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The Statement of Cash Flows _complete with solutions_

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					Statement of Cash Flows - Example 4 Wenatchee Whirlpool World Balance Sheet
12/31/96 Current Assets Cash Securities Available for Sale (at market) Accounts Receivable Allowance for doubtful accounts Merchandise Inventory Prepaid Operating Expenses 2,837,600 390,000 1,752,000 (120,500) 1,145,000 84,000 6,088,100 12/31/95 2,000,000 150,000 1,900,000 (110,000) 875,000 62,000 4,877,000

Noncurrent Assets Investments (equity method) Plant, property & equipment Accumulated Depreciation Intangible Assets TOTAL ASSETS Current Liabilities Accounts Payable Salaries Payable Income Taxes Payable Dividends Payable Current portion long term debt Noncurrent Liabilities Bonds Payable Discount on Bonds Deferred Income Taxes Other long term liabilities

3,097,000 16,420,000 (829,000) 71,500 24,847,600

3,000,000 10,800,000 (600,000) 128,000 18,205,000

880,000 20,000 13,400 35,000 29,000 977,400 10,000,000 (247,000) 180,000 562,000 10,495,000

750,000 15,000 27,000 60,000 21,000 873,000 5,000,000 (270,000) 88,000 3,000,000 7,818,000

Stockholder's Equity Convertible preferred, $100 par Common stock, $10 par Additional paid in capital Unrealized (gain)/loss investments Retained Earnings Total liabilities and equity

500,000 3,100,000 3,950,000 27,000 5,798,200 13,375,200 24,847,600

2,000,000 1,500,000 1,200,000 78,000 4,736,000 9,514,000 18,205,000

Wenatchee Whirlpool World Income Statement For year ending 12/31/96 Sales Earnings of affiliated company (equity method) Gain/(loss) on sale of PP&E Realized gain/(loss) on investments Realized gain on sale of patent Interest and dividend revenue Total revenues Cost of goods sold Salaries and wages Other operating expenses Bad debt expense Depreciation & amortization expense Interest expense Income taxes expense Net income Additional information: a. b. c. d. e. f. g. h. i. j. k. On February 25, WWW sold an internally developed patent for $1,000,000. The patent was carried on the books at unamortized legal fees amounting to $50,000 at date of sale. On March 31, WWW issued $5,000,000 in bonds at face value. The semi-annual bonds have a coupon rate of 10% per annum. During the year, WWW disposed of various items of equipment with a total book value of $65,000 and original cost of $80,000. The amount received was $25,000 in cash. During the third quarter, shareholders holding 15,000 shares of the preferred stock converted them into common stock. The conversion ratio was 6 shares of common for each share of preferred. On July 20, WWW sold 50,000 shares of its common stock for $41 per share. By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable. An existing factory with equipment was acquired during the year. The acquisition cost was allocated as follows: $772,000 to land, $3,450,000 to building and 678,000 to equipment. WWW acquired a parcel of land adjoining the new factory by giving the owner 20,000 shares of its common stock. At the date of the transaction, the market value of the stock was $40 per share. During the year WWW purchased $875,000 in marketable securities and sold securities which had cost $584,000. The market value of the portfolio at the end of the year was $390,000. WWW owns 30% of a company which manufactures parts that WWW uses in its production process. WWW received $18,000 in dividends from this partially owned company during 1996. Dividends declared during the year totaled $50,000. 3,600,000 590,000 345,000 38,500 250,500 669,400 740,400 6,200,000 115,000 (40,000) 108,000 950,000 13,000 7,346,000

6,233,800 1,112,200

Homework 4 - Acct 315
Worksheet Wenatchee Whirlpool World Cash Securities Available for Sale (at market) Accounts Receivable Allowance for doubtful accounts Merchandise Inventory Prepaid Operating Expenses Investments in affiliated companies (equity method) Plant, property & equipment Year ending 12/31/95 Ref 2,000,000 150,000 1,900,000 (110,000) 875,000 62,000 3,000,000 10,800,000 Debit 837,600 Ref Credit Year ending 12/31/96 2,837,600 390,000 1,752,000 (120,500) 1,145,000 84,000 3,097,000 16,420,000 Target 837,600 240,000 (148,000) (10,500) 270,000 22,000 97,000 5,620,000

