Solutions to Problems: Chapter 1
1. Calculating cash received.
a.
b.
c.
Beg. Rec.
$0
$900
$1,000
Sales
a.
b.
c.
$2,000
$5,000
$2,500
End Rec.
$500
$1,500
$750
less
-
Sales
$2,000
$5,000
$2,500
Change in
Accounts
Receivable
$500
$600
($250)
equals
Cash Received
=
=
=
$1,500
$4,400
$2,750
2. Cash paid to suppliers.
Data:
a.
b.
c.
Beginning
Accounts
Payable
BAP
$0
$0
$500
Ending
Accounts
Payable
EAP
$600
$600
$300
Beginning
Inventory
_______
BI
$0
$300
$800
Calculation of Purchases: (PUR = EI - BI + COGS)
EI
BI
COGS
a.
$1,200
$0
$2,000
b.
$1,500
$300
$3,000
c.
$500
$800
$5,000
Ending
Inventory
_______
EI
$1,200
$1,500
$500
Cost of
Goods Sold
_______
COGS
$2,000
$3,000
$5,000
PUR
$3,200
$4,200
$4,700
Cash payment to suppliers: (COGS + (EI - BI) - (EAP - BAP)) or (PUR - (EAP - BAP))
PUR
EAP
BAP
Cash Paid
a.
$3,200
$600
$0
$2,600
b.
$4,200
$600
$0
$3,600
c.
$4,700
$300
$500
$4,900
3. Genesis Enterprises, Inc. - developing a cash flow statement.
Balance Sheet
12/31/12
Cash
$500
Accounts Receivable
$750
12/31/13
$500
$2,000
a.
b.
4.
Inventory
Fixed assets
Acc. Dep.
Total Assets
$400
$1,000
($400)
$2,250
$600
$1,000
($700)
$3,400
Accounts Payable
Operating Accruals
Debt
Common
Stock
Retained Earnings
Total
Liabilities
$200
$300
$1,000
$950
$275
$1,000
$500
$500
$250
$675
$2,250
$3,400
Income Statement
1/01/13 - 12/31/13
-------------------------Sales
- Cost of goods sold
$9,000
$4,500
= Gross profit
$4,500
- Operating expenses
$3,800
(includes depreciation)
= Operating profit
$700
- Interest
$100
- Taxes
$175
= Net profit
$425
Cash Flow
Adjustment
Change
-------------$1,250
-  A/R
$750
-  A/P
$200
+  Inv
Gross cash margin =
-  Op
($25)
Acc
$300
-  Dep
Cash operating margin =
-  Acc
$0
Interest
-  Acc
$0
Taxes
-  Def
$0
Taxes
Cash Flow
---------$7,750
$3,950
$3,800
$3,525
$275
$100
$175
$0
Discussion: Profit does not equal cash for several reasons. First, the company's revenue was $9,000, but
it only collected $7,750 from its customers. Then it expensed COGS of $4,500 but only paid out cash of
$3,950 due primarily to an increase in accounts payable. Finally, it expensed $3,800 for operations but
paid out only $3,525 due to $300 of the expenses being for depreciation and operating accruals falling by
$25.
Crestin International, Inc. - developing a cash flow statement.
Balance Sheet
Cash
Accounts receivable
12/31/11
$200
$800
12/31/12
$550
$700
a.
Inventory
Fixed assets
(Accumulated
depreciation)
Total Assets
$250
$1,000
$150
$1,000
($400)
($600)
$1,850
$1,800
Accounts payable
Operating accruals
Debt
Common stock
Retained earnings
$200
$300
$750
$400
$200
$1,850
$250
$150
$395
$400
$605
$1,800
Developing a cash flow statement.
Income Statement
1/01/12 - 12/31/12
Sales
- Cost of goods sold
$4,500
$2,200
= Gross profit
$2,300
- Operating expenses
$1,500
(includes depreciation)
= Operating profit
Cash Flow
Adjustment
-  A/R
-  A/P
+  Inv
-  Op
Acc
-  Dep
$800
- Interest
$75
- Taxes
$320
= Net profit
$405
-  Acc
Interest
-  Acc
Taxes
Change
($100)
$50
($100)
Gross cash margin =
Cash Flow
$4,600
$2,050
$2,550
($150)
$200
Cash operating margin
=
$1,450
$1,100
$0
$75
$0
$320
$705
b.
Profit does not equal cash for several reasons. First, Landmark generated revenues of $4,500, yet it
collected cash of $4,600 by drawing down its balance of receivables by $100. Second, it expensed
$2,200 for COGS but only paid out cash of $2,050 by increasing accounts payable $50 and by
accumulating inventory of $100. It then expensed $1,500 for operations but only paid out $1,450 due to
depreciation of $200 and a decrease of accruals of $150. This resulted in $705 of operating cash flow.
Out of this, $355 of debt was paid off, leaving $350 excess cash to add to the beginning cash balance of
$200 resulting in an ending balance of $550.