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CHAPTER 21
QUESTIONS
The retained earnings account most often
decreases when a company pays a dividend. Another common reason for a decrease in retained earnings is when a company sustains a loss.

1. The statement of cash flows reconciles the
difference between the beginning and ending cash balance for a period. The sum of
cash flow from operations, cash flow from
investing, and cash flow from financing
should equal the change in the cash balance for the period being examined.

10. Because the indirect method begins with
the net income figure, items included in net
income that did not involve the flow of cash
must be eliminated. Because depreciation
expense (which does not involve cash
flows this period) was subtracted to arrive
at net income, it must be added back when
computing cash flow from operations.

2. Accounts Receivable most often increases
when a credit sale is recorded. Accounts
Receivable most often decreases when a
credit customer pays on account.
3. Inventory most often increases when items
to be resold are purchased. Inventory most
often decreases when items to be resold
are in fact sold.

11. Because the indirect method begins with
the net income figure, items included in net
income that do not relate to operating activities must be eliminated. Since the sale
of equipment is an investing activity, any effects of a gain or loss that have been included in net income must be removed.
Since a gain is added as part of net income, it must be subtracted when computing cash flows from operations. Since a
loss is subtracted as part of net income, it
must be added back when computing cash
flows from operations.

4. Accounts Payable most often increases
when goods or services are purchased but
not paid for at the time of purchase. Accounts Payable most often decreases when
goods or services previously purchased on
account are paid for.
5. The equipment account most often increases when equipment is purchased. The
equipment account most often decreases
when equipment that has been used in the
business is subsequently sold. Note: When
equipment is used, that use is recorded in
the accumulated depreciation account.

12. Because the indirect method begins with
the net income figure, accrual items included in net income that do not accurately
reflect cash flows must be adjusted. Since
the computation of net income begins with
the sales figure, that number must be adjusted to reflect the fact that more or less
cash may have been collected than was
reported as sales on the income statement.
An ending balance in the accounts receivable account greater than the balance at
the beginning of the period indicates that

cash collected during the period was less
than sales made during the period. Thus,
the net income figure (which includes the
sales number) must be adjusted down to
reflect the cash collected during the period.

6. The accumulated depreciation account
most often increases when equipment is
used and depreciation expense is recorded. The accumulated depreciation account most often decreases when equipment that has been used in the business is
subsequently sold.
7. Long-Term Debt most often increases
when new debt is incurred. Long-Term
Debt most often decreases when debt is
repaid.
8. The capital stock account most often increases when new stock is sold. The capital stock account most often decreases
when stock previously issued is repurchased and retired by the issuing company.

13. Because the indirect method begins with
the net income figure, accrual items included in net income that do not accurately
reflect cash flows must be adjusted. Since
the computation of net income includes

9. The retained earnings account most often
increases when a company is profitable.

931


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932


Chapter 21

cost of goods sold (which does not necessarily represent the amount paid for inventory), the number must be adjusted to reflect the fact that more or less cash may
have been paid for inventory than was reported as cost of goods sold on the income
statement. An ending balance in the inventory account that is less than the balance at
the beginning of the period indicates that
more inventory was sold during the period
than was purchased. Thus, the net income
figure (which includes cost of goods sold)
must be increased to reflect the fact that
less inventory was purchased (thereby resulting in a lower cash outflow) than was
sold during the period.
14. The accounts payable account goes down
over a period because more is paid on account than is purchased on account. The
income statement indirectly reflects the
amount of goods and services purchased
during a period. If the amount paid is greater than the amount purchased, then net income must be reduced for the difference
between the beginning and ending balance
in the account.
15. If the indirect method is used to report cash
flow from operations, then a company must
also disclose the amount of cash paid for
taxes for the period as well as the amount
of cash paid for interest.

16. A reconciliation schedule includes all items
that reconcile net income to cash from operations. A reconciliation schedule is required when the direct method is used to
report cash flows from operations.
17. The international cash flow standard treats

interest paid, dividends paid, and income
taxes paid with a little more flexibility than is
the case with U.S. GAAP. Interest paid may
be disclosed either as an operating activity
or as a financing activity. The same is true
for dividends paid. In the case of income
taxes paid, it is to be included as an operating activity unless the income taxes can be
specifically identified with a financing or an
investing activity in which case those income taxes are classified accordingly.
Cash received for interest and dividends
can be classified as either an operating or
investing activity.
18. The eight categories specified in FRS 1
are:
a. Operating activities
b. Returns on investments and servicing
of finance
c. Taxation
d. Capital expenditure and financial investment
e. Acquisitions and disposals
f. Equity dividends paid
g. Management of liquid resources
h. Financing


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Chapter 21

933


PRACTICE EXERCISES
PRACTICE 21–1 CASH COLLECTED FROM CUSTOMERS
Beginning accounts receivable .......................................
+ Sales................................................................................
= Cash available for collection ........................................
– Ending accounts receivable balance ...........................
= Cash collected from customers ...................................