Accumulated Depreciation Intangible Assets

(600,000) 128,000 18,205,000

(829,000) 71,500 24,847,600 (880,000) (20,000) (13,400) (35,000) (29,000)

(229,000) (56,500)

Accounts Payable Salaries Payable Income Taxes Payable Dividends Payable Current portion long term debt Bonds Payable Premium/Discount on Bonds Payable Deferred Income Taxes Other long term liabilities

(750,000) (15,000) (27,000) (60,000) (21,000) (5,000,000) 270,000 (88,000) (3,000,000)

(130,000) (5,000) 13,600 25,000 (8,000)

(10,000,000) (5,000,000) 247,000 (180,000) (562,000) (23,000) (92,000) 2,438,000

Wenatchee Whirlpool World 12/31/95 ref Convertible preferred, $100 par Common stock, $10 par (2,000,000) (1,500,000) Debit ref Credit 12/31/96 (500,000) Target 1,500,000

(3,100,000) (1,600,000)

Additional paid in capital

(1,200,000)

(3,950,000) (2,750,000)

Unrealized (gain)/loss investments Retained Earnings

(78,000) (4,736,000) 0 (18,205,000)

(27,000)

51,000

(5,798,200) (1,062,200) (24,847,600) 1996 Receipt/(Dis b)

Closing entry for

1996 Rev/(Exp)

Sales Earnings of affiliated companies (equity method) Gain/(loss) on sale of PP&E Realized gain/(loss) on investments Realized gain on sale of patent Interest and dividend revenue Cost of goods sold Salaries and wages Other operating expenses Bad debt expense Depreciation expense Amortization of intangible assets Interest expense Income taxes expense

6,200,000 115,000 (40,000) 108,000 950,000 13,000 (3,600,000) (590,000) (345,000) (38,500) (244,000) (6,500) (669,400) (740,400)

Net income (accrual basis)

1,112,200

Wenatchee Whirlpool World Statement of Cash Flows Operating Activities

INFLOWS

OUTFLOWS

(Subtotals)

Investing Activities

Financing Activities

Noncash Financing/Investing

CHANGE IN CASH Totals

837,600

Solution
Example 4- Acct 315 Worksheet Wenatchee Whirlpool World Cash Securities Available for Sale (at market) Accounts Receivable Allowance for doubtful accounts Merchandise Inventory Prepaid Operating Expenses Investments (equity method) Year ending 12/31/95 Ref 2,000,000 150,000 1,900,000 (110,000) 875,000 62,000 3,000,000 f p p l h Plant, property & equipment Accumulated Depreciation Intangible Assets Accounts Payable Salaries Payable Income Taxes Payable Dividends Payable Current portion long term debt Bonds Payable Premium/Discount on Bonds Payable Deferred Income Taxes Other long term liabilities Convertible preferred, $100 par 10,800,000 (600,000) 128,000 18,205,000 (750,000) (15,000) (27,000) (60,000) (21,000) (5,000,000) 270,000 (88,000) s (3,000,000) (2,000,000) s d 12/31/95 ref 2,430,000 8,000 Debit 1,500,000 h e Common stock, $10 par (1,500,000) d h e Additional paid in capital Unrealized (gain)/loss investments Retained Earnings 0 (1,200,000) (78,000) (4,736,000) (18,205,000) o k 51,000 50,000 X 1,112,200 d 200,000 500,000 900,000 600,000 1,550,000 600,000 (3,950,000) (27,000) (5,798,200) (24,847,600) (2,750,000) 51,000 (1,062,200) (3,100,000) (1,600,000) ref Credit (562,000) 12/31/96 (500,000) 2,438,000 Target 1,500,000 q k 13,600 75,000 k s b r q 50,000 8,000 5,000,000 23,000 92,000 p p 130,000 5,000 g c 28,000 270,000 22,000 115,000 800,000 4,900,000 15,000 c n n a 80,000 244,000 6,500 50,000 71,500 24,847,600 (880,000) (20,000) (13,400) (35,000) (29,000) (10,000,000) 247,000 (180,000) (130,000) (5,000) 13,600 25,000 (8,000) (5,000,000) (23,000) (92,000) (56,500) 16,420,000 (829,000) 5,620,000 (229,000) j 18,000 X I Debit 837,600 o 875,000 I p f m 51,000 584,000 120,000 28,000 38,500 1,752,000 (120,500) 1,145,000 84,000 3,097,000 (148,000) (10,500) 270,000 22,000 97,000 390,000 240,000 Ref Credit Year ending 12/31/96 2,837,600 Target 837,600

