Professional Documents
Culture Documents
Chapter 4 Solutions
Structure of the Balance Sheet and Statement of Cash Flows
Exercises
Exercises
E4-1. Determining collections on account
(AICPA adapted)
Cash receipts from sales include cash sales plus collections on account
computed as follows:
Cash sales
Beginning accounts receivable
Credit sales
Less: Ending accounts receivable
Total Cash receipts from sales
$ 200,000
400,000
3,000,000
__(485,000)
$3,115,000
Accounts Receivable
$ 400,000
X
Collections on account
3,000,000
$ 485,000
$ 200,000
_2,915,000
$3,115,000
$870,000
10,000
(110,000)
(510,000)
$260,000
Notice that cash dividends paid arises from the issuance of stock, a financing
activity, and thus is not included in cash flows from operations.
4-1
$ 40,000
105,000
12,000
$157,000
-0$240,000
240,000
(60,000)
$180,000
Accounts Payable
-0Payments on account (given) $200,000
X
$40,000
Beginning balance
Solve for: Purchases on account
Ending balance
Accounts Receivable
$0
$170,000 Collections on account (given)
234,000
X
X = $234,000 - $170,000
= $64,000 Ending balance of A/R.
E4-5. Determining cash disbursements
(AICPA adapted)
To answer this question, one needs to first determine the accrual basis
expenses and then (1) subtract from this figure expenses not paid in cash;
and (2) add amounts paid out in cash not recorded as accrual expenses.
Total accrual basis expenses:
Cost of goods sold = 70% of sales
= 70% $700,000
Selling, general, & administrative expense
Fixed portion
Variable portion
= 15% of sales
= 15% $700,000
Total accrual basis expenses
Subtract: Noncash expenses
Depreciation expense
Charge for uncollectible accounts (1% x $700,000)
Add: Increase in inventory which represents a net
noncash deduction in determining cost of goods sold
(see below)
Total cash disbursements for June
$490,000
71,000
_105,000
$666,000
(40,000)
(7,000)
__10,000
$629,000
need to add this inventory increase to the accrual basis expenses to get
cash basis expenses.
E4-6. Determining cash collections on account
(AICPA adapted)
Cash collected from customers can be determined by finding the change in
accounts receivable.
Beginning accounts receivable
Sales
Ending accounts receivable
Cash collections from customers for 2001
$ 21,600
438,000
__(30,400)
$429,200
Notice that no accounts were written off during the year so there was no
credit to accounts receivable for the $1,000 uncollectible accounts.
E4-7. Determining cash received from customers
(AICPA adapted)
Collections from customers equal sales revenue minus the increase in
accounts receivable, or $70,000 ($75,000 - $5,000).
E4-8. Determining cash from operations and reconciling with accrual net
income (CW)
Requirement 1:
Cash provided by operating activities:
Net income
$100,000
Noncash expenses:
Depreciation
_30,000
130,000
4-4
(110,000)
50,000
(15,000)
(150,000)
15,000
_(70,000)
(280,000)
($150,000)
Requirement 2:
Net income is $100,000, yet cash used by operating activities is ($150,000).
There are several reasons for the difference. Accounts receivable increased
by $110,000 (i.e., not all of the sales reported in the 2001 income statement
were collected in cash in 2001). Inventories decreased by $50,000 (i.e., part
of the cost of goods sold appearing in the 2001 income statement consists of
inventory that was paid for in an earlier year (i.e., 2000). Accounts payable
decreased by $150,000 (i.e., the firm paid cash for all of its 2001 purchases
of merchandise from suppliers, as well as $150,000 for purchases made in
2000). Other current liabilities decreased by $70,000 (i.e., the firm paid cash
for the various operating expenses it incurred in 2001 as well as $70,000 of
operating expenses that were incurred, but not paid in cash in 2000). The
changes in the prepaid expenses and the salaries payable accounts, along
with the depreciation expense, explain the remaining difference between the
firms net income and its cash flow from operating activities.
Note: This problem demonstrates that a firm can be profitable under the
accrual basis even though it does not generate positive cash flow from
operating activities.
