Page 652 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

b. Prepare a working paper to convert net income from an accrual basis to a cash basis. Then prepare a partial
statement of cash flows—direct method, showing only the cash flows from operating activities section.

Solution to demonstration problem
a.
Dells Company
Statement of cash flows
For the year ended 2010 June 30
Cash flows from operating
activities:
Net income $ 70,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Increase in accounts (60,000)
receivable
Increase in merchandise (30,000)
inventory
Increase in prepaid rent (10,000)
Increase in accounts 10,000
payable
Decrease in salaries payable(10,000)
Increase in federal income 10,000
taxes payable
Loss on sale of equipment 7,000
Depreciation expense 20,000
Net cash provided by $7,000
operating activities
Cash flows from investing
activities:
Proceeds from sale of $ 3,000
equipment
Purchase of equipment (220,000)
Net cash used by investing (217,000)
activities
Cash flows from financing
activities:
Proceeds from issuing $250,000
common stock
Repayment of bank note (50,000)
Dividends paid (40,000)
Net cash provided by 160,000
financing activities
Net increase (decrease) in $(50,000)
cash
b.
Dells Corporation
Working paper to convert income statement from accrual basis to cash basis
For the year ended 2010 June 30
Cash basis (Cash flows From operating activities)
Accrual Add Deduct
basis
Sales $1,000,000 $60,000 a $940,000
Cost of goods sold $600,000 $30,000 10,000 c $620,000
b
Salaries and wages expense 200,000 10,000 d 210,000
Rent expense 40,000 10,000 e 50,000
Depreciation expense 20,000 20,000 -0-
Interest expense 3,000 3,000
Loss on sale of equipment 7,000 7,000 -0-
Federal income taxes 60,000 10,000 f 50,000
930,000 933,000
Net income $70,000 $ 7,000
a Increase in accounts receivable.
B Increase in merchandise inventory.
C Increase in accounts payable.
D Decrease in salaries payable.

653