CHAPTER 5

Balance Sheet and Statement of Cash Flows

EXERCISE 5-7 (15–20 minutes)

Current assets
Cash...................................................................... $ 87,000*
Less: Restricted cash (plant expansion)........... 50,000 $ 37,000
Trading securities at fair value (cost,
$31,000).............................................................. 29,000
Accounts receivable (of which $50,000 is
pledged as collateral on a bank loan)............. 161,000
Less: Allowance for doubtful accounts............. 12,000 149,000
Interest receivable [($40,000 X 6%) X 8/12]........ 1,600
Inventories at lower of cost (determined
using LIFO) or market
Finished goods.............................................. 52,000
Work in process............................................. 34,000
Raw materials................................................. 207,000 293,000
Total current assets................................. $509,600

* ($37,000 + $50,000). An acceptable alternative is to report cash at

$37,000 and simply report the restricted cash (plant expansion) in the
investments section.
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Measurement, Reporting, AICPA PC:
None

EXERCISE 5-11 (25–30 minutes)

 Kelly Corporation
Balance Sheet
December 31, 2017
Assets
Current assets
Cash........................................................................ $ 6,850*
Supplies.................................................................. 1,200
Prepaid insurance.................................................. 1,000
Total current assets........................................ $ 9,050
Equipment..................................................................... 48,000
Less: Accumulated depreciation—equipment.......... 4,000 44,000
Trademark..................................................................... 950
Total assets..................................................... $54,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable.................................................. $10,000
Salaries and wages payable.................................. 500
Unearned service revenue..................................... 2,000
Total current liabilities................................... $12,500
Long-term liabilities
Bonds payable........................................................ 9,000
Total liabilities........................................................ 21,500
Stockholders’ equity
Common stock....................................................... 10,000
Retained earnings ($25,000 – $2,500**)................ 22,500
Total stockholders’ equity............................... 32,500
Total liabilities and stockholders’ equity.......... $54,000
*[$54,000 - $950 - $44,000 - $1,000 - $1,200]
**[$10,000 – ($9,000 + $1,400 + $1,200 + $900)]
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
 PROBLEM 5-2

MONTOYA, INC.
Balance Sheet
December 31, 2017

Assets
Current assets
Cash...................................................... $ 360,000
Debt investments (trading)................. 121,000
Notes receivable.................................. 445,700
Income taxes receivable..................... 97,630
Inventory............................................... 239,800
Prepaid expenses................................ 87,920
Total current assets....................... $1,352,050

Property, plant, and equipment

Land...................................................... 480,000
Buildings..............................................$1,640,000
Less: Accum. depreciation—
buildings............................. 270,200 1,369,800
Equipment............................................ 1,470,000
Less: Accum. depreciation—
equipment........................... 292,000 1,178,000 3,027,800

Intangible assets
Goodwill................................................ 125,000
Total assets.................................... $4,504,850
 PROBLEM 5-2 (Continued)

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable................................. $ 490,000
Notes payable (to banks)..................... 265,000
Payroll taxes payable........................... 177,591
Income taxes payable........................... 98,362
Rent payable.......................................... 45,000
Total current liabilities.................... $1,075,953

Long-term liabilities
Notes payable
(long-term)......................................... 1,600,000
Bonds payable...................................... $300,000
Less: Discount on bonds
payable.................................. 15,000 285,000
Rent payable (long-term)..................... 480,000 2,365,000
Total liabilities................................. 3,440,953

Stockholders’ equity
Capital stock
Preferred stock, $10 par; 20,000

shares authorized, 15,000 150,000

shares issued...............................
Common stock, $1 par;
400,000 shares authorized,
200,000 issued.............................. 200,000 350,000
Retained earnings
($1,063,897 – $350,000)...................... 713,897
Total stockholders’ equity
($4,504,850 – $3,440,953)............. 1,063,897
Total liabilities and
stockholders’ equity.................... $4,504,850
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 35-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
 PROBLEM 5-6

(a) LANSBURY INC.

Statement of Cash Flows
For the Year Ended December 31, 2017
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) (12,800)
Net cash provided by operating activities.......... 19,200

Cash flows from investing activities

Sale of investments.............................................. 15,000
Purchase of land................................................... (13,000)
Net cash provided by investing activities........... 2,000

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................................................... 17,000

Cash at beginning of year.......................................... 20,000
Cash at end of year..................................................... $37,000
Noncash investing and financing activities
Land purchased through issuance of $35,000 of bonds
PROBLEM 5-6 (Continued)

(b) LANSBURY INC.

Balance Sheet
December 31, 2017
Assets Liabilities and Stockholders’ Equity
Cash $37,000 Accounts payable $30,000
Accounts Notes payable
receivable 41,600 (long-term) 25,000 (4)
Debt Bonds payable 35,000 (5)
investments 20,400 (1) Common stock 120,000 (6)
Plant assets (net) 70,000 (2) Retained earnings 47,000 (7)
Land 88,000 (3)
$257,000 $257,000

(1) $32,000 – ($15,000 – $3,400)

(2) $81,000 – $11,000
(3) $40,000 + $13,000 + $35,000
(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 flows. 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............................................................ 13,000
Dividends....................................................................... 8,200
Free cash flow............................................................................ $ (2,000)

æ$19,200 ö÷
Its current cash debt coverage is 0.64 to 1 ççç ÷ and its cash debt
è $30,000 ø÷
æ $71,000 + $90,000 ö ÷
coverage is 0.24 to 1 ççç$19,200 ¸ ÷, which are
÷
è 2 ø
reasonable. Overall, it appears that its liquidity position is average and
overall financial flexibility and solvency should be improved.
LO: 3, 5, 6, Bloom: AP, Difficulty: Complex, Time: 35-45, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA
PC: Communication