E4-9. Determining cash from operations and reconciling with accrual net
income (CW)
Requirement 1:
Cash provided by operating activities:
Net income (loss)
($200,000)
Noncash expenses:
Depreciation
__50,000
(150,000)
4-5
140,000
(25,000)
(10,000)
120,000
(25,000)
__50,000
_250,000
$100,000
Requirement 2:
Net income (loss) is ($200,000), yet cash provided by operating activities is
a positive $100,000. There are several reasons for the difference. Accounts
receivable decreased by $140,000 (i.e., the firm collected all of 2001s sales
in cash as well as some of the sales made in 2000, but not collected in
2000). Inventories increased by $25,000 (i.e., the acquisition of merchandise
inventory in 2001 exceeded the amount reported in the income statement for
cost of goods sold). Accounts payable increased by $120,000 (i.e., the firm
did not pay for all of the merchandise purchases made from suppliers during
2001, thus the amount reported in the income statement for cost of goods
sold is an overstatement of cash payments for purchases in 2001). Interest
payable increased by $50,000 (i.e., the amount of interest paid in cash in
2001 is less than the amount of interest expense reported in the firms 2001
income statement). The changes in the other current assets and accrued
payables accounts, along with the depreciation expense explain the
remaining difference between the firms net income and its cash flow from
operating activities.
Note: This problem demonstrates that a firm can be unprofitable under the
accrual basis even though it generates positive cash flow from operating
activities.
4-6
4-7
$115,000
$115,000
-85,000
-90,000
$25,000
$30,000
$25,000
(10,000)
_15,000
$30,000
Requirement 2:
Since all sales are cash sales, sales revenue equals cash collected from
customers. Consequently, the adjustments made for changes in inventory and
accounts payable must convert the accrual accounting expense of cost of
goods sold to its cash flow counterpart, i.e., cash paid to suppliers. The
following table illustrates that adjusting for change in inventory converts cost
of goods sold to cost of purchases, and further adjusting for change in
accounts payable converts the cost of purchases to cash paid to suppliers.
4-8
P4-2. Explaining differences between cash flow from operations and accrual
net income
(CFA adapted)
Requirement 1:
Net income reflects (1) accrual accounting, (2) estimates of certain
expenses, (3) and management discretion in certain items.
Net income is not necessarily correlated to cash flows from operations
because of accrual accounting. The recording of revenues when earned, and
not received in the form of cash, and the recording of expenses in one period,
but actually paid in another, are examples of how accrual accounting can
result in net income figures that have no correlation to cash flows from
operations. Charges for noncash items (depreciation expense and
amortization of goodwill) will affect net income but have no effect on cash flows
from operations.
Estimates for items such as bad debts expense, depreciation expense and
the amortization of intangible assets are largely up to management to
determine. These items all lower net income but have no effect on cash flows
from operations. Examples include: restructuring of debt, gains and losses on
the sale of assets, discontinued operations, extraordinary items, and
changes in accounting principles. All of these items affect net income, but not
cash flows from operations.
Requirement 2:
The cash flow from operations (CFO) focuses on the liquidity aspect of
operations and not on measuring the profitability. If used as a measure of
performance, the CFO is less subject to distortion than the net income figure.
Analysts use the CFO as a check on the quality of earnings. The CFO then
is acting as a check on the reported net earnings figure but not as a
substitute for net earnings. Firms with high net earnings and low CFO may be
using income recognition techniques that are suspect. The ability for a firm to
4-9
4-10
4-11
$300,000
52,000
20,000
(15,000)
(5,000)
__(5,000)
$347,000
Investing activities
Sales of equipment
Purchase of equipment
Cash flows from investing
18,000
_(20,000)
($2,000)
Notice that the $30,000 increase in Notes payable is not included in cash
flows from investing activities. It is not a cash transaction if issued in
exchange for asset purchases. In the actual cash flow statement, an
exchange of notes payable for fixed assets may be included in the notes as a
significant noncash transaction. If the notes payable were issued in
exchange for cash, then it would be shown as a source of cash in the
financing activities section of the cash flow statement.
4-12
Ending balance
Accounts Receivable
$ 84,000
1,200,000
$5,000 Accounts written off
X
Cash collections on account
$ 78,000
Inventory
$150,000
$840,000
830,000
$140,000
Accounts Payable
$ 95,000
830,000
X
$ 98,000
Beginning balance
Purchase account
Ending balance
4-13
Requirement 3:
Cash Disbursed for general and administrative expenses in 2002 is computed
below.
