spi62260 ch11 001-016 - mcgraw-hill...

CHAPTER 11 Statement of Cash Flows

BRIEF EXERCISES

BE11–1 Classify each of the following items as an operating, investing, or financing activity. 1. Dividends paid. 2. Repayment of notes payable. 3. Payment for inventory. 4. Purchase of equipment. 5. Interest paid.

BE11–2 The following selected transactions occur during the first year of operations. Determine how each should be reported in the statement of cash flows. 1. Issued one million shares of common stock at $20 per share. 2. Paid $75,000 to suppliers for inventory. 3. Paid a dividend of $1 per share to common stockholders. 4. Loaned $50,000 to an employee and accepted a note receivable.

BE11–3 Place the following items in the correct order as they would appear in the statement of cash flows. 1. Financing activities. 2. Net increase (decrease) in cash. 3. Operating activities. 4. Beginning cash balance. 5. Ending cash balance. 6. Investing activities.

BE11–4 Laser World reports net income of $550,000. Depreciation expense is $40,000, accounts receivable increases $10,000, and accounts payable decreases $20,000. Calculate net cash flows from operating activities using the indirect method.

BE11–5 Macrosoft Company reports net income of $65,000. The accounting records reveal depreciation expense of $80,000 as well as increases in prepaid rent, accounts payable, and income tax payable of $60,000, $12,000, and $18,000, respectively. Prepare the operating activities section of Macrosoft’s statement of cash flows using the indirect method.

BE11–6 Hi-Tech, Inc., reports net income of $60 million. Included in that number are depreciation expense of $5 million and a loss on the sale of equipment of $1 million. Records reveal increases in accounts receivable, accounts payable, and inventory of $2 million, $3 million, and $4 million, respectively. What are Hi-Tech’s net cash flows from operating activities?

BE11–7 Engineering Wonders reports net income of $60 million. Included in that number is building depreciation expense of $5 million and a gain on the sale of land of $1 million. Records reveal decreases in accounts receivable, accounts payable, and inventory of $2 million, $3 million, and $4 million, respectively. What are Engineering Wonders’ net cash flows from operating activities?

BE11–8 Creative Sound Systems sold investments, land, and its own common stock for $30 million, $15 million, and $40 million, respectively. Creative Sound Systems also purchased treasury stock, equipment, and a patent for $21 million, $25 million, and $12 million, respectively. What amount should the company report as net cash flows from investing activities?

BE11–9 Refer to the situation described in BE11–8. What amount should Creative Sound Systems report as net cash flows from financing activities?

BE11–10 The balance sheet of Cranium Gaming reports total assets of $400,000 and $700,000 at the beginning and end of the year, respectively. Sales revenues are $1.1 million, net income is $65,000, and operating cash flows are $55,000. Calculate the cash return on assets, cash flow to sales, and asset turnover for Cranium Gaming.

Determine proper classification (LO1)


Understand the basic format for the statement of cash flows (LO2)

Calculate operating activities—indirect method (LO2)




Calculate net cash flows from investing activities (LO3)

Calculate net cash flows from financing activities (LO3)

Calculate the cash return on assets (LO4)


BE11–11 The balance sheet of Innovative Products reports total assets of $520,000 and $720,000 at the beginning and end of the year, respectively. The cash return on assets for the year is 20%. Calculate Innovative Products’ net cash flows from operating activities (operating cash flows) for the year.

BE11–12 Video Shack’s accounts receivable decreases during the year by $8 million. What is the amount of cash received from customers during the reporting period if its sales are $63 million?

BE11–13 Electronic Superstore’s inventory increases during the year by $4 million, and its accounts payable to suppliers increases by $6 million during the same period. What is the amount of cash paid to suppliers of merchandise during the reporting period if its cost of goods sold is $35 million?

BE11–14 Wireless Solutions reports operating expenses of $885,000. Operating expenses include both rent expense and salaries expense. Prepaid rent increases during the year by $20,000 and salaries payable increases by $15,000. What is the cash paid for operating expenses during the year?

BE11–15 Computer World reports income tax expense of $240,000. Income taxes payable at the beginning and end of the year are $55,000 and $65,000, respectively. What is the cash paid for income taxes during the year?