$

99,700
995,000
$1,094,700
95,000
$ 999,700

PRACTICE 21–2 AMOUNT OF INVENTORY PURCHASES
Beginning inventory
+ Purchases
= Goods available for sale
– Ending inventory
= Cost of goods sold
$43,100 + Purchases – $47,800 = $451,000
Purchases = $455,700
PRACTICE 21–3 CASH PAID FOR INVENTORY
Beginning accounts payable ...........................................
+ Purchases on account (from Practice 21–2) ...............
= Amount owed during the year ......................................
– Ending accounts payable..............................................
= Amount paid for inventory ............................................


$ 72,300
455,700
$ 528,000
68,600
$ 459,400

PRACTICE 21–4 CASH PAID FOR EXPENSES
Beginning balance in prepaid expenses ........................
+ Cash paid for other operating expenses .....................
– Other operating expenses used ...................................
= Ending balance in prepaid expenses...........................
Cash paid for other operating expenses = $139,000
PRACTICE 21–5 DEPRECIATION EXPENSE
$0—Cash is not paid for depreciation.

$ 14,100
?
(140,600)
$ 12,500


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Chapter 21

PRACTICE 21–6 CASH PAID FOR EQUIPMENT
Equipment, beginning balance ........................................
+ Cost of equipment purchased ......................................

– Original cost of equipment sold ...................................
= Equipment, ending balance ..........................................

$ 928,500
?
(106,000)
$ 880,000

Equipment purchased during the year ...........................

$ 57,500

PRACTICE 21–7 PROCEEDS FROM SALE OF EQUIPMENT
Original cost of equipment...............................................
– Accumulated depreciation ............................................
= Book value of equipment sold......................................

$ 61,000
(17,500)
$ 43,500

Book value of equipment sold .........................................
+ Gain on sale of equipment ............................................
= Proceeds from sale of equipment ................................

$ 43,500
8,500
$ 52,000

PRACTICE 21–8 LOAN REPAYMENT

Long-term debt, beginning balance ................................
+ Additional debt issued during the year .......................
– Debt repaid during the year ..........................................
= Long-term debt, ending balance ..................................

$ 235,400
172,000
?
$ 365,000

Debt repaid during the year .............................................

$ 42,400

PRACTICE 21–9 CASH PAID FOR DIVIDENDS
Retained earnings, beginning balance ...........................
+ Net income......................................................................
– Dividends ........................................................................
= Retained earnings, ending balance..............................

$ 955,500
176,000
?
$1,070,500

Dividends paid during the year........................................

$

61,000



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Chapter 21

935

PRACTICE 21–10 STATEMENT OF CASH FLOWS IN THE UNITED KINGDOM
1.

U.S. approach
(e)
(a)
(c)
(h)

2.

Cash collected from customers ..............................
Cash paid to purchase inventory............................
Cash paid for interest...............................................
Cash paid for income taxes.....................................
Net cash flow from operating activities..................

$10,000
(7,800)
(450)
(1,320)
$ 430


U.K. approach
(e)
(a)

Cash collected from customers ..............................
Cash paid to purchase inventory............................
Net cash flow from operating activities..................

$10,000
(7,800)
$ 2,200

Under the U.K. approach, cash paid for interest and cash paid for income taxes are
not shown as part of operating activities.


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Chapter 21

EXERCISES
21–11.
Accounts receivable, beginning balance ................................
+ Sales ........................................................................................
– Cash collected from customers ............................................
= Accounts receivable, ending balance ..................................

$


?
457,200
(415,000)
$ 77,500

Accounts receivable, beginning balance ................................

$ 35,300

21–12.
Net income .................................................................................
+ Depreciation expense ............................................................
+ Inventory decrease.................................................................
– Accounts receivable increase ...............................................
– Accounts payable decrease ..................................................
= Cash flow from operations ....................................................

$

?
78,000
41,000
(23,000)
(11,000)
$ 322,000

Net income .................................................................................

$ 237,000


21–13.
The following table may be helpful in understanding the adjustments made:
Income Statement
Sales ..........................................
Cost of goods sold...................

947,900
(404,600)

Depreciation expense ..............
Other operating expenses.......
Gain on sale of equipment ......
Net income ................................

(96,000)
(140,600)
3,000
309,700

Adjustments
2,100
(2,100)
(3,300)
96,000
1,600
(3,000)

Cash Flows
from Operations
950,000

(410,000)
0
(139,000)
0
401,000

Sales—Sales are lower than cash collected from customers because accounts receivable decreased during the period. More cash was collected ($2,100 more) than
was reported as sales on the income statement.
Cost of goods sold—Because accounts payable decreased over the period, more
was paid for inventory ($3,300 more) than was purchased during the period. Because
inventory increased for the period, more inventory was purchased ($2,100 more) than
was sold during the year. The net result of these two adjustments is that $5,400 more
in inventory was paid for during the period than was sold during the period.