For expenses incurred in 2001
Variable G&A ($110,000 X 50% in 2002)
Fixed G&A:
Less Depreciation
Bad debts
Amount paid in 2002
For expenses incurred in 2002
Variable G&A ($120,000 X 50% paid in 2002)
Fixed G&A:
Less Depreciation
Bad debts
Amount paid in 2002
Cash disbursement for G&A in 2002
4-14
$55,000
$100,000
(35,000)
(5,000)
60,000
X 20%
12,000
60,000
100,000
(35,000)
(5,000)
60,000
X 80%
48,000
$175,000
$16,670
+ 3,630
$19,428
(3,250)
(3,998)
$7,148
(2,788)
$200
+ 127
$20,300
(12,180)
$8,120
(4,360)
(2,256)
(399)
(169)
936
(327)
$609
Requirement 2:
Cash provided by operating activities:
Net income
Plus/minus noncash items:
+ Depreciation of equipment
+ Amortization of patents
+ Loss on sales of equipment
+ Increase in deferred taxes payable
$609
$2,256
399
169
__127
2,951
4-15
_(13,666)
($10,106)
Requirement 3:
Explanation for differences between accrual earnings and operating cash
flows:
Net income is $609, yet cash provided by operating activities is ($10,106).
There are several causes of the difference. Accounts receivable increased
during the year (i.e., not all 2001 sales were collected in cash in 2001),
inventories increased in 2001 (i.e., more inventory was purchased than is
reported as cost of goods sold in the income statement), accounts payable
decreased in 2001 (i.e., cash paid to suppliers covered 2001 purchases as
well as some purchases that were made, but not paid for, in 2000), and
accrued operating expenses decreased in 2001 (i.e., cash paid for operating
expenses in 2001 included all the expenses incurred in 2001 as well as
some that were incurred, but not paid, in 2000).
4-16
$72,481
_(4,603)
51,768
(7,400)
_3,146
$67,878
47,514
$20,364
9,409
__772
10,181
7,380
1,344
__117
1,461
__327
$1,669
4-17
671
__(87)
___584
$1,085
Requirement 2:
Cash provided by operating activities:
Net income
Plus/minus noncash items:
+ Depreciation of equipment
- Gain on sale of equipment
- Decrease in deferred taxes payable
Plus/minus changes in current
asset and liability accounts:
+ Decrease in accounts receivable
- Increase in inventory
+ Increase in accounts payable
+ Increase in accrued selling and
administrative expenses
+ Increase in accrued interest payable
Cash provided by operating activities
$1,085
7,380
(327)
___(87)
$8,051
4,603
(7,400)
3,146
72
___117
$1,238
$9,289
Requirement 3:
Explanation for difference between accrual and cash flow from operations:
Net income is $1,085, while cash provided by operating activities is much
larger $9,289. There are several causes of the difference. First, $7,380 of
depreciation expense reduced income, but it did not reduce cash flow, so it is
added back to net income to obtain cash from operations. Accounts
receivable decreased during the year (i.e., all 2001 sales were collected in
cash in 2001 as well as some sales made in 2000, but not collected in 2000),
accounts payable increased in 2001 (i.e., cash paid to suppliers in 2001 was
less than the cost of merchandise purchased and sold in 2001). These three
items are more than enough to offset the increase in the inventory account of
$7,400 (i.e., more inventory was acquired in 2001 than was sold to customers).
4-18
P4-9. Understanding the relation between operating cash flows and accrual
earnings
Requirement 1:
Sales1 ($28,000 + $3,000)
$31,000
Less:
Cost of goods sold2 ($13,000 + $2,000 - $3,000) (12,000)
Operating expenses3 ($9,000 - $2,000)
(7,000)
Depreciation expense
(4,000)
Income tax expense4 ($4,000 + $1,000)
(5,000)
Amortization expense
(1,000)
Gain on sale of equipment
2,000
Net income
$ 4,000
1
Requirement 2:
Net income
Plus/minus adjustments to reach cash flows
Operating activities:
(+) Depreciation
(+) Amortization of goodwill
(-) Gain on sale of equipment
(-) Increase in inventory
(+) Increase in accounts payable
(-) Increase in accounts receivable
(-) Decrease in accrued payables
(+) Increase in deferred income taxes payable
Cash flows from operating activities
$4,000
4,000
1,000
(2,000)
(3,000)
2,000
(3,000)
(2,000)
1,000
$2,000
4-19
Microsoft Corporation
Consolidated Balance Sheet
($ in Millions)
June 30
Year 2
Year 1
Assets
Current assets
Cash and short-term investments
Accounts receivable, net
Other
Total current assets
$ 13,927
1,460
502
15,889
1,505
4,703
260
$ 22,357
1,465
2,346
203
$ 14,387
4-20
759
359
915
2,888
809
5,730
8,966
980
427
10,373
721
336
466
1,418
669
3,610
980
980
8,025
7,622
16,627
$ 22,357
4,509
5,288
10,777
$ 14,387
4-21
4-22
Requirement 4:
Perhaps, the best answer to this question is to say that Microsoft's solid
balance sheets provide no obvious reason not to invest in the firm. However,
it would be unwise to base an investment recommendation solely on balance
sheet information. Moreover, other information about Microsoft should be
gathered and analyzed (see the next question).
