Intermediate Accounting II, ACCT 3322

Solutions to Review Questions, Chapter 21

1. Spencer Company had the following account balances for 2003:
12/31/03
44,000
12,000
60,000
3,500

Accounts receivable
Prepaid expenses
Accounts payable
Income tax payable

1/1/03
35,000
15,000
55,000
7,500

Spencer Company reported net income of $75,000 for 2003. Assuming no other changes
in current account balances, prepare the operating activities section of the statement of
cash flows for 2003.

12/31/03
$44,000
12,000
60,000
3,500

Accounts receivable
Prepaid expenses
Accounts payable
Income tax payable
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided (used) operating activities:
Increase in accounts receivable
Decrease in prepaid expenses
Increase in accounts payable
Decrease in income tax payable
Net cash provided by operating activities

1/1/03
$35,000
15,000
55,000
7,500

Change
($9,000)
3,000
5,000
(4,000)

$75,000

($9,000)
3,000
5,000
(4,000)

(5,000)
$70,000

2. During the year, cash increased by $250,000. Cash provided by financing activities was
$360,000 and Cash used in investing activities was $425,000. What were net cash flows
from operating activities on the statement of cash flows?

Cash flows from operating activities

$315,000

Cash flows from investing activities

(425,000)

Cash flows from financing activities

360,000

Increase in cash

$250,000

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3. Spencer Company declared cash dividends of $15,000 during the current year. The
beginning and ending balances in dividends payable were $7,500 and $4,500,
respectively. What was the amount of cash paid for dividends?

T-Account: Dividends Payable

Description
Debit
Beginning balance
Dividends declared
Required AJE, cash dividends paid
$18,000
Ending Balance

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Credit
$7,500
15,000
$4,500

4. Following are the income statement and some additional information for Spencer
Company for 2003.

Spencer Company
Income Statement
For the Year Ended December 31, 2003
Sales
Cost of goods sold
Gross profit

$100,000
55,000
45,000

Operating expenses
Depreciation expense
Income before income taxes
Income taxes
Net income

24,000
6,000

30,000
15,000
3,500
$11,500

All sales were on credit and accounts receivable increased by $3,000 this year compared
to last year. Merchandise purchases were on credit with a decrease in accounts payable
of $4,500 during the year. Ending inventory was $1,500 larger than beginning
inventory. Income taxes payable increased $2,200 during the year. All operating
expenses were paid for in cash.
Using the space provided prepare the cash flows from operating activities section of the
statement of cash flows using the indirect method.

Cash flows from operating activities:

Net income
Adjustments to reconcile net income to net
cash provided (used) operating activities:
Depreciation expense
Increase in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in income taxes payable
Net cash provided by operating activities

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$11,500

$6,000
(3,000)
(1,500)
(4,500)
2,200

(800)
$10,700

5. Partial balance sheets for Spencer Company and additional information are provided
below.
ABC Company
Partial Balance Sheets
December 31,
2003
Assets:
Available-for-sale securities
Equipment
Accumulated depreciation
Liabilities:
Notes payable
Shareholders' equity:
Common stock, $5 par
Paid-in capital, excess of par
Retained earnings

2002

$45,000
100,000
(25,000)

$0
75,000
(20,000)

25,000

200,000

250,000
50,000
40,000

100,000
0
30,000

Additional information for 2003:

July 1:
Issued 10,000 shares of common stock for cash.
July 1:
Purchased new equipment for cash.
December 31: Paid cash dividends of $65,000.
December 31: Paid down the note payable.
Using the space provided prepare the cash flows from investing activities and the cash
flows from financing activities sections of the statement of cash flows for 2003.
ABC Company
Partial Balance Sheets
December 31,
2003
Assets:
Available-for-sale securities
Equipment
Accumulated depreciation
Liabilities:
Notes payable
Shareholders' equity:
Common stock, $5 par
Paid-in capital, excess of par
Retained earnings

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2002

Change

$45,000
100,000
(25,000)

$0
75,000
(20,000)

