Chapter 13 MAS

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.
com
Chapter 13
How Well Am I Doing?
Statement of Cash Flows
Solutions to Questions
13-1 The statement of cash flows highlights
the major activities that have provided and used
cash during a period and shows their effects on
the overall cash balance.
13-2 Cash equivalents are short-term, highly
liquid investments such as Treasury bills, commercial paper, and money market funds. They
are included with cash because investments of
this type are made solely for the purpose of generating a return on temporarily idle funds and
they can be easily converted to cash.
13-3 (1) Operating activities: Transactions
that affect current assets, current liabilities, or
net income.
(2) Investing activities: Transactions that
involve the acquisition or disposition of noncurrent assets.
(3) Financing activities: Transactions
(other than the payment of interest) involving
borrowing from creditors, and any transactions
involving the owners of a company.
13-4 Interest is included as an operating activity since it is part of net income. Financing
activities are narrowly defined to include only
the principal amount borrowed or repaid.
13-5 Since the entire proceeds from a sale of
an asset (including any gain) appear as a cash
inflow from investing activities, the gain must be
deducted from net income to avoid double
counting.
13-6 Transactions involving accounts payable
are not considered to be financing activities because such transactions relate to a companys
day-to-day operating activities rather than to its
financing activities.
13-7 The repayment of $300,000 and the

borrowing of $500,000 must both be shown
gross on the statement of cash flows. That is,
the company would show $500,000 of cash provided by financing activities and then show
$300,000 of cash used by financing activities.
13-8 The direct method reconstructs the income statement on a cash basis by restating
revenues and expenses in terms of cash inflows
and outflows. The indirect method starts with
net income and adjusts it to a cash basis to determine the cash provided by operating activities.
13-9 Depreciation is not really a source of
cash, even though it is listed as a source on
the statement of cash flows. Adding back depreciation charges to net income to compute the
amount of cash provided by operating activities
creates the illusion that depreciation is a source
of cash. It isnt. Charges to the accumulated
depreciation account are added back to net income because they are equivalent to a decrease
in an asset account. [See Exhibit 13-2.]
13-10 An increase in the Accounts Receivable
account must be deducted from net income under the indirect method because this is an increase in a noncash asset.
13-11 A sale of equipment for cash would be
classified as an investing activity. Any transaction involving the acquisition or disposition of
noncurrent assets is classified as an investing
activity.
13-12 Free cash flow is net cash provided by
operating activities minus capital expenditures
and dividends.
The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Solutions Manual, Chapter 13
657
To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
Brief Exercise 13-1 (15 minutes)
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
Transaction
Equipment was purchased...................

Cash dividends declared and paid ........
Accounts receivable decreased ............
Short-term investments purchased ......
Equipment was sold ............................
Preferred stock was sold to investors ...
A stock dividend was declared and
issued .............................................
Interest was paid to long-term
creditors ..........................................
Salaries and wages payable
decreased........................................
Stock of another company was
purchased .......................................
Bonds were issued ..............................
Rent was received from subleasing
office space, reducing rents receivable ................................................
Common stock was repurchased and
retired .............................................
Activity
Operating Investing Financing
X
X
X
Not
Reported Source Use
X
X*
X
X
X
X
X
X
X
X
X
X
X
X
X
* This would be a cash equivalent and thus not reported separately on the statement of cash flows.

658
Introduction to Managerial Accounting, 5th Edition

Net income ..............................................................
$35,000
Adjustments to convert net income to a cash basis:
Depreciation charges ............................................. $20,000
Increase in accounts receivable .............................. (19,000)
Increase in inventory ............................................. (33,000)
Decrease in prepaid expenses ................................
1,000
Increase in accounts payable ................................. 15,000
Decrease in accrued liabilities ................................ (2,000)
Increase in deferred income taxes payable .............
4,000 (14,000)
Net cash provided by operating activities...................
$21,000

659

Free cash flow computation:
Net cash provided by operating activities ..
Capital expenditures ................................
Dividends ...............................................
Free cash flow ...........................................
$110,000
30,000
$34,000
140,000
$(106,000)

660
Exercise 13-4 (10 minutes)
Item
Amount
Accounts Receivable.....................
$90,000 decrease
Accrued Interest Receivable .........
$4,000 increase
Inventory .................................... $120,000 increase
Prepaid Expenses.........................
$3,000 decrease
Accounts Payable .........................
$65,000 decrease
Accrued Liabilities ........................
$8,000 increase
Deferred Income Taxes Payable ....
$12,000 increase
Sale of equipment........................
$7,000 gain
Sale of long-term investments ......
$10,000 loss
Add
X
X
X
X
X
Deduct
X
X
X
X

661

1.
Carmono Company
For the Year Ended December 31, 2009
Operating activities:
Net income ..................................................................

Depreciation charges .................................................
Decrease in accounts receivable .................................
Increase in inventory .................................................
Increase in accounts payable .....................................
Net cash provided by operating activities .......................
Investing activities:
Increase in plant and equipment ...................................

Net cash used for investing activities .............................
Financing activities:
Increase in common stock ............................................

Cash dividends.............................................................
Net cash used in financing activities ..............................
$35
$15
2
(10)
4
(40)
5
(14)
Net decrease in cash ....................................................

