Statement of Cash Flows - Example 4
Wenatchee Whirlpool World
Balance Sheet
Current Assets
Cash
Securities Available for Sale (at market)
Accounts Receivable
Allowance for doubtful accounts
Merchandise Inventory
Prepaid Operating Expenses
Noncurrent Assets
Investments (equity method)
Plant, property & equipment
Accumulated Depreciation
Intangible Assets
TOTAL ASSETS
Current Liabilities
Accounts Payable
Salaries Payable
Income Taxes Payable
Dividends Payable
Current portion long term debt
Noncurrent Liabilities
Bonds Payable
Discount on Bonds
Deferred Income Taxes
Other long term liabilities
Stockholder's Equity
Convertible preferred, $100 par
Common stock, $10 par
Additional paid in capital
Unrealized (gain)/loss investments
Retained Earnings
Total liabilities and equity
12/31/96
12/31/95
2,837,600
390,000
1,752,000
(120,500)
1,145,000
84,000
6,088,100
2,000,000
150,000
1,900,000
(110,000)
875,000
62,000
4,877,000
3,097,000
16,420,000
(829,000)
71,500
24,847,600
3,000,000
10,800,000
(600,000)
128,000
18,205,000
880,000
20,000
13,400
35,000
29,000
977,400
750,000
15,000
27,000
60,000
21,000
873,000
10,000,000
(247,000)
180,000
562,000
10,495,000
5,000,000
(270,000)
88,000
3,000,000
7,818,000
500,000
3,100,000
3,950,000
27,000
5,798,200
13,375,200
24,847,600
2,000,000
1,500,000
1,200,000
78,000
4,736,000
9,514,000
18,205,000
Wenatchee Whirlpool World
Income Statement
For year ending 12/31/96
Sales
Earnings of affiliated company (equity method)
Gain/(loss) on sale of PP&E
Realized gain/(loss) on investments
Realized gain on sale of patent
Interest and dividend revenue
Total revenues
Cost of goods sold
Salaries and wages
Other operating expenses
Bad debt expense
Depreciation & amortization expense
Interest expense
Income taxes expense
6,200,000
115,000
(40,000)
108,000
950,000
13,000
7,346,000
3,600,000
590,000
345,000
38,500
250,500
669,400
740,400
Net income
6,233,800
1,112,200
Additional information:
a.
On February 25, WWW sold an internally developed patent for $1,000,000. The patent was carried on the
books at unamortized legal fees amounting to $50,000 at date of sale.
b.
On March 31, WWW issued $5,000,000 in bonds at face value. The semi-annual bonds have a coupon rate
of 10% per annum.
c.
During the year, WWW disposed of various items of equipment with a total book value of $65,000 and
original cost of $80,000. The amount received was $25,000 in cash.
d.
During the third quarter, shareholders holding 15,000 shares of the preferred stock converted them into
common stock. The conversion ratio was 6 shares of common for each share of preferred.
e.
On July 20, WWW sold 50,000 shares of its common stock for $41 per share.
f.
By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.
g.
An existing factory with equipment was acquired during the year. The acquisition cost was allocated as
follows: $772,000 to land, $3,450,000 to building and 678,000 to equipment.
h.
WWW acquired a parcel of land adjoining the new factory by giving the owner 20,000 shares of its
common stock. At the date of the transaction, the market value of the stock was $40 per share.
i.
During the year WWW purchased $875,000 in marketable securities and sold securities which had cost
$584,000. The market value of the portfolio at the end of the year was $390,000.
j.
WWW owns 30% of a company which manufactures parts that WWW uses in its production process.
WWW received $18,000 in dividends from this partially owned company during 1996.
k.
Dividends declared during the year totaled $50,000.
