Depreciation

.. loss. 4 The proceeds from issuing 3,000 shares of common stock was $15,000. 5- The $16,000 gain on retirement of bonds resulted from paying $18,000 to retire bonds with a book value of $34,000. 6- Cash dividends of $14,000 were declared and paid.

GROVER COMPANY Balance sheet December 31, 1990 and 1989 1990 1989 Assets Current Assets: Cash $ 17,000 $ 12,000 Accounts Receivable 60,000 40,000 Merchandise Inventory 84,000 70,000 Prepaid Expenses 6,000 4,000 Total Current Assets $ 167,000 $ 126,000 Long Term Assets: Plant Assets $250,000 $210,000 Less: accumulated depreciation 60,000 190,000 48,000 162,000 Total Assets: $357,000 $288,000 Liabilities Current Liabilities: Accounts Payable $ 35,000 $ 40,000 Interest Payable 3,000 4,000 Income Taxes Payable 22,000 12,000 Total Current Liabilities $ 60,000 $ 56,000 Long Term Liabilities: Bonds Payable 90,000 64,000 Total Liabilities: $ 150,000 $ 210,000 Stockholders Equity Contributed Capital: Common stock $10 par value $ 95,000 $ 80,000 Retained earnings 112,000 88,000 Total stockholders equity 207,000 168,000 Total liabilities and stockholders equity $ 357,000 $ 288,000 GROVER COMPANY Income Statement For Year Ended December 31, 1990 Sales………………………… ……. $ 590,000 Cost of goods sold……………………. $ 300,000 Wages and other operating expenses……… 216,000 Interest expense……………………… 7,000 Income taxes expense…………………. 15,000 Depreciation expense…………………..

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24,000 (562,000) Loss on sale of plants………………….. (6,000) Gain on retirement of debt………………. 16,000 Net Income……………………….. … $ 38,000 Operating Activities We begin the analysis by calculating the cash flows from operating activities. In general, this involve adjusting the income statement items that relate to operating activities for changes in their related balance sheet accounts.

Cash Received From Customers: Accounts receivable increased from $40,000 to $60,000 , cash receipts from customers are equal to sales of $590,000 plus the $40,000 beginning balance less the $60,000 ending balance, or $570,000. Cash received from customers = Sales – Increase in accounts receivable If the balance of accounts receivable decreases Cash received from customers = Sales + Decrease in accounts receivable $570,000 of cash Grover Company received from customers is shown on the statement of cash flows as a cash inflow from operating activities. Cash Payments For Merchandise: $14,000 increase in merchandise inventory is added to cost of goods of $300,000 to get purchase of $314,000. Purchases of $314,000 plus a beginning balance of $40,000 , less the ending balance of $35,000 , equals each payments of $319,000 . + Increase in merchandise inventory Purchases = Cost of goods sold – Decrease in merchandise inventory And, + Decrease in accounts pay. Cash payments for merchandise = Purchases – Increase in accounts pay.

Grover Companys payments of $319,000 for merchandise are reported on the statement of cash flows as a cash outflow from operating activities. Cash Payments for Wages and Other Operating Expenses: Prepaid expenses increased by $2,000 during the period , the cash payments for wages and other operating expenses were $2,000 more than the reported expense. Thus, the amount for wages and other operating expenses is $216,000 plus $2,000 or $218,000 If Grover Companys balance sheets had shown accrued liabilities , you would also have to adjust the expense for the change in accrued liabilities. Cash paid for Wages and +inc. prepaid exp. +dec. accrued liab.

wages and other = other operating operating expenses expenses – dec. prepaid exp. -inc. accrued liab. Payments for Interest and Taxes: Interest payments were $8,000 and income tax payments were $5,000 + decrease in related payable Cash Payment = Expense – increase in related payable Investing Activities: Investing activities usually refer to transactions that affect long term assets. Recall from the information that was provided about Grover Companys transactions that the company purchased plant assets and also sold plant assets.

Both of these activities are investing activities. Purchase of plant assets: Grover Company purchase plant assets that cost $70,000 by issuing $60,000 of bonds payable to the seller and paying the $10,000 balance in cash. The $10,000 payment is reported as a cash outflow on the statement of cash flows. Sale of Plant Assets: Grover Company sold plant assets that cost $30,000 and were depreciated $12,000. The result of sale was a loss of $6000 and a cash receipt of $12,000. This cash receipt is reported on the statement of cash flows as a cash inflow from investing activities. Financing Activities: Financing activities usually relate to a companys long term dept and stockholders equity accounts.

In the information about Grover Company, there were four transactions that involved financing activities . One of these , the $60,000 issuance of bonds payable to purchase plant assets. The remaining tree transactions were the retirement of bonds , the issuance of common stock , and the payment of cash dividends. Payment to Retire Bonds Payable: Grover Company December 31 ,1990, balance sheet showed bonds payable of $34,000 . These were retired for $18,000 cash in 1990.

The income statement reports the $16,000 difference as a gain. The statement of cash flows shows the $18,000 payment as a cash outflow from financing activities. Receipt from Common Stock Issuance: During 1990, Grover Company issued 3000 shares of common stock for $5 per share. This $15,000 cash receipt is reported on the statement of cash flow as a financing activity. Look at the December 31, 1989, and 1990 balance sheets.

Notice that the Common Stock account balance increased from $80,000 at the beginning of 1990 to $95,000 at the end of 1990. Thus, $15,000 stock issue reconciles the change in the Common Stock account. Payment of Cash Dividends: According to the facts provided about Grover Companys transactions , cash dividend of $14,000 were paid during 1990. This payment is reported as a cash outflow from financing activities. Also , note that the effects of this $14,000 payment and the reported net income of $38,000 fully reconcile the beginning and ending balances of retained earnings . GROVER COMPANY Statement of Cash Flows ( Direct Method ) For Year Ended December 31, 1990 Operating Activities: Cash received from customers……………..

$ 570,000 Cash provide by operating activities………… $ 570,000 Cash paid for merchandise ………………. (319,000) Cash paid for wages and other expenses……. (218,000) Interest paid …………………………… (8,000) Income taxes paid………………………. (5,000) Cash disbursed for operating activities………. (550,000) Net Cash Provided By Operating Activities…….. $ 20,000 Investing Activities: Receipt from sale of plant asset……………..

$ 12,000 Payment to purchase plant asset……………. (10,000) Net Cash Used In Investing Activities…………. 2,000 Financing Activities: Payments to retire bonds…………………. $ (18,000) Proceeds from issuing stock………………. 15,000 Dividends paid…………………………. . (14,000) Net Cash Provided By Financing Activities………

(17,000) Net Increase (decrease) In Cash…………….. $ 5,000 Cash and Cash Equivalents , beginning of year….. $ 12,000 Cash and Cash Equivalents , end of year………. $ 17,000.