Statement of Cash Flows - Example 4

Wenatchee Whirlpool World

Balance Sheet
12/31/96 12/31/95
Current Assets
Cash 2,837,600 2,000,000
Securities Available for Sale (at market) 390,000 150,000
Accounts Receivable 1,752,000 1,900,000
Allowance for doubtful accounts (120,500) (110,000)
Merchandise Inventory 1,145,000 875,000
Prepaid Operating Expenses 84,000 62,000
6,088,100 4,877,000

Noncurrent Assets
Investments (equity method) 3,097,000 3,000,000
Plant, property & equipment 16,420,000 10,800,000
Accumulated Depreciation (829,000) (600,000)
Intangible Assets 71,500 128,000
TOTAL ASSETS 24,847,600 18,205,000

Current Liabilities
Accounts Payable 880,000 750,000
Salaries Payable 20,000 15,000
Income Taxes Payable 13,400 27,000
Dividends Payable 35,000 60,000
Current portion long term debt 29,000 21,000
977,400 873,000
Noncurrent Liabilities
Bonds Payable 10,000,000 5,000,000
Discount on Bonds (247,000) (270,000)
Deferred Income Taxes 180,000 88,000
Other long term liabilities 562,000 3,000,000
10,495,000 7,818,000

Stockholder's Equity
Convertible preferred, $100 par 500,000 2,000,000
Common stock, $10 par 3,100,000 1,500,000
Additional paid in capital 3,950,000 1,200,000
Unrealized (gain)/loss investments 27,000 78,000
Retained Earnings 5,798,200 4,736,000
13,375,200 9,514,000
Total liabilities and equity 24,847,600 18,205,000
 Wenatchee Whirlpool World
Income Statement
For year ending 12/31/96

Sales 6,200,000
Earnings of affiliated company (equity method) 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
Total revenues 7,346,000

Cost of goods sold 3,600,000

Salaries and wages 590,000
Other operating expenses 345,000
Bad debt expense 38,500
Depreciation & amortization expense 250,500
Interest expense 669,400
Income taxes expense 740,400 6,233,800

Net income 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 Year Year
ending ending
Wenatchee Whirlpool World 12/31/95 Ref Debit Ref Credit 12/31/96 Target
Cash 2,000,000 837,600 2,837,600 837,600
Securities Available for Sale (at 150,000 390,000 240,000
market)
Accounts Receivable 1,900,000 1,752,000 (148,000)

Allowance for doubtful accounts (110,000) (120,500) (10,500)

Merchandise Inventory 875,000 1,145,000 270,000

Prepaid Operating Expenses 62,000 84,000 22,000

Investments in affiliated 3,000,000 3,097,000 97,000

companies (equity method)
Plant, property & equipment 10,800,000 16,420,000 5,620,000

Accumulated Depreciation (600,000) (829,000) (229,000)

Intangible Assets 128,000 71,500 (56,500)

18,205,00 24,847,60
0 0
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)

Bonds Payable (5,000,000) (10,000,000 (5,000,00

) 0)
Premium/Discount on Bonds 270,000 247,000 (23,000)
Payable
Deferred Income Taxes (88,000) (180,000) (92,000)

Other long term liabilities (3,000,000) (562,000) 2,438,000

Wenatchee Whirlpool World
12/31/95 ref Debit ref Credit 12/31/96 Target
Convertible preferred, $100 par (2,000,000) (500,000) 1,500,000

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 (78,000) (27,000) 51,000

investments
Retained Earnings (4,736,000) (5,798,200) (1,062,200
)
0 (18,205,00 (24,847,60
0) 0)

Closing entry for 1996 1996

Rev/(Exp) Receipt/
(Disb)
Sales 6,200,000

Earnings of affiliated companies 115,000

(equity method)
Gain/(loss) on sale of PP&E (40,000)

Realized gain/(loss) on 108,000

investments
Realized gain on sale of patent 950,000

Interest and dividend revenue 13,000

Cost of goods sold (3,600,000)