Requirement 5:
At a minimum the following information should be obtained:
a) The firm's income statements for the past 4-5 years. These data would be
used to assess Microsoft's recent profitability and potential future
profitability.
b) The firm's cash flow statements for the past 4-5 years. These data would
be used to assess Microsoft's recent cash-flow generating ability and what
the cash flows were used for, as well as to help project the firm's potential
future cash flow generating ability.
c) Other information that the analyst might seek to obtain includes:
projections of future earnings and/or sales made by Microsoft
management,
projections about future demand for Microsoft's products from the firm or
from industry trade publication or other independent sources.
information about new products that Microsoft has in development and
the projected introduction dates for these products.
Other student responses are possible.
4-23
625
495
2,976
1,100
1,173
__347
6,716
390
2,779
_2,792
5,961
_(2,616)
3,345
__1,912
$11,973
$ 1,201
686
837
381
375
__583
4,063
Long-term debt
Other liabilities
Deferred taxes payable
Total liabilities
188
210
__243
4,704
Shareholders equity
Common stock and capital in excess of $ 1 par value
(authorized: 600,000,000 shares; issued and
outstanding: 251,547,000)
Retained earnings
Total shareholders equity
1,010
__6,259
__7,269
$11,973
4-24
b)
Land: $390
The following amounts, which are given in the problem, are needed to derive
the balance in the land account: Total assets of $11,973, total current assets
of $6,716, and the balances of all long-term asset accounts except land
(buildings and leasehold improvements $2,779, machinery and equipment
$2,792, accumulated depreciation ($2,616), and long-term receivables and
other Assets $1,912). Thus, the balance in the land account is:
Total assets = Current assets + Land + Buildings and leasehold improvements + Machinery and
equipment - Accumulated depreciation + Long-term receivables and other assets
4-25
d)
The given information includes total current liabilities as well as all of its
underlying components except for notes payable and short-term borrowings.
To solve for notes payable and short-term borrowings simply subtract all of
the given current liability components from total current liabilities. Specifically:
Notes payable and short-term borrowings = Total current liabilities - Accounts payable - Employee
compensation and benefits payable - Taxes payable - Deferred revenues Other accrued liabilities
The given information includes total current assets as well as all of its underlying components except for accounts and notes receivable. To solve for
accounts and notes receivable, simply subtract all of the given current asset
components from total current assets. Specifically:
Accounts and notes receivable = Total current assets - Cash and cash equivalents - Short-term
investments - Finished goods - Purchased parts and fabricated assemblies Other current assets
A ccounts and notes receivable = $6,716 - $625 - $495 - $1,100 - $1,173 - $347.
Accounts and notes receivable = $2,976.
4-26
Requirement 2:
One way to answer this question is to calculate the ratio of total Stockholders
equity to total assets. Specifically:
$7,269/$11,973 = 60.7%.
This suggests that Hewlett-Packard finances itself by relying slightly more on
investment by shareholders rather than creditors.
Of note is that what financing that is provided by creditors is primarily shortterm. Moreover, current liabilities are $4,063, while long-term liabilities are
only $641.
Requirement 3:
Hewlett-Packards largest current asset is accounts and notes receivable of
$2,976.
Requirement 4:
Hewlett-Packards largest current liability is notes and short-term borrowings
of $1,201.
Requirement 5:
Current ratio = Current assets/Current liabilities.
= $6,716/$4,063
= 1.65.
This means that Hewlett-Packard has $1.65 of current assets for each $1.00
of current liabilities. A simple rule of thumb for the current ratio is that it should
be greater than one. Thus, Hewlett-Packard appears to have adequate shortterm liquidity.