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Chapter 21

937

21–13. (Concluded)
Depreciation expense—Since depreciation does not involve a cash flow this period, it
is not included on the statement of cash flows. However, it is included on the income
statement as an expense.
Other operating expenses—Because prepaid expenses decreased during the period,
more of these prepaid expenses were used during the period ($1,600 more) than were
paid for during the period.
Gain on sale of equipment—The sale of equipment is an investing activity. All cash
flows relating to the purchase and sale of equipment will be disclosed in that section
of the statement of cash flows. Because the gain is included on the income statement, using the indirect method means the gain must be subtracted (since it was

originally added).
The income statement would be as follows:
Sales ...........................................................................................
Cost of goods sold ....................................................................
Depreciation expense ...............................................................
Gain on sale of equipment........................................................
Other operating expenses ........................................................
Net income .................................................................................

$ 947,900
(404,600)
(96,000)
3,000
(140,600)
$ 309,700

21–14.
The following table may be helpful in understanding the adjustments made:
Income Statement
Revenues ..................................
Cost of goods sold...................

740,000
(360,000)

Other expenses ........................
Depreciation expense ..............
Loss on sale of equipment......
Net income ................................


(104,000)
(87,000)
(9,000)
180,000

Adjustments
3,600
8,100
(8,400)
0
87,000
9,000

Cash Flows
from Operations
743,600
(360,300)
(104,000)
0
0
279,300

Sales—Sales are lower than cash collected from customers because accounts receivable decreased during the period. More cash was collected ($3,600 more) than
was reported as sales on the income statement.
Cost of goods sold—Because accounts payable decreased over the period, more
was paid for inventory ($8,400 more) than was purchased during the period. Because
inventory decreased for the period, more inventory was sold ($8,100 more) than was
purchased during the year. The net result of these two adjustments is that $300 more
in inventory was paid for during the period than was sold during the period.



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938

Chapter 21

21–14. (Concluded)
Depreciation expense—Since depreciation does not involve a cash flow this period, it
is not included on the statement of cash flows. However, it is included on the income
statement as an expense and under the indirect method an adjustment would be
made.
Other operating expenses—Since the balance in Prepaid Operating Expenses and/or
Operating Expenses Payable did not change during the period (if the balance had
changed, the figures would have been given), it is safe to assume that the amount
used and the amount paid during the period are the same.
Loss on sale of equipment—The sale of equipment is an investing activity. All cash
flows relating to the purchase and sale of equipment will be disclosed in that section
of the statement of cash flows. Because the loss is included on the income statement, using the indirect method means the loss must be added back (since it was
originally subtracted).
The statement of cash flows (using the indirect method) would be as follows:
Net income .................................................................................
Plus depreciation.......................................................................
Plus loss on sale of equipment................................................
Plus decrease in accounts receivable.....................................
Plus decrease in inventory .......................................................
Less decrease in accounts payable ........................................
Cash flows from operating activities.......................................

$180,000
87,000

9,000
3,600
8,100
(8,400)
$279,300

The statement of cash flows (using the direct method) would be as follows:
Cash collected from customers ...............................................
Cash paid for inventory ............................................................
Cash paid for other expenses ..................................................
Cash flows from operating activities.......................................

$ 743,600
(360,300)
(104,000)
$ 279,300


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Chapter 21

939

21–15.
Sunnyvale Corporation
Statement of Cash Flows (Indirect method)
For the Year Ended December 31, 2013
Cash flows from operating activities:
Net income ...........................................................................
Adjustments:

Depreciation expense ($240,000 + $60,000) ..........
Gain on sale of equipment ......................................
Increase in accounts receivable .............................
Increase in merchandise inventory ........................
Decrease in prepaid insurance ...............................
Decrease in accounts payable ................................
Decrease in salaries payable ..................................
Net cash provided by operating activities...................
Cash flows from investing activities:
Sale of equipment .......................................................
Purchase of buildings and equipment......................
Net cash used in investing activities ........................
Cash flows from financing activities:
Issuance of long-term note ........................................
Payment of dividends .................................................
Payment of note payable at bank ..............................
Net cash provided by financing activities ................
Net decrease in cash and cash equivalents .....................
Cash and cash equivalents at beginning of year .............
Cash and cash equivalents at end of year ........................

$ 280,000
300,000
(3,000)
(15,000)
(96,000)
1,500
(331,500)
(30,000)
$


106,000

$ 18,000
(1,240,500)
(1,222,500)
$ 1,500,000
(90,000)
(450,000)
960,000
$ (156,500)
675,000
$ 518,500


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940

Chapter 21

21–16.
Germaine Company
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2013
(Dollars in thousands)
Cash flows from operating activities:
Net income................................................................................
Adjustments:
Depreciation expense ........................................................
Decrease in accounts receivable......................................

Decrease in inventory ........................................................
Increase in prepaid general expenses .............................
Increase in accounts payable ...........................................
Increase in interest payable ..............................................
Increase in income taxes payable ....................................
Net cash provided by operating activities.............................
Cash flows from investing activities:
Sale of plant assets .................................................................
Purchase of plant assets.........................................................
Net cash used in investing activities .....................................
Cash flows from financing activities:
Issuance of bonds payable .....................................................
Issuance of common stock.....................................................
Payment of cash dividends.....................................................
Net cash used in financing activities .....................................
Net increase in cash......................................................................
Cash at beginning of year.............................................................
Cash at end of year........................................................................