($45,000)
(25,000)
5,000

25,000

200,000

(175,000)

250,000
50,000
40,000

100,000
0
30,000

150,000
50,000
10,000

Cash flows from investing activities:

Purchase of available-for-sale securities
Purchase of new equipment
Net cash used in investing activities

($45,000)
(25,000)

Cash flows from financing activities:

Cash received from issuance of common stock
Cash paid on note payable
Cash paid for dividends
Net cash provided by financing activities

$200,000
(175,000)
(65,000)

($70,000)

($40,000)

6. The Spencer Company reported the following balance sheet data for 2003 and 2002.

Spencer Company
Comparative Balance Sheets
For the Year Ended December 31,

Account
Cash
Accounts receivable
Inventory
Land, buildings and equipment
Accumulated depreciation
Accounts payable
Dividends payable
Notes payable
Bonds payable
Common stock
Retained earnings

2003
(15,900)
200,600
225,000
950,000
(425,000)
(145,000)
(50,000)
(25,000)
(25,000)
(225,000)
(464,700)
0

2002
201,850
120,800
195,000
1,325,000
(572,000)
(162,000)
(35,000)
(275,000)
(200,000)
(200,000)
(398,650)
0

Additional information for 2003:

(1.) Equipment costing $500,000 with a book value of $250,000 for was sold for
$270,000 in cash.
(2.) Common stock for was sold for $25,000 in cash.
(3.) New equipment was purchased for $125,000 cash.
(4.) Dividends were declared in the amount of $40,000.
(5.) Net income was $106,050.
a) Using the space provided on the next page prepare the cash flow worksheet.

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Spencer Company
Cash Flow Spreadsheet
For the Year Ended December 31,

Account

2004
2003
($15,900) $201,850

Accounts receivable
Inventory
Land, buildings and equipment
Accumulated depreciation
Accounts payable
Dividends payable
Notes payable
Bonds payable
Common stock
Retained earnings

200,600
120,800
225,000
195,000
950,000 1,325,000
(425,000) (572,000)
(145,000) (162,000)
(50,000)
(35,000)
(25,000) (275,000)
(25,000) (200,000)
(225,000) (200,000)
(464,700) (398,650)
$0
$0

Cash

Changes in Cash
Increase Decrease
$217,750

Operating Activities
Increase Decrease

79,800
30,000

$79,800
30,000

375,000

$500,000
147,000
17,000

$103,000

Financing Activities
Increase Decrease

$125,000
250,000

17,000

15,000

$15,000
250,000
175,000

25,000
66,050
481,050
$481,050

$250,000
175,000
25,000

698,800
217,750
$481,050

Analysis of retained earnings:

Net income
Gain on sale of equipment
Dividends paid
Changes in cash

Investing Activities
Increase Decrease

106,050
20,000

$217,750

209,050
62,250
$146,800

146,800
$146,800

20,000
520,000
145,000
$375,000

375,000

40,000

$375,000

$40,000

40,000
465,000
425,000
$40,000

b) Using the format provided prepare the statement of cash flows.

Spencer Company
Statement of Cash Flows
For the Year Ended December 31, 2003
Cash flows from operating activities:
Net income
Adjustments for noncash effects:
Depreciation
Increase in accounts receivable
Increase in inventory
Decrease in accounts payable
Gain on sale of equipment
Net cash flows from operating activities

$106,050
$103,000
(79,800)
(30,000)
(17,000)
(20,000)

Cash flows from investing activities:

Cash received from sale of equipment
Cash paid for purchase of equipment
Net cash flows from investing activities

270,000
(125,000)

Cash flows from financing activities:

Cash received from sale of stock
Cash paid on notes payable
Cash paid on bonds payable
Cash paid for dividends
Net cash flows from financing activities

25,000
(250,000)
(175,000)
(25,000)

Net increase in cash

Cash balance, January 1, 2003
Cash balance, December 31, 2003

(43,800)
62,250

145,000

(425,000)
(217,750)
201,850
($15,900)