Chapter 4—Solutions to Problems

Problem 1: Solution

Transaction # Identification

1 Operating

2 Investing

3 Noncash transaction

4 Financing

5 Noncash transaction

6 Operating

7 Investing

8 Financing

9 None of the above

10 Investing

11 Operating

12 Operating

13 Operating

14 Financing

15 Investing

Problem 2: Solution

Net Cash Flows from Operating Activities:

Net income $21,452

Adjustments to Reconcile Net

Income to Net Cash Flows

from Operating Activities:

Depreciation expense $ 5,200

Increase in accounts receivable (2,242)

Decrease in food inventory 200

Increase in prepaid insurance (736)

Increase in accounts payable 2,516

Decrease in accrued expenses (238)

Increase in taxes payable 451 5,151

Net Cash Flows from Operating Activities $26,603

Problem 3: Solution

Net Cash Flow from Investing Activities:

Sale of marketable securities $8,000

Purchase of marketable securities -10,000

Sale of equipment 5,000

Purchase of equipment -165,000

Net Cash Flow from Investing Activities -$162,000

Problem 4: Solution

1. Beginning payroll payable account balance $ 6,000

Payroll expense during 20X2 805,000

Less: Ending payroll payable account balance (8,000)

Cash disbursements for payroll during 20X2 $803,000

2. Insurance expenses for 20X2 $ 15,000

Prepaid insurance balance at the end of 20X2 5,000

Less: Prepaid insurance balance at beg. of 20X2 (3,000)

Insurance premiums paid during 20X2 $ 17,000

3. Utility expense during 20X2 $ 30,000

Accrued utility expense at the beg. of year 3,000

Less: Year-end accrual (4,000)

Amount paid to utility company during 20X2 $ 29,000

4. Ending balance of equipment $250,000

Less: Beginning balance of equipment account (200,000)

Plus: Cost of equipment sold during 20X2 20,000

Cash expenditures for equipment $ 70,000

5. Ending balance of marketable securities $ 25,000

Less: Beg. balance of marketable securities (20,000)

Plus: Cost of securities sold (and later replaced) 5,000

Expenditures for marketable securities $ 10,000

Problem 5: Solution

1. Cash received from guests

Cash sales $ 800,000

Collection of receivables:

Sales on account $2,540,000

Less: Increase in receivables (10,000) 2,530,000

Total $3,330,000

2. Dividends paid

Dividends declared in 20X2 paid in 20X3 $ 10,000

Dividends declared and paid in 20X3:

Dividends declared in 20X3 $120,000

Less: Dividends payable at

the end of 20X3 (15,000) 105,000

Total $115,000

3. Cash payments for food purchases

Cost of food used in 20X3 $400,000

Add: Increase in food inventory 8,000

Add: Decrease in suppliers payables 5,000

Total $413,000

4. Cash borrowed and recorded as LTD:

Increase in LTD $500,000

Add: Conversion of debt to stock 200,000

Add: Reclassify to current debt 50,000

Total $750,000

5. Income taxes paid

Income tax expense $25,000

Less: Increase in income taxes payable (1,000)

Total $24,000

Problem 6: Solution

Net Cash Flows from Operating Activities:

Net income $600,400 (1)

Adjustments to Reconcile Net