Financial Accounting: An Integrated Statements Approach, 2nd Edition

Rundell Inc.

Comparative Balance Sheet

December 31, 2007 and 2006

Increase

2007 2006 Decrease*

Assets

Cash $ 97,500 $ 26,000 $ 71,500

Accounts receivable (net) 74,000 65,000 9,000

Inventories 172,000 180,000 8,000*

Land 80,000 125,000 45,000*

Building 260,000 200,000 60,000

Accumulated depreciation—building (65,300) (58,300) (7,000)

Total assets $618,200 $537,700 $ 80,500

Liabilities

Accounts payable (merchandise creditors) $ 43,500 $ 46,700 $ 3,200*

Accrued expenses payable (operating

expenses) 26,500 24,300 2,200

Income taxes payable 7,900 8,400 500*

Dividends payable 14,000 10,000 4,000

Bonds payable 100,000 150,000 50,000*

Total liabilities $191,900 $239,400 $ 47,500*

Stockholders’ Equity

Common stock ($2 par) $ 24,000 $ 16,000 $ 8,000

Paid-in capital in excess of par 120,000 80,000 40,000

Retained earnings 282,300 202,300 80,000

Total stockholders’ equity $426,300 $298,300 $128,000

Total liabilities and stockholders’ equity $618,200 $537,700 $ 80,500

Chapter 13 Statement of Cash Flows 585

earnings resulting from issuing a stock dividend does not affect cash. Such transactions

are not reported on the statement of cash flows.

For Rundell Inc., the retained earnings account indicates that the $80,000 change

resulted from net income of $108,000 and cash dividends declared of $28,000. The ef-

fect of each of these items on cash flows is discussed in the following sections.

Cash Flows from Operating Activities

The net income of $108,000 reported by Rundell Inc. normally is not equal to the

amount of cash generated from operations during the period. This is because net in-

come is determined using the accrual method of accounting.

Under the accrual method of accounting, revenues and expenses are recorded at

different times from when cash is received or paid. For example, merchandise may be

sold on account and the cash received at a later date.

Likewise, insurance expense represents the amount of insurance expired during

the period. The premiums for the insurance may have been paid in a prior period.

Thus, the net income reported on the income statement must be adjusted in determin-

ing cash flows from operating activities. The typical adjustments to net income are

summarized in Exhibit 4.^2

Exhibit 3

Comparative Balance
Sheet

2 Other items that also require adjustments to net income to obtain cash flow from operating activities

include amortization of bonds payable discounts (add), losses on debt retirement (add), amortization of

bonds payable premium (deduct), and gains on retirement of debt (deduct).