SOLUTIONS TO EXERCISES

EXERCISE 5-5

Uhura Company
Balance Sheet
December 31, 2004
Assets
Current assets
Cash			$ 230,000
Trading securities—at fair value			120,000
Accounts receivable		$357,000
Less allowance for doubtful accounts		17,000	340,000
Inventories, at lower of average cost or market			401,000
Prepaid expenses			12,000
Total current assets			1,103,000
Long-term investments
Land held for future use		175,000
Cash surrender value of life insurance		90,000	265,000
Property, plant, and equipment
Building	$730,000
Less accum. depr.—building	160,000	570,000
Office equipment	265,000
Less accum. depr.—office equipment	105,000	160,000	730,000
Intangible assets
Goodwill			80,000
Total assets			$2,178,000

EXERCISE 5-5 (Continued)

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable			$ 105,000
Bank overdraft			30,000
Notes payable (due next year)			125,000
Rent payable			49,000
Total current liabilities				$309,000
Long-term liabilities
Bonds payable	$500,000
Add premium on bonds payable	53,000		$553,000
Pension obligation		82,000		635,000
Total liabilities				944,000
Stockholders’ equity
Common stock, $1 par, authorized 400,000 shares, issued 290,000 shares	290,000
Additional paid-in capital	160,000		450,000
Retained earnings			784,000
Total stockholders’ equity				1,234,000
Total liabilities and stock- holders’ equity				$2,178,000

EXERCISE 5-6

	Geronimo Company
	Balance Sheet
	As of July 31, 2004
	Assets
	Current assets
	Cash			$ 60,000*
	Accounts receivable		$ 46,700**
	Less allowance for doubtful accounts		3,500	43,200
	Inventories			65,300***
	Total current assets			168,500
	Long-term investments
	Bond sinking fund			15,000
	Property, plant, and equipment
	Equipment		112,000
	Less accumulated depreciation—equipment		28,000	84,000
	Intangible assets
	Patents			21,000
	Total assets			$288,500
Liabilities and Stockholders’ Equity
Current liabilities
Notes and accounts payable			$ 52,000****
Taxes payable			6,000
Total current liabilities					58,000
Long-term liabilities					75,000
Total liabilities					133,000
Stockholders’ equity					155,500
Total liabilities and stock- holders’ equity					$288,500
*		($69,000 – $15,000 + $6,000)
**		($52,000 – $5,300)
***		($60,000 + $5,300)
****		($44,000 + $8,000)

EXERCISE 5-7

Current assets
Cash	$ 87,000*
Less cash restricted for 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 12%) X 8/12]		3,200
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		$511,200

*An acceptable alternative is to report cash at $37,000 and simply report the cash restricted for plant expansion in the investments section.

EXERCISE 5-8

1. Dividends payable of $2,375,000 will be reported as a current liability [(1,000,000 – 50,000) X $2.50].

2. No amounts are reported as a current or long-term liability. Stock dividends distributable are reported in the stockholders' equity section.

3. Bonds payable of $25,000,000 and interest payable of $3,000,000 ($100,000,000 X 12% X 3/12) will be reported as a current liability. Bonds payable of $75,000,000 will be reported as a long-term liability.

4. Customer advances of $17,000,000 will be reported as a current liability ($12,000,000 + $30,000,000 – $25,000,000).

EXERCISE 5-12

	John Nalezny Corporation
	Balance Sheet
	December 31, 2004
	Assets
	Current assets
	Cash				$197,000
	Trading securities				153,000
	Accounts receivable		$435,000
	Less allowance for doubtful accounts		(25,000)		410,000
	Inventories					597,000
	Total current assets							1,357,000
	Long-term investments
	Investments in bonds				299,000
	Investments in stocks				277,000
	Total long-term investments							576,000
	Property, plant, and equipment
	Land				260,000
	Building		1,040,000
	Less accum. depreciation		(152,000)		888,000
	Equipment		600,000
	Less accum. depreciation		(60,000)		540,000
	Total property, plant, and equipment							1,688,000
	Intangible assets
	Franchise (net of $80,000 amortization)				160,000
	Patent (net of $30,000 amortization)				195,000
	Total intangible assets							355,000
	Total assets							$3,976,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable				$ 455,000
Short-term notes payable				90,000
Dividends payable				136,000
Accrued liabilities				96,000
Total current liabilities								$ 777,000
Long-term debt
Long-term notes payable				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
**Computation of Retained Earnings:
Sales							$8,100,000
Investment revenue							63,000
Extraordinary gain							80,000
Cost of goods sold							(4,800,000)
Selling expenses							(2,000,000)
Administrative expenses							(900,000)
Interest expense							(211,000)
Net income							$ 332,000
Beginning retained earnings							$218,000
Prior period adjustment—depreciation error							(140,000)
Beginning retained earnings, restated							$ 78,000
Net income							332,000
Ending retained earnings							$410,000

EXERCISE 5-13 (15-20 minutes)

(a)	4.	(f)	1.	(k)	1.
(b)	3.	(g)	5.	(l)	2.
(c)	4.	(h)	4.	(m)	2.
(d)	3.	(i)	5.
(e)	1.	(j)	4.

