3. Cash received from customers.
b. Write a brief statement explaining why cash received from customers differs from the amount of net sales.
The general ledger of MPX, Inc., provides the following information relating to purchases of merchandise:
EXERCISE 13.4 Comparing Net Sales and Cash Receipts LO3 E
C an C LO6
EXERCISE 13.5 Computing Cash Paid for Purchases of Merchandise E
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Confirming Pages
Exercises 599
Cash and cash equivalents, Jan. 1. . . $ 35,800 Cash and cash equivalents, Dec. 31 . . . 74,800 Cash paid to acquire plant assets . . . 21,000 Proceeds from short-term borrowing . . . 10,000 Loans made to borrowers . . . 5,000 Collections on loans (excluding interest) . . . 4,000 Interest and dividends received . . . 27,000 Cash received from customers . . . 795,000 Proceeds from sales of plant assets . . . 9,000 Dividends paid . . . 55,000 Cash paid to suppliers and employees . . . 635,000 Interest paid . . . 19,000 Income taxes paid . . . 71,000
Using this information, prepare a statement of cash flows. Include a proper heading for the finan- cial statement, and classify the given information into the categories of operating activities, invest- ing activities, and financing activities. Determine net cash flows from operating activities by the direct method. Place brackets around the dollar amounts of all cash disbursements.
Indicate how you would expect the following strategies to affect the company’s net cash flows from operating activities (1) in the near future and (2) in later periods (after the strategy’s long- term effects have “taken hold”). Fully explain your reasoning.
a. A successful pharmaceutical company substantially reduces its expenditures for research and development.
b. A restaurant that previously sold only for cash adopts a policy of accepting bank credit cards, such as Visa and MasterCard.
c. A manufacturing company reduces by 50 percent the size of its inventories of raw materials (assume no change in inventory storage costs).
d. Through tax planning, a rapidly growing real estate developer is able to defer significant amounts of income taxes.
e. A rapidly growing software company announces that it will stop paying cash dividends for the foreseeable future and will instead distribute stock dividends.
An analysis of the annual financial statements of Conner Corporation reveals the following:
a. The company had a $5 million extraordinary loss from insurance proceeds received due to a tornado that destroyed a factory building.
b. Depreciation for the year amounted to $8 million.
c. During the year, $2 million in cash was transferred from the company’s checking account into a money market fund.
d. Accounts receivable from customers increased by $4 million over the year.
e. Cash received from customers during the year amounted to $167 million.
f. Prepaid expenses decreased by $1 million over the year.
g. Dividends declared during the year amounted to $7 million; dividends paid during the year amounted to $6 million.
h. Accounts payable (to suppliers of merchandise) increased by $2.5 million during the year.
i. The liability for accrued income taxes payable amounted to $5 million at the beginning of the year and $3 million at year-end.
In the computation of net cash flows from operating activities by the indirect method, explain whether each of the above items should be added to net income, deducted from net income, or omitted from the computation. Briefly explain your reasons for each answer.
EXERCISE 13.8 Effects of Business Strategies
E E LO8
EXERCISE 13.9 An Analysis of Possible Reconciling Items
LO6 E P It A LO7
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The following data are taken from the income statement and balance sheet of Keaner Machinery, Inc.:
EXERCISE 13.10 Computation of Net Cash Flows from Operating Activities—
Indirect Method E
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Dec. 31, Jan. 1,
2011 2011
Income statement:
Net Income . . . $385,000 Depreciation Expense . . . 125,000 Amortization of Intangible Assets . . . 40,000 Gain on Sale of Plant Assets . . . 90,000 Loss on Sale of Investments . . . 35,000 Balance sheet:
Accounts Receivable . . . . . $335,000 $380,000 Inventory . . . 503,000 575,000 Prepaid Expenses . . . 22,000 10,000 Accounts Payable (to merchandise suppliers) . . . 379,000 410,000 Accrued Expenses Payable . . . 180,000 155,000
Using this information, prepare a partial statement of cash flows for the year ended December 31, 2011, showing the computation of net cash flows from operating activities by the indirect method.
