Under accrual accounting costs should be capitalized

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Unformatted text preview: operating activities: Net income 728,140 Adjustments: Increase in accounts receivable Increase in inventory Increase in prepaid insurance Decrease in premium on bonds payable Increase in accounts payable Increase in miscellaneous payables Depreciation expense Bad debt expense Unrealized loss on mkt. securities $ $ (380,000) (630,000) (60,000) (1 4 0 ) 925,000 75,000 140,000 70,400 25,000 Total adjustments 165,260 Net cash increase (decrease) due to operating activities $ 893,400 Cash flows from investing activities: Purchase of marketable securities (250,000) Purchase of fixed assets (750,000) Net cash increase (decrease) due to investing activities $ (1,000,000) Cash flows from financing activities: Proceeds from bond issue 29,200 Proceeds from preferred stock issue 102,000 Proceeds from common stock issue 1,500,000 Net cash increase (decrease) due to financing activities $ 1,631,200 Net increase in cash $ 1,524,600 Beginning cash balance, January 1, 2011 0 Ending cash balance, December 31, 2011 $ 1,524,600 ISSUES FOR DISCUSSION ID14–1 a. Quality of earnings and earnings persistence have to do with the sustainability of the earnings as well as nearness of the earnings to the cash generated by operating activities. The indirect method of preparing the statement of cash flows is especially helpful in spotting the noncash adjustments to net income. This information helps investors identify the companies that use aggressive accounting choices, since the magnitude of such adjustments, in general, would be higher in these cases. b. In the case of Mattel, the changes in accounts receivable were certainly positive, which indicated that the majority of the sales were on credit with no contributions to cash. The change in the inventory could have been attributed to either: 1. matching the old production and currents sales or 2. purchasing new inventory on credit. Similarly, an increase in deferred taxes and translation gains would indicate no related cash effect except an adjustment to...
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