Cash, beginning of the year ..........................................
Cash, end of the year ...................................................
11
46
(40)
(9)
(3)
6
$ 3
2. Free cash flow computation:

Net cash provided by operating activities..................
Capital expenditures .............................................
Dividends ............................................................
Free cash flow ........................................................
$40
14
$ 46
54
$(8)

662
Exercise 13-5 (continued)

Note to the instructor: Although it is not required for part (1) of the exercise, a worksheet may be
helpful.
Change
Source
or use?
2
+10
Source
Use
+2
10
+2
10
Operating
Operating
+40
Use
40
40
Investing
Assets (except cash and cash equivalents)

Current assets:
Accounts receivable ...........
Inventory..........................
Noncurrent assets:
Plant and equipment .........
Cash Flow
Effect
Adjustments
Adjusted
Effect
Classification
Liabilities, Contra-assets, and Stockholders Equity

Contra-assets:
Accumulated depreciation ..
Current liabilities:
Accounts payable ..............
Stockholders equity:
Common stock ..................
Retained earnings:
Net income ....................
Dividends .......................
+15
Source
+15
+15
Operating
+4
Source
+4
+4
Operating
+5
Source
+5
+5
Financing
+35
14
Source
Use
+35
14
+35
14
Operating
Financing
Additional entries
None...................................
Total ...................................

663

1. Net income ............................................................
Depreciation charges ...........................................
Increase in accounts receivable ............................
Decrease in inventory ..........................................
Increase in prepaid expenses ...............................
Increase in accounts payable ................................
Decrease in accrued liabilities ...............................
Gain on sale of long-term investments ..................
Loss on sale of land .............................................
Increase in deferred income taxes ........................
Net cash provided by operating activities .................
2.
$ 84
$ 60
(110)
70
(9)
35
(4)
(10)
6
8
46
$130
Pavolik Company
Net cash provided by operating activities from part

(1) above ............................................................
$130
Proceeds from sale of long-term investments ........... $ 16

Proceeds from sale of land ......................................
9
Additions to plant and equipment ............................ (200)
Net cash used for investing activities .......................
Increase in bonds ...................................................

Decrease in common stock .....................................
Cash dividends .......................................................
Net cash provided by financing activities .................
Net decrease in cash (net cash flow) .......................
Cash balance, beginning of the year ........................
Cash balance, end of the year .................................
150
(80)
(30)
(175)
40
(5)
90
$ 85

664

Note to the instructor: Although it is not a requirement of the exercise, a worksheet may be helpful.
Change
Source
or use?
+110
70
+9
Use
Source
Use
110
+70
9
6
+200
15
Source
Use
Source
+6
200
+15

Current assets:
Accounts receivable ...........
Inventory..........................
Prepaid expenses ..............
Noncurrent assets:
Long-term investments ......
Plant and equipment .........
Land.................................
Cash
Flow
Effect
Adjustments
6
15
Adjusted
Effect
Classification
110
+70
9
Operating
Operating
Operating
0
200
0
Investing
Investing
Investing

Contra-assets:
Accumulated depreciation ..
Accounts payable ..............
Accrued liabilities ..............
Noncurrent liabilities:
Bonds payable ..................
Deferred income taxes.......
+60
Source
+60
+60
Operating
+35
4
Source
Use
+35
4
+35
4
Operating
Operating
+150
+8
Source
Source
+150
+8
+150
+8
Financing
Operating

665
Common stock ...................
Retained earnings:
Net income .....................
Dividends ........................
Change
Source
or use?
Cash
Flow
Effect
Adjustments
Adjusted
Effect
Classification
80
Use
80
80
Financing
+84
30
Source
Use
+84
30
+84
30
Operating
Financing
+16
+16
Investing
10
+9
+6
10
+9
+6
Operating
Investing
Operating
Additional entries
Proceeds from sale of longterm investments ...............

Gain on sale of long-term
investments .......................
Proceeds from sale of land ....
Loss on sale of land ..............
Total ....................................

666
Problem 13-7A (20 minutes)
Transaction
a. Common stock was sold for

cash ......................................
b. Interest was paid on a note
decreasing Interest Payable ....
c. Bonds were retired ...................
d. A long-term loan was made to
a subsidiary ...........................
e. Interest was received on the
loan in (d) .............................
f. A stock dividend was declared
and issued on common stock..
g. A building was acquired by
issuing shares of common
stock .....................................
h. Equipment was sold for cash .....
i. Short-term investments were
sold ......................................
j. Cash dividends were declared
and paid................................
k. Preferred stock was converted
into common stock ................
Source,
Reported
Not on
Use, or
Activity
in Separate
the
Neither Operating Investing Financing Schedule Statement
Source
Use
Use
X
X
Use
Source
X
X
Neither
Neither
Source
X
X
Neither
Use
Neither
X
X
X

667
Problem 13-7A (continued)
Transaction
Source,
Reported
Not on
Use, or
Activity
in Separate
the
Neither Operating Investing Financing Schedule Statement
l. Deferred Income Taxes, a

long-term liability, was reduced ...................................
Use
m. Dividends were received on
stock of another company
held as an investment ............ Source
n. Equipment was purchased by
giving a long-term note to
the seller ............................... Neither
X
X
X

668

1. and 2.
Weaver Company
Net income ..........................................................

Adjustments to convert net income to cash basis:
Depreciation charges .........................................
Increase in accounts receivable ..........................
Decrease in inventory ........................................
Increase in prepaid expenses .............................
Increase in accounts payable .............................
Decrease in accrued liabilities.............................
Gain on sale of investments ...............................
Loss on sale of equipment .................................
Increase in deferred income taxes ......................
Net cash provided by operating activities ...............
Proceeds from sale of long-term investments.........