Calculate the net cash flows from operating activities (LO4)

Determine cash received from customers (LO5)

Determine cash paid to suppliers (LO5)

Determine cash paid for operating expenses (LO5)

Determine cash paid for income taxes (LO5)

EXERCISES

E11–1 Match (by letter) the following items with the description or example that best fits. Each letter is used only once.

Terms

1. Operating activities. 2. Investing activities. 3. Financing activities. 4. Noncash activities. 5. Indirect method. 6. Direct method. 7. Depreciation expense. 8. Cash return on assets.

Descriptions

a. Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows.

b. Item included in net income, but excluded from net operating cash flows. c. Net cash flows from operating activities divided by average total assets. d. Cash transactions involving lenders and investors. e. Cash transactions involving net income. f. Cash transactions for the purchase and sale of long-term assets. g. Purchase of long-term assets by issuing stock. h. Shows the cash inflows and outflows from operations such as cash received from

customers and cash paid for inventory, salaries, rent, interest, and taxes.

E11–2 Discount Computers is in its second year of business providing computer repair services in the local community and reselling used computers on the Internet. The company is owned by 10 investors, each investing $100,000. Justin Lake was hired as president and CEO, with one stipulation: He would receive no salary unless the company achieved annual operating cash flows exceeding $200,000. If the $200,000 was achieved, Justin would receive a $100,000 bonus, and each of the 10 investors would receive a dividend of $10,000.

Match terms with their definitions (LO1, 2, 3, 4, 5)



At the end of the year, Justin had Nicole Roberts, one of the business interns from the local college, calculate a preliminary statement of cash flows. Operating cash flows were $185,000. Justin carefully looked over the calculations that night and then met with Nicole in the morning. Justin starts out: “Nicole, you did an excellent job in preparing the statement of cash flows. The only change I could find is that we need to move the $25,000 increase in notes payable to the bank from financing activities to operating activities. We borrowed that money three months ago and plan to pay it back within a year. After you finish the changes, round up the rest of the interns. Lunch is on me.”

Required: Do you agree with the change recommended by Justin Lake? Is there anything unethical about his actions? What should Nicole do in this situation?

E11–3 Analysis of an income statement, balance sheet, and additional information from the accounting records of Gadgets, Inc., reveals the following items. 1. Purchase of a patent. 2. Depreciation expense. 3. Decrease in accounts receivable. 4. Issuance of a note payable. 5. Increase in inventory. 6. Collection of notes receivable. 7. Purchase of equipment. 8. Exchange of long-term assets. 9. Decrease in accounts payable. 10. Payment of dividends.

Required: Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.

E11–4 Wi-Fi, Inc., has the following selected transactions during the year. 1. Issues $20 million in bonds. 2. Purchases equipment for $80,000. 3. Pays a $20,000 account payable. 4. Collects a $15,000 account receivable. 5. Exchanges land for a new patent. Both are valued at $300,000. 6. Declares and pays a cash dividend of $100,000. 7. Loans $50,000 to a customer, accepting a note receivable. 8. Pays $75,000 to suppliers for inventory.

Required: Indicate in which section of the statement of cash flows each of these items would be reported: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.

E11–5 Ernie’s Electronics had the following transactions with Bert’s Bargain House: 1. Ernie sold Bert land, originally purchased for $180,000, at a sales price of $195,000,

resulting in a gain on sale of land of $15,000. 2. Ernie borrowed $100,000 from Bert, signing a three-year note payable. 3. Ernie purchased $1 million in common stock in Bert’s Bargain House through a

private placement. 4. Ernie received a dividend of $40,000 from the common stock investment in Bert’s

Bargain House.

Required: Analyze each of the four transactions from the perspective of Ernie’s Electronics. Indicate in which section of the statement of cash flows each of these items would be reported for Ernie’s Electronics: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.




Flip Side of E11–6


Required: Prepare a correct format for Technology Solutions to use in preparing the statement of cash flows.

E11–8 Hardware Suppliers reports net income of $155,000. Included in net income is a gain on the sale of land of $15,000. A comparison of this year’s and last year’s balance sheets reveals an increase in accounts receivable of $25,000, an increase in inventory of $15,000, and a decrease in accounts payable of $45,000.

