Concept explainers
The following balance sheets and income statement were taken from the records of Rosie-Lee Company:
Additional transactions were as follows:
- a. Sold equipment costing $21,600, with accumulated
depreciation of $16,200, for $3,600. - b. Issued bonds for $90,000 on December 31.
- c. Paid cash dividends of $36,000.
- d. Retired mortgage of $108,000 on December 31.
Required:
- 1. Prepare a schedule of operating cash flows using (a) the indirect method and (b) the direct method.
- 2. Prepare a statement of cash flows using the indirect method.
1.
(a).
Construct a schedule showing the operating cash flows with the use of indirect method.
Explanation of Solution
Cash Flows from Operating Activities:
This category of a cash flow statement shows the operational and profit generating activities in a firm. The operating cash flows increase or decrease the current assets and current liabilities of a firm.
The schedule showing operating cash flows using indirect method is in the table below:
R-L Company | |
Schedule for Cash Flow from Operating Activities | |
For the year ended June 30, 20X2 | |
Particulars | Amount ($) |
Cash flows from operating activities: | |
Net income | 122,400 |
Add/ Less: | |
Increase in accounts receivable1 | (18,000) |
Increase in accounts payable2 | 18,000 |
Depreciation expense3 | 19,800 |
Loss on sale of equipment | 1,800 |
Net cash from operating activities | 144,000 |
Table (1)
Therefore, net cash flow from operating activities is $144,000.
Working Note:
1.
Calculation of difference in accounts receivable:
2.
Calculation of difference in accounts payable:
3.
The total depreciation expense is $19,800
1.
(b).
Construct a schedule showing the operating cash flows with the use of direct method.
Explanation of Solution
The schedule showing operating cash flows using direct method is in the table below:
Schedule for Operating Cash Flows | |||
R-L Company | |||
For the year ended June 30, 20X2 | |||
Direct Method | |||
Particulars | Income statement ($) | Adjustments ($) | Cash flows ($) |
Cash flows from operating activities: | |||
Revenues | 920,000 | (18,000)1 | 902,000 |
Cost of goods sold | (620,000) | 18,0002 | (602,000) |
Operating expenses | (177,600) | 19,8003 | |
1,800 | (156,000) | ||
Net cash from operating activities | 144,000 |
Table (2)
Therefore, net cash flow from operating activities is $144,000.
Working Note:
1.
Calculation of difference in accounts receivable:
2.
Calculation of difference in accounts payable:
3.
The total depreciation expense is $19,800
2.
Construct the statement of cash flows with the use of indirect method.
Explanation of Solution
Cash Flow Statement:
Cash flow statement is a financial statement prepared to provide information about the sources and uses of cash in a firm. In this statement, the activities increasing cash are referred as cash inflows and the activities that decrease cash are referred as cash outflows.
The statement of cash flows for R-L Company for 20X2 using indirect method is shown below:
R-L Company | ||
Statement of Cash Flows | ||
For the year ended June 30, 20X2 | ||
Particulars | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net income | 122,400 | |
Add/ Less: | ||
Increase in accounts receivable1 | (18,000) | |
Increase in accounts payable2 | 18,000 | |
Depreciation expense3 | 19,800 | |
Loss on sale of equipment | 1,800 | |
Net cash from operating activities | 144,000 | |
Cash flows from investing activities: | ||
Sale of equipment | 3,600 | |
Purchase of investments | (54,000) | |
Purchase of equipment4 | (30,600) | |
Purchase of land5 | (18,000) | |
Net cash from investing activities | (99,000) | |
Cash flows from financing activities: | ||
Retirement of mortgage | (108,000) | |
Issuance of bonds | 90,000 | |
Retirement of preferred stock | (36,000) | |
Payment of dividends | (36,000) | |
Issuance of common stock6 | 108,000 | |
Net cash from financing activities | 18,000 | |
Net increase in cash | 63,000 |
Table (3)
Therefore, there is a net increase in cash of $63,000.
Working Note:
1.
Calculation of difference in accounts receivable:
2.
Calculation of difference in accounts payable:
3.
The total depreciation expense is $19,800
4.
Calculation of purchase value of equipment:
5.
Calculation of purchase value of land:
6.
Calculation of issuance value of common stock:
Want to see more full solutions like this?