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Wenatchee Whirlpool World
Closing entry for Sales Earnings of affiliated company (equity method) Gain/(loss) on sale of PP&E Realized gain/(loss) on investments Realized gain on sale of patent Interest and dividend revenue Cost of goods sold Salaries and wages Other operating expenses Bad debt expense Depreciation expense Amortization of intangible assets Interest expense Income taxes expense Net income (accrual basis) Statement of Cash Flows Operating Activities Reconciling schedule: Net Income Depreciation & amortization Bond premiums/discounts Realized gains/losses PP&E Realized gain/loss investments Gain on sale of patent Undistributed Earnings of Investees Deferred income taxes Change in working capital accounts: Net accounts receivable Merchandise Inventory Prepaid Operating Expenses Accounts Payable Salaries Payable Income Taxes Payable Cash provided by operations: 158,500 (270,000) (22,000) 130,000 5,000 (13,600) 350,600 1,112,200 250,500 23,000 40,000 (108,000) (950,000) (97,000) 92,000 X 1996 Rev/(Exp) 6,200,000 115,000 (40,000) 108,000 950,000 13,000 (3,600,000) (590,000) (345,000) (38,500) (244,000) (6,500) (669,400) (740,400) 1,112,200 m n n r q X 38,500 244,000 6,500 23,000 92,000 1,112,200 INFLOWS 350,600 q X 13,600 350,600 OUTFLOWS j p p 18,000 130,000 5,000 p 22,000 p 270,000 c 40,000 I a 108,000 950,000 p 120,000 l 115,000 1996 Receipt/(Disb) 6,320,000 0 0 0 0 31,000 (3,740,000) (585,000) (367,000) 0 0 0 (646,400) (662,000) 350,600 (Subtotals)

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Investing Activities Sale of patent Sale of equipment Purchase factory Purchase investment securities Sold investment securities I 692,000 a c 1,000,000 25,000 g I 4,900,000 875,000

Financing Activities Issued bonds Issued common stock Dividends paid Long-term debt repaid b e 5,000,000 2,050,000 k s 75,000 2,430,000

Noncash Financing/Investing Preferred converted to common stock Swap common stock for land CHANGE IN CASH Totals 25,237,000 d h 1,500,000 800,000 d h X 1,500,000 800,000 837,600 25,237,000

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Solution

Working through the additional items of information:
a. On February 25, WWW sold an internally developed patent for $1,000,000. The patent was carried on the books at unamortized legal fees amounting to $50,000 at date of sale.

Cash [Investing - inflow] Intangible Assets Realized gain on sale of patent
b.

1,000,000 50,000 950,000

On March 31, WWW issued $5,000,000 in bonds at face value. The semi-annual bonds have a coupon rate of 10% per annum.

Cash [Financing - inflow] Bonds payable
c.

5,000,000 5,000,000

During the year, WWW disposed of various items of equipment with a total book value of $65,000 and original cost of $80,000. The amount received was $25,000 in cash. Accumulated depreciation would be $15,000 (80,000 - 65,000)

Cash [Investing - inflow] Accumulated depreciation Loss on sale of plant, property & equipment Plant, property and equipment
d.

25,000 15,000 40,000 80,000

During the third quarter, shareholders holding 15,000 shares of the preferred stock converted them into common stock. The conversion ratio was 6 shares of common for each share of preferred. Therefore 90,000 shares of common stock would be issues (6 * 15,000) with a par value of $900,000 ($10 par each). The book value of the preferred was 1,500,000. Therefore, additional paid in capital to balance the journal entry would be 600,000.

Convertible Preferred Stock, $100 par Common stock, $10 par Additional paid-in capital
e.

