Statement of Cash Flows - Example 4Wenatchee Whirlpool World

Balance Sheet12/31/96 12/31/95

Current AssetsCash 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 AssetsInvestments (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 LiabilitiesAccounts 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 LiabilitiesBonds 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 EquityConvertible 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 WorldIncome 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 315Worksheet Year

endingYear

endingWenatchee Whirlpool World 12/31/95 Ref Debit Ref Credit 12/31/96 TargetCash 2,000,000 837,600 2,837,600 837,600 Securities Available for Sale (at market)

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)

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

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

Investments in affiliated companies (equity method)

3,000,000 3,097,000 97,000

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)

18,205,000

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)

Bonds Payable (5,000,000) (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)

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

Wenatchee Whirlpool World12/31/95 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 investments

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

Retained Earnings (4,736,000) (5,798,200) (1,062,200)

0 (18,205,000)

(24,847,600)

Closing entry for 1996 1996

Rev/(Exp) Receipt/(Disb)

Sales 6,200,000

Earnings of affiliated companies (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

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 WorldStatement of Cash Flows INFLOWS OUTFLOWS (Subtotals)Operating Activities

Investing Activities

Financing Activities

Noncash Financing/Investing

CHANGE IN CASH 837,600 Totals

SolutionExample 4- Acct 315Worksheet Year ending Year endingWenatchee Whirlpool World 12/31/95 Ref Debit Ref Credit 12/31/96 TargetCash 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 TargetConvertible 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 method)

115,000 l 115,000 0

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 ActivitiesSale 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 ActivitiesIssued 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/InvestingPreferred 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] 1,000,000Intangible Assets 50,000Realized 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] 5,000,000Bonds 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] 25,000Accumulated depreciation 15,000Loss on sale of plant, property & equipment 40,000

Plant, property and equipment 80,000d. 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 1,500,000Common stock, $10 par 900,000Additional 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] 2,050,000Common stock, $10 par 500,000Additional 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 28,000Accounts 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 4,900,000Cash [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 800,000Common stock, $10 par 200,000Additional 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 875,000Cash [Investing outflow] 875,000

Cash [Investing inflow] 692,000Investments - Securities available for sale 584,000Gain 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] 18,000Investments (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 50,000Dividends payable 50,000

Dividends payable 75,000Cash [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 115,000Earnings 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 38,500Allowance 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 244,000Amortization of intangible assets 6,500

Accumulated depreciation 244,000Intangible assets 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 51,000Investments 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 120,000Accounts receivable 120,000

Merchandise inventory 270,000Cost of goods sold 270,000

Prepaid operating expenses 22,000Other operating expenses 22,000Accounts payable 130,000

Cost of goods sold 130,000Salaries 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 13,600Income tax expense 13,600Deferred 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 23,000Discount 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 8,000Current 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 2,430,000Cash [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 “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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Example 4 - Acct 301Solution

Wenatchee Whirlpool WorldStatement of Cash Flows

For year ended 12/31/96

Inflows Outflows NetCash provided by operationsCash 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 activitiesPurchase 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 activitiesDividends 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 1,500,000Land obtained by issue of common stock 800,000

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Example 3 - Acct 301 SolutionWenatchee Whirlpool World

For year ended 12/31/96

Schedule to reconcile net income to cash provided by operationsNet 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 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 customers)

120,000

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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