Proceeds from sale of equipment ..........................
Additions to plant and equipment .........................
Net cash used for investing activities .....................
Increase in bonds payable ....................................

Decrease in common stock ...................................
Cash dividends ....................................................
Net cash provided by financing activities ...............
Net decrease in cash ............................................
Cash balance, beginning of the year .....................
Cash balance, end of the year ..............................
$ 63
$ 24
(100)
50
(4)
80
(12)
(7)
4
6
10
20
(180)
110
(40)
(30)
41
104
(150)
40
(6)
15
$ 9

669

Note to the instructor: Although it is not a requirement, a worksheet may be helpful.
Change
Source
or use?
Cash
Flow
Effect
+100
50
+4
Use
Source
Use
100
+50
4
3
+140
Source
Use
+3
140

Current assets:
Accounts receivable ............
Inventory...........................
Prepaid expenses ...............
Noncurrent assets:
Long-term investments .......
Plant and equipment ..........
Adjustments
Adjusted
Effect
Classification
100
+50
4
Operating
Operating
Operating
3
40
0
180
Investing
Investing
+16
+24
Operating
+80
12
Operating
Operating

Contra-assets:
Accumulated depreciation ...
Accounts payable ...............
Accrued liabilities ...............
+8
Source
+8
+80
12
Source
Use
+80
12

670
Bonds payable ...................
Deferred income taxes........
Common stock ...................
Retained earnings:
Net income .....................
Dividends ........................
Change
Source
or use?
Cash
Flow
Effect
+110
+6
Source
Source
Adjustments
Adjusted
Effect
Classification
+110
+6
+110
+6
Financing
Operating
40
Use
40
40
Financing
+63
30
Source
Use
+63
30
+63
30
Operating
Financing
+10
7
+10
7
Investing
Operating
+20
+4
+20
+4
Investing
Operating
Additional entries
Proceeds from sale of investments ..........................

Gain on sale of investments ...
Proceeds from sale of
equipment .........................
Loss on sale of equipment .....
Total ....................................

671

1. and 2.
Joyner Company
For Year 2
Net income ............................................................

Depreciation charges ........................................... $42,000
Increase in accounts receivable ............................ (80,000)
Increase in inventory ........................................... (50,000)
Decrease in prepaid expenses ..............................
7,000
Increase in accounts payable ...............................
60,000
Decrease in accrued liabilities .............................. (10,000)
Gain on sale of equipment ...................................
(8,000)
Increase in deferred income taxes ........................
3,000
Net cash provided by operating activities.................
$ 56,000
(36,000)
20,000
Proceeds from the sale of equipment ......................

18,000
Loan to Hymas Company........................................ (40,000)
Additions to plant and equipment ........................... (150,000)
Net cash used for investing activities .......................
(172,000)
Increase in bonds payable ...................................... 120,000

Increase in common stock ......................................
30,000
Cash dividends ...................................................... (15,000)
Net cash provided by financing activities .................
Net decrease in cash ..............................................
Cash balance, beginning of year .............................
Cash balance, end of year ......................................
135,000
(17,000)
21,000
$ 4,000

672

$150,000
Dividends ............................................................
15,000
Free cash flow ........................................................
$ 20,000
165,000
$(145,000)
4. A relatively small amount of cash was provided by operating activities

during the year as a result of large increases in accounts receivable and
inventory. Most of the cash that was provided by operating activities was
paid out in dividends. The small amount that remained, combined with
the cash provided by the issue of bonds and the issue of common stock,
was insufficient to purchase a large amount of equipment and make a
loan to another company. As a result, the cash on hand declined sharply
during the year.

673

Change
Source
or use?
Cash
Flow
Effect
+80
+50
7
Use
Use
Source
+40
+110
Use
Use

Current assets:
Inventory...........................
Noncurrent assets:
Loan to Hymas Company ....
Adjustments
Adjusted
Effect
Classification
80
50
+7
80
50
+7
Operating
Operating
Operating
40
110
40
40
150
Investing
Investing
+30
+42
Operating

Contra-assets:
Bonds payable ...................
+12
Source
+12
+60
10
Source
Use
+60
10
+60
10
Operating
Operating
+120
+3
Source
Source
+120
+3
+120
+3
Financing
Operating

674
Common stock ...................
Retained earnings:
Net income .....................
Dividends ........................
Change
Source
or use?
Cash
Flow
Effect
+30
Source
+56
15
Source
Use
Adjustments
Adjusted
Effect
Classification
+30
+30
Financing
+56
15
+56
15
Operating
Financing
+18
8
Investing
Operating
Additional entries

equipment .........................
Gain on sale of equipment .....
Total ....................................
+18
8
17
17

675

1. See the worksheet at the end of this solution.
2.
Lomax Company
Net income .......................................................

Depreciation charges ......................................
Decrease in patents ........................................
Increase in accounts receivable .......................
Decrease in inventory .....................................
Increase in prepaid expenses ..........................
Increase in accounts payable ...........................
Decrease in accrued liabilities ..........................
Gain on sale of long-term investments .............
Loss on sale of equipment ...............................
Increase in deferred income taxes ...................
Net cash provided by operating activities ............
Proceeds from sale of long-term investments ......

