Solution manual managerial accounting 13e by garrison ch15

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Chapter 15
“How Well Am I Doing?”
Statement of Cash Flows
Solutions to Questions
15-1 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.
15-2 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.
15-3 (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.
15-4 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.
15-5 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.
15-6 Transactions involving accounts payable
are not considered to be financing activities because such transactions relate to a company’s
day-to-day operating activities rather than to its
financing activities.

15-7 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.
15-8 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.
15-9 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 isn’t. 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 15-2.]
15-10 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.
15-11 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.
15-12 Free cash flow is net cash provided by

operating activities minus capital expenditures
and dividends.

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Exercise 15-1 (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

X

X

X

X

X

X

X

* This would be a cash equivalent and thus not reported separately on the statement of cash flows.

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Exercise 15-2 (15 minutes)
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

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Exercise 15-3 (5 minutes)
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)

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Exercise 15-4 (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

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Exercise 15-5 (30 minutes)
1.
Carmono Company
Statement of Cash Flows
For the Year Ended December 31, 2009

Operating activities:

Net income ..................................................................
Adjustments to convert net income to a cash basis:
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)

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Exercise 15-5 (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

–3

–3

Additional entries

None...................................
Total ...................................

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Exercise 15-6 (30 minutes)
1. Net income ............................................................
Adjustments to convert net income to a 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 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
Statement of Cash Flows

Operating activities:

Net cash provided by operating activities from part
(1) above ............................................................

$130

Investing activities:

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 .......................

Financing 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

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Exercise 15-6 (continued)
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

Assets (except cash and cash equivalents)
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

Liabilities, Contra-assets, and Stockholders’ Equity
Contra-assets:
Accumulated depreciation ..
Current liabilities:
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

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Exercise 15-6 (continued)

Stockholders’ equity:
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 ....................................

–5

–5

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Problem 15-7 (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

X

Neither
Neither
Source

X
X

X

Neither
Use
Neither

X
X

X

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Problem 15-7 (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

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Problem 15-8 (30 minutes)
1. and 2.

Weaver Company
Statement of Cash Flows
For the Year Ended December 31, 2009

Operating activities:

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 ...............

Investing activities:

Proceeds from sale of long-term investments.........
Proceeds from sale of equipment ..........................
Additions to plant and equipment .........................
Net cash used for investing activities .....................

Financing 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

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Problem 15-8 (continued)
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

Assets (except cash and cash equivalents)
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

Liabilities, Contra-assets, and Stockholders’ Equity
Contra-assets:
Accumulated depreciation ...
Current liabilities:
Accounts payable ...............
Accrued liabilities ...............

+8

Source

+8

+80
–12

Source
Use

+80
–12

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Problem 15-8 (continued)

Noncurrent liabilities:
Bonds payable ...................
Deferred income taxes........
Stockholders’ equity:
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 ....................................

–6

–6

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Problem 15-9 (45 minutes)
1. and 2.

Joyner Company
Statement of Cash Flows
For Year 2

Operating activities:

Net income ............................................................
Adjustments to convert net income to cash basis:
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

Investing activities:

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)

Financing activities:

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

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Problem 15-9 (continued)
3. Free cash flow computation:
Net cash provided by operating activities..................
Capital expenditures .............................................
$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.

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Problem 15-9 (continued)
Note to the instructor: Although it is not a requirement, a worksheet may be helpful.

Change

Source
or use?

Cash
Flow
Effect

+80
+50
–7

Use
Use
Source

+40
+110

Use
Use

Assets (except cash and cash equivalents)
Current assets:
Accounts receivable ............
Inventory...........................
Prepaid expenses ...............
Noncurrent assets:
Loan to Hymas Company ....
Plant and equipment ..........

Adjustments

Adjusted
Effect

Classification

–80
–50
+7

–80
–50
+7

Operating
Operating

Operating

–40
–110

–40

–40
–150

Investing
Investing

+30

+42

Operating

Liabilities, Contra-assets, and Stockholders’ Equity
Contra-assets:
Accumulated depreciation ...
Current liabilities:
Accounts payable ...............
Accrued liabilities ...............
Noncurrent liabilities:
Bonds payable ...................
Deferred income taxes........

+12

Source

+12

+60
–10

Source
Use

+60
–10

+60
–10

Operating
Operating

+120
+3

Source
Source

+120
+3

+120

+3

Financing
Operating

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Problem 15-9 (continued)

Stockholders’ equity:
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

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

+18
–8
–17

–17

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Problem 15-10 (75 minutes)

1. See the worksheet at the end of this solution.
2.

Lomax Company
Statement of Cash Flows
For the Year Ended December 31, 2009

Operating activities:

Net income .......................................................
Adjustments to convert net income to cash basis:
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 ............

Investing 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)

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Problem 15-10 (continued)

Financing activities:

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

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Problem 15-10 (continued)
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 company’s 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 company’s 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 16 for
a discussion of the Debt-to-Equity ratio and other financial ratios.)

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Problem 15-10 (continued)

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

Assets (except cash and cash equivalents)
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

Liabilities, Contra-assets, and Stockholders’ Equity
Contra-assets:
Accumulated depreciation ....

Current liabilities:
Accounts payable ................
Accrued liabilities ................

+55

Source

+55

+300
–17

Source
Use

+300
–17

+40

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Problem 15-10 (continued)

Noncurrent liabilities:
Long-term notes .................
Deferred income taxes.........
Stockholders’ equity:
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 ...........
Proceeds from sale of
equipment ..........................
Loss on sale of equipment ......
Proceeds from sale of longterm investments ................
Gain on sale of long-term
investments ........................
Total .....................................

+21

+21

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Problem 15-11 (45 minutes)
1. and 2.

Rusco Products
Statement of Cash Flows
For the Year Ended July 31, 2009

Operating activities:

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

Investing activities:

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)

Financing 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 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

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Solutions Manual, Chapter 15

881