$ 38
$ 55
20
20
(9)
25
3
3

117
$ 155


$ 180
(315) (a)
(135)
$

8 (b)
8 (c)
(30)
(14)
$ 6
16
$ 22

COMPUTATIONS:
(a)

Beginning plant assets.........................................................
Less: Plant assets sold ........................................................
Ending plant assets ..............................................................
Difference (plant assets purchased) ...................................

$ 1,000
290
$ 710
1,025
$ 315

(b)


Beginning bonds payable ....................................................
Ending bonds payable..........................................................
Increase (bonds payable issued).........................................

$

97
105
$
8

(c)

Beginning common stock ....................................................
Ending common stock..........................................................
Increase (common stock issued) ........................................

$ 354
362
$
8


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941

21–16. (Concluded)
The following table also can be used in computing cash from operating activities:

Income Statement
Sales ..........................................
Cost of goods sold...................

1,450
(990)

Depreciation expense ..............
General expenses ....................
Interest expense.......................
Income tax expense .................
Net income ................................

(55)
(340)
(12)
(15)
38

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Decrease in accounts receivable
Decrease in inventory
Increase in accounts payable

Amount of reported depreciation expense
Increase in prepaid general expenses
Increase in interest payable
Increase in income taxes payable

Adjustments
(a) 20
(b) 20
(c) 25
(d) 55
(e) (9)
(f)
3
(g) 3

Cash Flows
from Operations
1,470
(945)
0
(349)
(9)
(12)
155


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Chapter 21


21–17.
Germaine Company
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2013
(Dollars in thousands)
Cash flows from operating activities:
Cash receipts from customers ...............................................
Cash payments for:
Purchases of inventory......................................................
General expenses...............................................................
Interest ................................................................................
Income tax...........................................................................
Net cash provided by operating activities.............................
Cash flows from investing activities:
Sale of plant assets .................................................................
Purchase of plant assets.........................................................
Net cash used in investing activities .....................................
Cash flows from financing activities:
Issuance of bonds payable .....................................................
Issuance of common stock.....................................................
Payment of cash dividends.....................................................
Net cash used in financing activities .....................................
Net increase in cash......................................................................
Cash at beginning of year.............................................................
Cash at end of year........................................................................
COMPUTATIONS:
(a) Sales..........................................................................................
+ Beginning accounts receivable ........................................
– Ending accounts receivable..............................................

= Cash receipts from customers .........................................
(b) Cost of goods sold ..................................................................
– Beginning inventory...........................................................
+ Ending inventory ................................................................
= Inventory purchases ..........................................................
+ Beginning accounts payable.............................................
– Ending accounts payable ..................................................
= Cash payments for inventory purchases.........................
(c) General expenses ....................................................................
– Beginning prepaid general expenses ..............................
+ Ending prepaid general expenses ....................................
= Cash payments for general expenses..............................

$ 1,470 (a)
$(945)
(349)
(9)
(12)

(b)
(c)
(d)
(e) (1,315)
$ 155

$ 180
(315)
(135)
$


8
8
(30)
$
$

(14)
6
16
22

$ 1,450
245
(225)
$ 1,470
$ 990
(125)
105
$ 970
45
(70)
$ 945
$ 340
(12)
21
$ 349


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943

21–17. (Concluded)
(d) Interest expense.......................................................................
+ Beginning interest payable ...............................................
– Ending interest payable.....................................................
= Cash payments for interest expense ...............................

$ 12
12
(15)
$ 9

(e) Income tax expense.................................................................
+ Beginning income taxes payable ....................................
– Ending income taxes payable ..........................................
= Cash payments for income tax .........................................

$ 15
77
(80)
$ 12

The following table also can be used in computing cash from operating activities.

Income Statement
Sales ..........................................
Cost of goods sold...................


1,450
(990)

Depreciation expense ..............
General expenses ....................
Interest expense.......................
Income tax expense .................
Net income ................................

(55)
(340)
(12)
(15)
38

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Decrease in accounts receivable
Decrease in inventory
Increase in accounts payable
Amount of reported depreciation expense
Increase in prepaid general expenses
Increase in interest payable
Increase in income taxes payable


Adjustments
(a) 20
(b) 20
(c) 25
(d) 55
(e) (9)
(f)
3
(g) 3

Cash Flows
from Operations
1,470
(945)
0
(349)
(9)
(12)
155


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Chapter 21

PROBLEMS
21–18.
1. Cash flows from operating activities:

Cash receipts from customers ........................................
$334,000 (a)
Cash payments for:
Inventory ......................................................................... $183,500 (b)
Selling and administrative expenses ...........................
51,700 (c)
Interest ............................................................................
4,400 (d)
Income taxes...................................................................
17,550 (e) 257,150
Net cash provided by operating activities......................
$ 76,850
COMPUTATIONS:
(a) Cash receipts from customers:
Net sales revenue..................................................................................
Less: Increase in accounts receivable ...............................................
Total cash received from customers ..................................................

$340,000
(6,000)
$334,000

(b) Cash payments for inventory:
Cost of goods sold................................................................................
Add: Increase in inventory ...................................................................
Less: Increase in accounts payable....................................................
Total cash paid for inventory ...............................................................