A better way to gauge the adequacy of a firms current ratio is to compare it to
prior years values for the firm, as well as with the values for other firms in the
industry.
Requirement 6:
Other current assets may consist of items such as prepaid expenses like
insurance, rent, advertising, etc.
4-27
P4-12. Analyzing the difference between operating cash flows and accrual earnings
Requirement 1:
(a)
Item:
Operating Activities
Sales
Cost of goods sold
Selling and admin. expenses
Interest expense
(b)
Non-cash Accruals
Revenue Earned or
Expenses Incurred
Accrual
Income
$6,438,507
- 5,102,977
- 855,809
- 34,436 12
Depreciation expense
- 104,614 15
- 135,500 16
Net income
- $20,145
(c)
Prepayments/
Buildups/Other
Adjustments
- $170,933
+ 53,099
+ 45,096
- 2,327 13
+ 104,614
- 5,568 17
(d)
(a+b+c)
Cash Received (+)
or Paid (-)
+ $6,418,362
- 5,220,811
5
6
+ 7,283 10
- 803,430 11
- 36,763 14
-- 141,068 18
205,171 19
+ 216,290 20
Investing activities
Capital expenditures
- 352,092 21
- 352,092
Financing activities
Sale of stock
Issuance of long-term debt
Dividends
Net financing cash flows
Net cash flow
+ 100,857 22
+ 89,352 23
__- 48,031 24
+142,178
$6,376
Beginning cash
Ending cash
Change in cash
$428
_6,804
$6,376
4-28
Notes:
1.
2.
The increase in the accounts receivable account (i.e., sales not collected
in cash during the year), $97,106 - $76,961.
3.
4.
5.
6.
7.
8.
9.
10. The decrease in the prepaid expenses account for the year
cash expense.
16. Accrual accounting income tax expense from the income statement.
17. The decrease in the income tax payable account, (i.e., $37,390 - $42,958).
18. Cash paid for income taxes during the year.
19. From the income statement.
20. By calculation.
4-29
Requirement 2:
Food Tiger
Statement of Cash Flows
For the Year Ended December 31, 2001
Operating cash flows
Net income
Plus
Depreciation
Increase in accounts payable
Increase in accrued expenses
Decrease in prepaid expenses
Minus
Increase in accounts receivable
Increase in inventory
Decrease in accrued interest payable
Decrease in income taxes payable
Net operating cash flows
Investing cash flows
Capital expenditures
Net investing cash flows
$205,171
104,614
53,099
45,096
_7,283
20,145
170,933
2,327
__5,568
105,478
(198,973)
$216,290
(352,092)
(352,092)
100,857
89,352
(48,031)
142,178
$6,376
$428
_6,804
$6,376
4-30
$ 3,566,040
$3,350,000
(100,500)
3,249,500
2,750,000
9,565,540
4,000,000
(1,774,500)
2,225,500
$11,791,040
Cash :
Cash balance at December 31, 2000
Add:
2001 net sales
Less: 12/31/01 accounts receivable
Accounts receivable at 12/31/00
Less: accounts charged off in 2001
$1,000,000
2,221,000
130,000
3,351,000
3,000,000
$1,050,000
1,800,000
2,590,040
5,440,040
$11,791,040
$4,386,040
$15,650,000
(3,350,000)
3,150,000
(50,000)
4-31
12,300,000
3,100,000
19,786,040
Less:
Purchases and freight-in
Other administrative, selling and general expenses
Less: 12/31/01 accounts payable and accrued liabilities
12/31/00 current liabilities
Interest expense
Fixed assets purchased in 2001($4,000,000 less $3,300,000)
Dividends paid (see statement of retained earnings)
Installment of 2001 tax paid prior to 12/31/01
Cash Balance at 12/31/01
2
Fixed assets:
Depreciation expense in 2001 (given)
Less: Depreciation on 12/31/00 fixed assets (13% of 3,300,000)
Depreciation on fixed asset additions in 2001
One-half years depreciation taken in year fixed assets
acquired. Full years depreciation = $45,500 X 2
Depreciation rate 13% - 2001 fixed asset additions ($91,000 .13)
Add: Fixed assets on 12/31/00
Fixed assets on 12/31/01
10,905,000
2,403,250
13,308,250
2,221,000
11,087,250
3,391,500
700,000
410,000
400,000
16,220,000
$ 3,566,040
474,500
(429,000)
$
45,500
$
91,000
700,000
3,300,000
$ 4,000,000
Accumulated depreciation:
Balance 12/31/00
Add: Depreciation expense in 2001 (given)
Accumulated depreciation
$ 1,300,000
474,500
$ 1,774,500
$ 5,000,000
20
$ 250,000
X 4
$ 1,000,000
4-32
530,000
(400,000)
$ 130,000
$ 4,000,000
(1,000,000)
$ 3,000,000
Capital stock:
Balance 12/31/00
Add: Stock dividend of 5%
Balance 12/31/01
$1,000,000
50,000
$1,050,000
$1,500,000
300,000
Balance 12/31/01
$1,800,000
Requirement 2:
Vanguard Corporation
Income Statement
Year ended December 31, 1999
Net sales (given)
Cost of sales
Beginning inventory (given)
Purchases & freight (given)
$15,650,000
$ 2,800,000
10,905,000
13,705,000
(2,750,000)
231,250
474,500
56,000
2,403,250
5% per year on notes adjusted for four 2001 quarterly payments of $250,000.