Homework 4 - Acct 315
Worksheet
Wenatchee Whirlpool World
Cash
Year ending
12/31/95 Ref
Credit
Year ending
12/31/96
Target
837,600
150,000
390,000
240,000
Accounts Receivable
1,900,000
1,752,000
(148,000)
Allowance for doubtful accounts
(110,000)
(120,500)
(10,500)
875,000
1,145,000
270,000
62,000
84,000
22,000
3,000,000
3,097,000
97,000
10,800,000
16,420,000
5,620,000
(600,000)
(829,000)
(229,000)
128,000
71,500
(56,500)
18,205,000
24,847,600
Accounts Payable
(750,000)
(880,000)
(130,000)
Salaries Payable
(15,000)
(20,000)
(5,000)
Income Taxes Payable
(27,000)
(13,400)
13,600
Dividends Payable
(60,000)
(35,000)
25,000
Current portion long term debt
(21,000)
(29,000)
(8,000)
Merchandise Inventory
Prepaid Operating Expenses
Investments in affiliated companies
(equity method)
Plant, property & equipment
Accumulated Depreciation
Intangible Assets
Bonds Payable
(5,000,000)
837,600
Ref
2,837,600
Securities Available for Sale (at
market)
2,000,000
Debit
(10,000,000) (5,000,000)
Premium/Discount on Bonds Payable
270,000
247,000
(23,000)
Deferred Income Taxes
(88,000)
(180,000)
(92,000)
(3,000,000)
(562,000)
2,438,000
Other long term liabilities
Wenatchee Whirlpool World
12/31/95 ref
Debit
ref
Credit
12/31/96
Convertible preferred, $100 par
(2,000,000)
Common stock, $10 par
(1,500,000)
(3,100,000) (1,600,000)
Additional paid in capital
(1,200,000)
(3,950,000) (2,750,000)
Unrealized (gain)/loss investments
Retained Earnings
Closing entry for
(78,000)
(4,736,000)
1996
1996
6,200,000
115,000
Gain/(loss) on sale of PP&E
(40,000)
Realized gain/(loss) on investments
108,000
Realized gain on sale of patent
950,000
Interest and dividend revenue
13,000
(3,600,000)
Salaries and wages
(590,000)
Other operating expenses
(345,000)
Bad debt expense
Depreciation expense
Amortization of intangible assets
(38,500)
(244,000)
(6,500)
Interest expense
(669,400)
Income taxes expense
(740,400)
Net income (accrual basis)
1,112,200
1,500,000
51,000
(5,798,200) (1,062,200)
(24,847,600)
Earnings of affiliated companies
(equity method)
Cost of goods sold
(27,000)
0 (18,205,000)
Rev/(Exp)
Sales
(500,000)
Target
Receipt/(Dis
b)
Wenatchee Whirlpool World
Statement of Cash Flows
INFLOWS
OUTFLOWS
Operating Activities
Investing Activities
Financing Activities
Noncash Financing/Investing
CHANGE IN CASH
Totals
837,600
(Subtotals)
Solution
Example 4- Acct 315
Worksheet
Year ending
Wenatchee Whirlpool World
Year ending
12/31/95 Ref
Cash
2,000,000
Securities Available for Sale (at market)
150,000
X
I
Debit
Ref
Credit
12/31/96
837,600
875,000
Target
2,837,600
837,600
390,000
240,000
o
51,000
I
584,000
p
120,000
f
28,000
1,752,000
(148,000)
m
38,500
(120,500)
(10,500)
Accounts Receivable
1,900,000
Allowance for doubtful accounts
(110,000)
f
28,000
875,000
p
270,000
1,145,000
270,000
Prepaid Operating Expenses
62,000
p
22,000
84,000
22,000
Investments (equity method)
3,000,000
l
115,000
h
800,000
10,800,000
g
(600,000)
c
Merchandise Inventory
Plant, property & equipment
Accumulated Depreciation
Intangible Assets
j
18,000
3,097,000
97,000
4,900,000
c
80,000
16,420,000
5,620,000
15,000
n
244,000
(829,000)
(229,000)
n
6,500
a
50,000
71,500
(56,500)
128,000
18,205,000
Accounts Payable
24,847,600
(750,000)
Salaries Payable
(15,000)
Income Taxes Payable
(27,000)
q
13,600
Dividends Payable
(60,000)
k
75,000
Current portion long term debt
p
130,000
(880,000)
(130,000)
p
5,000
(20,000)
(5,000)
(13,400)
13,600
k
50,000
(35,000)
25,000
(21,000)
s
8,000
(29,000)
(8,000)
(5,000,000)
b
5,000,000
(10,000,000)
(5,000,000)
Premium/Discount on Bonds Payable
270,000
r
23,000
247,000
(23,000)
Deferred Income Taxes
(88,000)
q
92,000
(180,000)
(92,000)
(562,000)
2,438,000
Bonds Payable
Other long term liabilities
(3,000,000)
s
2,430,000
s
8,000
12/31/95 ref
Convertible preferred, $100 par
(2,000,000)
Common stock, $10 par
(1,200,000)
Unrealized (gain)/loss investments
