Question
Sales $900,000 Cost of Goods 500,000 Gross Margin. 400,000 Selling and Administrative Expenses328,000 Net operating income 72,000 Gain on sale of equipment. 8,000 Income before
Sales $900,000
Cost of Goods 500,000
Gross Margin. 400,000
Selling and Administrative Expenses328,000
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 cost of 40,000 and on which it was accumulated depreciation of 30,000 was sold during year 2, for 18,000.
1. Net cash provided by operating activities:
First we begin by calculating Accumulated Depreciation Credit and Gain on 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? $x, xxx. You will need this amount to calculate the Net Cash later; it should be subtracted from net income because this is a depreciable asset.
Step 3: The guidelines from Exhibit 12-2 (pg 563) can be used to analyze the changes in noncash balance sheet accounts that impact net income as follows:
Increase in Account Balance | Decrease in Account Balance | |
Current Assets | ||
Accounts receivable................ y1-y2 | xx,000 | |
Inventory................................. y1-y2 | xx,000 | |
Prepaid expenses..................... y1-y2 | + 7,000 | |
Current Liabilities | ||
Accounts payable.................... y2-y1 | + xx,000 | |
Accrued liabilities.................... y2-y1 | xx,000 | |
Income taxes payable.............. y2-y1 | + 3,000 |
Tip: y1, y2 means year 1, year 2
(All these numbers are found on pg 591 balance sheet)
Tip: The gain on sale of equipment ($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 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 |
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