Among the transactions of Beeler, Inc., were the following:
a. Made payments on accounts payable to merchandise suppliers.
b. Paid the principal amount of a note payable to First Bank.
c. Paid interest charges relating to a note payable to First Bank.
d. Issued bonds payable for cash; management plans to use this cash in the near future to expand manufacturing and warehouse capabilities.
e. Paid salaries to employees in the finance department.
f. Collected an account receivable from a customer.
g. Transferred cash from the general bank account into a money market fund.
h. Used the cash received in d, above, to purchase land and a building suitable for a manufactur- ing facility.
i. Made a year-end adjusting entry to recognize depreciation expense.
j. At year-end, purchased for cash an insurance policy covering the next 12 months.
k. Paid the quarterly dividend on preferred stock.
l. Paid the semiannual interest on bonds payable.
m. Received a quarterly dividend from an investment in the preferred stock of another corporation.
n. Sold for cash an investment in the preferred stock of another corporation.
o. Received cash upon the maturity of an investment in cash equivalents. (Ignore interest.) Instructions
Most of the preceding transactions should be included among the activities summarized in a statement of cash flows. For each transaction that should be included in this statement, indicate whether the transaction should be classified as an operating activity, an investing activity, or a financing activity.
If the transaction should not be included in the current year’s statement of cash flows, briefly explain why not. (Assume that net cash flows from operating activities are determined by the direct method. ) Among the transactions of Marvel Manufacturing were the following:
1. Made payments on accounts payable to office suppliers.
2. Paid the principal amount of a mortgage to Seventh Bank.
3. Paid interest charges relating to a mortgage to Seventh Bank.
4. Issued preferred stock for cash; management plans to use this cash in the near future to pur- chase another company.
EXERCISE 13.11 Classifying Cash Flows
E C LO2
EXERCISE 13.12 Classifying Cash Flows
E C LO2
Confirming Pages
Exercises 601
5. Paid salaries to employees in the finance department.
6. Collected an account receivable from a customer.
7. Transferred cash from the general bank account into a money market fund.
8. Used the cash received in 4, above, to purchase Moran Manufacturing Co.
9. Made a year-end adjusting entry to recognize amortization expense.
10. At year-end, purchased for cash an advertising spot on a local radio station for the next eight months.
11. Paid the annual dividend on preferred stock.
12. Paid the semiannual interest on bonds payable.
13. Received a semiannual dividend from an investment in the common stock of another corporation.
14. Sold for cash an investment in the common stock of another corporation.
15. Received cash upon the maturity of an investment in cash equivalents. (Ignore interest.) Instructions
Most of the preceding transactions should be included among the activities summarized in a statement of cash flows. For each transaction that should be included in this statement, indicate whether the transaction should be classified as an operating activity, an investing activity, or a financing activity.
If the transaction should not be included in the current year’s statement of cash flows, briefly explain why not. (Assume that net cash flows from operating activities are determined by the direct method. ) Wofford Company provides the following information related to its investing and financing activi- ties for the current year:
EXERCISE 13.13 Cash Flows from Investing Activities E
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Cash receipts:
Sale of common stock . . . $250,000 Sale of equipment (at $34,000 loss) . . . 156,000 Sale of land (at $50,000 gain) . . . 160,000 Cash payments:
Purchase of equipment . . . $178,000 Purchase of treasury stock . . . 45,000 Retirement of debt . . . 36,500 Dividends on preferred and common stock . . . 75,000
Cash provided by:
Receipts from customers . . . $560,000 Sale of bonds . . . 400,000 Sale of treasury stock . . . 34,000 Interest and dividends received . . . 56,000 Sale of equipment (at a $56,000 loss) . . . 236,000 Cash used for:
Payments to employees . . . $135,000 Payments to purchase inventory . . . 190,000 Dividends on common stock . . . 60,000 Purchase of treasury stock . . . 20,000 Interest expense . . . 78,000 a. Calculate the net amount of cash provided by or used for investing activities for the year.
b. What impact, if any, do the following facts have on your calculation? ( 1 ) Equipment was sold at a loss, and ( 2 ) land was sold at a gain.
c. Briefly explain your decision to exclude any of the items listed above if they were not included in your calculation in part a.