Retained Earnings
0
ref
Credit
12/31/96
1,500,000
(1,500,000)
Additional paid in capital
Document1 Created by T. Gordon 3/14/2016
d
Debit
(78,000)
o
51,000
(4,736,000)
k
50,000
h
200,000
e
500,000
d
900,000
h
600,000
e
1,550,000
d
600,000
X
1,112,200
(18,205,000)
(500,000)
1,500,000
(3,100,000)
(1,600,000)
(3,950,000)
(2,750,000)
(27,000)
51,000
(5,798,200)
(1,062,200)
(24,847,600)
Page 6
Target
Wenatchee Whirlpool World
Closing entry for
1996
1996
Rev/(Exp)
Sales
6,200,000
Receipt/(Disb)
p
120,000
Earnings of affiliated company (equity
method)
Gain/(loss) on sale of PP&E
(40,000)
Realized gain/(loss) on investments
108,000
I
108,000
0
Realized gain on sale of patent
950,000
a
950,000
0
Interest and dividend revenue
13,000
j
18,000
Cost of goods sold
(3,600,000)
p
130,000
Salaries and wages
(590,000)
p
5,000
Other operating expenses
(345,000)
Bad debt expense
115,000
6,320,000
l
c
115,000
0
40,000
0
31,000
p
270,000
(3,740,000)
(585,000)
p
22,000
(367,000)
(38,500)
m
38,500
0
(244,000)
n
244,000
0
(6,500)
n
6,500
0
Interest expense
(669,400)
r
23,000
(646,400)
Income taxes expense
(740,400)
q
92,000
q
13,600
(662,000)
Net income (accrual basis)
1,112,200
X
1,112,200
X
350,600
350,600
Depreciation expense
Amortization of intangible assets
Statement of Cash Flows
INFLOWS
X
Operating Activities
OUTFLOWS
(Subtotals)
350,600
Reconciling schedule:
Net Income
Depreciation & amortization
1,112,200
250,500
Bond premiums/discounts
23,000
Realized gains/losses PP&E
40,000
Realized gain/loss investments
(108,000)
Gain on sale of patent
(950,000)
Undistributed Earnings of Investees
Deferred income taxes
(97,000)
92,000
Change in working capital accounts:
Net accounts receivable
158,500
Merchandise Inventory
(270,000)
Prepaid Operating Expenses
(22,000)
Accounts Payable
130,000
Salaries Payable
5,000
Income Taxes Payable
(13,600)
Cash provided by operations:
350,600
Document1 Created by T. Gordon 3/14/2016
Page 7
Document1 Created by T. Gordon 3/14/2016
Page 8
Investing Activities
Sale of patent
a
1,000,000
Sale of equipment
c
25,000
Purchase factory
g
4,900,000
Purchase investment securities
I
875,000
Sold investment securities
I
692,000
Issued bonds
b
5,000,000
Issued common stock
e
2,050,000
Financing Activities
Dividends paid
k
75,000
Long-term debt repaid
s
2,430,000
Noncash Financing/Investing
Preferred converted to common stock
d
1,500,000
d
1,500,000
Swap common stock for land
h
800,000
h
800,000
X
837,600
CHANGE IN CASH
Totals
Document1 Created by T. Gordon 3/14/2016
25,237,000
25,237,000
Page 9
Solution
Working through the additional items of information:
a.
On February 25, WWW sold an internally developed patent for $1,000,000. The patent was carried on the
books at unamortized legal fees amounting to $50,000 at date of sale.
Cash [Investing - inflow]
Intangible Assets
Realized gain on sale of patent
b.
80,000
1,500,000
900,000
600,000
2,050,000
500,000
1,550,000
By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.
Allowance for doubtful accounts
Accounts receivable
g.
25,000
15,000
40,000
On July 20, WWW sold 50,000 shares of its common stock for $41 per share. The proceeds would be
$2,050,000 (41 * 50,000) and the par value portion would be $500,000 with the rest as additional paid in
capital.
Cash [Financing - inflow]
Common stock, $10 par
Additional paid in capital
f.
5,000,000
During the third quarter, shareholders holding 15,000 shares of the preferred stock converted them into
common stock. The conversion ratio was 6 shares of common for each share of preferred. Therefore 90,000
shares of common stock would be issues (6 * 15,000) with a par value of $900,000 ($10 par each). The book
value of the preferred was 1,500,000. Therefore, additional paid in capital to balance the journal entry
would be 600,000.
Convertible Preferred Stock, $100 par
Common stock, $10 par
Additional paid-in capital
e.