1,500,000 900,000 600,000

On July 20, WWW sold 50,000 shares of its common stock for $41 per share. The proceeds would be $2,050,000 (41 * 50,000) and the par value portion would be $500,000 with the rest as additional paid in capital.

Cash [Financing - inflow] Common stock, $10 par Additional paid in capital
f.

2,050,000 500,000 1,550,000

By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.

Allowance for doubtful accounts Accounts receivable
g.

28,000 28,000

An existing factory with equipment was acquired during the year. The acquisition cost was allocated as follows: $772,000 to land, $3,450,000 to building and 678,000 to equipment. This totals to $4,900,000.

Plant, property and equipment Cash [Investing outflow]

4,900,000 4,900,000

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h.

WWW acquired a parcel of land adjoining the new factory by giving the owner 20,000 shares of its common stock. At the date of the transaction, the market value of the stock was $40 per share. The value of the land is $800,000 (20,000 * 40).

Plant, property and equipment Common stock, $10 par Additional paid in capital
i.

800,000 200,000 600,000

During the year WWW purchased $875,000 in marketable securities and sold securities which had cost $584,000. The market value of the portfolio at the end of the year was $390,000. From the income statement, the gain on sale was 108,000. Therefore, the cash received from the sale of securities was 584+108 = $692,000

Investments - Securities available for sale Cash [Investing outflow] Cash [Investing inflow] Investments - Securities available for sale Gain on sale of investments
j.

875,000 875,000 692,000 584,000 108,000

WWW owns 30% of a company which manufactures parts that WWW uses in its production process. WWW received $18,000 in dividends from this partially owned company during 1996. Dividends received from equity-method investments reduce the investment account and do NOT appear on the income statement.

Cash [Operating - dividends received] Investments (partially-owned companies)
k.

18,000 18,000

Dividends declared during the year totaled $50,000. Dividends declared reduce retained earnings and increase dividends payable. The balancing number in dividends payable (if this account exists) will be the dividends paid. If there is no dividends payable account, then the dividends declared = the dividends paid.

Retained earnings Dividends payable Dividends payable Cash [Financing - outflow]

50,000 50,000 75,000 75,000

Starting through the income statement, looking for noncash items: l. No deposit was made for share of earnings of partially owned companies. Therefore, this account needs to be zeroed out by re-constructing the entry that recorded the share of earnings. 115,000 115,000

Investments in partially owned company Earnings of partially-owned company

m. No check was written for bad debt expense. Therefore, this account needs to be zeroed out by re-constructing the entry that recorded bad debt expense for the year (the credit is always to allowance for doubtful accounts. Bad debt expense Allowance for doubtful accounts 38,500 38,500

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n.

No checks are written to record depreciation expense and amortization of intangibles. Therefore, these accounts need to be zeroed out by reconstructing the entry that recorded the expenses. 244,000 6,500 244,000 6,500

Depreciation expense Amortization of intangible assets Accumulated depreciation Intangible assets

Starting through the balance sheet to investigate accounts not yet balanced: o. Securities available for sale (at market) doesn’t balance by $51,000. However, this amount appears in the owners’ equity section as the change in Unrealized (gain)/loss on investments. Therefore, this amount must have been the adjusting entry for the “allowance for change in value” account. 51,000 51,000

Unrealized gain/loss on investments Investments in AFS securities (allowance) p.

The remaining difference in accounts receivable ($120,000) is the adjustment to sales to get from accrual basis to cash basis. The difference in Merchandise Inventory is an adjustment to cost of goods sold. The difference in prepaid operating expenses is an adjustment to other operating expenses. The change in accounts payable would mostly be related to cost of goods sold. The change in salaries payable affects salaries and wages expense. 120,000 120,000 270,000 270,000 22,000 22,000 130,000 130,000 5,000 5,000

Sales Accounts receivable Merchandise inventory Cost of goods sold Prepaid operating expenses Other operating expenses Accounts payable Cost of goods sold Salaries payable Salaries and wages q.

Income tax expense is affected by two accounts on the balance sheet - income taxes payable and deferred income taxes. 13,600 13,600 92,000 92,000

Income taxes payable Income tax expense Deferred income taxes Income tax expense r.

Amortization of premiums and discounts on bonds payable impacts interest expense.

