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The Statement of Cash Flows _complete with solutions _

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

Noncurrent Assets
Investments (equity method)                              3,097,000    3,000,000
Plant, property & equipment                             16,420,000   10,800,000
Accumulated Depreciation                                 (829,000)    (600,000)
Intangible Assets                                           71,500      128,000
TOTAL ASSETS                                            24,847,600   18,205,000

Current Liabilities
Accounts Payable                                           880,000     750,000
Salaries Payable                                            20,000      15,000
Income Taxes Payable                                        13,400      27,000
Dividends Payable                                           35,000      60,000
Current portion long term debt                              29,000      21,000
                                                           977,400     873,000
Noncurrent Liabilities
Bonds Payable                                           10,000,000    5,000,000
Discount on Bonds                                        (247,000)    (270,000)
Deferred Income Taxes                                      180,000       88,000
Other long term liabilities                                562,000    3,000,000
                                                        10,495,000    7,818,000

Stockholder's Equity
Convertible preferred, $100 par                            500,000    2,000,000
Common stock, $10 par                                    3,100,000    1,500,000
Additional paid in capital                               3,950,000    1,200,000
Unrealized (gain)/loss investments                          27,000       78,000
Retained Earnings                                        5,798,200    4,736,000
                                                        13,375,200    9,514,000
Total liabilities and equity                            24,847,600   18,205,000
                                          Wenatchee Whirlpool World
                                              Income Statement
                                           For year ending 12/31/96

Sales                                                                                     6,200,000
Earnings of affiliated company (equity method)                                              115,000
Gain/(loss) on sale of PP&E                                                                 (40,000)
Realized gain/(loss) on investments                                                         108,000
Realized gain on sale of patent                                                             950,000
Interest and dividend revenue                                                                 13,000
     Total revenues                                                                       7,346,000

Cost of goods sold                                                     3,600,000
Salaries and wages                                                       590,000
Other operating expenses                                                 345,000
Bad debt expense                                                          38,500
Depreciation & amortization expense                                      250,500
Interest expense                                                         669,400
Income taxes expense                                                     740,400          6,233,800

Net income                                                                                1,112,200

Additional 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.
b.      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.
c.      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.
d.      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.
e.      On July 20, WWW sold 50,000 shares of its common stock for $41 per share.
f.      By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.
g.      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.
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.
i.      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.
j.      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.
k.      Dividends declared during the year totaled $50,000.
Homework 4 - Acct 315
Worksheet                             Year ending                                  Year ending
Wenatchee Whirlpool World                 12/31/95 Ref   Debit      Ref   Credit       12/31/96   Target
Cash                                     2,000,000        837,600                     2,837,600    837,600
Securities Available for Sale (at         150,000                                      390,000     240,000
market)
Accounts Receivable                      1,900,000                                    1,752,000   (148,000)


Allowance for doubtful accounts          (110,000)                                    (120,500)    (10,500)


Merchandise Inventory                     875,000                                     1,145,000    270,000


Prepaid Operating Expenses                 62,000                                       84,000      22,000


Investments in affiliated companies      3,000,000                                    3,097,000     97,000
(equity method)
Plant, property & equipment             10,800,000                                   16,420,000   5,620,000


Accumulated Depreciation                 (600,000)                                    (829,000)   (229,000)


Intangible Assets                         128,000                                       71,500     (56,500)


                                        18,205,000                                   24,847,600
Accounts Payable                         (750,000)                                    (880,000)   (130,000)


Salaries Payable                          (15,000)                                     (20,000)     (5,000)


Income Taxes Payable                      (27,000)                                     (13,400)     13,600


Dividends Payable                         (60,000)                                     (35,000)     25,000


Current portion long term debt            (21,000)                                     (29,000)     (8,000)


Bonds Payable                          (5,000,000)                                 (10,000,000) (5,000,000)


Premium/Discount on Bonds Payable         270,000                                      247,000     (23,000)


Deferred Income Taxes                     (88,000)                                    (180,000)    (92,000)


Other long term liabilities            (3,000,000)                                    (562,000)   2,438,000
Wenatchee Whirlpool World
                                            12/31/95 ref   Debit   ref   Credit       12/31/96   Target
Convertible preferred, $100 par          (2,000,000)                                 (500,000)   1,500,000


Common stock, $10 par                    (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          (78,000)                                  (27,000)     51,000

Retained Earnings                        (4,736,000)                               (5,798,200) (1,062,200)


                                      0 (18,205,000)                              (24,847,600)


Closing entry for                              1996                                      1996
                                         Rev/(Exp)                                Receipt/(Dis
                                                                                      b)
Sales                                      6,200,000


Earnings of affiliated companies            115,000
(equity method)
Gain/(loss) on sale of PP&E                 (40,000)