Shepherd Industries had the following cash flows by major categories during the current year:
EXERCISE 13.14 Cash Flows from Financing Activities E
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a. Calculate the net amount of cash provided by or used for financing activities for the year.
b. Briefly justify why you excluded any of the above items in your calculation in part a.
c. Briefly explain your treatment of interest expense in your calculation in part a.
Statements of cash flow for Home Depot, Inc., for 2009, 2008, and 2007 are included in Appendix A of this text.
a. Focus on the information for 2009 (year ending January 31, 2010). How does net earnings compare with net cash provided by or used in operations, and what accounts for the primary difference between the two amounts?
b. What are the major uses of cash, other than operations, and how have these varied over the three-year period presented?
c. Cash flows from both investing and financing activities have been mostly negative for all three years presented. Considering Home Depot ’s overall cash flows, including its cash flows from operations, would you say that this leads to a negative interpretation of Home Depot ’s cash position at January 31, 2010? Why or why not?
d. Calculate the amount of free cash flow for each of 2007, 2008, and 2009, and comment briefly on your conclusion concerning this information.
Problem Set A
The accounting staff of Harris Company has assembled the following information for the year ended December 31, 2011:
EXERCISE 13.15 Home Depot, Inc.
Using a Statement of Cash Flows LO1 E
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accounting
PROBLEM 13.1A Format of a Statement of Cash Flows
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LO4 Cash sales . . . $ 800,000 Credit sales . . . 2,500,000 Collections on accounts receivable . . . 2,200,000 Cash transferred from the money market fund to the general bank
account . . . 250,000 Interest and dividends received . . . 100,000 Purchases (all on account) . . . 1,800,000 Payments on accounts payable to merchandise suppliers. . . 1,500,000 Cash payments for operating expenses . . . 1,050,000 Interest paid . . . 180,000 Income taxes paid . . . 95,000 Loans made to borrowers . . . 500,000 Collections on loans (excluding receipts of interest) . . . 260,000 Cash paid to acquire plant assets . . . 3,100,000 Book value of plant assets sold . . . 660,000 Loss on sales of plant assets . . . 80,000 Proceeds from issuing bonds payable . . . 2,500,000 Dividends paid . . . 120,000 Cash and cash equivalents, Jan. 1. . . 489,000 Instructions
Prepare a statement of cash flows in the format illustrated in Exhibit 13–1 . Place brackets around amounts representing cash outflows. Use the direct method of reporting cash flows from operating activities.
Some of the items above will be listed in your statement without change. However, you will have to combine certain given information to compute the amounts of (1) collections from customers, (2) cash paid to suppliers and employees, and (3) proceeds from sales of plant assets. (Hint: Not every item listed is used in preparing a statement of cash flows.)
An analysis of the income statement and the balance sheet accounts of Headrick, Inc., at December 31, 2011, provides the following information:
PROBLEM 13.2A Reporting Investing Activities
P R LO4
Problem Set A accounting
Confirming Pages
Problem Set A 603
Additional Information
1. Except as noted in 4 below, payments and proceeds relating to investing transactions were made in cash.
2. The marketable securities are not cash equivalents.
3. All notes receivable relate to cash loans made to borrowers, not to receivables from customers.
4. Purchases of new equipment during the year ($196,000) were financed by paying $60,000 in cash and issuing a long-term note payable for $136,000.
5. Debits to the accumulated depreciation accounts are made whenever depreciable plant assets are retired. Thus, the book value of plant assets retired during the year was $45,000 ($120,000 ⫺
$75,000).
Instructions
a. Prepare the investing activities section of a statement of cash flows. Show supporting compu- tations for the amounts of (1) proceeds from sales of marketable securities and (2) proceeds from sales of plant assets. Place brackets around numbers representing cash outflows.
b. Prepare the supporting schedule that should accompany the statement of cash flows in order to disclose the noncash aspects of the company’s investing and financing activities.
c. Assume that Headrick’s management expects approximately the same amount of cash to be used for investing activities next year. In general terms, explain how the company might gen- erate cash for this purpose.