Required: Prepare the operating activities section of the statement of cash flows using the indirect method. Do you see a pattern in Hardware Suppliers’ adjustments to net income to arrive at operating cash flows? What might this imply?

E11–9 Software Distributors reports net income of $55,000. Included in that number is depreciation expense of $10,000 and a loss on the sale of land of $5,000. A comparison of this year’s and last year’s balance sheets reveals a decrease in accounts receivable of $25,000, a decrease in inventory of $15,000, and an increase in accounts payable of $45,000.

Required: Prepare the operating activities section of the statement of cash flows using the indirect method. Do you see a pattern in Software Distributors’ adjustments to net income to arrive at operating cash flows? What might this imply?



E11–6 Refer to the transactions between Ernie’s Electronics and Bert’s Bargain House recorded in E11–5.

Required: Analyze each of the four transactions from the perspective of Bert’s Bargain House. Indicate in which section of the statement of cash flows each of these items would be reported for Bert’s Bargain House: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.

E11–7 Technology Solutions’ format for the statement of cash flows was corrupted by a computer virus, as follows:


Prepare the basic format for the statement of cash flows (LO2, 3)

Flip Side of E11–5

TECHNOLOGY SOLUTIONSStatement of Cash Flows

For the year ended December 31, 2012

Cash at the beginning of the period $$$Cash at the end of the period $$$Net increase (decrease) in cash $$$

Cash Flows from Financing Activities List of cash inflows and outflows from financing activities Net cash flows from financing activities $$$

Noncash Activities List of noncash transactions $$$

Cash Flows from Investing Activities List of cash inflows and outflows from investing activities Net cash flows from investing activities $$$

Cash Flows from Operating Activities List of items adjusting net income to operating cash flows Adjustments Net income Net cash flows from operating activities $$$


E11–10 The balance sheet for Plasma Screens Corporation along with additional information is provided below:

Prepare a statement of cash flows—indirect method (LO2, 3)

PLASMA SCREENS CORPORATIONBalance Sheet

December 31, 2012 and 2011

2012 2011

AssetsCurrent assets: Cash $ 112,000 $ 120,000 Accounts receivable 78,000 92,000 Inventory 95,000 80,000 Prepaid rent 4,000 2,000Long-term assets: Land 480,000 480,000 Equipment 790,000 670,000 Accumulated depreciation (428,000) (268,000) Total assets $1,131,000 $1,176,000

Liabilities and Stockholders’ EquityCurrent liabilities: Accounts payable $ 99,000 $ 85,000 Interest payable 6,000 12,000 Income tax payable 8,000 5,000Long-term liabilities: Notes payable 100,000 200,000Stockholders’ equity: Common stock 700,000 700,000 Retained earnings 218,000 174,000 Total liabilities and stockholders’ equity $1,131,000 $1,176,000

Additional Information for 2012:1. Net income is $69,000.2. The company purchases $120,000 in equipment.3. Depreciation expense is $160,000.4. The company repays $100,000 in notes payable.5. The company declares and pays a cash dividend of $25,000.

Required: Prepare the statement of cash flows using the indirect method.

E11–11 Portions of the financial statements for Peach Computer are provided below. Calculate operating activities—indirect method (LO2)

PEACH COMPUTERIncome Statement


Revenues $1,800,000Expenses: Cost of goods sold $1,050,000 Operating expenses 560,000 Depreciation expense 50,000 Income tax expense 40,000 Total expenses 1,700,000Net income $ 100,000


Required: Prepare the operating activities section of the statement of cash flows for Peach Computer using the indirect method.

