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Exercise 16-5

The net income reported on the income statement for the current year was $255,800.
Depreciation recorded on equipment and a building amounted to $53,500 for the year.
Balances of the current asset and current liability accounts at the beginning and end of the
year are as follows:

End of Year Beginning of Year

Cash $ 42,000 $ 44,200 Accounts receivable (net) 65,400 67,000 Inventories 125,900
112,600 Prepaid expenses 5,800 6,000 Accounts payable (merchandise creditors) 61,400
67,500 Salaries payable 8,300 7,900

a. Prepare the cash flows from operating activities section of the statement of cash flows,
using the indirect method.
b. If the direct method had been used, would the net cash flow from operating activities
have been the same? Explain.

Answer

a. Cash flows from operating activities:

Net income : 255,800

Added: Depreciation 53,500

Decrease in accounts receivable 1,600

Decrease in prepaid expense 200

Increase in salaries payable 400

55,700

311,500

Deduct: Increase in inventories 13,300

Decrease in accounts payable 6,100

19,400

Cash from operations ....................................................................... 292,100

b. Yes. The amount of cash flows from operating activities reported on the
statement of cash flows is not affected by the method of reporting such flows.
Ex. 16–19

The income statement of Heart Grain Bakeries, Inc. for the current year ended June
30 is as follows:
Sales $645,000
Cost of merchandise sold 367,800
Gross profit $277,200
Operating expenses: Depreciation expense $ 45,000
Other operating expenses 155,400
Total operating expenses 200,400
Income before income tax $ 76,800
Income tax expense 25,400
Net income $ 51,400

Changes in the balances of selected accounts from the beginning to the end of the
current year are as follows:
Increase Decrease*
Accounts receivable (net) $12,000*
Inventories 4,200
Prepaid expenses 2,500*
Accounts payable (merchandise creditors) 8,400*
Accrued expenses (operating expenses) 2,300
Income tax payable 3,600*

Prepare the cash flows from operating activities section of the statement of cash
flows, using the direct method.

Answer

Cash flows from operating activities:


Cash received from customers ......................... $657,0001
Deduct: Cash payments for merchandise ...... $380,4002
Cash payments for operating
expenses ..................................... 150,6003
Cash payments for income tax ......... 29,0004 560,000
Net cash flow from operating activities.............. $ 97,000
Computations:
1. Sales .................................................................................... $645,000
Add decrease in accounts receivable .................................. 12,000
Cash received from customers ............................................ $657,000
2. Cost of merchandise sold .................................................... $367,800
Add: Increase in inventories .............................................. $ 4,200
Decrease in accounts payable .................................. 8,400 12,600
Cash payments for merchandise ......................................... $380,400
3. Operating expenses other than depreciation ....................... $155,400
Deduct: Decrease in prepaid expenses ............................ $ 2,500
Increase in accrued expenses ............................. 2,300 4,800
Cash payments for operating expenses............................... $150,600
4. Income tax expense ............................................................. $ 25,400
Add decrease in income tax payable ................................... 3,600
Cash payments for income tax $ 29,00

Exercise 16-20

The income statement for Wholly Bagel Company for the current year ended June 30 and balances
of selected accounts at the beginning and the end of the year are as follows:

Sales $265,000

Cost of merchandise sold $95,800

Gross profit $169,200

Operating expenses:

Depreciation expense $12,500

Other operating expenses $125,700

Total operating expenses $138,200

Income before income tax $31,000

Income tax expense $12,300

Net income $18,700

Beginning
of

End of Year Year

Accounts receivable (net) $14,800 $12,500

Inventories $38,100 $32,800

Prepaid expenses $6,000 $6,400

Accounts payable (merchandise creditors) $27,900 $24,300

Accrued expenses (operating expenses) $7,900 $8,400

Income tax payable $1,500 $1,500


Prepare the cash flows from operating activities section of the statement of cash flows, using the
direct method.