An analysis of the income statement and the balance sheet accounts of Hayes Export Co. at December 31, 2011 provides the following information:
PROBLEM 13.3A Reporting Investing Activities
P R LO4
Income statement items:
Gain on Sale of Marketable Securities . . . $ 42,000 Loss on Sales of Plant Assets . . . 33,000 Analysis of balance sheet accounts:
Marketable Securities account:
Debit entries . . . $ 75,000 Credit entries . . . 90,000
Notes Receivable account:
Debit entries . . . 210,000 Credit entries . . . 162,000
Plant and Equipment accounts:
Debit entries to plant asset accounts . . . 196,000 Credit entries to plant asset accounts . . . 120,000 Debit entries to accumulated depreciation accounts . . . 75,000
Income statement items:
Gain on Sale of Plant Assets . . . $ 12,000 Loss on Sales of Marketable Securities . . . 16,000 Analysis of balance sheet accounts:
Marketable Securities account:
Debit entries . . . $ 78,000 Credit entries . . . . . 62,000
Notes Receivable account:
Debit entries . . . 55,000 Credit entries . . . 60,000
Plant and Equipment accounts:
Debit entries to plant asset accounts . . . 150,000 Credit entries to plant asset accounts . . . 140,000 Debit entries to accumulated depreciation accounts . . . 100,000
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Additional Information
1. Except as noted in 4 below, payments and proceeds relating to investing transactions were made in cash.
2. The marketable securities are not cash equivalents.
3. All notes receivable relate to cash loans made to borrowers, not to receivables from customers.
4. Purchases of new equipment during the year ($150,000) were financed by paying $50,000 in cash and issuing a long-term note payable for $100,000.
5. Debits to the accumulated depreciation accounts are made whenever depreciable plant assets are sold or retired. Thus, the book value of plant assets sold or retired during the year was
$40,000 ($140,000 ⫺ $100,000).
Instructions
a. Prepare the investing activities section of a statement of cash flows. Show supporting compu- tations for the amounts of (1) proceeds from sales of marketable securities and (2) proceeds from sales of plant assets. Place brackets around amounts representing cash outflows.
b. Prepare the supplementary schedule that should accompany the statement of cash flows in order to disclose the noncash aspects of the company’s investing and financing activities.
c. Does management have more control or less control over the timing and amount of cash out- lays for investing activities than for operating activities? Explain.
The following income statement and selected balance sheet account data are available for Treece, Inc., at December 31, 2011:
PROBLEM 13.4A Reporting Operating Cash Flows by the Direct Method LO3 P
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TREECE, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Net sales . . . $2,850,000 Dividend income . . . 104,000 Interest income . . . 70,000 Gain on sales of marketable securities . . . 4,000 Total revenue and gains . . . $3,028,000 Costs and expenses:
Cost of goods sold . . . $1,550,000 Operating expenses . . . 980,000 Interest expense . . . 185,000 Income tax expense . . . 90,000
Total costs and expenses . . . 2,805,000 Net income . . . $ 223,000 End of Beginning Year of Year Selected account balances:
Accounts receivable . . . $ 650,000 $ 720,000 Accrued interest receivable . . . 9,000 6,000 Inventories . . . 800,000 765,000 Short-term prepayments . . . . 20,000 15,000 Accounts payable (merchandise suppliers) . . . 570,000 562,000 Accrued operating expenses payable . . . 65,000 94,000 Accrued interest payable . . . 21,000 12,000 Accrued income taxes payable . . . 22,000 35,000
Confirming Pages
Problem Set A 605
Additional Information
1. Dividend revenue is recognized on the cash basis. All other income statement amounts are recognized on the accrual basis.
2. Operating expenses include depreciation expense of $115,000.
Instructions
a. Prepare a partial statement of cash flows, including only the operating activities section of the statement and using the direct method . Place brackets around numbers representing cash pay- ments. Show supporting computations for the following:
1. Cash received from customers 2. Interest and dividends received 3. Cash paid to suppliers and employees 4. Interest paid
5. Income taxes paid
b. Management of Treece, Inc., is exploring ways to increase the cash flows from operations.