E11–12 Google has the following selected data ($ in millions): Calculate financial ratios (LO4)

PEACH COMPUTERSelected Balance Sheet Data

December 31

2012 2011 Increase (I) or Decrease (D)

Cash $102,000 $85,000 $17,000 (I)Accounts receivable 45,000 49,000 4,000 (D)Inventory 75,000 55,000 20,000 (I)Prepaid rent 3,000 5,000 2,000 (D)Accounts payable 45,000 37,000 8,000 (I)Income tax payable 5,000 10,000 5,000 (D)

2009 2008

Net sales $23,651 $21,796Net income 6,520 4,227Operating cash flows 9,316 7,853Total assets 40,497 31,768

Required: 1. Calculate the return on assets. Compare it with the amounts calculated for Apple

and Dell in Illustration 11–21 . 2. Calculate the cash return on assets. Compare it with the amounts calculated for

Apple and Dell in Illustration 11–22 . 3. Calculate the cash flow to sales ratio and the asset turnover ratio. Compare the

ratios with those calculated for Apple and Dell in Illustrations 11–24 and 11–25 . Is Google’s business strategy closer to Apple’s or to Dell’s?

E11–13 Refer to the information provided for Peach Computer in E11–11.

Required: Prepare the operating activities section of the statement of cash flows for Peach Computer using the direct method.

E11–14 Mega Screens, Inc., reports sales revenue of $2,700,000, cost of goods sold of $1,500,000, and income tax expense of $140,000 for the year ended December 31, 2012. Selected balance sheet accounts are as follows:

Calculate operating activities—direct method (LO5)


MEGA SCREENS, INC.Selected Balance Sheet Data

December 31

2012 2011 Increase (I) or Decrease (D)

Cash $145,000 $185,000 $40,000 (D)Accounts receivable 275,000 225,000 50,000 (I)Inventory 120,000 155,000 35,000 (D)Accounts payable 115,000 127,000 12,000 (D)Income tax payable 20,000 15,000 5,000 (I)

Required: Calculate cash received from customers, cash paid to suppliers, and cash paid for income taxes.


E11–15 The income statement for Hewlett-Packard reports revenues of $91,658 million and cost of goods sold of $69,178 million. An examination of balance sheet amounts indicates accounts receivable increased $1,723 million, inventory increased $873 million, and accounts payable to suppliers decreased $1,957 million.

Required: Using the direct method, calculate (1) cash received from customers and (2) cash paid to suppliers.


PROBLEMS: SET A

P11–1A Listed below are several transactions. For each transaction, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI) or cash outflow (CO), or has no effect on cash (NE). The first answer is provided as an example.


Transaction Type of Activity Cash Inflow or Outflow

1. Payment of employee salaries. O CO 2. Sale of land for cash. 3. Purchase of rent in advance. 4. Collection of an account receivable. 5. Issuance of common stock. 6. Purchase of inventory. 7. Collection of notes receivable. 8. Payment of income taxes. 9. Sale of equipment for a note receivable.10. Issuance of bonds.11. Loan to another firm.12. Payment of a long-term note payable.13. Purchase of treasury stock.14. Payment of an account payable.15. Sale of equipment for cash.

P11–2A Seth Erkenbeck, a recent college graduate, has just completed the basic format to be used in preparing the statement of cash flows (indirect method) for ATM Software Developers. All amounts are in thousands (000s).

Basic format for the statement of cash flows (LO2, 3)

ATM SOFTWARE DEVELOPERSStatement of Cash Flows


Cash Flows from Operating Activities Net income $ Adjustments for noncash effects:

Net cash flows from operating activities

Cash Flows from Investing Activities

Net cash flows from investing activities

Cash Flows from Financing Activities

Net cash flows from financing activitiesNet increase (decrease) in cash $2,565Cash at the beginning of the period 7,410Cash at the end of the period $9,975


Listed below in random order are line items to be included in the statement of cash flows.

Cash received from the sale of land $ 8,550Issuance of common stock 12,825Depreciation expense 5,415Increase in accounts receivable 3,990Decrease in accounts payable 1,710Issuance of long-term notes payable 16,245Purchase of equipment 39,615Decrease in inventory 1,425Decrease in prepaid rent 855Payment of dividends 6,270Net income 11,400Purchase of treasury stock 2,565

Required: Prepare the statement of cash flows for ATM Software Developers using the indirect method.

P11–3A Portions of the financial statements for Alliance Technologies are provided below. Calculate operating activities—indirect method (LO2)

Required: Prepare the operating activities section of the statement of cash flows for Alliance Technologies using the indirect method.

