Week one assignment - due at 9/25/2017 at noon

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Chapter 1 Overview

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Key Terms

Click on each key term to see the defini�on.

direct approach (h�p://content.thuzelearning.com/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12

An approach to statement construc�on whereby individual income statement items are converted from the accrual basis to cash basis of accoun�ng.

financing ac�vi�es (h�p://content.thuzelearning.com/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12

Transac�ons related to obtaining and repaying capital funding needs.

indirect approach (h�p://content.thuzelearning.com/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12

An approach to statement construc�on whereby cash flow from opera�ons is derived by making certain adjustments to accrual-basis net income.

inves�ng ac�vi�es (h�p://content.thuzelearning.com/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12

Transac�ons related to acquiring and disposing of longer-term investments in stocks and debt issued by others, as well as buying and selling items of property, plant, and equipment.

noncash inves�ng and financing ac�vi�es (h�p://content.thuzelearning.com/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12

Transac�ons that do not trigger a direct inflow or ou�low of cash but are nonetheless highly significant inves�ng/financing events.

opera�ng ac�vi�es (h�p://content.thuzelearning.com/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12.2/sec�ons/front_ma�er/books/AUACC206.12

The rou�ne transac�ons of a business and events that enter into the determina�on of ongoing income.

Concept Check

Cri�cal Thinking Ques�ons

1. What informa�on does the statement of cash flows disclose? Give several examples. 2. Describe the nature of opera�ng ac�vi�es, including specific examples of opera�ng cash inflows and ou�lows. 3. Define inves�ng ac�vi�es, ci�ng several examples of typical inves�ng inflows and ou�lows.

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4. List five examples of financing ac�vi�es. Which of these cause cash inflows and which cause cash ou�lows? 5. Why are noncash transac�ons, such as the exchange of common stock for a building, included on a statement of cash flows? How are these noncash transac�ons

disclosed? 6. Differen�ate between the direct and indirect methods of preparing the statement of cash flows.

Exercises

1. Classifica�on of ac�vi�es

Classify each of the following transac�ons as arising from an opera�ng (O), inves�ng (I), financing (F), or noncash inves�ng/financing (N) ac�vity:

________ a. Received $80,000 from the sale of land

________ b. Received $3,200 from cash sales

________ c. Paid a $5,000 dividend

________ d. Purchased $8,800 of merchandise for cash

________ e. Received $100,000 from the issuance of common stock

________ f. Paid $1,200 of interest on a note payable

________ g. Acquired a new laser printer by paying $650

________ h. Acquired a $400,000 building by signing a $400,000 mortgage note

2. Indirect calcula�on of opera�ng cash flows

Video Corpora�on's balance sheet revealed the following account balance informa�on:

Account Dec. 31, 20X6 Dec. 31, 20X5

Accounts receivable $52,000 $57,000

Merchandise inventory 75,000 68,000

Accounts payable 21,000 19,500

The accrual-basis net income was $107,000. In compu�ng net income, the company recorded $12,600 of deprecia�on expense; there were no gains or losses from inves�ng and financing ac�vi�es.

On the basis of the preceding informa�on, calculate Video's cash flows from opera�ng ac�vi�es by using the indirect method.

3. Indirect calcula�on of opera�ng cash flows

Specialty Services Inc. reported a net income of $110,000 for the year just ended, which includes an $18,000 gain on the sale of long-term investments. The following data were obtained from compara�ve balance sheets:

Oct. 31, 20X2 Oct. 31, 20X1

Trade accounts receivable $245,000 $203,000

Merchandise inventory 230,000 308,000

Accumulated deprecia�on: equipment

120,000 65,000

Accounts payable 190,000 124,000

Accrued liabili�es 38,000 73,000

There were no purchases or disposals of equipment during the year. The long-term investment had a carrying (book) value of $77,000 and was sold for cash on June 15.

On the basis of the preceding informa�on, determine the cash provided by opera�ng ac�vi�es from November 1, 20X1 through October 31, 20X2. The firm uses the indirect method of statement prepara�on.