$188,000
2,000

(6,500)
$183,500

(c) Cash payments for selling and administrative expenses:
Selling and administrative expenses ..................................................
Less: Decrease in prepaid expenses ..................................................
Total cash paid for selling and administrative expenses .................

$ 52,600
(900)
$ 51,700

(d) Cash payments for interest expense:
Interest expense....................................................................................
Add: Decrease in interest payable ......................................................
Total cash paid for interest expense...................................................

$

(e) Cash payments for income taxes:
Income taxes .........................................................................................
Less: Increase in income taxes payable.............................................
Total cash paid for income taxes ........................................................

$ 21,850
(4,300)
$ 17,550

$


3,200
1,200
4,400

2. According to FASB ASC Topic 230, dividends paid have no impact on net cash flow
from operations. Dividends affect retained earnings, not net income. The cash paid
for dividends is shown as a financing activity, not as an operating activity.


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945

21–19.
Riker Company
Partial Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2013
Cash flows from operating activities:
Cash receipts from customers ...........................................
Cash payments for:
Inventory ............................................................................
Operating expenses..........................................................
Interest ...............................................................................
Income taxes .....................................................................
Net cash flow provided by operating activities ................

$ 803,750 (a)
$489,490 (b)
98,800 (c)

22,500 (d)
37,930 (e)

648,720
$155,030

COMPUTATIONS:
(a) Sales.......................................................................................................
– Increase in accounts receivable.......................................................
= Cash receipts from customers .........................................................

$ 812,350
(8,600)
$ 803,750

(b) Cost of goods sold ...............................................................................
– Decrease in inventory........................................................................
+ Decrease in accounts payable (80%)...............................................
= Cash payments for inventory ...........................................................

$ 500,000
(12,430)
1,920
$ 489,490

(c) Operating expenses..............................................................................
+ Decrease in accounts payable (20%)...............................................
– Decrease in prepaid operating expenses........................................
= Cash payments for operating expenses..........................................


$ 100,000
480
(1,680)
$ 98,800

(d) Interest expense....................................................................................
– Increase in interest payable..............................................................
= Cash payments for interest ..............................................................

$ 23,000
(500)
$ 22,500

(e) Income tax expense..............................................................................
– Increase in income taxes payable ....................................................
= Cash payments for income taxes.....................................................

$ 40,430
(2,500)
$ 37,930


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Chapter 21

21–20.
Troi Company
Income Statement

For the Year Ended December 31, 2013
Sales ........................................................................................
Cost of goods sold .................................................................
Gross profit .............................................................................
Operating expenses:
General expenses...............................................................
Wages expense ..................................................................
Amortization expense ........................................................
Depreciation expense ........................................................
Operating income ...................................................................
Other revenue and expenses:
Interest expense .................................................................
Loss on retirement of bonds payable ..............................
Gain on sale of property, plant, and equipment..............
Income before income taxes .................................................
Income tax expense................................................................
Net income ..............................................................................

$692,300 (a)
307,000 (b)
$385,300
$101,300 (c)
151,700 (d)
4,000 (e)
27,600 (f)

$ (9,800) (g)
(3,000) (h)
5,200 (i)


284,600
$100,700

(7,600)
$ 93,100
24,300 (j)
$ 68,800

COMPUTATIONS:
(a) Cash collected from customers .............................................................
+ Increase in accounts receivable..........................................................
= Sales.......................................................................................................

$ 685,300
7,000
$ 692,300

(b) Cash payments for inventory .................................................................
+ Increase in accounts payable ..............................................................
+ Decrease in inventory...........................................................................
= Cost of goods sold ...............................................................................

$ 300,000
3,000
4,000
$ 307,000

(c) Cash payments for general expenses ...................................................
– Increase in prepaid general expenses................................................
= General expenses .................................................................................


$ 102,000
700
$ 101,300

(d) Cash payments for wages.......................................................................
+ Increase in wages payable...................................................................
= Wages expense .....................................................................................

$ 150,000
1,700
$ 151,700

(e) Beginning patent......................................................................................
– Ending patent ........................................................................................
= Amortization expense...........................................................................

$ 40,000
36,000
$ 4,000

(f) Beginning accumulated depreciation ....................................................
– Accumulated depreciation associated with asset sale.....................
= Total .......................................................................................................
– Ending accumulated depreciation ......................................................
= Depreciation expense...........................................................................

$ 128,900
53,000
$ 75,900

103,500
$ 27,600


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Chapter 21

947

21–20. (Concluded)
(g) Cash payments for interest expense ........................................................ $ 11,000
– Decrease in interest payable ..................................................................
1,200
= Interest expense....................................................................................... $
9,800
(h) Decrease in bonds payable........................................................................ $ 20,000
– Cash used to retire bonds payable ........................................................
23,000
= Loss on retirement................................................................................... $ (3,000)
(i) Book value of property, plant, and equipment sold ................................ $ 22,000
– Sales price ................................................................................................
27,200
= Gain on sale.............................................................................................. $
5,200
(j) Cash payments for income tax expense .................................................. $ 23,900
+ Increase in income taxes payable..........................................................
400
= Income tax expense..................................................................................... $ 24,300
21–21.