P11–4A The income statement, balance sheet, and additional information for Video Phones, Inc., are provided.


ALLIANCE TECHNOLOGIESIncome Statement


Revenues $305,000Expenses: Cost of goods sold $185,000 Operating expenses 60,000 Depreciation expense 16,000 Income tax expense 22,000 Total expenses 283,000Net income $ 22,000

ALLIANCE TECHNOLOGIESSelected Balance Sheet Data

December 31, 2012, compared to December 31, 2011

Decrease in accounts receivable $ 6,000Increase in inventory 13,000Decrease in prepaid rent 9,000Increase in operating expenses payable 5,000Decrease in accounts payable 8,000Increase in income tax payable 20,000


VIDEO PHONES, INC.Balance SheetDecember 31

2012 2011

AssetsCurrent assets: Cash $186,000 $144,000 Accounts receivable 81,000 60,000 Inventory 105,000 135,000 Prepaid rent 12,000 6,000Long-term assets: Investments 105,000 0 Land 210,000 240,000 Equipment 270,000 210,000 Accumulated depreciation (69,000) (42,000) Total assets $900,000 $753,000

Liabilities and Stockholders’ EquityCurrent liabilities: Accounts payable $ 66,000 $ 81,000 Interest payable 6,000 10,000 Income tax payable 15,000 14,000Long-term liabilities: Notes payable 285,000 225,000Stockholders’ equity: Common stock 300,000 300,000 Retained earnings 228,000 123,000 Total liabilities and stockholders’ equity $900,000 $753,000

VIDEO PHONES, INC.Income Statement


Revenues $3,036,000Expenses: Cost of goods sold $1,950,000 Operating expenses 858,000 Depreciation expense 27,000 Loss on sale of land 8,000 Interest expense 15,000 Income tax expense 48,000 Total expenses 2,906,000Net income $ 130,000

Required: Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying note.

Additional Information for 2012:1. Purchase investment in bonds for $105,000.2. Sell land costing $30,000 for only $22,000, resulting in an $8,000 loss on sale of land.3. Purchase $60,000 in equipment by borrowing $60,000 with a note payable due in three

years. No cash is exchanged in the transaction.4. Declare and pay a cash dividend of $25,000.


P11–5A Google and Yahoo are competitors in the Internet search engine business. Selected financial data for Google and Yahoo are as follows:

Calculate and analyze ratios (LO4)

Required: 1. Calculate the return on assets for both companies. Compare the ratios with those

calculated for Apple and Dell in Illustration 11–21 . 2. Calculate the cash return on assets for both companies. Compare the ratios with

those calculated for Apple and Dell in Illustration 11–22 . 3. Calculate the cash flow to sales ratio and the asset turnover ratio for both companies.

Compare the ratios with those calculated for Apple and Dell in Illustrations 11–24 and 11–25 . Are Google’s and Yahoo’s business strategies closer to Apple’s or to Dell’s?

P11–6A Refer to the information provided in P11–3A for Alliance Technologies.

Required: Prepare the operating activities section of the statement of cash flows for Alliance Technologies using the direct method.

P11–7A Data for Video Phones, Inc., is provided in P11–4A.

Required: Prepare the statement of cash flows for Video Phones, Inc., using the direct method. Disclose any noncash transactions in an accompanying note.

P11–8A Cash flows from operating activities for both the indirect and direct methods are presented for Reverse Logic. All amounts are in thousands (000s).



Prepare an income statement using operating cash flow information—indirect and direct methods (LO2, 5)

($ in millions) 2009 2008

Google Net sales $23,651 $21,796 Net income 6,520 4,227 Operating cash flows 9,316 7,853 Total assets 40,497 31,768

Yahoo Net sales $ 6,460 $ 7,209 Net income 598 424 Operating cash flows 1,310 1,880 Total assets 14,936 13,690

Cash Flows from Operating Activities (Indirect method) Net income $164 Adjustments for noncash effects: Depreciation expense 52 Changes in current assets and current liabilities: Increase in accounts receivable (28) Decrease in inventory 40 Increase in prepaid rent (4) Decrease in accounts payable (16) Decrease in income tax payable (8) Net cash flows from operating activities $200

Cash Flows from Operating Activities (Direct method) Cash received from customers $ 4,020 Cash paid to suppliers (2,580) Cash paid for operating expenses (1,152) Cash paid for income taxes (88) Net cash flows from operating activities $200

Required: Complete the following income statement for Reverse Logic. Assume all accounts payable are to suppliers.