EXERCISE 5-14

Constantine Cavamanlis Inc.
Statement of Cash Flows
For the Year Ended December 31, 2004
Cash flows from operating activities
Net income		$44,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense	$ 6,000
Increase in accounts receivable	(3,000)
Increase in accounts payable	5,000	8,000
Net cash provided by operating activities		52,000
Cash flows from investing activities
Purchase of equipment		(17,000)
Cash flows from financing activities
Issuance of common stock	20,000
Payment of cash dividends	(23,000)
Net cash used by financing activities		(3,000)
Net increase in cash		32,000
Cash at beginning of year		13,000
Cash at end of year		$45,000

	PROBLEM 5-3
Side Kicks Company
Balance Sheet
December 31, 2004
Assets
Current assets
Cash				$ 41,000
Accounts receivable		$163,500
Less allowance for doubtful accounts		8,700		154,800
Inventory—at LIFO cost				308,500
Prepaid insurance				5,900
Total current assets					$ 510,200
Long-term investments
Investments in stocks and bonds, of which investments costing $120,000 have been pledged as security for notes payable—at fair value					339,000
Property, plant, and equipment
Cost of uncompleted plant facilities
Land		85,000
Building in process of construction		124,000	209,000
Equipment—at cost		400,000
Less accum. depreciation		140,000	260,000			469,000
Intangible assets
Patents—at cost less amortization					36,000
Total assets					$1,354,200

Liabilities and Stockholders’ Equity
Current liabilities
Bank loans payable, secured by investments which cost $120,000		$ 94,000
Accounts payable		148,000
Accrued expenses		49,200
Total current liabilities			$ 291,200
Long-term liabilities
11% bonds payable, due January 1, 2013		400,000
Less unamortized discount on bonds payable		20,000	380,000
Total liabilities			671,200
Stockholders’ equity
Capital stock
Authorized 600,000 shares of $1 par value; issued and outstanding, 500,000 shares	$500,000
Additional paid-in capital	45,000	545,000
Retained earnings		138,000	683,000
Total liabilities and stockholders’ equity			$1,354,200

	PROBLEM 5-5
Stephen King Corporation
Balance Sheet
December 31, 2004
Assets
Current assets
Cash				$ 114,000
Trading securities—at fair value				80,000
Accounts receivable			$170,000
Less allowance for doubtful accounts			10,000	160,000
Inventories, at lower of cost (determined using FIFO) or market				180,000
Total current assets				$ 534,000
Long-term investments
Investments in common stock (available for sale)—at fair value			270,000
Bond sinking fund			250,000
Cash surrender value of llife insurance			40,000
Land held for future use			270,000	830,000
Property, plant, and equipment
Land			500,000
Buildings		$1,040,000
Less accum. depreciation— building		360,000	680,000
Equipment		450,000
Less accum. depreciation— equipment		180,000	270,000	1,450,000
Intangible assets
Franchise			165,000
Goodwill			100,000	265,000
Total assets				$3,079,000
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable				$ 90,000
Notes payable				80,000
Bank overdraft				14,000
Taxes payable				40,000
Unearned revenue				5,000
Total current liabilities				$ 229,000
Long-term liabilities
Notes payable			$ 120,000
10% bonds payable, due 2010		$1,000,000
Less discount on bonds payable		40,000	960,000	1,080,000
Total liabilities				1,309,000
Stockholders’ equity
Capital stock
Preferred stock, no par value; 200,000 shares authorized, 70,000 issued		450,000
Common stock, $1 par value; 400,000 shares authorized, 100,000 issued		100,000
Paid-in capital in excess of par on common stock (100,000 X [$10.00 – $1.00)]		900,000	1,450,000
Retained earnings			320,000
Total stockholders’ equity				1,770,000
Total liabilities and stockholders’ equity				$3,079,000

PROBLEM 5-6

(a) Alistair Cooke, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2004
Cash flows from operating activities
Net income		$32,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expense	12,000
Gain on sale of investments	(3,400)
Increase in Acct. Receivable ($41,600 – $21,200)	(20,400)	(11,800)
Net cash provided by operating activities		20,200
Cash flows from investing activities
Sale of investments	17,000
Purchase of land	(18,000)
Net cash used in investing		(1,000)
Cash flows from financing activities
Issuance of capital stock	24,000
Retirement of notes payable	(16,000)
Payment of cash dividends	(8,200)
Net cash used by financing activities		(200)
Net increase in cash		19,000
Cash at beginning of year		20,000
Cash at end of year		$39,000

The purchase of land through the issuance of $30,000 of bonds is a significant noncash financing transaction that would be disclosed in notes accompanying the financial statements.

(b)

Alistair Cooke Inc.
Balance Sheet
December 31, 2004
Assets			Liabilities and Stockholders’ Equity
Cash	$39,000			Accounts payable	$30,000
Accounts receivable	41,600			Long-term notes payable	25,000	(4)
Investments	18,400	(1)		Bonds payable	30,000	(5)
Plant assets (net)	69,000	(2)		Capital stock	124,000	(6)
Land	88,000	(3)		Retained earnings	47,000	(7)
	$256,000				$256,000

(1) $32,000 – ($17,000 – $3,400)

(2) $81,000 – $12,000

(3) $40,000 + $18,000 + $30,000

(4) $41,000 – $16,000

(5) $0 + $30,000

(6) $100,000 + $24,000

(7) $23,200 + $32,000 – $8,200

(c) This type of 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 63% ($20,200 ¸ $32,000).

An analysis of Cooke’s free cash flow indicates it is negative as shown below:

Free Cash Flow Analysis
Net cash provided by operating activities	$20,200
Less: Purchase of land	(18,000)
Dividends	(8,200)
Free cash flow	$ (6,000)

Its current cash debt coverage is .67 to 1 and its cash debt coverage ratio is .26 to 1 , which are reasonable. Overall, it appears that its liquidity position is average and overall financial flexibility should be improved.