Proceeds from sale of equipment .......................
Increase in loans to subsidiaries .........................
Additions to plant and equipment .......................
Net cash used for investing activities ..................
$170,000
$ 95,000
6,000
(180,000)
12,000
(5,000)
300,000
(17,000)
(60,000)
20,000
15,000
110,000
70,000
(50,000)
(700,000)
186,000
356,000
(570,000)

676
Issue of long-term notes...................................

Retire long-term notes ......................................
Increase in common stock ................................
Cash dividends .................................................
Net cash provided by financing activities ...........
Net increase in cash and cash equivalents .........
Cash balance, beginning of the year ..................
Cash balance, end of the year ...........................
600,000
(380,000)
90,000
(75,000)
235,000
21,000
40,000
$ 61,000

677

3. The large amount of cash provided by operating activities is traceable
for the most part to the $300,000 increase in accounts payable. If the
accounts payable had remained basically unchanged, the same as inventory, then operating activities would have provided very little cash and
the company might have experienced serious cash problems.
Note particularly that the cash provided by operating activities was used
to purchase plant and equipment. Thus, the company is using cash derived from a short-term source (buildup of accounts payable) to finance
long-term asset acquisitions. In short, although the company is generating substantial cash from operating activities, the quality of this source
is open to question.
Also, note the substantial increase in accounts receivable. Apparently,
the companys collections from customers are lagging, perhaps because
of sales to customers whose credit is weak. This may be the result of
trying to increase sales so fast that proper credit checks are not being
made. Again, this can lead to serious cash problems if the trend continues.
In the companys financing activities, it appears that long-term debt
sources, rather than equity sources, are being used to provide for
expansion. Although companies frequently use debt to finance expansion,
the level of debt in this company is increasing rapidly. (See Chapter 14 for
a discussion of the Debt-to-Equity ratio and other financial ratios.)

678
Change
Source
or use?
Cash
Flow
Effect
+180
12
+5
Use
Source
Use
180
+12
5
50
+50
+570
6
Source
Use
Use
Source
+50
50
570
+6

Current assets:
Accounts receivable .............
Inventory............................
Prepaid expenses ................
Noncurrent assets:
Long-term investments ........
Loans to subsidiaries ...........
Plant and equipment ...........
Patents ...............................
Adjustments
50
130
Adjusted
Effect
Classification
180
+12
5
Operating
Operating
Operating
0
50
700
+6
Investing
Investing
Investing
Operating
+95
Operating
+300
17
Operating
Operating

Contra-assets:
Accumulated depreciation ....
Accounts payable ................
Accrued liabilities ................
+55
Source
+55
+300
17
Source
Use
+300
17
+40

679
Long-term notes .................
Deferred income taxes.........
Common stock ....................
Retained earnings:
Net income ......................
Dividends .........................
Change
Source
or use?
Cash
Flow
Effect
+220
+15
Source
Source
+220
+15
+90
Source
+170
75
Source
Use
Adjustments
Adjusted
Effect
Classification
+380
+600
+15
Financing
Operating
+90
+90
Financing
+170
75
+170
75
Operating
Financing
380
380
Financing
+70
+20
+70
+20
Investing
Operating
+110
+110
Investing
-60
60
Operating
Additional entries
Retire long-term notes ...........

equipment ..........................
Loss on sale of equipment ......
Proceeds from sale of longterm investments ................
Gain on sale of long-term
investments ........................
Total .....................................
+21
+21

680

1. and 2.
Rusco Products
For the Year Ended July 31, 2009
Net income .......................................................

$ 30,000
Adjustments to convert net income to cash
basis:
Depreciation charges ...................................... $20,000
Increase in accounts receivable ....................... (40,000)
Increase in inventory ...................................... (50,000)
Decrease in prepaid expenses .........................
4,000
Increase in accounts payable ........................... 63,000
Decrease in accrued liabilities ..........................
(9,000)
Gain on sale of investments ............................. (10,000)
Loss on sale of equipment ...............................
2,000
Increase in deferred income taxes ...................
8,000
(12,000)
Net cash provided by operating activities ............
18,000
Proceeds from sale investments ......................... 30,000

Proceeds from sale of equipment .......................
8,000
Additions to plant and equipment ....................... (150,000)
Net cash used for investing activities ..................
(112,000)
Increase in bonds payable .................................

Increase in common stock .................................
Cash dividends ..................................................
Net cash provided by financing activities.............
Net decrease in cash .........................................
Cash balance, beginning of the year ...................
Cash balance, end of the year ............................
Schedule of noncash investing and financing
activities:
Preferred stock converted into common stock ...
70,000
20,000
(9,000)
81,000
(13,000)
21,000
$ 8,000
$ 16,000

681

$ 18,000
$150,000
Dividends ............................................................
9,000
159,000
Free cash flow ........................................................
$(141,000)
4. Although the company reported a large net income for the year, a relatively small amount of cash was provided by operations due to increases
in both accounts receivable and inventory. The cash provided by operations, when added to the cash provided by the sale of investments, the
issue of bonds, and the sale of common stock, was not sufficient to
cover the purchase of plant and equipment during the year. Note that
the company increased its investment in plant and equipment by almost
50%. More care should have been taken in planning for this major investment in plant assets. Also, the company should get better control
over its accounts receivable and inventory.