REVERSE LOGICIncome Statement


Revenues $ ?Expenses: Cost of goods sold $ ? Operating expenses ? Depreciation expense 52 Income tax expense ? Total expenses ?Net income $164

[Hint: Use the following calculations and work backwards from bottom (in red) to top for each item.]

Revenues± Change in accounts receivable

= Cash received from customers

Cost of goods sold± Change in inventory

= Purchases± Change in accounts payable

= Cash paid to suppliers

Operating expenses± Change in prepaid rent

= Cash paid for operating expenses

Income tax expense± Change in income tax payable

= Cash paid for income taxes

P11–1B Listed below are several transactions. For each transaction, indicate by letter whether the cash effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I), financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow (CI) or cash outflow (CO), or has no effect on cash (NE). The first answer is provided as an example.


PROBLEMS: SET B

Transaction Type of ActivityCash Inflow or

Outflow

1. Issuance of common stock. F CI 2. Sale of land for cash. 3. Purchase of treasury stock. 4. Collection of an account receivable. 5. Issuance of a note payable. 6. Purchase of inventory. 7. Repayment of a note payable. 8. Payment of employee salaries.

(continued)


P11–2B Natalie Daniels has completed the basic format to be used in preparing the statement of cash flows (indirect method) for CPU Hardware Designers. All amounts are in thousands (000s).

Basic format for the statement of cash flows (LO2, 3)

Transaction Type of ActivityCash Inflow or

Outflow

9. Sale of equipment for a note receivable.10. Issuance of bonds.11. Investment in bonds.12. Payment of interest on bonds payable.13. Payment of a cash dividend.14. Purchase of a building.15. Collection of a note receivable.

Below, in random order, are line items to be included in the statement of cash flows.

Cash received from the sale of land $ 3,000Issuance of common stock 250,000Depreciation expense 20,000Increase in accounts receivable 60,000Increase in accounts payable 10,000Loss on sale of land 7,000Purchase of equipment 220,000Increase in inventory 30,000Increase in prepaid rent 10,000Payment of dividends 40,000Net income 70,000Repayment of notes payable 50,000

CPU HARDWARE DESIGNERSStatement of Cash Flows


Cash Flows from Operating Activities Net income Adjustments for noncash effects:

Net cash flows from operating activities

Cash Flows from Investing Activities

Net cash flows from investing activities

Cash Flows from Financing Activities

Net cash flows from financing activitiesNet increase (decrease) in cash $(50,000)Cash at the beginning of the period 80,000Cash at the end of the period $ 30,000

(concluded)

Required: Prepare the statement of cash flows for CPU Hardware Designers using the indirect method.


SOFTWARE ASSOCIATESIncome Statement


Revenues $610,000Expenses: Cost of goods sold $370,000 Operating expenses 120,000 Depreciation expense 32,000 Income tax expense 44,000 Total expenses 566,000Net income $ 44,000

VIRTUAL GAMING SYSTEMSIncome Statement


Revenues $2,500,000Gain on sale of land 2,000 Total revenues 2,502,000Expenses: Cost of goods sold $1,600,000 Operating expenses 605,000 Depreciation expense 23,000 Interest expense 24,000 Income tax expense 70,000 Total expenses 2,322,000Net income $ 180,000

Required: Prepare the operating activities section of the statement of cash flows for Software Associates using the indirect method.

P11–4B The income statement, balance sheet, and additional information for Virtual Gaming Systems are provided.


SOFTWARE ASSOCIATESSelected Balance Sheet Data

December 31, 2012, compared to December 31, 2011

Decrease in accounts receivable $ 9,000Decrease in inventory 12,000Increase in prepaid rent 2,000Decrease in operating expenses payable 3,000Increase in accounts payable 6,000Increase in income tax payable 7,000

P11–3B Portions of the financial statements for Software Associates are provided below. Calculate operating activities—indirect method (LO2)


Required: Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying note.