($62,500 + $59,375 + $56,250 + $53,125)
2
Balance at 12/31/01 (3% of $3,350,000)
$100,500
Balance at 12/31/00 (given)
$94,500
Amounts written off (given)
(50,000 )
44,500
Amount required
$ 56,000
4-33
10,955,000
4,695,000
3,165,000
1,530,000
( 530,000)
$ 1,000,000
Vanguard Corporation
Statement of Retained Earnings
Year Ended December 31, 1999
Beginning retained earnings (given)
Net earnings for the year (from Income Statement)
Less cash dividends paid:
1st quarter 1,000,000 shares @.10
2nd quarter 1,000,000 shares @.10
3rd quarter
1,050,000 shares @.10
4th quarter 1,050,000 shares @.10
Total cash dividends paid
$2,350,040
1,000,000
$3,350,040
$100,000
100,000
105,000
105,000
410,000
350,000
760,000
$2,590,040
4-34
$ 580,000
6,400,000
_(840,000)
$6,140,000
Requirement 2:
To find cash payments during 2001 on accounts payable to suppliers, we first
must compute purchases.
Beginning inventory
+ Purchases (plug figure)
- Ending inventory
= Cost of goods sold (given)
$ 420,000
5,240,000
_(660,000)
$5,000,000
(530,000)
5,240,000
__440,000
$5,150,000
4-35
Requirement 3:
Cash provided by operations can be seen by looking at the 2001 statement
of cash flows for Debbie Dress Shops.
Debbie Dress Shops
Statement of Cash Flows
Net income
Depreciation ($110,000 - $50,000)
Increase in accounts payable
Increase in accrued expenses
Increase in accounts receivable
Increase in inventory
Increase in prepaid expenses
Cash flows from operating activities
Purchase of land, buildings, and fixtures
Purchase of long-term investment
Cash flows from investing activities
$400,000
60,000
90,000
10,000
(260,000)
(240,000)
(50,000)
$10,000
(530,000)
(80,000)
($610,000)
300,000
500,000
(100,000)
$700,000
$100,000
** The amount listed for payment of cash dividends can be computed using T-account analysis
as follows:
4-36
Retained Earnings
$330,000
400,000
Dividends declared
Beginning
balance
Net income
$170,000
$560,000
Ending balance
Using the dividends declared amount we found above, we can find the actual
cash paid out for dividends by looking at the dividends payable account.
Dividends payable
Beginning balance
$170,000 Dividends declared
$100,000
$70,000 Ending balance
4-37
b)
Cash used by investing activities = Capital expenditures + Acquisition of Sun Electric, net of cash
acquired + Increase in other noncurrent assets - Disposal of property and equipment.
Cash provided by financing activities = Increase in notes payable - Payment of long -term debt +
Increase in long-term debt + Proceeds from stock option plans - Cash dividends paid.
Increase in cash and cash equivalents = Cash provided by operating activities - Cash used by
investing activities + Cash provided by financing activities - Effect of exchange rate changes.
Cash and cash equivalents at end of year = Cash and cash equivalents at beginning of
year + Increase in cash and cash equivalents.