682

Change
Source
or use?
Cash
Flow
Effect
+40
+50
4
Use
Use
Source
40
50
+4
20
+130
Source
Use
+20
130

Current assets:
Inventory...........................
Noncurrent assets:
Long-term investments .......
Adjustments
Adjusted
Effect
Classification
40
50
+4
Operating
Operating
Operating
20
20
0
150
Investing
Investing
+10
+20
Operating
+63
9
Operating
Operating

Contra-assets:
+10
Source
+10
+63
9
Source
Use
+63
9

683
Bonds payable ...................
Preferred stock...................
Common stock ...................
Retained earnings:
Net income .....................
Dividends ........................
Change
Source
or use?
Cash
Flow
Effect
+70
+8
Source
Source
+70
+8
16
+36
Use
Source
16
+36
+30
9
Source
Use
+30
9
Adjustments
Adjusted
Effect
Classification
+70
+8
Financing
Operating
0
+20
Financing
+30
9
Operating
Financing
+30
10
+30
10
Investing
Operating
+8
+2
+8
+2
Investing
Operating
+16
16
Additional entries

investments .......................
Gain on sale of investments ...
equipment .........................
Loss on sale of equipment .....
Total ....................................
13
13

684
Communicating in Practice
Date:
To:
From:
Subject:
Current Date
Instructors Name
Students Name
Preparing and Interpreting the Statement of Cash Flows
In addition to summarizing general information about the company obtained from the companys web site, each students memorandum should
address the following:
1. Whether the company uses the direct method or the indirect method to
determine the cash flows from operating activities and why that method
is used.
2. A summary of how the information reported on the statement of cash
flows is used for decision-making purposes.

685
Research and Application

1. Netflix mentions four competitive strengths on page 3 of its 10-K: comprehensive library of titles, personalized merchandising, scalable business model, and convenience, selection and fast delivery. These
strengths suggest that Netflixs strategy relies on a combination of customer intimacy and operational excellence. Netflix is attempting to
create customer intimacy by using proprietary personalized merchandising software to tailor a comprehensive library of 55,000 titles to the
unique viewing interests of individual customers. The companys operational excellence value proposition is a function of providing customers
with convenient internet-based access to and fast delivery of a large selection of DVD movies. It is also a function of the companys scalable
business model. In other words, Netflixs internet-based business model
allows it to increase sales without the need to build and staff costly retail outlets.
While students can make defensible arguments in favor of either value
proposition, most internet companies attract customers by offering convenient order placement and delivery of products such as books, DVDs,
airline tickets, etc. at low prices. Although these companies seek to increase sales by using software that tailors their offerings to individual
customer preferences, the bedrock of their success hinges on operational excellence.
2. Netflix faces numerous business risks as described on pages 8-20 of the
annual report. Students may appropriately contend that many of these
risks call into question the viability of Netflixs strategy. Here are four
risks faced by Netflix. Two of these risks are largely uncontrollable and
two have suggested control activities:
Risk: Video on Demand (VOD) technology, which enables cable and internet providers to immediately transmit movies to customers on demand, may supplant the Netflix business model. Netflix customers cannot get immediate access to the movies they wish to watch because
they have to wait until they arrive by mail. Netflix does not have a readily available control activity to reduce this risk, which continues to grow
as the quality and speed of VOD content delivery improves.

686
Research and Application (continued)

Risk: Studios will alter their filmed entertainment release date practices
in a manner that threatens Netflixs sales. Page 10 of the 10-K says
DVDs currently enjoy a significant competitive advantage over other
distribution channels, such as pay-per-view and VOD, because of the
early distribution window for DVDs. Currently, studios distribute their
filmed entertainment content approximately three to six months after
theatrical release to the home video market, seven to nine months after
theatrical release to pay-per-view and VOD, one year after theatrical release to satellite and cable, and two to three years after theatrical release to basic cable and syndicated networks. If movie studios choose
to shrink or close the window of time that companies such as Netflix can
rent new DVD releases without competition from competing mediums
(such as pay-per-view and VOD), it will lower retailers DVD rental revenues. Netflix does not have a readily available control activity to reduce
this risk.
Risk: Computer viruses could disrupt Netflixs website. In addition, computer hackers could obtain unauthorized accessed to customers credit
card numbers. Either event would damage the companys reputation
and sales growth goals. Control activities: Invest generously in firewalls
and encryption technology to keep website and sensitive customer information secure.
Risk: Inaccurate forecasts may lead to excessive inventory of some
movie titles and stockouts of other titles. Control activities: Create software that allows users to rate movies that they have viewed. The customer feedback helps predict what movie titles will thrive or dive.

687

3. The comparative balance sheet is shown below and on the following page:
Netflix, Inc.
Comparative Balance Sheet
(in thousands)
Beginning
Ending
Balance
Balance
Assets
Current assets:
Cash and cash equivalents .....................
Prepaid expenses ..................................
Prepaid revenue sharing expenses..........
Deferred tax assets ...............................
Other current assets ..............................
Total current assets .................................
DVD library, net.......................................
Intangible assets, net ..............................
Property and equipment, net ....................
Deposits..................................................
Deferred tax assets..................................
Other assets ............................................
Total assets.............................................
$174,461
2,741
4,695
0
5,449
187,346
42,158
961
18,728
1,600
0
1,000
$251,793
$212,256
7,848
5,252
13,666
4,669
243,691
57,032
457
40,213
1,249
21,239
800
$364,681
Change
Source
Or Use?
+37,795
+5,107
+557
+13,666
780
Use
Use
Use
Source
+14,874
504
+21,485
351
+21,239
200
Use
Source
Use
Source
Use
Source