Chapter 14 Solutions
CENGAGENOWV2 FOR MOWEN/HANSEN/HEITGER S
- The comparative balance sheet of Prime Sports Gear, Inc., at December 31, the end of the fiscal year, is as follows: Additional data obtained from the records of Prime Sports Gear are as follows: a. Net income for 2013 was 121,610. b. Depreciation reported on income statement for 2013 was 46,500. c. Purchased 165,000 of new equipment, putting 90,000 cash down and issuing 75,000 of bonds for the balance. d. Old equipment originally costing 19,500, with accumulated depreciation of 7,950, was sold for 8,000. e. Retired 60,000 of bonds. f. Declared cash dividends of 64,000. g. Issued 1,500 shares of common stock at 27 cash per share. You have been asked to prepare a statement of cash flows for Prime Sports Gear for 2013. Review the worksheet called CASHFLOW that has been provided to assist you in preparing the statement. The worksheet has been designed so that as you make entries in columns D and F, column G will be automatically updated. For example, FORMULA1 should be entered as =B17+D17F17. Columns C and E are to be used to enter letter references for each of the debit and credit entries on the worksheet.arrow_forwardAnalyzing Transactions. Using the analytical framework, indicate the effect of the following related transactions of a firm. a. January 1: Issued 10,000 shares of common stock for 50,000. b. January 1: Acquired a building costing 35,000, paying 5,000 in cash and borrowing the remainder from a bank. c. During the year: Acquired inventory costing 40,000 on account from various suppliers. d. During the year: Sold inventory costing 30,000 for 65,000 on account. e. During the year: Paid employees 15,000 as compensation for services rendered during the year. f. During the year: Collected 45,000 from customers related to sales on account. g. During the year: Paid merchandise suppliers 28,000 related to purchases on account. h. December 31: Recognized depreciation on the building of 7,000 for financial reporting. Depreciation expense for income tax purposes was 10,000. i. December 31: Recognized compensation for services rendered during the last week in December but not paid by year-end of 4,000. j. December 31: Recognized and paid interest on the bank loan in Part b of 2,400 for the year. k. Recognized income taxes on the net effect of the preceding transactions at an income tax rate of 40%. Assume that the firm pays cash immediately for any taxes currently due to the government.arrow_forwardThe comparative balance sheet of Prime Sports Gear, Inc., at December 31, the end of the fiscal year, is as follows: Additional data obtained from the records of Prime Sports Gear are as follows: a. Net income for 2013 was 121,610. b. Depreciation reported on income statement for 2013 was 46,500. c. Purchased 165,000 of new equipment, putting 90,000 cash down and issuing 75,000 of bonds for the balance. d. Old equipment originally costing 19,500, with accumulated depreciation of 7,950, was sold for 8,000. e. Retired 60,000 of bonds. f. Declared cash dividends of 64,000. g. Issued 1,500 shares of common stock at 27 cash per share. Open the file CASHFLOW from the website for this book at cengagebrain.com. First, enter the formulas. Then, complete the worksheet in the manner described next. According to the problem, cash increased from 39,600 to 67,210 during the year. This is a 27,610 increase. To record this increase on the worksheet, move to row 17. Since this is the first account you are analyzing, enter the letter a in column C. Then enter 27610 in column D (a debit since cash increased). This brings the year-end balance (column G) to 67,210, its proper balance. Now move to the bottom part of the statement where you see the categories Operating Activities, Investing Activities, and so on. The credit side of the entry has to be entered here. The proper space for this cash entry is on row 59. Enter the letter a in cell E59 and 27610 in cell F59. Notice the totals at the bottom of the page (row 60) now agree. The next account balance that changed is accounts receivable. It increased by 9,035. To enter this change on the worksheet, enter the letter b in cell C18 and 9035 in cell D18 (again, a debit since accounts receivable increased). This brings the year-end balance in column G to 121,250, its proper balance. The change in accounts receivable balance is an operating activity adjustment (as explained in your textbook). Enter the credit side of this entry in cells E34 and F34, and enter the explanation Increase in accounts receivable in cell A34. Note: Your textbook probably shows Net income as the first item under Operating Activities. We will get to that later. The sequence in which you enter items on this worksheet is not important. All other balance sheet accounts must be analyzed in the same manner, placing appropriate debit or credit entries in the top part of the worksheet to obtain the proper balances in column G, and then entering the second side of the entry in the appropriate row on the bottom part of the worksheet. You should use letter references to identify all entries. Also, you must enter a description of the entry in column A under the appropriate activity category. Although a sequence of analyzing the balance sheet from top to bottom is suggested here, this order is not necessary. As mentioned earlier, your textbook