4-38
($ in 000)
Operating Activities
Net earnings
Adjustments to reconcile net earnings to net
Cash provided by operating activities:
Depreciation
Amortization
Deferred income taxes
Gain on sale of assets
Changes in operating assets and liabilities:
(Increase) decrease in receivables
(Increase) decrease in inventories
Increase in prepaid expenses
Decrease in accounts payable
Increase in accruals, deposits, and other
long-term liabilities
Net cash provided by operating activities
$65,975
25,484
3,973
(6,005)
(250)
(5,458)
5,928
(4,829)
(8,202)
_23,330
99,946
Investing Activities
Capital expenditures
Acquisition of Sun Electric, net of cash acquired
Disposal of property and equipment
(Increase) decrease in other noncurrent assets
Net cash used in investing activities
(21,081)
(110,719)
3,379
__(3,609)
(132,030)
Financing Activities
Payment of long-term debt
Increase in long-term debt
Increase (decrease) in notes payable
Proceeds from stock option plans
Cash dividends paid
Net cash provided by (used in) financing activities
Effect of exchange rate changes
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(8,332)
78,650
52,503
4,940
(45,718)
82,043
_(1,916)
48,043
_10,930
$58,973
4-39
C4-3. Drop Zone Corp. (CW): Understanding the relation between successive
balance sheets and cash flow statement
Drop Zone Corporation
Balance Sheet
For the Year Ended December 31, 2001
Assets
Current assets
Cash
Accounts receivable, net
Inventory
Prepaid assets
Total current assets
2000 Amount
Plus/Minus
__Change__
2001
Amount
($7,410 + $2,565)
(6,270 + 3,990)
(13,395 - 1,425)
(1,995 - 855)
$9,975
10,260
11,970
__1,140
29,070
Land
Buildings and equipment
Less: Accumulated depreciation,
buildings and equipment
(27,930 - 8,550)
(194,655 + 39,615)
19,380
234,270
_(40,185 + 5,415)
__45,600
Total assets
$211,470
33,345
($11,400 - $2,850)
(3,135 + 1,140)
14,535
Long-term debt
$241,395
$8,550
___4,275
12,825
(19,950 + 16,245)
36,195
Stockholders equity
Common stock $10.00 par value
(18,525 + 5,000)
Paid-in capital
(31,920 + 12,825 - 5,000)
23,525
39,745
Retained earnings
149,910
__(18,240 + 2,565)
20,805
4-40
$211,470
$241,395
The details underlying the calculation of the 2001 amounts are as follows:
a) The ending cash account balance of $9,975 is equal to the beginning
balance of $7,410 plus the increase in cash of $2,565 reported in the cash
flow statement.
b) The ending balance in accounts receivable, net, of $10,260 is equal to
beginning balance of $6,270 plus the increase in the accounts balance of
$3,990 reported in the cash flow statement.
c) The ending inventory account balance of $11,970 is equal to the beginning
balance of $13,395 minus the decrease in the account balance of $1,425
reported in the cash flow statement.
d) The ending balance in the prepaid assets account of $1,140 is equal to
the beginning balance of $1,995 minus the decrease in the account
balance of $855 reported in the cash flow statement.
e) The ending balance in the land account of $19,380 is equal to the
beginning balance of $27,930 minus the cost of the land that was sold of
$8,550.
f) The ending balance in the buildings and equipment account of $234,270 is
equal to the beginning balance of $194,655 plus the acquisitions of
$39,615.
g) The ending balance in the accumulated depreciation, buildings and
equipment account of $45,600 is the beginning balance of $40,185 plus the
depreciation of $5,415 for the current year.
h) The ending balance in accounts payable of $8,550 is equal to the
beginning balance of $11,400 minus the decrease in the account balance
of $2,850.
i) The ending balance in the accrued payables account of $4,275 is equal to
the beginning balance of $3,135 plus the increase in the account balance
of $1,140 reported in the cash flow statement.
j) The ending balance in long-term debt account of $36,195 is the beginning
balance of $19,950 plus the amount of long-term debt issued during the
year of $16,245.
k) The ending balance in the common stock account of $23,525 is equal to
the beginning balance of $18,525 plus the par value of the shares issued
during the year of $5,000.