688
Managerial Accounting, 12th Edition

Liabilities and Stockholders Equity
Accounts payable ..................................
Accrued expenses..................................
Deferred revenue ..................................
Current portion of capital leases .............
Total current liabilities..............................
Deferred rent ..........................................
Total liabilities .........................................
$ 49,775
13,131
31,936
68
94,910
600
95,510
$ 63,491
25,563
48,533
0
137,587
842
138,429
+13,716
+12,432
+16,597
68
Source
Source
Source
Use
+242
Source
Stockholders Equity:
Common stock ......................................
Additional paid-in capital ........................
Deferred stock-based compensation .......
Accumulated other comp. income ...........
Accumulated deficit ...............................
Total stockholders equity.........................
Total liabilities and stockholders equity.....
53
292,843
(4,693)
(222)
(131,698)
156,283
$251,793
55
317,194
(1,326)
0
(89,671)
226,252
$364,681
+2
+24,351
+3,367
+222
+42,027
Source
Source
Source
Source
Source

689

4. The changes shown on the balance sheet are accounted for on the
statement of cash flows as follows (all amounts are in thousands):
The change in the Cash and Cash Equivalents of $37,795 is shown on
the statement of cash flows as the Net Increase in Cash and Cash Equivalents.
The changes in Prepaid Expenses, Prepaid Revenue Sharing Expenses,
and Other Current Assets are accounted for in the operating activities
section of the statement of cash flows under Changes in Prepaid Expenses and Other Current Assets. The reconciliation is as follows:
Balance Sheet:
Prepaid expenses (Use)........................................

Prepaid revenue sharing expenses (Use) ...............
Other current assets (Source) ...............................
Use of cash .........................................................
$(5,107)
(557)
780
$(4,884)
Change in prepaid expenses and other current assets (Use) .........................................................
$(4,884)
Statement of Cash Flows:
The changes in Deferred Tax Assets in the current and noncurrent asset
sections of the balance sheet are accounted for in the operating activities section of the statement of cash flows under Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities. The reconciliation is as follows:
Balance Sheet:
Deferred tax assetscurrent (Use) .......................

Deferred tax assetsnoncurrent (Use)..................
Use of cash .........................................................
$(13,666)
(21,239)
$(34,905)
Adjustments to net incomeDeferred taxes (Use) .
$(34,905)

690

The change in the DVD Library, Net account on the balance sheet is accounted for in the operating and investing activities sections of the
statement of cash flows. The reconciliation is as follows:
Balance Sheet:
DVD library, net (Use) ..........................................
Adjustment to net incomeamortization of DVD

library (Source) .................................................
Adjustment to net incomegain on disposal of
DVDs (Use).......................................................
Acquisitions of DVD library (Use) ..........................
Proceeds from sale of DVDs (Source) ....................
Use of cash .........................................................
$(14,874)
$96,883
(3,588)
(113,950)
5,781
$(14,874)
The change in the Intangible Assets, Net account on the balance sheet
is accounted for in the operating and investing activities sections of the
statement of cash flows. The reconciliation is as follows:
Balance Sheet:
Intangible assets, net (Source) .............................
$504
Adjustments to net incomeamortization of intangible assets (Source) ....................................

Acquisition of intangible asset (Use)......................
Source of cash.....................................................
$985
(481)
$504
The change in the Property and Equipment, Net account on the balance
sheet is accounted for in the operating and investing activities sections
of the statement of cash flows. The reconciliation is as follows:
Balance Sheet:
Property and equipment, net (Use) .......................
$(21,485)
Adjustments to net incomedepreciation of property and equipment (Source) .............................

Purchases of property and equipment (Use) ..........
Use of cash .........................................................
$ 9,134
(30,619)
$(21,485)

691

The changes in the Deposits and Other Assets balance sheet accounts
are accounted for in the investing activities section of the statement of
cash flows. The reconciliation is as follows:
Balance Sheet:
Deposits (Source) ..................................................

Other assets (Source) ............................................
Source of cash.......................................................
$351
200
$551
Deposits and other assets ......................................
$551
The changes in the Accounts Payable ($13,716), Accrued Expenses

($12,432), Deferred Revenue ($16,597), and Deferred Rent ($242) balance sheet accounts are directly recorded in the operating activities section of the statement of cash flows.
The change in the Current Portion of Capital Leases account on the balance sheet is accounted for in the operating and financing activities sections of the balance sheet. The reconciliation is as follows:
Balance Sheet:
Current portion of capital leases (Use) ....................
$(68)
Adjustments to net incomenon-cash interest expense (Source) ...................................................

Principal payments on notes payable and capital
lease obligations (Use) ........................................
Use of cash ...........................................................
$11
(79)
$68
The Common Stock, Additional Paid-In Capital, and Deferred StockBased Compensation balance sheet accounts are recorded in the operating and financing activities sections of the statement of cash flows. The
reconciliation is as follows:

692
Balance Sheet:
Common stock (Source) .........................................

Additional paid-in capital (Source) ..........................
Deferred stock-based compensation (Source) ..........
Source of cash.......................................................
Adjustments to net incomestock-based compensation expense (Source) ......................................

Proceeds from issuance of commons stock (Source)
Source of cash.......................................................
2
24,351
3,367
$27,720
$14,327
13,393
$27,720
The change in the Accumulated Other Comprehensive Income balance

sheet account ($222) is directly accounted for in the financing activities
section of the statement of cash flows. The change in the Accumulated
Deficit balance sheet account ($42,027) corresponds with the net income reported in the statement of cash flows.

