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Unformatted text preview: on account – Increase in accounts receivable = ($5,967,000 75%) – $1,671,750 c This amount can also be calculated as 2012 sales of $5,967,000 less the increase in Accounts Receivable of $1,671,750 during 2012. d $2,145,000 = Salary expense of $2,025,000 – Ending salary payable of $25,000 + Beginning salary payable of $145,000 e $705,000 = Advertising expense of $755,000 – Advertising payable of $50,000 f $348,000 = Supplies expense of $281,000 + Beginning supply inventory payable of $67,000 P14–18 Concluded b. The first thing that must be explained to the stockholders is the nature of dividends. Dividends are paid out of assets, not out of net income. If a company has insufficient assets or has alternative uses for its assets, it will be unable to declare a cash dividend. Although net income is a measure of the net assets that have flowed into the company during the year from operations, these net assets may be in a form, such as inventory or accounts receivable, that cannot be easily distributed to stockholders. Thus, net income provides only a low­quality indication of potential dividends. A better indication of a company's potential ability to declare and pay cash dividends is the net cash flows from operating activities. In this particular case, 2011 was a good year for the Lynch Engineering Firm. The company generated $597,000 in net income and $5,027,000 in cash flows from operating activities [see part (a)]. The large cash flows are due primarily to the collection of receivables that were outstanding at the beginning of the year and were not associated at all with 2011 net income. 2012 was also a good year with respect to net income; the company generated income of $638,000. However, the company realized only a net cash flow from operating activities of $67,250. The low cash flows, in comparison to 2011's net cash flows, are due to (1) a larger proportion of sales being on account in 2012 and (2) customers not paying their accounts promptly. As a boar...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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