4. Overview of direct and indirect methods

Evaluate the comments that follow as being true or false. If the comment is false, briefly explain why.

a. Both the direct method and the indirect method will produce the same cash flow from opera�ng ac�vi�es. b. Deprecia�on expense is added back to net income when the indirect method is used. c. One of the advantages of using the direct method rather than the indirect method is that larger cash flows from financing ac�vi�es will be reported.

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d. The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement prepara�on is employed. e. The dollar change in the Merchandise Inventory account appears on the statement of cash flows only when the direct method of statement prepara�on is

used.

5. Statement prepara�on: Direct method

The compara�ve balance sheets of Village Company follow:

VILLAGE COMPANY Compara�ve Balance Sheets December 31, 20X2 and 20X1

Dec. 31, 20X2 Dec. 31, 20X1

Cash $ 5,000 $ 7,000

Accounts receivable (net) 12,000 18,000

Merchandise inventory 35,000 28,000

Property, plant, & equipment 40,000 30,000

Less: Accumulated deprecia�on (17,000) (10,000) Total assets $ 75,000 $ 73,000

Accounts payable* $ 25,000 $ 21,000

Income taxes payable 4,000 1,000

Common stock 24,000 24,000

Retained earnings 22,000 27,000 Total liabili�es & stock, equity $ 75,000 $ 73,000

*Relate to purchases of merchandise

The firm's accrual-basis income statement revealed the following data: sales, $120,000; cost of goods sold, $80,000; selling and administra�ve expenses, $25,000; deprecia�on expense, $7,000; and income taxes, $3,000. (There was no interest expense.) Dividends declared and paid during 20X2 totaled $10,000. Finally, Village purchased $10,000 of equipment for cash on August 14.

a. Determine the increase or decrease in cash during 20X2. b. Prepare a statement of cash flows by using the direct method.

6. Equipment transac�on and cash flow repor�ng

The property, plant, and equipment sec�on of ProComp Inc.'s compara�ve balance sheet follows:

Dec. 31, 20X4 Dec. 31,

20X3

Property, plant, & equipment

Land $ 94,000 $ 94,000

Equipment 652,000 527,000

Less: Accumulated deprecia�on (316,000) (341,000)

New equipment purchased during 20X4 totaled $280,000. The 20X4 income statement disclosed equipment deprecia�on expense of $41,000 and a $9,000 loss on the sale of equipment.

a. Determine the cost and accumulated deprecia�on of the equipment sold during 20X4. b. Determine the selling price of the equipment sold. c. Show how the sale of equipment would appear on a statement of cash flows prepared by using the indirect method.

7. Evalua�on of cash flows

The following statement of cash flows was prepared for Yellowstone Company:

YELLOWSTONE COMPANY Statement of Cash Flows

for the Year Ended December 31, 20X2

Cash flows from opera�ng ac�vi�es Cash received from customers $240,000 Less cash payments for:

Purchases of merchandise $180,000 Selling & administra�ve expenses 75,000

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Interest 20,000 275,000 Net cash used by opera�ng ac�vi�es $ (35,000)

Cash flows from inves�ng ac�vi�es Sale of equipment $ 20,000 Sale of vehicles 10,000 Sale of long-term investments 40,000

Net cash provided by inves�ng act 70,000

Cash flows from financing ac�vi�es Re�rement of long-term debt (50,000)

Net increase (decrease) in cash $ (15,000)

Cash balance, January 1, 20X2 54,000

Cash balance, December 31, 20X2 $ 39,000

Evaluate the nature of the decrease in cash. Does your analysis indicate any poten�al problems for Yellowstone?

Problems

1. Transac�on analysis: Opera�ng, inves�ng, and financing ac�vi�es The management of Maui Corpora�on desires to know the nature of each of the following transac�ons and events:

1. Collected cash from customers for cash sales. 2. Purchased a short-term investment for cash. 3. Secured a mortgage note to finance the acquisi�on of a building. 4. Issued 10-year bonds for cash. 5. Paid a short-term nonopera�ng note. 6. Sold equipment having a book value of $30,000 for $30,000 cash. 7. Sold a parcel of land at cost; received a long-term note. 8. Received dividends on a long-term stock investment. 9. Paid income taxes.