One way that cash flows could be increased is through more aggressive collection of receiv- ables. Assuming that management has already taken all the steps possible to increase rev- enue and reduce expenses, describe two other ways that cash flows from operations could be increased.
Using the information presented in Problem 13.4A, prepare a partial statement of cash flows for the current year, showing the computation of net cash flows from operating activities by the indi- rect method. Explain why the decline in accounts receivable over the year was added to net income in computing the cash flows from operating activities.
You are the controller for 21st Century Technologies. Your staff has prepared an income statement for the current year and has developed the following additional information by analyzing changes in the company’s balance sheet accounts.
PROBLEM 13.5A Reporting Operating Cash Flows by the Indirect Method LO6 P
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PROBLEM 13.6A Preparing a Statement of Cash Flows: A Comprehensive Problem without a Worksheet
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21st CENTURY TECHNOLOGIES INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Net sales . . . $3,200,000 Interest revenue . . . 40,000 Gain on sales of marketable securities . . . 34,000 Total revenue and gains . . . $3,274,000 Costs and expenses:
Cost of goods sold . . . $1,620,000 Operating expenses (including depreciation
of $150,000) . . . 1,240,000 Interest expense . . . 42,000 Income tax expense . . . 100,000 Loss on sales of plant assets . . . 12,000
Total costs, expenses, and losses . . . 3,014,000 Net income . . . $ 260,000
Additional Information
1. Accounts receivable increased by $60,000.
2. Accrued interest receivable decreased by $2,000.
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3. Inventory decreased by $60,000, and accounts payable to suppliers of merchandise decreased by $16,000.
4. Short-term prepayments of operating expenses increased by $6,000, and accrued liabilities for operating expenses decreased by $8,000.
5. The liability for accrued interest payable increased by $4,000 during the year.
6. The liability for accrued income taxes payable decreased by $14,000 during the year.
7. The following schedule summarizes the total debit and credit entries during the year in other balance sheet accounts:
Debit Credit
Entries Entries
Marketable Securities . . . $ 60,000 $ 38,000 Notes Receivable (cash loans made to borrowers) . . . 44,000 28,000 Plant Assets (see paragraph 8) . . . 500,000 36,000 Notes Payable (short-term borrowing) . . . 92,000 82,000 Capital Stock . . . 20,000 Additional Paid-in Capital—Capital Stock . . . 160,000 Retained Earnings (see paragraph 9) . . . 120,000 260,000
8. The $36,000 in credit entries to the Plant Assets account is net of any debits to Accumulated Depreciation when plant assets were retired. Thus, the $36,000 in credit entries represents the book value of all plant assets sold or retired during the year.
9. The $120,000 debit to Retained Earnings represents dividends declared and paid during the year. The $260,000 credit entry represents the net income shown in the income statement.
10. All investing and financing activities were cash transactions.
11. Cash and cash equivalents amounted to $244,000 at the beginning of the year and to $164,000 at year-end.
Instructions
a. Prepare a statement of cash flows for the current year. Use the direct method of reporting cash flows from operating activities. Place brackets around dollar amounts representing cash out- flows. Show separately your computations of the following amounts:
1. Cash received from customers 2. Interest received
3. Cash paid to suppliers and employees 4. Interest paid
5. Income taxes paid
6. Proceeds from sales of marketable securities 7. Proceeds from sales of plant assets
8. Proceeds from issuing capital stock b. Explain the primary reason why:
1. The amount of cash provided by operating activities was substantially greater than the company’s net income.
2. There was a net decrease in cash over the year, despite the substantial amount of cash provided by operating activities.
c. As 21st Century’s controller, you think that through more efficient cash management, the company could have held the increase in accounts receivable for the year to $10,000, with- out affecting net income. Explain how holding down the growth in receivables affects cash.
Compute the effect that limiting the growth in receivables to $10,000 would have had on the company’s net increase or decrease in cash (and cash equivalents) for the year.