Salaries and wages (590,000)

Other operating expenses (345,000)

Bad debt expense (38,500)

Depreciation expense (244,000)
Amortization of intangible assets (6,500)
Interest expense (669,400)

Income taxes expense (740,400)

Net income (accrual basis) 1,112,200

Wenatchee Whirlpool World
Statement of Cash Flows INFLOWS OUTFLOWS (Subtotals)
Operating Activities

Investing Activities

Financing Activities

Noncash Financing/Investing

CHANGE IN CASH 837,600

Totals
 Solution
Example 4- Acct 315
Worksheet Year ending Year ending
Wenatchee Whirlpool World 12/31/95 Ref Debit Ref Credit 12/31/96 Target
Cash 2,000,000 X 837,600 2,837,600 837,600
o 51,000
Securities Available for Sale (at market) 150,000 I 875,000 I 584,000 390,000 240,000
p 120,000
Accounts Receivable 1,900,000 f 28,000 1,752,000 (148,000)
Allowance for doubtful accounts (110,000) f 28,000 m 38,500 (120,500) (10,500)
Merchandise Inventory 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 j 18,000 3,097,000 97,000

h 800,000
Plant, property & equipment 10,800,000 g 4,900,000 c 80,000 16,420,000 5,620,000
Accumulated Depreciation (600,000) c 15,000 n 244,000 (829,000) (229,000)
n 6,500
Intangible Assets 128,000 a 50,000 71,500 (56,500)
18,205,000 24,847,600
Accounts Payable (750,000) p 130,000 (880,000) (130,000)
Salaries Payable (15,000) p 5,000 (20,000) (5,000)
Income Taxes Payable (27,000) q 13,600 (13,400) 13,600
Dividends Payable (60,000) k 75,000 k 50,000 (35,000) 25,000
Current portion long term debt (21,000) s 8,000 (29,000) (8,000)
Bonds Payable (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)
s 2,430,000
Other long term liabilities (3,000,000) s 8,000 (562,000) 2,438,000
12/31/95 ref Debit ref Credit 12/31/96 Target
Convertible preferred, $100 par (2,000,000) d 1,500,000 (500,000) 1,500,000
h 200,000
e 500,000
Common stock, $10 par (1,500,000) d 900,000 (3,100,000) (1,600,000)
h 600,000
e 1,550,000
Additional paid in capital (1,200,000) d 600,000 (3,950,000) (2,750,000)
Unrealized (gain)/loss investments (78,000) o 51,000 (27,000) 51,000
Retained Earnings (4,736,000) k 50,000 X 1,112,200 (5,798,200) (1,062,200)
0 (18,205,000) (24,847,600)

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Wenatchee Whirlpool World

Closing entry for 1996 1996

Rev/(Exp) Receipt/(Disb)
Sales 6,200,000 p 120,000 6,320,000
Earnings of affiliated company (equity 115,000 l 115,000 0
method)
Gain/(loss) on sale of PP&E (40,000) c 40,000 0
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 31,000
Cost of goods sold (3,600,000) p 130,000 p 270,000 (3,740,000)
Salaries and wages (590,000) p 5,000 (585,000)
Other operating expenses (345,000) p 22,000 (367,000)
Bad debt expense (38,500) m 38,500 0
Depreciation expense (244,000) n 244,000 0
Amortization of intangible assets (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
Statement of Cash Flows INFLOWS OUTFLOWS (Subtotals)
Operating Activities X 350,600

Reconciling schedule:
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 Investees (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

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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

Financing Activities
Issued bonds b 5,000,000
Issued common stock e 2,050,000
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

CHANGE IN CASH X 837,600

Totals 25,237,000 25,237,000

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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] 1,000,000

Intangible Assets 50,000
Realized gain on sale of patent 950,000
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.