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Interest expense Discount on bonds payable s.

23,000 23,000

Long-term debt is presented in two numbers on balance sheet - current and noncurrent. These accounts need to be combined to find out how much was borrowed or repaid during the year. Take the change in one account to the other. The remaining “amount to balance” will be the cash inflow or outflow. 8,000 8,000

Other long-term debt Current portion of long-term debt

After this entry, the number necessary to balance other long-term debt is $2,430,000 which must be the amount of long-term debt repaid during the year. Other long-term debt Cash [Financing - outflow] 2,430,000 2,430,000

If all balance sheet accounts have been explained (check it!), you are ready to complete the cash flows from operations by adjusting the revenue/expense accounts for the amounts entered into the income statement section. Then total up the investing activities and the operating activities. The cash flows from operating plus/minus the cash flows from investing and operating should TIE TO THE CHANGE IN CASH. If so, you are ready for the last step – the indirect method reconciliation schedule. The reconciliation schedule. Start with Net Income and adjust for all the “zero’d out” items in the income statement section EXCEPT for bad debt expense. In other words, add back deprecation expense, adjust for gain/loss, etc. The skip down a few rows and start the “changes in working capital section” and enter the OPPOSITE SIGN as compared to the balance sheet section (the SAME SIGN as the entry in the income statement section). You’ll probably still be “off” so check through the direct method (income statement) section and look for amounts that are not yet on the reconciling schedule and trace them back to the entry. For example, you might find a change in bond premium or discount on the interest expense line. Getting it to balance isn’t a picnic but it can be done! Once the workpaper is complete, you are ready to prepare the “formal” statement of cash flow with headings, appropriate descriptions, and disclosures of noncash financing and investing activities.

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Example 4 - Acct 301 Solution Wenatchee Whirlpool World Statement of Cash Flows For year ended 12/31/96 Inflows Cash provided by operations Cash collected from customers Interest & dividends received Cash paid for merchandise Cash paid to employees Other operating disbursements Interest paid Income taxes paid Subtotals Cash provided by investing activities Purchase plant, property & equipment Sale of plant, property & equipment Sale of patent Marketable securities purchased Marketable securities sold Subtotals Cash provided by financing activities Dividends paid Long-term debt retired Bonds issued Common stock issued Subtotals Change in cash Beginning balance - Cash Ending balance - Cash 6,320,000 31,000 (3,740,000) (585,000) (367,000) (646,400) (662,000) 6,351,000 (6,000,400) Outflows Net

350,600

(4,900,000) 25,000 1,000,000 (875,000) 692,000 1,717,000 (5,775,000) (4,058,000)

(75,000) (2,430,000) 5,000,000 2,050,000 7,050,000 (2,505,000)

4,545,000 837,600 2,000,000 2,837,600

Non-cash financing and investing activities Preferred stock converted to common 1,500,000 Land obtained by issue of common stock 800,000

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Example 3 - Acct 301 Wenatchee Whirlpool World For year ended

Solution 12/31/96

Schedule to reconcile net income to cash provided by operations Net Income 1,112,200 Depreciation & amortization 250,500 Bond premiums/discounts 23,000 Realized gains/losses PP&E 40,000 Realized gain/loss investments (108,000) Gain on sale of patent (950,000) Undistributed Earnings of Affiliates (97,000) * Deferred income taxes 92,000 Change in working capital accounts: Net accounts receivable 158,500 ** Merchandise Inventory (270,000) Prepaid Operating Expenses (22,000) Accounts Payable 130,000 Salaries Payable 5,000 Income Taxes Payable (13,600) Cash provided by operations: 350,600 The following notes are explanations and not part of a formal statement of cash flow * Earnings of affiliates (equity method) Dividends received (equity method affiliates) (115,000) 18,000 (97,000)

** This is the easiest way to handle bad debts: just enter change in NET A/R: Change in Accounts Receivable 148,000 Change in Allowance for Doubtful Accounts 10,500 158,500 This is the more difficult alternate: Adjustment to sales (to get cash collected from 120,000 customers) Bad debt expense 38,500 158,500 What does not work is to include bad debt expense + change in Accounts Receivable and change in Allowance!

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