693
Appendix 13A
The Direct Method of Determining the Net Cash
Provided by Operating Activities
Brief Exercise 13A-1 (15 minutes)

Sales .............................................................
Adjustments to a cash basis:
Less increase in accounts receivable ..........
$ 350,000
Cost of goods sold .........................................

Plus increase in inventory ..........................
Less increase in accounts payable ..............
140,000
Selling and administrative expenses ................

Less decrease in prepaid expenses ............
Plus decrease in accrued liabilities .............
Less depreciation charges .........................
Income taxes.................................................
Less increase in deferred income taxes ......
Net cash provided by operating activities.........
19,000 $331,000
+ 33,000
15,000
158,000
160,000
1,000
+ 2,000
20,000
141,000
15,000
4,000
11,000
$ 21,000
Note that the $21,000 above agrees with the amount provided by operating activities under the indirect method in the previous exercise.

694
Exercise 13A-2 (15 minutes)

Sales .........................................................
Decrease in accounts receivable ............
$275
Cost of goods sold .....................................

Increase in inventory ............................
Increase in accounts payable .................
150
Selling and administrative expenses ............

Depreciation charges ............................
Net cash provided by operating activities.....
+ 2 $277
+ 10
4
156
90
15
75
$ 46

Solutions Manual, Appendix 13A
695

1. Sales ............................................................. $150,000
Increase in accounts receivable .................. 10,000 $140,000
Cost of goods sold ..........................................
Increase in inventory .................................
Increase in accounts payable .....................
Increase in prepaid expenses .....................
Decrease in accrued liabilities ....................
Depreciation charges .................................
Income taxes .................................................
Decrease in income taxes payable
Increase in deferred income taxes ..............
Net cash provided by operating activities .........
90,000
+9,000
7,000
92,000
40,000
+2,000
+3,000
7,500
37,500
8,000
+500
2,000
6,500
$ 4,000
2. Gains and losses on the sale of assets would have no effect on the
computations in (1). The reason is that these items are not part of
sales, cost of goods sold, selling and administrative expenses, or income
taxes. Thus, gains and losses on the income statement are ignored
under the direct method.

696

Sales ..........................................................
Increase in accounts receivable ..............
$700
Cost of goods sold ......................................

Decrease in inventory ............................
Increase in accounts payable ..................
400
Selling and administrative expenses .............

Increase in prepaid expenses .................
Decrease in accrued liabilities .................
Depreciation charges .............................
184
Income tax expense....................................

Increase in deferred income taxes ..........
36
Net cash provided by operating activities......
110 $590
70
35
+9
+4
60
295
137
28
$130
Note that the $130 net cash provided figure agrees with the indirect method in the previous exercise.

697
Problem 13A-5A (30 minutes)

1. Sales ....................................................................
Increase in accounts receivable .........................
$800
Cost of goods sold .................................................

Decrease in inventory .......................................
Increase in accounts payable ............................
500
Selling and administrative expenses .......................

Increase in prepaid expenses ............................
Decrease in accrued liabilities ...........................
Depreciation charges ........................................
213
Income taxes ........................................................

Increase in deferred income taxes .....................
Net cash provided by operating activities ................
100 $700
50
80
+4
+12
24
370
205
27
6
21
$104

698
Problem 13A-5A (continued)

2.
Weaver Company
Cash received from customers ...................................

$700
Less cash disbursements for:
Cost of merchandise purchased ............................... $370
Selling and administrative expenses ......................... 205
Income taxes ......................................................... 21
Total cash disbursements ...........................................
596
Net cash provided by operating activities ....................
104
Proceeds from sale of long-term investments .............. 10

Proceeds from sale of equipment ............................... 20
Additions to plant and equipment ............................... (180)
Net cash used for investing activities ..........................
(150)
Increase in bonds payable ......................................... 110

Decrease in common stock ........................................ (40)
Cash dividends .......................................................... (30)
Net cash provided by financing activities ....................
Net decrease in cash .................................................
Cash balance, beginning of the year ...........................
Cash balance, end of the year ....................................
40
(6)
15
$ 9

699

1. Sales ............................................................. $900,000
Increase in accounts receivable .................. 80,000 $820,000
Cost of goods sold ..........................................
Increase in inventory .................................
Increase in accounts payable .....................
Decrease in prepaid expenses ....................
Decrease in accrued liabilities ....................
Depreciation charges .................................
Income taxes .................................................
Increase in deferred income taxes ..............
Net cash provided by operating activities .........
500,000
+50,000
60,000
490,000
328,000
7,000
+10,000
42,000
289,000
24,000
3,000
21,000
$ 20,000

700

2.
Joyner Company
For Year 2
Cash received from customers ..........................

Cost of merchandise purchased ...................... $490,000
Selling and administrative expenses ................ 289,000
Income taxes ................................................
21,000
Total cash disbursements ..................................
Net cash provided by operating activities ...........
$820,000
800,000
20,000
Proceeds from sale of equipment ......................

18,000
Loan to Hymas Company .................................. (40,000)
Additions to plant and equipment ...................... (150,000)
Net cash used for investing activities .................
Increase in bonds payable ................................