Cash [Financing - inflow] 5,000,000

Bonds payable 5,000,000
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. Accumulated depreciation would be
$15,000 (80,000 - 65,000)

Cash [Investing - inflow] 25,000

Accumulated depreciation 15,000
Loss on sale of plant, property & equipment 40,000
Plant, property and equipment 80,000
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. 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 1,500,000

Common stock, $10 par 900,000
Additional paid-in capital 600,000
e. 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] 2,050,000

Common stock, $10 par 500,000
Additional paid in capital 1,550,000
f. By the end of the year, WWW had written off as uncollectible a total of $28,000 in accounts receivable.

Allowance for doubtful accounts 28,000

Accounts receivable 28,000
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. This totals to $4,900,000.

Plant, property and equipment 4,900,000

Cash [Investing outflow] 4,900,000

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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 800,000

Common stock, $10 par 200,000
Additional paid in capital 600,000
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. 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 875,000

Cash [Investing outflow] 875,000
Cash [Investing inflow] 692,000
Investments - Securities available for sale 584,000
Gain on sale of investments 108,000
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. Dividends received from
equity-method investments reduce the investment account and do NOT appear on the income statement.

Cash [Operating - dividends received] 18,000

Investments (partially-owned companies) 18,000
k. 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 50,000

Dividends payable 50,000
Dividends payable 75,000
Cash [Financing - outflow] 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 115,000

Earnings of partially-owned company 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 38,500

Allowance for doubtful accounts 38,500

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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 244,000

Amortization of intangible assets 6,500
Accumulated depreciation 244,000
Intangible assets 6,500

Starting through the balance sheet to investigate accounts not yet balanced:

o. Securities available for sale (at market) doesnt 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 51,000

Investments in AFS securities (allowance) 51,000

p. 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 120,000
Accounts receivable 120,000
Merchandise inventory 270,000
Cost of goods sold 270,000
Prepaid operating expenses 22,000
Other operating expenses 22,000
Accounts payable 130,000
Cost of goods sold 130,000
Salaries payable 5,000
Salaries and wages 5,000

q. Income tax expense is affected by two accounts on the balance sheet - income taxes payable
and deferred income taxes.

Income taxes payable 13,600

Income tax expense 13,600
Deferred income taxes 92,000
Income tax expense 92,000

r. Amortization of premiums and discounts on bonds payable impacts interest expense.

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Interest expense 23,000
Discount on bonds payable 23,000

s. 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 8,000

Current portion of long-term debt 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 2,430,000

Cash [Financing - outflow] 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 zerod 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). Youll 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 isnt 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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 Example 4 - Acct 301
Solution
Wenatchee Whirlpool World
Statement of Cash Flows
For year ended 12/31/96

Inflows Outflows Net

Cash provided by operations
Cash collected from customers 6,320,000
Interest & dividends received 31,000
Cash paid for merchandise (3,740,000
)
Cash paid to employees (585,000)
Other operating disbursements (367,000)
Interest paid (646,400)
Income taxes paid (662,000)
Subtotals 6,351,000 (6,000,400 350,600
)

Cash provided by investing activities

Purchase plant, property & equipment (4,900,000
)
Sale of plant, property & equipment 25,000
Sale of patent 1,000,000
Marketable securities purchased (875,000)
Marketable securities sold 692,000
Subtotals 1,717,000 (5,775,000 (4,058,000)
)

Cash provided by financing activities

Dividends paid (75,000)
Long-term debt retired (2,430,000
)
Bonds issued 5,000,000
Common stock issued 2,050,000
Subtotals 7,050,000 (2,505,000 4,545,000
)

Change in cash 837,600

Beginning balance - Cash 2,000,000
Ending balance - Cash 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

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 Example 3 - Acct 301 Solution
Wenatchee Whirlpool World
For year ended 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) (115,000)

Dividends received (equity method affiliates) 18,000
(97,000)

** This is the easiest way to handle bad debts: just enter change in NET
A/R:
Change in Accounts 148,000
Receivable
Change in Allowance for Doubtful 10,500
Accounts
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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