Problem 1 - Reporting Investing Activities
An analysis of the income statement and the balance sheet accounts of Holmes Export Co. at December 31 of the current year, provides the following information.
Income statement items:
- Gain on Sale of Plant Assets - $12,000
- Loss on Sales of Marketable Securities - 16,000
Analysis of balance sheet accounts:
Marketable Securities account:
- Debit entries - 78,000
- Credit entries - 62,000
Notes Receivable account:
- Debit entries - 55,000
- Credit entries - 62,000
Plant and Equipment accounts:
- Debit entries to plant asset accounts - 170,000
- Credit entries to plant asset accounts - 140,000
- Debit entries to accumulated depreciation accounts - 100,000
Additional Information -
1. Except as noted in 4, payments and proceeds relating to investing transactions were made in cash.
2. The marketable securities are not cash equivalents.
3. All notes receivable relate to cash loans made to borrowers, not to receivables from customers.
4. Purchases of new equipment during the year ($170,000) were financed by paying $60,000 in cash and issuing a long-term note payable for $110,000.
5. Debits to the accumulated depreciation accounts are made whenever depreciable plant assets are sold or retired. The book value of plant assets sold or retired during the year was $40,000 ($140.000 - $100,000).
Instructions -
a. Prepare the investing activities section of a statement of cash flows, Show supporting computations for the amounts of (1) proceeds from sales of marketable securities and (2) proceeds from sales of plant assets. Place brackets around amounts representing cash outflows.
b. Prepare the supplementary schedule that should accompany the statement of cash flows in order to disclose the noncash aspects of the company's investing and financing activities.
c. Does management have more control or less control over the timing and amount of cash outlays for investing activities than for operating activities? Explain.
Problem 2 - Preparing a Statement of Cash Flows: A Comprehensive Problem without a Worksheet
You are the controller for 21st Century Technologies. Your staff has prepared an income statement for the current year and has developed the following additional information by analyzing changes in the company's 'balance sheet accounts.
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21ST CENTURY TECHNOLOGIES INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2018
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Revenue
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Net sales
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$3,200,000
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Interest revenue
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40,000
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Gain on sales of marketable securities
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34,000
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Total revenue and gains
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$3,274,000
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Costs and expenses:
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Cost of goods sold
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$1,620,000
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Operating expenses (including depreciation of $150,000)
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1,240,000
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Interest expense
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42,000
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Income tax expense
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100,000
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Loss on sales of plant assets
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12,000
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Total costs, expenses and losses
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3,014,000
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Net Income
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$260,000
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Additional Information
1. Accounts receivable increased by $60,000.
2. Accrued interest receivable decreased by $2,000.
3. Inventory decreased by 560,000, and accounts payable to suppliers of merchandise decreased by $16.000.
4. Short-term prepayments of operating expenses increased by 56,000, and accrued liabilities for operating expenses decreased by $8.000.
5. The liability for accrued interest payable increased by $4,000 during the year.
6. The liability for accrued income taxes payable decreased by $14,000 during the year.
7. The following schedule summarizes the total debit and credit entries during the year in other balance sheet accounts.
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Debit Entries
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Credit Entries
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Marketable Securities
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$60,000
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$38,000
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Notes Receivable (cash loans made to borrowers)
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44,000
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28,000
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Plant Assets (see paragraph 8)
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500,000
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36,000
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Notes Payable (short-term borrowing)
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92,000
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82,000
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Capital Stock
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20,000
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Additional Paid-in Capital-Capital Stock
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160,000
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Retained Earnings (see paragraph 9)
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120,000
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260,000
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8. The $36,000 in credit entries to the Plant Assets account is net of any debits to Accumulated Depreciation when plant assets were retired. The $36,000 in credit entries represents the book value of all plant assets sold or retired during the year.
9. The $120,000 debit to Retained Earnings represents dividends declared and paid during the year. The $260,000 credit entry represents the net income shown in the income statement.
10. All investing and financing activities were cash transactions.
11. Cash and cash equivalents amounted to $244,000 at the beginning of the year and to $164,100 at year-end.
Instructions -
a. Prepare a statement of cash flows for the current year. Use the direct method of reporting cash flows from operating activities. Place brackets around dollar amounts representing cash outflows. Show separately your computations of the following amounts.
1. Cash received from customers.
2. Interest received.
3. Cash paid to suppliers and employees.
4. Interest paid.
5. Income taxes paid.
6. Proceeds from sales of marketable securities.
7. Proceeds from sales of plant assets.
8. Proceeds from issuing capital stock.
b. Explain the primary reason why:
1. The amount of cash provided by operating activities was substantially greater than the company's net income.
2. There was a net decrease in cash over the year, despite the substantial amount of cash provided by operating activities.
c. As 21st Century's controller, you think that through more efficient cash management, the company could have held the increase in accounts receivable for the year to $10,000, without affecting net income. Explain how holding down the growth in receivables affects cash. Compute the effect that limiting the growth in receivables to $10,000 would have had on the company's net increase or decrease in cash (and cash equivalents) for the year.