E 20 18 Classifying accounting changes LO1 through LO5 Indicate with the appropriate letter the nature of each situation described below Change in principle reported retrospectively Change in principle reported prospectively Change in estimate EP Change in estimate resulting from a change in principle Change in reporting entity Not an accounting change Exercise 20 18 PR PP E R N E E EP 1 Change from declining balance depreciation to straight line 2 Change in the estimated useful life of office equipment 3 Technological advance that renders worthless a patent with an unamortized cost of 45 000 PR 4 Change from determining lower of cost or market for inventories by the individual item approach to the aggregate approach PR 5 Change from LIFO inventory costing to weighted average inventory costing loss contingency E 6 Settling a lawsuit for less than the amount accrued previously as a R 7 Including in the consolidated financial statements a subsidiary acquired several years earlier that was appropriately not included in previous years N 8 Change by a retail store from reporting bad debt expense on a pay as you go basis to the allowance method PR 9 A shift of certain manufacturing overhead costs to inventory that previously were expensed as incurred to more accurately measure cost of goods sold Either method is generally acceptable E 10 Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated Error correction change from an unacceptable method to GAAP P 21 11 Arduous Company Prepare a statement of cash flows direct method LO3 LO8 The comparative balance sheets for 2011 and 2010 and the income statement for 2011 are given below for Arduous Company Additional information from Arduous s accounting records is provided also a b c d e f g h i j k During 2011 6 million of customer accounts were written off as uncollectible Investment revenue includes Arduous Company s 6 million share of the net income of Demur Company an equity method investee Treasury bills were sold during 2011 at a gain of 2 million Arduous Company classifies its investments in Treasury bills as cash equivalents A machine originally costing 70 million that was one half depreciated was rendered unusable by a rare flood Most major components of the machine were unharmed and were sold for 17 million Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by 3 million The preferred stock of Tory Corporation was purchased for 25 million as a long term investment Land costing 46 million was acquired by issuing 23 million cash and a 15 four year 23 million note payable to the seller A building was acquired by a 15 year capital lease present value of lease payments 82 million 60 million of bonds were retired at maturity In February Arduous issued a 4 stock dividend 4 million shares The market price of the 5 par value common stock was 7 50 per share at that time In April 1 million shares of common stock were repurchased as treasury stock at a cost of 9 million Required Prepare the statement of cash flows of Arduous Company for the year ended December 31 2011 Present cash flows from operating activities by the direct method A reconciliation schedule is not required Problem 21 11 Arduous Company Spreadsheet for the Statement of Cash Flows Dec 31 2010 Debits Changes Credits Dec 31 2011 Balance Sheet Assets Cash Accounts receivable 202 81 21 35 Less Allowance Investment rev receivable Inventory Prepaid insurance Long term investment Land Buildings and equipment Patent Liabilities 2 5 6 25 46 X 82 X 2 4 2 13 14 15 11 8 4 200 8 125 150 400 32 1 074 Less Acc depreciation 120 35 Accounts payable 65 4 15 1 1 2 2 8 4 11 6 7 70 12 2 116 200 10 205 6 4 156 196 412 97 30 1 218 50 9 10 X 14 X 15 4 3 23 82 17 17 18 20 10 75 6 8 12 11 23 82 215 22 430 95 75 Bonds payable 275 16 60 Less Discount 25 9 3 Salaries payable 5 Bond interest payable Income tax payable 14 10 5 2 11 4 8 0 0 410 85 0 227 0 1 074 Deferred tax liability Notes payable Lease liability Shareholders Equity Common stock Paid in capital ex of par Preferred stock Retained earnings Less Treasury stock 17 19 20 30 22 9 12 67 242 9 1 218 Problem 21 11 continued Spreadsheet for the Statement of Cash Flows continued Dec 31 2010 Debits Changes Credits Dec 31 2011 Cost of goods sold 4 180 Statement of Income Revenues Sales revenue Investment revenue Gain on sale of treasury bills Expenses Salaries expense Depreciation expense Patent amortization expense Bad debt expense Insurance expense Bond interest expense Income tax expense Extraordinary loss flood Less Tax savings 5 6 7 1 8 9 10 11 65 12 2 8 7 28 45 18 1 410 410 2 3 11 2 11 2 180 65 12 2 8 7 28 45 18 10 9 9 Net income 12 67 67 X Noncash investing and financing activity P 21 14 Surmise Company Statement of cash flows indirect method limited information LO4 LO8 The comparative balance sheets for 2011 and 2010 are given below for Surmise Company Net income for 2011 was 50 million Required Prepare the statement of cash flows of Surmise Company for the year ended December 31 2011 Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method You will need to make reasonable assumptions concerning the reasons for changes in some account balances A spreadsheet or T account analysis will be helpful Problem 21 14 Surmise Company Spreadsheet for the Statement of Cash Flows Dec 31 2010 Debits Changes Credits Dec 31 2011 Balance Sheet Assets Cash Accounts receivable Less Allowance Prepaid expenses Inventory 16 5 8 6 3 15 40 40 96 4 5 130 100 17 604 Long term investment 40 10 Buildings and equip 300 11 111 X Less Acc depreciation 120 Land Patent Liabilities Accounts payable Accrued liabilities 32 10 7 9 15 12 5 3 4 8 2 4 22 1 45 92 12 8 145 80 100 411 142 16 743 17 2 Bonds payable 125 13 60 Notes payable Lease liability Shareholders Equity Common stock Paid in capital ex of par 0 0 50 205 604 Retained earnings 182 15 20 X Noncash investing and financing activity 12 35 35 X 11 111 111 65 60 245 212 743 14 14 1 10 40 50 Problem 21 14 continued Spreadsheet for the Statement of Cash Flows continued Dec 31 2010 Debits Changes Credits Dec 31 2011 1 50 2 3 4 5 22 8 1 4 Statement of Cash Flows Operating activities Net income Adjustments for noncash effects Depreciation expense Bad debt expense Patent amortization expense Decrease in accounts