5,000,000
During the year, WWW disposed of various items of equipment with a total book value of $65,000 and
original cost of $80,000. The amount received was $25,000 in cash. Accumulated depreciation would be
$15,000 (80,000 - 65,000)
Cash [Investing - inflow]
Accumulated depreciation
Loss on sale of plant, property & equipment
Plant, property and equipment
d.
50,000
950,000
On March 31, WWW issued $5,000,000 in bonds at face value. The semi-annual bonds have a coupon rate
of 10% per annum.
Cash [Financing - inflow]
Bonds payable
c.
1,000,000
28,000
28,000
An existing factory with equipment was acquired during the year. The acquisition cost was allocated as
follows: $772,000 to land, $3,450,000 to building and 678,000 to equipment. This totals to $4,900,000.
Plant, property and equipment
Cash [Investing outflow]
Document1 Created by T. Gordon 3/14/2016
4,900,000
4,900,000
Page 10
h.
WWW acquired a parcel of land adjoining the new factory by giving the owner 20,000 shares of its common
stock. At the date of the transaction, the market value of the stock was $40 per share. The value of the land
is $800,000 (20,000 * 40).
Plant, property and equipment
Common stock, $10 par
Additional paid in capital
i.
875,000
875,000
692,000
584,000
108,000
WWW owns 30% of a company which manufactures parts that WWW uses in its production process.
WWW received $18,000 in dividends from this partially owned company during 1996. Dividends received
from equity-method investments reduce the investment account and do NOT appear on the income statement.
Cash [Operating - dividends received]
Investments (partially-owned companies)
k.
200,000
600,000
During the year WWW purchased $875,000 in marketable securities and sold securities which had cost
$584,000. The market value of the portfolio at the end of the year was $390,000. From the income
statement, the gain on sale was 108,000. Therefore, the cash received from the sale of securities was
584+108 = $692,000
Investments - Securities available for sale
Cash [Investing outflow]
Cash [Investing inflow]
Investments - Securities available for sale
Gain on sale of investments
j.
800,000
18,000
18,000
Dividends declared during the year totaled $50,000. Dividends declared reduce retained earnings and
increase dividends payable. The balancing number in dividends payable (if this account exists) will be the
dividends paid. If there is no dividends payable account, then the dividends declared = the dividends paid.
Retained earnings
Dividends payable
Dividends payable
Cash [Financing - outflow]
50,000
50,000
75,000
75,000
Starting through the income statement, looking for noncash items:
l.
No deposit was made for share of earnings of partially owned companies. Therefore, this
account needs to be zeroed out by re-constructing the entry that recorded the share of
earnings.
Investments in partially owned company
Earnings of partially-owned company
115,000
115,000
m. No check was written for bad debt expense. Therefore, this account needs to be zeroed out by
re-constructing the entry that recorded bad debt expense for the year (the credit is always to
allowance for doubtful accounts.
Bad debt expense
Allowance for doubtful accounts
Document1 Created by T. Gordon 3/14/2016
38,500
38,500
Page 11
n.
No checks are written to record depreciation expense and amortization of intangibles.
Therefore, these accounts need to be zeroed out by reconstructing the entry that recorded the
expenses.
Depreciation expense
Amortization of intangible assets
Accumulated depreciation
Intangible assets
244,000
6,500
244,000
6,500
Starting through the balance sheet to investigate accounts not yet balanced:
o.
Securities available for sale (at market) doesn’t balance by $51,000. However, this amount
appears in the owners’ equity section as the change in Unrealized (gain)/loss on investments.
Therefore, this amount must have been the adjusting entry for the “allowance for change in
value” account.
Unrealized gain/loss on investments
Investments in AFS securities (allowance)
p.
120,000
120,000
270,000
270,000
22,000
22,000
130,000
130,000
5,000
5,000
Income tax expense is affected by two accounts on the balance sheet - income taxes payable
and deferred income taxes.
Income taxes payable
Income tax expense
Deferred income taxes
Income tax expense
r.
51,000
The remaining difference in accounts receivable ($120,000) is the adjustment to sales to get
from accrual basis to cash basis. The difference in Merchandise Inventory is an adjustment to
cost of goods sold. The difference in prepaid operating expenses is an adjustment to other
operating expenses. The change in accounts payable would mostly be related to cost of goods
sold. The change in salaries payable affects salaries and wages expense.
Sales
Accounts receivable
Merchandise inventory
Cost of goods sold
Prepaid operating expenses
Other operating expenses
Accounts payable
Cost of goods sold
Salaries payable
Salaries and wages
q.
51,000
13,600
13,600
92,000
92,000
Amortization of premiums and discounts on bonds payable impacts interest expense.