Answer:

Wholly Bagel Company

Statement of Cash Flows-Direct Method

For the Year Ended June 30

Cash Flows from operating activities :

Cash received from customers ………………………………………………………………………………… $262,700

Deduct: Cash paid for merchandise ……………………………………………………. $97,500

Cash paid for operating expenses ………………………………………….. $125,800

Cash paid for income tax ……………………………………………………….. $12,300 $235,600

Net Cash flow from operating activities ……………………………………………………………………… $27,100

Computation :

$265,000 - $2,300 = $262,700

$95,800 - $3,600 + $5,300 = $97,500

$125,700 - $400 + $500 = $125,800

Problem 16-1A
The comparative balance sheet of Winner’s Edge Sporting Goods, Inc. for December 31, 2006 and
2005, is as follows:

Dec. 31, 2006 Dec. 31, 2005

Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 464,100 $ 395,800
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,200 145,700
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395,000 367,900
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 120,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,000 0
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695,500
575,500
Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . . (194,000)
(168,000)
$1,683,800 $1,436,900

Liabilities and Stockholders’ Equity


Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . . .$ 228,700 $ 210,500
Accrued expenses (operating expenses) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500 21,400
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 10,000
Common stock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 60,000
Paid-in capital in excess of par—common stock . . . . . . . . . . . . . . . . . . . . .265,000 175,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,084,600 960,000
$1,683,800 $1,436,900

The following additional information was taken from the records:


a. The investments were sold for $132,000 cash.
b. Equipment and land were acquired for cash.
c. There were no disposals of equipment during the year.
d. The common stock was issued for cash.
e. There was a $180,600 credit to Retained Earnings for net income.
f. There was a $56,000 debit to Retained Earnings for cash dividends declared.

Instructions

Prepare a statement of cash flows, using the indirect method of presenting cash flows from
operating activities.

WINNER’S EDGE SPORTING GOODS, INC.


Statement of Cash Flows
For the Year Ended December 31, 2006
Cash flows from operating activities:
Net income, per income statement ................. $180,600
Add: Depreciation .............................................. $26,000
Increase in accounts payable ............................... 18,200 44,200
$224,800
Deduct: Increase in accounts receivable ...... $ 17,500
Increase in inventories .................... 27,100
Gain on sale of investments............ 12,000
Decrease in accrued expenses ....... 4,900
................................................ 61,500
Net cash flow from operating activities ............ $ 163,300
Cash flows from investing activities:
Cash received from sale of investments ......... $132,000
Less: Cash paid for purchase of land .................. $160,000
Cash paid for purchase of equipment ........ 120,000 280,000
Net cash flow used for investing
activities……………………………………… (148,000)

Cash flows from financing activities:


Cash received from sale of
common stock ........................................... $105,000
Less cash paid for dividends ................................ 52,000*
Net cash flow provided by financing
activities ..................................................... 53,000

Increase in cash ................................................... $224,800 - $148,000 + $53,000


.................................................................. $68,300
Cash at the beginning of the year ........................ 395,800
Cash at the end of the year .................................. $ 464,100

Problem 16 – 2A
JAWABAN

Medalist Athletic Apparel Co.


Statement of Cash Flows
For The Year Ended December 31, 2006

Cash flows from operating activities :


Net Income $ 61,500
Add :
Depreciation $ 17,900
Decrease in Account Receivable 4,200
Increase in Accounts Payable 1,700 23,800
$ 85,300
Deduct :
Increase in Merchandise Inventory $ 5,400
Increase in Prepaid Insurance 1,500 6,900
Net Cash flow from operating activities $ 78,400
Cash flows from investing activities :
Deduct :
Cash paid for equipment $ 47,500
Net cash flow used for investing activities (47,500)
Cash flows from financing activities :
Cash received from sale of common stock $ 104,000
Less :
Mortage note payable $ 95,000
Cash paid for dividen 48,000 143,000
Net cash flow from financing activities (39,000)
Decrease in Cash ($ 8,100)
Cash at the beginning year 45,300
Cash at the end of the year $ 37,200

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