Realized gain/(loss) on investments         108,000

Realized gain on sale of patent             950,000

Interest and dividend revenue                 13,000


Cost of goods sold                       (3,600,000)


Salaries and wages                         (590,000)


Other operating expenses                   (345,000)


Bad debt expense                            (38,500)


Depreciation expense                       (244,000)

Amortization of intangible assets            (6,500)

Interest expense                           (669,400)


Income taxes expense                       (740,400)
Net income (accrual basis)   1,112,200
Wenatchee Whirlpool World
Statement of Cash Flows       INFLOWS   OUTFLOWS     (Subtotals)
Operating Activities




Investing Activities




Financing Activities




Noncash Financing/Investing




   CHANGE IN CASH                          837,600
Totals
                                                                Solution
Example 4- Acct 315
Worksheet                                        Year ending                                              Year ending
Wenatchee Whirlpool World                              12/31/95 Ref        Debit       Ref   Credit           12/31/96      Target
Cash                                                  2,000,000    X         837,600                         2,837,600         837,600
                                                                                       o        51,000
Securities Available for Sale (at market)               150,000     I        875,000    I      584,000         390,000         240,000
                                                                                       p       120,000
Accounts Receivable                                   1,900,000                         f       28,000       1,752,000       (148,000)
Allowance for doubtful accounts                       (110,000)     f         28,000   m        38,500       (120,500)        (10,500)
Merchandise Inventory                                   875,000     p        270,000                         1,145,000         270,000
Prepaid Operating Expenses                               62,000     p         22,000                            84,000          22,000
Investments (equity method)                           3,000,000     l        115,000    j       18,000       3,097,000          97,000


                                                                    h        800,000
Plant, property & equipment                         10,800,000      g      4,900,000    c       80,000      16,420,000       5,620,000
Accumulated Depreciation                              (600,000)     c         15,000   n       244,000       (829,000)       (229,000)
                                                                                       n         6,500
Intangible Assets                                       128,000                         a       50,000          71,500        (56,500)
                                                    18,205,000                                              24,847,600
Accounts Payable                                      (750,000)                        p       130,000       (880,000)       (130,000)
Salaries Payable                                       (15,000)                        p         5,000         (20,000)         (5,000)
Income Taxes Payable                                   (27,000)     q         13,600                           (13,400)         13,600
Dividends Payable                                      (60,000)     k         75,000   k        50,000         (35,000)         25,000
Current portion long term debt                         (21,000)                         s        8,000         (29,000)         (8,000)
Bonds Payable                                       (5,000,000)                        b      5,000,000    (10,000,000)     (5,000,000)
Premium/Discount on Bonds Payable                       270,000                         r       23,000         247,000        (23,000)
Deferred Income Taxes                                  (88,000)                        q        92,000       (180,000)        (92,000)
                                                                    s      2,430,000
Other long term liabilities                         (3,000,000)     s          8,000                         (562,000)       2,438,000
                                                       12/31/95 ref        Debit       ref   Credit           12/31/96      Target
Convertible preferred, $100 par                     (2,000,000)     d      1,500,000                         (500,000)       1,500,000
                                                                                       h       200,000
                                                                                        e      500,000
Common stock, $10 par                               (1,500,000)                        d       900,000      (3,100,000)     (1,600,000)
                                                                                       h       600,000
                                                                                        e     1,550,000
Additional paid in capital                          (1,200,000)                        d       600,000      (3,950,000)     (2,750,000)
Unrealized (gain)/loss investments                     (78,000)     o         51,000                           (27,000)         51,000
Retained Earnings                                   (4,736,000)     k         50,000   X      1,112,200     (5,798,200)     (1,062,200)
                                             0    (18,205,000)                                             (24,847,600)



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Wenatchee Whirlpool World

Closing entry for                                          1996                                                    1996
                                                  Rev/(Exp)                                               Receipt/(Disb)
Sales                                                 6,200,000     p         120,000                          6,320,000
Earnings of affiliated company (equity                  115,000                          l      115,000                  0
method)
Gain/(loss) on sale of PP&E                            (40,000)     c          40,000                                    0
Realized gain/(loss) on investments                     108,000                          I      108,000                  0
Realized gain on sale of patent                         950,000                          a      950,000                  0
Interest and dividend revenue                            13,000     j          18,000                            31,000
Cost of goods sold                                  (3,600,000)     p         130,000    p      270,000      (3,740,000)
Salaries and wages                                    (590,000)     p           5,000                          (585,000)
Other operating expenses                              (345,000)                          p       22,000        (367,000)
Bad debt expense                                       (38,500)    m           38,500                                    0
Depreciation expense                                  (244,000)     n         244,000                                    0
Amortization of intangible assets                        (6,500)    n           6,500                                    0
Interest expense                                      (669,400)     r          23,000                          (646,400)
Income taxes expense                                  (740,400)     q          92,000    q       13,600        (662,000)
Net income (accrual basis)                            1,112,200    X         1,112,200   X      350,600         350,600
Statement of Cash Flows                                                    INFLOWS           OUTFLOWS      (Subtotals)
Operating Activities                                               X          350,600


