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Chapter 5: Q23Q. (page 238)

Net income for the year for Carrie, Inc. was \(750,000, but the statement of cash flows reports that net cash provided by operating activities was \)860,000. What might account for the difference?

Short Answer

Expert verified

Net cash from the operation is higher than the net income of the business entitybecause of higher non-cash expenses reported in the income statement.

Step by step solution

01

Definition of Accrual Accounting

The Accrual accounting concept can be defined as the accounting method of reporting all the business transactions of financial nature as they occur without considering the flow of cash.

02

Different in net income and net cash from operating activities

The difference between the net cash provided from operating activities and net income is non-cash expenses such as depreciation and amortization. Such expenses will reduce the net income but not reduce the cash from operating activities because it does not include cash outflow.

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Most popular questions from this chapter

(Classification of Balance Sheet Accounts) Assume that Fielder Enterprises uses the following headings on its balance sheet.

(a) Current assets

(g) Long-term liabilities

(b) Investments

(h) Capital stock

(c) Property, plant, and equipment

(i) Equity attribute to non-controlling interest

(d) Intangible assets

(i) paid-in-capital in excess of par

(e) Other assets

(k) Retained earnings

(f) Current liabilities

Instructions

Indicate by letter how each of the following usually should be classified. If an item should appear in a note to the financial statements, use the letter “N” to indicate this fact. If an item need not be reported at all on the balance sheet, use the letter “X.”

1. Prepaid insurance.

2. Stock owned in affiliated companies.

3. Unearned service revenue.

4. Advances to suppliers.

5. Unearned rent revenue.

6. Preferred stock.

7. Additional paid-in capital on preferred stock.

8. Copyrights.

9. Petty cash fund.

10. Sales taxes payable.

11. Accrued interest on notes receivable.

12. Twenty-year issue of bonds payable that will mature within the next year. (No sinking fund exists, and refunding is not planned.)

13. Machinery retired from use and held for sale.

14. Fully depreciated machine still in use.

15. Accrued interest on bonds payable.

16. Salaries that company budget shows will be paid to employees within the next year.

17. Discount on bonds payable. (Assume related to bonds payable in item 12.)

18. Accumulated depreciation—buildings.

19. Shares held by non-controlling stockholders.

A comparative balance sheet for Shabbona Corporation is presented below.

Particular

December 31

2017

2016

Assets

Cash

\(73,000

\)22,000

Accounts receivable

82,000

66,000

Inventory

180,000

189,000

Land

71,000

110,000

Equipment

260,000

200,000

Accumulated depreciation – Equipment

(69,000)

(42,000)

Total

\(597,000

\)545,000

Liabilities and stockholder’s equity

Account payable

\(34,000

\)47,000

Bonds payable

150,000

200,000

Common stock (\(1 par)

214,000

164,000

Retained earnings

199,000

134,000

Total

\)597,000

\(545,000

Additional information:

1. Net income for 2017 was \)125,000. No gains or losses were recorded in 2017.

2. Cash dividends of \(60,000 were declared and paid.

3. Bonds payable amounting to \)50,000 were retired through issuance of common stock.

Instructions

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

(b) Determine Shabbona Corporation’s current cash debt coverage, cash debt coverage, and free cash flow. Comment on its liquidity and financial flexibility.

(Identifying Balance Sheet Deficiencies) The assets of Fonzarelli Corporation are presented below (000s omitted).

FONZARELLI CORPORATION

BALANCE SHEET (PARTIAL)

DECEMBER 31, 2018

Assets

Cash

\(100,000

Unclaimed payroll check

27,500

Debt investment (trading) (fair value \)30,000) at cost

37,000

Accounts receivables (less bad debt reserves)

75,000

Inventory—at lower-of-cost (determined by the next-in, first-out method) or net realizable value

240,000

Total current assets

479,500

Tangible assets

Land (less accumulated depreciation)

80,000

Building and equipment

\(800,000

Less: Accumulated depreciation

(250,000)

550,000

Net tangible assets

630,000

Long-term investment

Stock and bonds

100,000

Treasury stock

70,000

Total long-term investment

170,000

Other assets

Discount on bonds payable

19,400

Sinking funds

975,000

Total other assets

994,400

Total assets

\)2,273,900

Instructions

Indicate the deficiencies, if any, in the foregoing presentation of Fonzarelli Corporation’s assets.

What is a “Summary of Significant Accounting Policies”?

Perez Company reported an increase in inventories in the past year. Discuss the effect of this change on the current ratio (current assets ÷ current liabilities). What does this tell a statement user about Perez Company’s liquidity?
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