Cash ......................................
Accounts receivable............
Inventory...............................
Buildings and equipment....
Accumulated depreciation..

Terra Company
Balance Sheet
December 31
$ 36,000
Accounts payable.................
8,000
Expenses payable ................
7,300
Interest payable ....................
154,000
Long-term debt .....................
(12,000) Total liabilities ......................
Common stock .....................
Retained earnings ................
Total stockholders’ equity

6,300
4,000
1,400
88,000
$ 99,700
$100,000
(6,400)
$ 93,600


Total assets ..........................

$193,300

Total liabilities and
stockholders’ equity ..........

$193,300

$

Cash—Since this is the beginning of the company’s first year, the increase in cash
also represents the ending balance in the cash account.
Accounts receivable—Sales for the year less cash collections; $140,000 – $132,000 =
$8,000.
Inventory—Purchases for the year less cost of goods sold; $93,300 – $86,000 =
$7,300.
Buildings and equipment—Amount purchased during the year less the original cost
of any equipment sold during the year; $175,000 – $21,000 = $154,000.
Accumulated depreciation—Amount expensed during the year less accumulated depreciation associated with equipment sold during the year; $16,000 – $4,000 =
$12,000.


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948

Chapter 21

21–21. (Concluded)

Accounts payable—Amount purchased on account during the year less amounts
paid on account; $93,300 – $87,000 = $6,300.
Expenses payable—Amount of other expenses incurred during the year less amount
paid for those expenses; $34,000 – $30,000 = $4,000.
Interest payable—Amount of interest expense incurred during the year less the
amount paid for interest during the year; $8,400 – $7,000 = $1,400.
Long-term debt—Amount of long-term debt incurred or issued during the year less
amount of debt repaid during the year; $88,000 – $0 = $88,000.
Common stock—Proceeds from stock sold during the year = $100,000.
Retained earnings—Net loss less dividends; ($2,400) – $4,000 = ($6,400).
21–22.
The following T-accounts and explanations are not required but may be useful in the
preparation of the statement of cash flows.
Cash Flows—Operating
(a)
44,000
(g)
29,000
(i)
1,000
(k)
4,000
(l)
38,000
(n)
500
(q)
9,000
(t)
9,300

(u)
25,000
Net cash provided by operating activities .....

(l)
(o)
(p)
(r)
(s)
(v)

12,000
6,300
45,000
500
5,000
8,000

(h)
(j)

6,000
100,000
99,000

(d)
(m)

8,000
20,000


83,000

Cash Flows—Investing
(i)

7,000

Net cash used in investing activities..............
Cash Flows—Financing
(e)
6,000
(f)
210,000
Net cash provided by financing activities .....

188,000


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Chapter 21

949

21–22. (Continued)
Cash Flows—Summary
Net cash provided—operating ........................
Net cash used—investing................................
Net cash provided—financing.........................
Net increase in cash.........................................


83,000
99,000
188,000
(w)
271,000

Cash and Cash Equivalents
Beg. bal.

Investment Securities—Trading

50,000

(w)

172,000

End. bal.

222,000

Beg. bal.
End. bal.

Accounts Receivable (net)

40,000

4,000


(l)

26,000

Inventories

95,000
45,000

Beg. bal.

300,000

End. bal.

140,000

End. bal.

291,000

Prepaid Insurance

(q)

9,000

Land and Building


Beg. bal.
(r)

2,000
500

Beg. bal.

195,000

End. bal.

2,500

End. bal.

195,000

Accumulated Depreciation—Building

Equipment

Beg. bal.
(g)

22,500
3,750

Beg. bal.
(j)


170,000
150,000

End. bal.

26,250

End. bal.

305,000

Accumulated Depreciation—Equipment

(i)

15,000

Treasury Stock

6,000 Beg. bal.
7,000 (g)

27,500
25,250

Beg. bal.

10,000


End. bal.

39,750

End. bal.

5,000

Accounts Payable
(s)

(k)

10,000

Beg. bal.
(p)

(h)
(i)

172,000
271,000

(e)

5,000

Notes Payable—Current


5,000 Beg. bal.

60,000

Beg. bal.
(j)

20,000
50,000

End. bal.

55,000

End. bal.

70,000


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950

Chapter 21

21–22. (Continued)
Miscellaneous Expenses Payable

Taxes Payable

Beg. bal.

(t)

8,700
9,300

Beg. bal.
(u)

10,000
25,000

End. bal.

18,000

End. bal.

35,000

Unearned Revenue
(v)

Notes Payable—Long-Term

8,000 Beg. bal.

9,000

End. bal.


1,000

(m)

Bonds Payable—Long-Term

60,000

End. bal.

40,000

Discount on Bonds Payable

Beg. bal.

250,000

Beg. bal.

9,000 (n)

End. bal.

250,000

End. bal.

8,500


Deferred Income Tax Liability
(o)

20,000 Beg. bal.

500

Common Stock, $2 par

6,300 Beg. bal.