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Page 12
Interest expense
Discount on bonds payable
s.
23,000
23,000
Long-term debt is presented in two numbers on balance sheet - current and noncurrent. These
accounts need to be combined to find out how much was borrowed or repaid during the year.
Take the change in one account to the other. The remaining “amount to balance” will be the
cash inflow or outflow.
Other long-term debt
Current portion of long-term debt
8,000
8,000
After this entry, the number necessary to balance other long-term debt is $2,430,000 which must
be the amount of long-term debt repaid during the year.
Other long-term debt
Cash [Financing - outflow]
2,430,000
2,430,000
If all balance sheet accounts have been explained (check it!), you are ready to complete the cash
flows from operations by adjusting the revenue/expense accounts for the amounts entered into the
income statement section. Then total up the investing activities and the operating activities. The
cash flows from operating plus/minus the cash flows from investing and operating should TIE TO
THE CHANGE IN CASH. If so, you are ready for the last step – the indirect method
reconciliation schedule.
The reconciliation schedule. Start with Net Income and adjust for all the “zero’d out” items in
the income statement section EXCEPT for bad debt expense. In other words, add back
deprecation expense, adjust for gain/loss, etc. The skip down a few rows and start the “changes in
working capital section” and enter the OPPOSITE SIGN as compared to the balance sheet section
(the SAME SIGN as the entry in the income statement section). You’ll probably still be “off” so
check through the direct method (income statement) section and look for amounts that are not yet
on the reconciling schedule and trace them back to the entry. For example, you might find a
change in bond premium or discount on the interest expense line. Getting it to balance isn’t a
picnic but it can be done!
Once the workpaper is complete, you are ready to prepare the “formal” statement of cash flow
with headings, appropriate descriptions, and disclosures of noncash financing and investing
activities.
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Page 13
Example 4 - Acct 301
Solution
Wenatchee Whirlpool World
Statement of Cash Flows
For year ended 12/31/96
Inflows
Cash provided by operations
Cash collected from customers
Interest & dividends received
Cash paid for merchandise
Cash paid to employees
Other operating disbursements
Interest paid
Income taxes paid
Outflows
Net
6,320,000
31,000
Subtotals
Cash provided by investing activities
Purchase plant, property & equipment
Sale of plant, property & equipment
Sale of patent
Marketable securities purchased
Marketable securities sold
Subtotals
Cash provided by financing activities
Dividends paid
Long-term debt retired
Bonds issued
Common stock issued
Subtotals
(3,740,000)
(585,000)
(367,000)
(646,400)
(662,000)
6,351,000 (6,000,400)
350,600
(4,900,000)
25,000
1,000,000
(875,000)
692,000
1,717,000 (5,775,000) (4,058,000)
(75,000)
(2,430,000)
5,000,000
2,050,000
7,050,000 (2,505,000)
Change in cash
Beginning balance - Cash
Ending balance - Cash
4,545,000
837,600
2,000,000
2,837,600
Non-cash financing and investing activities
Preferred stock converted to common
1,500,000
Land obtained by issue of common stock
800,000
Document1 Created by T. Gordon 3/14/2016
Page 14
Example 3 - Acct 301
Wenatchee Whirlpool World
For year ended
Solution
12/31/96
Schedule to reconcile net income to cash provided by operations
Net Income
1,112,200
Depreciation & amortization
250,500
Bond premiums/discounts
23,000
Realized gains/losses PP&E
40,000
Realized gain/loss investments
(108,000)
Gain on sale of patent
(950,000)
Undistributed Earnings of Affiliates
(97,000) *
Deferred income taxes
92,000
Change in working capital accounts:
Net accounts receivable
158,500 **
Merchandise Inventory
(270,000)
Prepaid Operating Expenses
(22,000)
Accounts Payable
130,000
Salaries Payable
5,000
Income Taxes Payable
(13,600)
Cash provided by operations:
350,600
The following notes are explanations and
not part of a formal statement of cash flow
* Earnings of affiliates (equity method)
Dividends received (equity method affiliates)
(115,000)
18,000
(97,000)
** This is the easiest way to handle bad debts: just enter change in NET A/R:
Change in Accounts Receivable
148,000
Change in Allowance for Doubtful Accounts
10,500
158,500
This is the more difficult alternate:
Adjustment to sales (to get cash collected from
120,000
customers)
Bad debt expense
38,500
158,500
What does not work is to include bad debt expense +
change in Accounts Receivable and change in Allowance!
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Page 15