1. Net cash provided by operating activities:

First, we begin by calculating Accumulated Depreciation Credit and Gain on the Sale of equipment. We will need them to calculate the Net Cash later.

Step 1:

Beginning balance – Debits + Credits = Ending balance (why? see pg 582 for a good example)

Therefore, the following equation can be applied to the Accumulated Depreciation account to compute the depreciation to add back to net income:

Beginning balance – Debits + Credits = Ending balance

$120,000 – $30,000 + Credits = $132,000

Credits = $132, 000 – $120, 000 + $30,000

Credits = $42, 000

Step 2:

Gain on sale of equipment: Equipment that had cost $40,000 and on which there was accumulated depreciation of $30,000 was sold during year 2 for $18,000 (pg 591 last paragraph). Now figure out by how much was the gain? $x, xxx. You will need this amount to calculate the Net Cash later; it should be subtracted from net income because this is a depreciable asset.

Step 3: The guidelines from Exhibit 12-2 (pg 563) can be used to analyze the changes in noncash balance sheet accounts that impact net income as follows:

	Increase in Account Balance	Decrease in Account Balance
Current Assets
Accounts receivable................ y1-y2	– xx,000
Inventory................................. y1-y2	– xx,000
Prepaid expenses..................... y1-y2		+ 7,000
Current Liabilities
Accounts payable.................... y2-y1	+ xx,000
Accrued liabilities.................... y2-y1		– xx,000
Income taxes are payable.............. y2-y1	+ 3,000

Tip: y1, y2 means year 1, year 2

(All these numbers are found on pg 591 balance sheet)

Tip: The gain on the sale of equipment ($x,000) is subtracted from net income.

Step 4: Now compute the Net cash provided by plugging the numbers above. Also, note the Net Income on pg 591 income statement. Use it in computing the net cash provided by operating activities below

The net cash provided by operating activities is computed as follows:

Net income........................................................................................		$xx,000
Adjustments to convert net income to a cash basis:
Depreciation..................................................................................	$ xx,000
Increase in accounts receivable......................................................	(xx,000)
Increase in inventory.....................................................................	(xx,000)
Decrease in prepaid expenses........................................................	x,000
Increase in accounts payable.........................................................	xx,000
Decrease in accrued liabilities........................................................	(xx,000)
Increase in income taxes payable...................................................	x,000
Gain on sale of equipment.............................................................	(x,000)	(36,000)
Net cash provided by operating activities..........................................		$xx,000

2. Prepare a statement of cash flows.

Investing and Financing activities:

The guidelines from Exhibit 12-3 can be used to analyze the changes in noncash balance sheet accounts that impact investing and financing cash flows as follows:

	Increase in Account Balance	Decrease in Account Balance
Noncurrent Assets
Property, plant, and equipment................... y1-y2	– xxx,000
Loan to Hymans Company......................... y1-y2	– xx,000
Liabilities and Stockholders’ Equity
Bonds payable............................................ y2-y1	+ xxx,000
Common stock............................................ y2-y1	+ xx,000

Information Available:

Sales …… $900,000

Cost of Goods …500,000

Gross Margin…. 400,000

Selling and Administrative Expenses…328,000

Net operating income… 72,000

Gain on sale of equipment…. 8,000

Income before taxes…. 80,000

Income …24,000

Net income… 56,000

Year 2 Year 2

Cash… 3,000 21,000

Accounts receivable 250,000 17,000

Inventory 310,000 260,000

Prepaid Expenses 7,000 14,000

Total Current Assets 571,000 465,000

Property , plant and equipment 510,000 400,000

Less Accumulated depreciation 132,000 120,000

Net property plant and equip 378,000 280,000

Loan to Hymans Company 40,000 0

Total Assets 989,000 745,000

Liabilities and Stock Holders Equity

Accounts Payable 310,000 250,000

Accrued Liabilities 20,000 30,000

Income taxes payable 45,000 42,000

Total current liabilities 375,000 322,000

Bonds payable 190,000 70,000

Total liabilities 565,000 392,000

Common stock 300,000 270,000

Retained earnings 124,000 83,000

Total stock holders equity 424,000 353,000

Total liabilities and stock holder equity 989,000 745,000

Equipment that had a cost of 40,000 and on which it was accumulated depreciation of 30,000 was sold during year 2, for 18,000.