Increase in common stock ................................
Cash dividends .................................................
Net cash provided by financing activities ...........
Net decrease in cash ........................................
Cash balance, beginning of year ........................
Cash balance, end of year.................................
120,000
30,000
(15,000)
(172,000)
135,000
(17,000)
21,000
$ 4,000
3. The decline in cash is explainable largely by the companys inability to

generate a significant amount of cash from operating activities. Note
that the company generated only $20,000 from operating activities, although net income was $56,000 for the year. This small amount of cash
generated is due primarily to the buildup of accounts receivable. Even
though an additional $150,000 was obtained from an issue of bonds and
an issue of common stock ($120,000 + $30,000 = $150,000), the cash
available was not sufficient to expand the plant, make a substantial loan
to another company, and pay a large cash dividend. As a result, cash
declined during the year.
701

1. The income statement adjusted to a cash basis:
Sales .........................................................
$500,000
Increase in accounts receivable ..............
40,000 $460,000
Cost of goods sold ......................................
Increase in inventory .............................
Increase in accounts payable .................
Selling and administrative expenses .............
Decrease in prepaid expenses ................
Decrease in accrued liabilities .................
Depreciation charges .............................
Income taxes .............................................
Increase in deferred income taxes ..........
Net cash provided by operating activities .....
300,000
+50,000
63,000
287,000
158,000
4,000
+ 9,000
20,000
143,000
20,000
8,000
12,000
$ 18,000

702

2.
Rusco Products
For the Year Ended July 31, 2009
Cash received from customers .........................

Cost of merchandise purchased .....................
Selling and administrative expenses ...............
Income taxes ...............................................
Total cash disbursements .................................
Net cash provided by operating activities ..........
Proceeds from sale of investments ...................

Proceeds from sale of equipment .....................
Additions to plant and equipment .....................
Net cash used for investing activities ................
Increase in bonds payable ...............................

Increase in common stock ...............................
Cash dividends ................................................
Net cash provided by financing activities ..........
$460,000
$287,000
143,000
12,000
30,000
8,000
(150,000)
70,000
20,000
(9,000)
442,000
18,000
(112,000)
81,000
Net decrease in cash .......................................

Cash balance, beginning of the year .................
Cash balance, end of the year ..........................
(13,000)
21,000
$ 8,000
Schedule of noncash investing and financing

activities:
Preferred stock converted into common stock ...
$ 16,000

703

3. There are two reasons for the sharp decline in cash. First, note that a
relatively small amount of cash was provided by operations during the
year. This is due to a build-up in accounts receivable and inventory,
which together have grown by $90,000; the build-up of receivables reduced the amount of cash received from customers, and the build-up of
inventory increased the amount of cash required to purchase goods.
Second, the company paid out in dividends half of the cash provided by
operations, while at the same time increasing its investment in plant and
equipment by almost 50%. These uses of cash far outstripped the
amount of cash available through operations and the sale of bonds,
common stock, and investments, resulting in a sharp decrease in the
amount of cash available.

704
Appendix 13B
The T-Account Approach to Preparing the Statement of Cash Flows
Brief Exercise 13B-1 (30 minutes)
Cash
Provided Used
Increase in accounts re(1)
35 ceivable
Net income
Decrease in prepaid
expenses
(4)
Increase in accounts
payable
(5)
Increase in deferred
income taxes (given)
Depreciation expense
(given)
Net cash provided by
operating activities
1 Increase in inventory
Decrease in accrued liabili15 ties
Bal.
Bal.
(6)
Accrued Liabilities
Bal.
2
Bal.
(3) 33
(6)
4
20
21
Accounts Receivable
Bal.
106
(2)
19
Bal.
125
Prepaid Expenses
7
(4)
6
(2) 19
Bal.
(3)
Bal.
Inventory
180
33
213
Accounts Payable
Bal.
(5)
Bal.
195
15
210
6
4
Solutions Manual, Appendix 13B
705

Chapter 13 MAS

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Chapter 13 MAS

Загружено:

Авторское право:

Доступные форматы

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.

13-7 The repayment of $300,000 and the

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Brief Exercise 13-1 (15 minutes)

Equipment was purchased...................

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Brief Exercise 13-2 (15 minutes)

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Brief Exercise 13-3 (5 minutes)

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Exercise 13-4 (10 minutes)

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Exercise 13-5 (30 minutes)

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

Increase in plant and equipment ...................................

Increase in common stock ............................................

Net decrease in cash ....................................................

2. Free cash flow computation:

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Exercise 13-5 (continued)

Assets (except cash and cash equivalents)

Liabilities, Contra-assets, and Stockholders Equity

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Exercise 13-6 (30 minutes)

Net cash provided by operating activities from part

Proceeds from sale of long-term investments ........... $ 16

Increase in bonds ...................................................

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Exercise 13-6 (continued)

Assets (except cash and cash equivalents)

Liabilities, Contra-assets, and Stockholders Equity

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Exercise 13-6 (continued)

Proceeds from sale of longterm investments ...............

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Problem 13-7A (20 minutes)

a. Common stock was sold for

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Problem 13-7A (continued)

l. Deferred Income Taxes, a

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Problem 13-8A (30 minutes)

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

Proceeds from sale of long-term investments.........

Increase in bonds payable ....................................

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Problem 13-8A (continued)

Assets (except cash and cash equivalents)

Liabilities, Contra-assets, and Stockholders Equity

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Introduction to Managerial Accounting, 5th Edition

Problem 13-8A (continued)

Proceeds from sale of investments ..........................

The McGraw-Hill Companies, Inc., 2010. All rights reserved.

Problem 13-9A (45 minutes)

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

Proceeds from the sale of equipment ......................

Increase in bonds payable ...................................... 120,000