Ch 5 Assigned Homework Solutions EXERCISE 5 3 15 20 minutes 1 a 10 f 2 b 11 a 3 f 12 f 4 a 13 a or e preferably a 5 f 14 c and N 6 h 15 f 7 i 16 X 8 d 17 f 9 a 18 c EXERCISE 5 9 30 35 minutes a Allessandro Scarlatti Company Balance Sheet Partial December 31 2014 Current assets Cash Accounts receivable 34 396 91 300 Less Allowance for doubtful accounts 7 000 84 300 Inventory 159 000 Prepaid expenses 9 000 Total current assets 286 696 Cash balance Add Cash disbursement after discount 39 000 X 98 40 000 38 220 78 220 Less Cash sales in January 30 000 21 500 8 500 Cash collected on account 23 324 Bank loan proceeds 35 324 23 324 12 000 Adjusted cash Accounts receivable balance Add Accounts reduced from January collection 23 324 98 34 396 89 000 23 800 112 800 Deduct Accounts receivable in January Adjusted accounts receivable Inventory Less Inventory received on consignment Adjusted inventory 21 500 91 300 171 000 12 000 159 000 EXERCISE 5 9 Continued Current liabilities Accounts payable 115 000a Notes payable 55 000b Total current liabilities a Accounts payable balance Add Cash disbursements Purchase invoice omitted 27 000 12 000 b 170 000 61 000 39 000 15 000 54 000 Adjusted accounts payable 115 000 Notes payable balance 67 000 Less Proceeds of bank loan Adjusted notes payable 12 000 55 000 b Adjustment to retained earnings balance Add January sales discounts 23 324 98 X 02 Deduct January sales 30 000 January purchase discounts 39 000 X 2 780 December purchases 15 000 Consignment inventory 12 000 Change decrease to retained earnings 476 57 780 57 304 EXERCISE 5 12 30 35 minutes Scott Butler Corporation Balance Sheet December 31 2014 Assets Current assets Cash 197 000 Debt investments Trading 153 000 Accounts receivable 435 000 Less Allowance for doubtful accounts Inventory 25 000 410 000 597 000 Total current assets 1 357 000 Long term investments Debt investments 299 000 Equity investments 277 000 Total long term investments 576 000 Property plant and equipment Land 260 000 Buildings 1 040 000 Less Accum depreciation building 152 000 888 000 Equipment 600 000 Less Accum depreciation equipment 60 000 540 000 Total property plant and equipment 1 688 000 Intangible assets Franchises 160 000 Patents 195 000 Total intangible assets 355 000 Total assets 3 976 000 EXERCISE 5 12 Continued Liabilities and Stockholders Equity Current liabilities Accounts payable 455 000 Notes payable short term 90 000 Dividends payable 136 000 Accrued liabilities 96 000 Total current liabilities 777 000 Long term debt Notes payable long term 900 000 Bonds payable 1 000 000 Total long term liabilities 1 900 000 Total liabilities 2 677 000 Stockholder s equity Paid in capital Common stock 5 par 1 000 000 Additional paid in capital 80 000 1 080 000 Retained earnings 410 000 Total paid in capital and retained earnings 1 490 000 Less Treasury stock 191 000 Total stockholders equity 1 299 000 Total liabilities and stockholders equity 3 976 000 PROBLEM 5 6 a LANSBURY INC Statement of Cash Flows For the Year Ended December 31 2014 Cash flows from operating activities Net income 32 000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 11 000 Gain on sale of investments 3 400 Increase in account receivable 41 600 21 200 20 400 Net cash provided by operating activities 12 800 19 200 Cash flows from investing activities Sale of investments 15 000 Purchase of land 18 000 Net cash used by investing activities 3 000 Cash flows from financing activities Issuance of common stock 20 000 Retirement of notes payable 16 000 Payment of cash dividends 8 200 Net cash used by financing activities 4 200 Net increase in cash 12 000 Cash at beginning of year 20 000 Cash at end of year Noncash investing and financing activities 32 000 Land purchased through issuance of 30 000 of bonds PROBLEM 5 6 Continued b LANSBURY INC Balance Sheet December 31 2014 Assets Cash Liabilities and Stockholders Equity 32 000 Accounts receivable 41 600 Equity investments 20 400 1 Plant assets net 70 000 2 Land 88 000 3 252 000 Accounts payable Notes payable long term Bonds payable Common stock Retained earnings 30 000 25 000 4 30 000 5 120 000 6 47 000 7 252 000 1 32 000 15 000 3 400 2 81 000 11 000 3 40 000 18 000 30 000 4 41 000 16 000 5 0 30 000 6 100 000 20 000 7 23 200 32 000 8 200 c Cash flow information is useful for assessing the amount timing and uncertainty of future cash flows For example by showing the specific inflows and outflows from operating activities investing activities and financing activities the user has a better understanding of the liquidity and financial flexibility of the enterprise Similarly these reports are useful in providing feedback about the flow of enterprise resources This information should help users make more accurate predictions of future cash flow In addition some individuals have expressed concern about the quality of the earnings because the measurement of the income depends on a number of accruals and estimates which may be somewhat subjective As a result the higher the ratio of cash provided by operating activities to net income the more comfort some users have in the reliability of the earnings In this problem the ratio of cash provided by operating activities to net income is 60 19 200 32 000 PROBLEM 5 6 Continued An analysis of Lansbury s free cash flow indicates it is negative as shown below Free Cash Flow Analysis Net cash provided by operating activities 19 200 Less Purchase of land 18 000 Dividends 8 200 Free cash flow 7 000 19 200 Its current cash debt coverage is 0 64 to 1 and its cash 30 000 71 000 85 000 debt coverage is 0 25 to 1 19 200 which are 2 reasonable Overall it appears that its liquidity position is average and overall financial flexibility and solvency should be improved