10. Issued preferred stock in exchange for a valuable patent. 11. Reacquired treasury stock for cash. 12. Paid previously declared cash dividends.

Instruc�ons

a. Briefly explain the difference between inves�ng and financing ac�vi�es and noncash inves�ng/financing ac�vi�es. b. Design a table with the following columnar headings: opera�ng ac�vity, inves�ng ac�vity, financing ac�vity, and noncash inves�ng/financing ac�vity. Classify

the 12 transac�ons listed by using these headings. For all classifica�ons except noncash inves�ng/financing, indicate whether the transac�on causes a cash inflow (+) or a cash ou�low (−).

2. Opera�ng ac�vi�es: Direct and indirect methods The 20X5 income statement of Office Products Inc. follows:

OFFICE PRODUCTS INC. Income Statement

for the Year Ended December 31, 20X5

Net sales $980,000

Cost of goods sold Beginning inventory $235,000 Net purchases 720,000 Goods available for sale $955,000 Less: Ending inventory 260,000 Cost of goods sold 695,000

Gross profit $285,000

Expenses Selling & administra�ve $149,000 Deprecia�on 54,000 203,000

$ 82,000

Other revenue (expense) Interest expense $ (18,000) Gain on sale of equipment 26,000 8,000

Income before income taxes $ 90,000

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Income taxes 27,000

Net income $ 63,000

The following addi�onal informa�on was obtained from the general ledger and management personnel:

1. Accounts payable related to the purchases of merchandise decreased during 20X5 by $32,800. In contrast, accounts receivable increased by $23,700. 2. Prepaid expenses and wages payable increased throughout 20X5 by $2,400 and $5,600, respec�vely. 3. The balance in the income taxes payable account on January 1 was $4,900; the December 31 balance was $4,100. 4. The company financed a $78,000 equipment purchase by signing a note payable that is due in 20X8.

Instruc�ons

a. Prepare the opera�ng ac�vi�es sec�on of the statement of cash flows by using the direct method. b. Prepare the opera�ng ac�vi�es sec�on of the statement of cash flows by using the indirect method.

3. Cash flow informa�on: Direct and indirect methods The compara�ve year-end balance sheets of Sign Graphics Inc. revealed the following ac�vity in the company's current accounts:

20X5 20X4

Increase (decrease)

Current assets

Cash $ 55,400 $ 35,200 $ 20,200

Accounts receivable (net)

83,800 88,000 (4,200)

Inventory 243,400 233,800 9,600

Prepaid expenses 25,400 24,200 1,200

Current liabili�es

Accounts payable $ 123,600 $140,600 $(17,000)

Taxes payable 43,600 49,200 (5,600)

Interest payable 9,000 6,400 2,600

Accrued liabili�es 38,800 60,400 (21,600)

Note payable 44,000 — 44,000

The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabili�es relate to the firm's selling and administra�ve expenses. The company's condensed income statement follows:

SIGN GRAPHICS INC. Income Statement

for the Year Ended December 31, 20X5

Sales $713,800

Less: Cost of goods sold 323,000

Gross profit $390,800

Less: Selling & administra�ve expenses $186,000 Deprecia�on expense 17,000 Interest expense 27,000 230,000

Add: Gain on sale of land $160,800

21,800

Income before taxes $182,600

Income taxes 36,800

Net income $145,800

Other data:

1. Long-term investments were purchased for cash at a cost of $74,600. 2. Cash proceeds from the sale of land totaled $76,200. 3. Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunica�ons system was acquired by issuing 3,000

shares of preferred stock. 4. A long-term note of $49,400 was repaid. 5. Twenty thousand shares of common stock were issued at $5.19 per share. 6. The company paid cash dividends amoun�ng to $128,600.

Instruc�ons

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a. Prepare the opera�ng ac�vi�es sec�on of the company's statement of cash flows, assuming use of 1) the direct method. 2) the indirect method.

b. Prepare the inves�ng and financing ac�vi�es sec�ons of the statement of cash flows.