53,300

Beg. bal.
(b)
(f)

200,000
59,400
100,000

End. bal.

47,000

End. bal.

359,400

Retained Earnings Appropriated for

Possible Building Expansion
Beg. bal.
(c)

33,000
10,000

End. bal.

43,000

Unappropriated Retained Earnings
(b)
(c)
(d)

59,400 Beg. bal.
10,000 (a)
8,000

112,000
44,000

End. bal.

78,600

Paid-In Capital in Excess of Par Value
Beg. bal.
5,000

(e)
1,000
(f)
110,000
End. bal.
116,000


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Chapter 21

951

21–22. (Continued)
Explanations for T-account entries:
(a) Net income is computed as follows:
Sales ...........................................................................................................
Gain on sale of investment securities .....................................................
Cost of goods sold ....................................................................................
Selling and general expenses ..................................................................
Income taxes ..............................................................................................
Unrealized loss on trading securities......................................................
Loss on sale of equipment .......................................................................
Net income .............................................................................................

$ 898,000
12,000
(539,000)
(287,000)
(35,000)

(4,000)
(1,000)
$ 44,000

In this problem, the nominal accounts have not yet been closed to Retained Earnings. Closing the nominal accounts would result in an ending balance in Unappropriated Retained Earnings of $78,600 ($34,600 + $44,000). The following entry
would be required in the cash flow T-accounts:
Cash Flows—Operating .....................................................................
Unappropriated Retained Earnings ..............................................

44,000
44,000

(b) The 30% stock dividend is a large stock dividend, so just the par value of the
29,700 (99,000 × 0.30) new shares is transferred from Unappropriated Retained
Earnings to Common Stock. There are no cash flow effects.
Unappropriated Retained Earnings ..................................................
Common Stock, $2 par ..................................................................
*29,700 shares × $2 per share = $59,400

59,400*
59,400

(c) The $10,000 increase in appropriated Retained Earnings suggests an additional
retained earnings appropriation.
Unappropriated Retained Earnings ..................................................
Retained Earnings Appropriated for Possible Building
Expansion ....................................................................................

10,000
10,000


(d) The remaining difference between the beginning and ending Unappropriated Retained Earnings balance represents cash dividends for the year.
Unappropriated Retained Earnings ..................................................
Cash Flows—Financing.................................................................
*$112,000 + $44,000 – $59,400 – $10,000 – $78,600 = $8,000

8,000*
8,000


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952

Chapter 21

21–22. (Continued)
(e) Treasury stock was sold for $1,000 more than its cost of $5,000.
Cash Flows—Financing .....................................................................
Treasury Stock ...............................................................................
Paid-ln Capital in Excess of Par Value.........................................

6,000
5,000
1,000

(f) The remaining differences in common stock at par and paid-in capital in excess
of par value must be from new stock issues.
Cash Flows—Financing ..................................................................... 210,000
Common Stock, $2 par ..................................................................
100,000*

Paid-ln Capital in Excess of Par Value.........................................
110,000†
*$359,400 – $59,400 – $200,000 = $100,000
†
$116,000 – $1,000 – $5,000 = $110,000
(g) Building and equipment depreciation expense for the year:
Cash Flows—Operating .....................................................................
Accumulated Depreciation—Building..........................................
Accumulated Depreciation—Equipment......................................

29,000
3,750
25,250

(h) Equipment overhaul:
Accumulated Depreciation—Equipment..........................................
Cash Flows—Investing ..................................................................
(i)

6,000
6,000

The $1,000 indicated loss on the equipment sale is added back to Cash Flows—
Operating because it has no cash effects but was subtracted from net income.
Cash Flows—Investing ......................................................................
7,000
Accumulated Depreciation—Equipment..........................................
7,000*
Cash Flows—Operating .....................................................................
1,000

Equipment.......................................................................................
15,000
*$1,000 loss on $7,000 sales proceeds indicates equipment book value of $8,000.
With an original cost of $15,000, the accumulated depreciation associated with
the equipment must have been $7,000 ($15,000 – $8,000).

(j)

Equipment was purchased partially for cash and partially by issuing a 6-month
note payable for $50,000.
Equipment ........................................................................................... 150,000*
Notes Payable—Current ................................................................
50,000**
Cash Flows—lnvesting ..................................................................
100,000
*$305,000 – $170,000 + $15,000 = $150,000
**The $50,000 purchase of equipment with a note would be disclosed as a noncash and investing activities in the notes to the financial statements or at the bottom of the statement of cash flows.

(k) The unrealized loss on trading securities is added to Cash Flows—Operating because the loss was subtracted from net income but had no cash flow effect.
Cash Flows—Operating .....................................................................
Investment Securities—Trading ...................................................

4,000
4,000


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Chapter 21

953


21–22. (Continued)
(l)

The remaining reduction in the basis of the investment securities of $26,000
($40,000 – $10,000 – $4,000) came from the sale of investment securities with a
gain of $12,000. The gain is subtracted from Cash Flows—Operating to avoid
double counting the cash effects of the transaction. The proceeds from the sale
are reported as cash from operating activities because the company has determined that its purchase and sale of trading securities are operating activities.
Cash Flows—Operating .....................................................................
Investment Securities—Trading ...................................................
Cash Flows—Operating.................................................................