Reconciling schedule:
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 Investees                    (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



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



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



Noncash Financing/Investing
Preferred converted to common stock                                 d       1,500,000   d    1,500,000
Swap common stock for land                                          h        800,000    h     800,000


    CHANGE IN CASH                                                                      X     837,600
Totals                                                                     25,237,000       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]                                         1,000,000
    Intangible Assets                                                                      50,000
    Realized gain on sale of patent                                                       950,000
b.         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]                                         5,000,000
    Bonds payable                                                                       5,000,000
c.         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]                                             25,000
Accumulated depreciation                                              15,000
Loss on sale of plant, property & equipment                           40,000
    Plant, property and equipment                                                           80,000
d.         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                             1,500,000
   Common stock, $10 par                                                                  900,000
   Additional paid-in capital                                                             600,000
e.         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]                                         2,050,000
    Common stock, $10 par                                                                 500,000
    Additional paid in capital                                                          1,550,000
f.         By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.

Allowance for doubtful accounts                                       28,000
    Accounts receivable                                                                     28,000
g.         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                                     4,900,000
    Cash [Investing outflow]                                                            4,900,000



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                                                        Page 10
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                                       800,000
    Common stock, $10 par                                                                200,000
    Additional paid in capital                                                           600,000
i.       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                         875,000
    Cash [Investing outflow]                                                             875,000
Cash [Investing inflow]                                             692,000
    Investments - Securities available for sale                                          584,000
    Gain on sale of investments                                                          108,000
j.       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]                                 18,000
    Investments (partially-owned companies)                                                18,000
k.       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                                                     50,000
    Dividends payable                                                                      50,000
Dividends payable                                                     75,000
    Cash [Financing - outflow]                                                             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.

Investments in partially owned company                              115,000
    Earnings of partially-owned company                                                  115,000

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                                                      38,500
    Allowance for doubtful accounts                                                        38,500



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                                                        Page 11
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.

Depreciation expense                                                244,000
Amortization of intangible assets                                     6,500
   Accumulated depreciation                                                    244,000
   Intangible assets                                                             6,500

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.

Unrealized gain/loss on investments                                   51,000
    Investments in AFS securities (allowance)                                   51,000


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.

Sales                                                               120,000
    Accounts receivable                                                        120,000
Merchandise inventory                                               270,000
    Cost of goods sold                                                         270,000
Prepaid operating expenses                                            22,000
    Other operating expenses                                                    22,000
    Accounts payable                                                           130,000
Cost of goods sold                                                  130,000
    Salaries payable                                                             5,000
Salaries and wages                                                     5,000

q.   Income tax expense is affected by two accounts on the balance sheet - income taxes payable
     and deferred income taxes.

Income taxes payable                                                  13,600
    Income tax expense                                                          13,600
    Deferred income taxes                                                       92,000
Income tax expense                                                    92,000

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



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                                                        Page 12
Interest expense                                                      23,000
     Discount on bonds payable                                                   23,000

s.   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.

Other long-term debt                                                   8,000
    Current portion of long-term debt                                             8,000

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                                              2,430,000
    Cash [Financing - outflow]                                                 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     Outflows       Net
Cash provided by operations
Cash collected from customers                                              6,320,000
Interest & dividends received                                                 31,000
Cash paid for merchandise                                                            (3,740,000)
Cash paid to employees                                                                 (585,000)
Other operating disbursements                                                          (367,000)
Interest paid                                                                          (646,400)
Income taxes paid                                                                      (662,000)
                                                      Subtotals            6,351,000 (6,000,400)      350,600

Cash provided by investing activities
Purchase plant, property & equipment                                                   (4,900,000)
Sale of plant, property & equipment                                           25,000
Sale of patent                                                             1,000,000
Marketable securities purchased                                                         (875,000)
Marketable securities sold                                                   692,000
                                    Subtotals                              1,717,000 (5,775,000) (4,058,000)

Cash provided by financing activities
Dividends paid                                                                            (75,000)
Long-term debt retired                                                                 (2,430,000)
Bonds issued                                                               5,000,000
Common stock issued                                                        2,050,000
                                  Subtotals                                7,050,000 (2,505,000)     4,545,000

Change in cash                                                                                         837,600
Beginning balance - Cash                                                                             2,000,000
Ending balance - Cash                                                                                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                                 Solution
          Wenatchee Whirlpool World
                           For year ended                          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)                                     (115,000)
   Dividends received (equity method affiliates)                                 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!




c9173c64-9b6b-4aab-8698-84272511098b.doc Created by T. Gordon 12/22/2010                  Page 15

				
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