E4-2. Balance sheet preparation
Mikeska Company
Balance Sheet
As of 12/31/2011
(in thousands)
Assets:
Current assets:
Cash
Accounts receivable (less allowance for doubtful
accounts, $7)
Inventory
Factory supplies
Property, plant, and equipment:
Land
Buildings and equipment
Less: Accumulated depreciation
Intangible assets:
Patents
Goodwill
Other assets:
Returnable containers
Total assets
Liabilities:
Current liabilities:
Wages payable
Accounts payable
$
68
95
163
20
$ 500
200
(50)
$
1
346
650
51
49
100
32
$ 1,128
$ 195
140
Long-term liabilities:
Bonds payable
Discount on bonds payable
Liability for contingencies (Note 1)
Total liabilities
Equity:
Capital stock, $10 par, 5,000 shares issued
and outstanding
Additional paid-in capital
Total contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
335
$
388
50
773
$ 400
(12)
$
50
75
$
125
230
$ 355
$ 1,128
Note 1: This classification assumes that this amount has been
properly accrued. If, instead, the item is interpreted as an
appropriation of retained earnings, it would be classified
as a part of retained earnings. In either case, the
company should specify more precisely the nature of the
contingency. E4-2.Balance sheet preparation
E4-4. Balance sheet classifications
Reagan Company
Balance Sheet
As of December 31, 2011
Liabilities and Stockholders’
Assets
Equity
Current assets:
Current liabilities:
Cash
Accounts payable
Short-term investments
Accrued expenses
Trade accounts receivable
Income taxes payable
Current portion of long-term
Inventories:
debt
Raw materials
Notes payable
Work in process
Total current liabilities
Finished goods
Prepaid expenses
Long-term liabilities
Total current assets
Bonds payable
Deferred income taxes
Plant assets:
Total liabilities
Land
Buildings
Stockholders’ equity:
Less: Accumulated
Preferred stock
depreciation
Machinery and equipment
Common stock
Less: Accumulated
Contributed capital in excess
depreciation
of par
Retained earnings
Intangible assets:
Total stockholders’ equity
2
Goodwill
Total liabilities and
stockholders’ equity
Trademarks
Total assets
E4-9. Determining cash collections on account
(AICPA adapted)
Cash collected from customers can be determined by finding
the change in accounts receivable.
Sales
Increase in accounts receivable
Cash collections from customers for 2011
438,000
(8,800)
$429,200
E4-10. Determining cash from operations and reconciling with
accrual net
income
Requirement 1:
Cash provided by operating activities:
Net income
$100,000
Noncash expenses:
Depreciation
_30,000
130,000
Changes in working capital accounts:
Increase in accounts receivable
Decrease in inventories
Increase in prepaid expenses
Decrease in accounts payable
Increase in salaries payable
Decrease in other current liabilities
Cash provided by operating activities
(110,000)
50,000
(15,000)
(150,000)
15,000
_(70,000)
(280,000)
($150,000)
Requirement 2:
Net income is $100,000, yet cash used by operating activities
is ($150,000). There are several reasons for the difference.
Accounts receivable increased by $110,000 (i.e., not all of the
3
sales reported in the 2011 income statement were collected in
cash in 2011). Inventories decreased by $50,000 (i.e., part
of the cost of goods sold appearing in the 2011 income
statement consists of inventory that was paid for in an earlier
year (i.e., 2010). Accounts payable decreased by $150,000
(i.e., the firm paid cash for all of its 2011 purchases
4
of merchandise from suppliers, as well as $150,000 for
purchases made in 2010). Other current liabilities decreased
by $70,000 (i.e., the firm paid cash
for the various operating expenses it incurred in 2011 as well
as $70,000 of operating expenses that were incurred, but not
paid in cash in 2010). The changes in the prepaid expenses
and the salaries payable accounts, along with the depreciation
expense, explain the remaining difference between the firm’s
net income and its cash flow from operating activities.
Note: This problem demonstrates that a firm can be profitable
under the accrual basis even though it does not generate
positive cash flow from operating activities.
P4-2. Preparation of a statement of cash flows and a balance
sheet
Requirement 1:
Kay Wing, Inc.
Statement of Cash Flows
For the Year Ended 12/31/2011
Cash flows from operating activities
Net income
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation expense
12,000
Gain on retirement of bonds
(2,000)
Loss on sale of equipment
4,000
Increase in accounts receivable
($37,000 - $41,500)
(4,500)
Increase in inventory
($70,000 - $73,000)
(3,000)
Decrease in accounts payable
($33,000 - $25,500)
(7,500)
Cash flow provided by operating activities
Cash flows from investing activities
Purchase of land
Sale of equipment
Purchase of short-term investments
Net cash used in investing
5
$35,500
(1,000)
34,500
(15,000)
10,000
(8,300)
(13,300)
Cash flows from financing activities
Issuance of capital stock
40,000
Retirement of bonds
(28,000)
Payment of cash dividends
(5,000)
Net cash provided by financing activities
7,000
Net increase in cash
28,200
Cash at beginning of year
65,000
Cash at end of year
$93,200
Note to the instructor: The purchase of the building for
$75,000 through the issuance of bonds is a significant noncash financing transaction that would be disclosed in the
notes to the financial statements.
Requirement 2:
Kay Wing, Inc.
Balance Sheet
December 31, 2011
Cash
Accounts receivable
Short-term investments
Inventory
Long-term investments
Land
Plant and equipment (net)
Total assets
$
93,200
41,500
8,300 (1)
73,000
20,000
89,000 (2)
158,000 (3)
$ 483,000
Accounts payable
$ 25,500
Taxes payable
4,000
Notes payable
35,000 (4)
Bonds payable
125,000 (5)
Capital stock
130,000 (6)
Retained earnings
163,500 (7)
Total liabilities and stockholders’ equity
$ 483,000
(1) $0 + $8,300
(2) $39,000 + $50,000
(3) $109,000 – $14,000 – $12,000  $75,000
(4) $0 + $35,000
(5) $80,000 – $30,000 + $75,000
(6) $90,000 + $40,000
(7) $133,000 + $35,500 – $5,000
6