)
10,000
Issuance of mortgage payable
(14)
19,600
Sale of common stock
(15)
Retirement of bonds
(16)
Totals
Decrease in cash
(17)
23–37
TIME AND PURPOSE OF PROBLEMS
Problem 23-1 (Time 40–45 minutes)
Purpose—to develop an understanding of the procedures involved in the preparation of a statement of
cash flows. The student is required to prepare the statement using the indirect method.
Problem 23-2 (Time 50–60 minutes)
Purpose—to develop an understanding of the procedures involved in the preparation of a statement of
cash flows, including a schedule of noncash investing and financing activities. The student is required
to prepare the statement using the indirect method, and consider the proper treatment of an extraordi-
nary item.
Problem 23-3 (Time 50–60 minutes)
Purpose—to develop an understanding of the procedures involved in the preparation of a statement of
cash flows. The student is required to prepare the statement using the direct method.
Problem 23-4 (Time 45–60 minutes)
Purpose—to develop an understanding of the procedures involved in the preparation of a statement of
cash flows. The student is required to prepare the statement using the direct method, including a
reconciliation schedule.
Problem 23-5 (Time 50–65 minutes)
Purpose—to develop an understanding of the procedures involved in the preparation of a statement
of cash flows, including the treatment accorded unusual and extraordinary items. The student is
required to prepare the statement using the indirect method, and include any supporting schedules or
computations.
Problem 23-6 (Time 40–50 minutes)
Purpose—to develop an understanding of the procedures involved in the preparation of a statement of
cash flows. The student is required to prepare the statement using the indirect method. The student
also must calculate the net cash flow from operating activities using the direct method.
Problem 23-7 (Time 30–40 minutes)
Purpose—Using comparative financial statement data, the student is required to prepare the statement
of cash flows, using the direct method. The student must also prepare the operating activities section of
the statement of cash flows using the indirect method.
Problem 23-8 (Time 30–40 minutes)
Purpose—to develop an understanding of both the direct and indirect method. The student is first asked
to compute net cash provided by operating activities under the direct method. In addition a statement of
cash flows using the indirect method must be computed.
Problem 23-9 (Time 30–40 minutes)
Purpose—to develop an understanding of the indirect method. In the second part, the student is asked
to determine how operating, investing and financing sections of the statement of cash flows will change
under various situations.
SOLUTIONS TO PROBLEMS
PROBLEM 23-1
SULLIVAN CORP.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income …………………………………………….
$370,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation ……………………………………
(a)
Gain on sale of equipment ……………….
(b)
Equity in earnings of Myers Co. ………..
(c)
Decrease in accounts receivable ………
Increase in inventories …………………….
Increase in accounts payable …………..
Decrease in income taxes payable ……
(20,000)
Net cash provided by operating
activities …………………………………………….
Cash flows from investing activities:
Proceeds from sale of equipment…………….
40,000
Loan to TLC Co. ……………………………………..
(300,000)
Principal payment of loan receivable ……….
50,000
Net cash used by investing
activities ……………………………….
(210,000)
Cash flows from financing activities:
Dividends paid ……………………………………….
(100,000)
Net cash used by financing
activities ……………………………….
(100,000)
Net increase in cash ……………………………………….
Cash, January 1, 2012 …………………………………….
23–39
PROBLEM 23-1 (Continued)
Schedule at bottom of statement of cash flows:
Noncash investing and financing activities:
Issuance of lease obligation for capital lease …..
$400,000
Explanation of Amounts
(b) Gain on sale of equipment
Proceeds ………………………………………………..
$ 40,000
Carrying value ………………………………………..
(38,000)
Gain …………………………………………………..
$ 2,000
(c) Equity in earnings of Myers Co.
Myers’s net income for 2012 ……………………
Sullivan’s ownership……………………………….
Undistributed earnings of Myers Co ….
$ 35,000
(a) Depreciation
Net increase in accumulated
depreciation for the year ended
December 31, 2012 ……………………………..
$125,000
Accumulated depreciation on equipment sold:
Cost ……………………………………………………….
$60,000
Carrying value ………………………………………..
22,000
Depreciation for 2012 ……………………………………..
PROBLEM 23-2
HINCKLEY CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ……………………………………………..
$14,750 (a)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Gain from flood damage …………………..
*
Depreciation expense ……………………….
1,900
(c)
Patent amortization ………………………….
1,250
Gain on sale of investments ……………..
Increase in accounts receivable (net) ..
Increase in inventory ………………………..
Increase in accounts payable ……………
(7,450)
Net cash provided by operating activities …
Cash flows from investing activities
Sale of investments …………………………………
4,700
Sale of equipment ……………………………………
2,500
Purchase of equipment …………………………...
(20,000)
(d)
Proceeds from flood damage to building ….
32,000
Net cash provided by investing activities ….
19,200
Cash flows from financing activities
Payment of dividends ……………………………..
Payment of short-term note payable …………
Net cash used by financing activities ……….
(6,000)
Increase in cash …………………………………………….
20,500
Cash, January 1, 2012 …………………………………….