38,000
26,000
12,000

(m) Repayment of notes payable—long-term:
Notes Payable—Long-Term...............................................................
Cash Flows—Financing.................................................................

20,000
20,000

(n) The amortization of the bond discount is added back to Cash Flows—Operating.
Cash Flows—Operating .....................................................................
Discount on Bonds Payable..........................................................

500
500


(o) The decrease in deferred income tax liability is subtracted from Cash Flows—
Operating.
Deferred Income Tax Liability ...........................................................
Cash Flows—Operating.................................................................

6,300
6,300

Cash flow from operating activities must be adjusted for changes in the levels of
current operating assets and current operating liabilities.
(p)
(q)
(r)
(s)
(t)
(u)
(v)
(w)

Accounts Receivable (net)..............................................................
Cash Flows—Operating ..............................................................

45,000

Cash Flows—Operating ..................................................................
Inventories ...................................................................................

9,000


Prepaid Insurance............................................................................
Cash Flows—Operating ..............................................................

500

Accounts Payable............................................................................
Cash Flows—Operating ..............................................................

5,000

Cash Flows—Operating ..................................................................
Miscellaneous Expenses Payable .............................................

9,300

Cash Flows—Operating ..................................................................
Taxes Payable..............................................................................

25,000

Unearned Revenue ..........................................................................
Cash Flows—Operating ..............................................................

8,000

45,000
9,000
500
5,000
9,300

25,000
8,000

Cash and Cash Equivalents............................................................ 172,000
Net Increase in Cash ...................................................................
172,000


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954

Chapter 21

21–22. (Concluded)
Beneficio Corporation
Statement of Cash Flows
For the Year Ended October 31, 2013
Cash flows from operating activities:
Net income................................................................................
Adjustments:
Depreciation expense ...........................................................
Loss on sale of equipment...................................................
Unrealized loss on trading securities .................................
Amortization of bond discount ............................................
Gain on sale of investment securities—trading.................
Proceeds from sale of investment securities—trading.....
Decrease in deferred income tax liability ...........................
Increase in net accounts receivable ...................................
Decrease in inventories........................................................
Increase in prepaid insurance .............................................

Decrease in accounts payable.............................................
Increase in miscellaneous expenses payable....................
Increase in taxes payable.....................................................
Decrease in unearned revenue ............................................
Net cash provided by operating activities.............................
Cash flows from investing activities:
Purchase of equipment ...........................................................
Overhaul of equipment............................................................
Sale of equipment ....................................................................
Net cash used in investing activities .....................................
Cash flows from financing activities:
Payment of cash dividends.....................................................
Retirement of notes payable...................................................
Sale of treasury stock..............................................................
Issuance of common stock.....................................................
Net cash provided by financing activities .............................
Net increase in cash......................................................................
Cash and cash equivalents at beginning of year .......................
Cash and cash equivalents at end of year ..................................

$ 44,000
29,000
1,000
4,000
500
(12,000)
38,000
(6,300)
(45,000)
9,000

(500)
(5,000)
9,300
25,000
(8,000)
$ 83,000
$ (100,000)
(6,000)
7,000
(99,000)
$

(8,000)
(20,000)
6,000
210,000
188,000
$172,000
50,000
$222,000


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Chapter 21

955

21–23.
Blue Panel Corporation
Statement of Cash Flows

For the Year Ended December 31, 2013
Operating activities:
Cash collected from customers .....................................................
Less: Cash paid for inventory ......................................................
Cash paid for selling and administrative expenses.........
Cash paid for income taxes................................................

$ 56,965
(32,386)
(6,229)
(2,376)

Net cash provided by operating activities...............................

$15,974

Investing activities:
Purchased property, plant, and equipment ..................................
Proceeds from sale of property, plant, and equipment ...............

$ (4,900)
85

Net cash used in investing activities .......................................

(4,815)

Financing activities:
Proceeds from sale of stock...........................................................
Repayment of long-term debt.........................................................

Payment of dividend........................................................................
Net cash used in financing activities .......................................

$

400
(1,864)
(2,940)
(4,404)

Net increase in cash........................................................................
Beginning cash balance .................................................................

$ 6,755
1,506

Ending cash balance .......................................................................

$ 8,261

COMPUTATIONS FOR OPERATING ACTIVITY ITEMS:
Cash collected from customers
Sales – increase in accounts receivable – decrease in unearned revenue; $57,860 –
$835 – $60 = $56,965
Cash paid for inventory
Cost of goods sold + decrease in inventory = inventory purchased during the year
($32,600) + $294 = ($32,306)
Inventory purchased during the year – decrease in accounts payable = cash paid for
inventory
($32,306) – $80 = ($32,386)

Cash paid for selling and administrative expenses
Selling and administrative expenses + decrease in prepaid selling and administrative
expenses + increase in other long-term liabilities [as per item (c)]; ($6,550) + $16 +
$305 = ($6,229)