4-41
4-42
2000
Amount
($39,825 + $14,175)
(147,825 - 73,575)
(27,000 - 6,750)
(6,750 + 6,750)
$54,000
74,250
20,250
__13,500
221,400
162,000
(202,500 - 67,500)
(202,500 - 202,500)
(40,500 + 13,500)
135,000
0
54,000
13,500
(40,500 + 13,500)
__54,000
$680,400
$391,500
($62,100 + $22,275)
(20,250 - 13,500)
(20,250 + 10,125)
$84,375
6,750
__30,375
102,600
121,500
(148,500 + 6,750)
(158,625 - 158,625)
155,250
0
(23,500 - 7,500)
(233,000 - 168,000)
(14,175 - 20,925 + 47,250)
16,000
65,000
40,500
(0 + 6,750)
___6,750
$680,400
$391,500
4-43
The details underlying the calculation of the 2000 amounts are as follows (all
amounts are obtained by simply working backwards from the ending balances):
a) The beginning balance in the cash account of $54,000 is equal to the
ending balance of $39,825 plus the decrease in cash reported in the cash
flow statement of $14,175.
b) The beginning balance in accounts receivable, net, of $74,250 is equal to
the ending balance $147,825 minus the increase in the account balance of
$73,575 during 2001.
c) The beginning balance in the inventory account of $20,250 is equal to the
ending balance of $27,000 minus the increase in the account balance of
$6,750.
d) The beginning balance in the prepaid expenses account of $13,500 is
equal to the ending balance of $6,750 plus the decrease in the account
balance during the year of $6,750.
e) The beginning balance in the land account of $135,000 is equal to the
ending balance of $202,500 minus the cash paid to acquire land during
2001 of $67,500.
f) The beginning balance in the buildings account of $0.0 is equal to the
ending balance of $202,500 minus the cost of the buildings acquired
during the year of $202,500.
g) The beginning balance in the equipment account of $54,000 is equal to the
ending balance of $40,500 plus the cost of the equipment sold during the
year of $13,500.
h) The beginning balance in the accumulated depreciation, buildings and
equipment account of $13,500 is equal to the ending balance of $27,000
minus the depreciation expense for the year of $16,875 plus the
accumulated depreciation on the equipment that was sold in 2001 of
$3,375.
i) The beginning balance in the patents, net account of $54,000 is equal to
the ending balance of $40,500 plus the amortization expense taken in 2001
of $13,500.
j) The beginning balance in accounts payable of $84,375 is equal to the
ending balance of $62,100 plus the decrease in the account balance of
$22,275.
4-44
4-45
4-46
d) Cash dividends:
Cash used by financing activities of ($537.7) is obtained from (c). Its
components (except cash dividends) are all given in the case: Issuance of
common stock $17.7, purchase of treasury stock $83.6, borrowings of notes
payable $182.1, issuance of long-term debt $4.3, other financing activities
$1.1, reduction of long-term debt $126.0, and reduction of notes payable
$274.0. Cash dividends may be derived as follows:
Cash used by financing activities = Issuance of common stock - Purchase of treasury stock +
Borrowings of notes payable + Issuance of long-term debt + Other financing activities - Reduction of
long-term debt - Reduction of notes payable - Cash dividends.
4-47
Requirement 3:
This is a trick question. Depreciation is not a source of cash (i.e., reporting
more depreciation does not increase cash flow). Depreciation is a noncash
expense which needs to be added back to net income to derive Cash
Provided by Operations when a firm uses the indirect method to report
operating cash flows in its cash statement.
Requirement 4:
There are two primary reasons for the difference. They are that Kelloggs
financing activities (e.g., cash dividends, reduction of notes payable, etc.)
used $537.7 million of cash and that the firms investing activities (e.g.,
additions to properties) used $319.9 million of cash. Together these outflows
total $857.6 which, when subtracted from the $934.4 cash inflow from
operations, leaves an increase in cash of about $77.5.
4-48
$606.0
222.8
(5.4)
16.8
10.2
(41.4)
(22.9)
42.7
105.6
934.4
Investing Activities
Additions to properties
Property disposals
Other acquisitions
Cash used by investing activities
(333.5)
25.2
_(11.6)
(319.9)
Financing Activities
Borrowings of notes payable
Reduction of notes payable
Issuance of long-term debt
Reduction of long-term debt
Issuance of common stock
Purchase of treasury stock
Cash dividends
Other
Cash used by financing activities
182.1
(274.0)
4.3
(126.0)
17.7
(83.6)
(259.3)
__1.1
(537.7)
_0.7
77.5
100.5
$178.0
4-49