P11–5B Hewlett-Packard and IBM are close competitors in the sale of computer products and technology consulting. Selected financial data for Hewlett-Packard and IBM are as follows:

Calculate and analyze ratios (LO4)

Additional Information for 2012:1. Purchase additional investment in stocks for $85,000.2. Sell land costing $50,000 for $52,000, resulting in a $2,000 gain on sale of land.3. Purchase $20,000 in equipment by borrowing $20,000 with a note payable due in three

years. No cash is exchanged in the transaction.4. Declare and pay a cash dividend of $110,000.5. Issue common stock for $50,000.

VIRTUAL GAMING SYSTEMSBalance SheetDecember 31

2012 2011

AssetsCurrent assets: Cash $199,000 $144,000 Accounts receivable 75,000 90,000 Inventory 145,000 135,000 Prepaid rent 4,000 6,000Long-term assets: Investments 185,000 100,000 Land 210,000 260,000 Equipment 230,000 210,000 Accumulated depreciation (128,000) (105,000) Total assets $920,000 $840,000

Liabilities and Stockholders’ EquityCurrent liabilities: Accounts payable $ 30,000 $ 88,000 Interest payable 4,000 3,000 Income tax payable 21,000 24,000Long-term liabilities: Notes payable 245,000 225,000Stockholders’ equity: Common stock 350,000 300,000 Retained earnings 270,000 200,000 Total liabilities and stockholders’ equity $920,000 $840,000

($ in millions) 2009 2008

Hewlett-Packard Net sales $114,552 $118,364 Net income 7,660 8,329

Operating cash flows 13,379 14,591Total assets 114,799 113,331

IBMNet sales $ 95,758 $103,630Net income 13,425 12,334Operating cash flows 20,773 18,812Total assets 109,022 109,524


Required: 1. Calculate the return on assets for both companies. Compare the ratios with those

calculated for Apple and Dell in Illustration 11–21 . 2. Calculate the cash return on assets for both companies. Compare the ratios with

those calculated for Apple and Dell in Illustration 11–22 . 3. Calculate the cash flow to sales ratio and the asset turnover ratio for both

companies. Which company has the better ratios, Hewlett-Packard or IBM? Are Hewlett-Packard’s and IBM’s business strategies closer to Apple’s or to Dell’s?

P11–6B Refer to the information provided in P11–3B for Software Associates.

Required: Prepare the operating activities section of the statement of cash flows for Software Associates using the direct method.

P11–7B Data for Virtual Gaming Systems is provided in P11–4B.

Required: Prepare the statement of cash flows for Virtual Gaming Systems using the direct method. Disclose any noncash transactions in an accompanying note.

P11–8B Cash flows from operating activities for both the indirect and direct methods are presented for Electronic Transformations.



Prepare an income statement using operating cash flow information—indirect and direct methods (LO2, 5) Cash Flows from Operating Activities (Indirect method)

Net income $35,000 Adjustments for noncash effects: Depreciation expense 8,000

Changes in current assets and current liabilities: Increase in accounts receivable (12,000) Increase in accounts payable 7,000 Increase in income tax payable 5,000 Net cash flows from operating activities $43,000

Cash Flows from Operating Activities (Direct method) Cash received from customers $78,000 Cash paid for operating expenses (25,000) Cash paid for income taxes (10,000) Net cash flows from operating activities $43,000

Required: Complete the following income statement for Electronic Transformations. Assume all accounts payable are to suppliers.

ELECTRONIC TRANSFORMATIONSIncome Statement


Revenues $ ?Expenses: Operating expenses $ ? Depreciation expense 8,000 Income tax expense ? Total expenses ?Net income $35,000


Revenues± Change in accounts receivable = Cash received from customers

Operating expenses± Change in accounts payable = Cash paid for operating expenses

Income tax expense± Change in income tax payable = Cash paid for income taxes

[ Hint: Use the calculations on the next page and work backwards from bottom (in red) to top for each item.]

spi62260 ch11 001-016 - mcgraw-hill...

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