may specify a different sequence. Also, note that some accounts may have both debit and credit adjustments to them. The worksheet is not a substitute for a statement of cash flows, but it does provide you with all the numbers you need to properly prepare one. You will be done with your analysis when: a. The individual account balances at December 31, 2013, as shown on the worksheet (column G) equal those shown in the given problem data. b. The transaction column totals are equal (cells D60 and F60). c. The sum of the operating, investing, and financing activities (cell G59) equals the change in cash (cell D59 or F59). When you are finished, enter your name in cell A1. Save your completed file as CASHFLOW2. Print the worksheet when done. Also print your formulas. Check figure: Total credits at 12/31/2013 (cell G31), 860,460.arrow_forward
- Determine the following amounts: a. The amount of the liabilities of a business that has 60,800 in assets and in which the owner has 34,500 equity. b. The equity of the owner of a tour bus that cost 57,000 and on which is owed 21,800 on an installment loan payable to the bank. c. The amount of the assets of a business that has 11,780 in liabilities and in which the owner has 28,500 equity.arrow_forwardLowes Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,700 stores. Lowes recently reported the following balance sheet data (in millions): a. Determine the total stockholders equity at the end of Years 2 and 1. b. Determine the ratio of liabilities to stockholders equity for Year 2 and Year 1. Round to two decimal places. c. What conclusions regarding the risk to the creditors can you draw from (b)? d. Using the balance sheet data for The Home Depot in Exercise 1-26, how does the ratio of liabilities to stockholders equity of Lowes compare to that of The Home Depot?arrow_forwardReturn on assets The financial statements of The Hershey Company (HSY) are shown in Exhibits 6 through 9 of this chapter. Based upon these statements, answer the following questions. Hershey had total assets of $4,412 (million) at the beginning of the year. Compute the return on assets for Hershey for the year shown in Exhibits 6-9.arrow_forward
- Juroe Company provided the following income statement for last year: Juroes balance sheet as of December 31 last year showed total liabilities of 10,250,000, total equity of 6,150,000, and total assets of 16,400,000. Required: Note: Round answers to two decimal places. 1. Calculate the times-interest-earned ratio. 2. Calculate the debt ratio. 3. Calculate the debt-to-equity ratio.arrow_forwardAnalyzing the Accounts The controller for Summit Sales Inc. provides the following information on transactions that occurred during the year: a. Purchased supplies on credit, $18,600 b. Paid $14,800 cash toward the purchase in Transaction a c. Provided services to customers on credit1 $46,925 d. Collected $39,650 cash from accounts receivable e. Recorded depreciation expense, $8,175 f. Employee salaries accrued, $15,650 g. Paid $15,650 cash to employees for salaries earned h. Accrued interest expense on long-term debt, $1,950 i. Paid a total of $25,000 on long-term debt, which includes $1.950 interest from Transaction h j. Paid $2,220 cash for l years insurance coverage in advance k. Recognized insurance expense, $1,340, that was paid in a previous period l. Sold equipment with a book value of $7,500 for $7,500 cash m. Declared cash dividend, $12,000 n. Paid cash dividend declared in Transaction m o. Purchased new equipment for $28,300 cash. p. Issued common stock for $60,000 cash q. Used $10,700 of supplies to produce revenues Summit Sales uses the indirect method to prepare its statement of cash flows. Required: 1. Construct a table similar to the one shown at the top of the next page. Analyze each transaction and indicate its effect on the fundamental accounting equation. If the transaction increases a financial statement element, write the amount of the increase preceded by a plus sign (+) in the appropriate column. If the transaction decreases a financial statement element, write the amount of the decrease preceded by a minus sign (-) in the appropriate column. 2. Indicate whether each transaction results in a cash inflow or a cash outflow in the Effect on Cash Flows column. If the transaction has no effect on cash flow, then indicate this by placing none in the Effect on Cash Flows column. 3. For each transaction that affected cash flows, indicate whether the cash flow would be classified as a cash flow from operating activities, cash flow from investing activities, or cash flow from financing activities. If there is no effect on cash flows, indicate this as a non-cash activity.arrow_forwardReturn on assets The following data (in millions) were adapted from recent financial statements of Tootsie Roll Industries Inc. (TR): What is Tootsie Roll’s percent of the cost of sales to sales? Round to one decimal place.arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage LearningExcel Applications for Accounting PrinciplesAccountingISBN:9781111581565Author:Gaylord N. SmithPublisher:Cengage Learning
- Survey of Accounting (Accounting I)AccountingISBN:9781305961883Author:Carl WarrenPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningFinancial AccountingAccountingISBN:9781337272124Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning