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Chapter 5: Q22Q. (page 238)

The net income for the year for Genesis, Inc. is \(750,000, but the statement of cash flows reports that the net cash provided by operating activities is \)640,000. What might account for the difference?

Short Answer

Expert verified

Net income reported by the business entity is higher than the net cash from operating activities because of large credit sales and higher payments to accounts payable.

Step by step solution

01

Definition of Cash Basis of Accounting

The accounting method of reporting all the financial information that includes the cash flow either inward or outward is known as the cash basis of accounting.Non-cash transactions are not included in this method of accounting.

02

Reason for Difference between the Net Income and Cash Provided by Operating Activities

There are two reasons for the difference between the net income and the net cash from operation:

  1. Higher credit sales or increase in receivables.
  2. Repayment of accounts payable or reduction in payables.

Higher credit sales will increase the net income of the business entity and will not affect the cash from operations. The reduction in payables will reduce the money from the process and will not affect the net income of the business entity.

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Most popular questions from this chapter

Grant Wood Corporation’s balance sheet at the end of 2016 included the following items.

Current assets (\(Cash 82,000)

\)235,000

Current liabilities

\(150,000

Land

30,000

Bond payable

100,000

Building

120,000

Common stock

180,000

Equipment

90,000

Retained earnings

44,000

Accumulated depreciation – Building

(30,000)

Accumulated depreciation – Equipment

(11,000)

Patents

40,000

Total

\)474,000

Total

\(474,000

The following information is available for 2017.

1. Net income was \)55,000.

2. Equipment (cost \(20,000 and accumulated depreciation \)8,000) was sold for \(10,000.

3. Depreciation expense was \)4,000 on the building and \(9,000 on equipment.

4. Patent amortization was \)2,500.

5. Current assets other than cash increased by \(29,000. Current liabilities increased by \)13,000.

6. An addition to the building was completed at a cost of \(27,000.

7. A long-term investment in stock was purchased for \)16,000.

8. Bonds payable of \(50,000 were issued.

9. Cash dividends of \)30,000 were declared and paid.

10. Treasury stock was purchased at a cost of $11,000.

Instructions

(Show only totals for current assets and current liabilities.)

(a) Prepare a statement of cash flows for 2017.

(b) Prepare a balance sheet at December 31, 2017.

Case 3: Deere & Company Presented below is the SEC-mandated disclosure of contractual obligations provided by Deere & Company in a recent annual report. Deere & Company reported current assets of \(50,060 and total current liabilities of \)21,394 at year-end. (All dollars are in millions.)

Aggregate Contractual Obligations

The payment schedule for the company’s contractual obligations at year-end in millions of dollars is as follows:

Total

Less than 1 year

1-3 Years

4 and 5 Years

More than 5 Years

Debt

Equipment Operations

\( 5,091

\) 434

\( 270

\)775

\( 3,612

Financial services

31,692

9,962

11,477

6,578

3,675

Total

36,783

10,396

11,747

7,353

7,287

Interest on debt

4,777

609

1,069

745

2,354

Account payable

2,743

2,611

90

39

3

Capital lease

87

39

42

4

2

Purchase obligations

3,007

2,970

37

0

0

Operating leases

371

121

134

70

46

Total

\) 47,768

\( 16,746

\)13,119

8,211

9,692

Instructions

(a) Compute Deere & Company’s working capital and current ratio (current assets ÷ current liabilities) with and without the off-balance-sheet contractual obligations reported in the schedule.

(b) Briefly discuss how the information provided in the contractual obligation disclosure would be useful in evaluating Deere & Company for loans (1) due in one year and (2) due in five years.

What is a “Summary of Significant Accounting Policies”?

Early in January 2018, Hopkins Company is preparing for a meeting with its bankers to discuss a loan request. Its bookkeeper provided the following accounts and balances at December 31, 2017.

Debit \(

Credit \)

Cash

\(75,000

Accounts receivable (net)

38,500

Inventory (net)

65,300

Equipment (net)

84,000

Patent

15,000

Notes and Accounts payable

\)52,000

Note payable (due 2019)

75,000

Common stock

100,000

Retained earnings

50,800

\(277,800

\)277,800

Except for the following items, Hopkins has recorded all adjustments in its accounts.

1. Cash includes \(500 petty cash and \)15,000 in a bond sinking fund.

2. Net accounts receivable is comprised of \(52,000 in accounts receivable and \)13,500 in allowance for doubtful accounts.

3. Equipment had a cost of \(112,000 and accumulated depreciation of \)28,000.

4. On January 8, 2018, one of Hopkins’ customers declared bankruptcy. At December 31, 2017, this customer owed Hopkins \(9,000.

Accounting

Prepare a corrected December 31, 2017, balance sheet for Hopkins Company.

Analysis

Hopkins’ bank is considering granting an additional loan in the amount of \)45,000, which will be due December 31, 2018. How can the information in the balance sheet provide useful information to the bank about Hopkins’ ability to repay the loan?

Principles

In the upcoming meeting with the bank, Hopkins plans to provide additional information about the fair value of its equipment and some internally generated intangible assets related to its customer lists. This information indicates that Hopkins has significant unrealized gains on these assets, which are not reflected on the balance sheet. What objections is the bank likely to raise about the usefulness of this information in evaluating Hopkins for the loan renewal?

What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?
See all solutions

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