Exercise 7-3 (30 minutes)a. Cash Flows from Operations Computation:Net income$10,000Add (deduct) items to convert to cash basis:Depreciation, depletion, and amortization$8,000Deferred income taxes 400Amortization of bond discount 50Increase in accounts payable 1,200Decrease in inventories 850 10,500$20,500Undistributed earnings of unconsolidated subsidiaries and affiliates(200)Amortization of premium on bonds payable(60)Increase in accounts receivable (900) (1,160)Cash provided by operations $19,340b.(1)The issuance of treasury stock for employee stock plans (as compensation) requires an addback to net income because it is an expense not using cash.(2)The cash outflow for interest is not included in expense and must be included as cash outflow in investing activities (as part of outlays for property.)(3)If the difference between pension expense and actual funding is an accrued liability, the unpaid portion must be added back to income as an expense not requiring cash. If the amount funded exceeds pension expense, then net income must be reduced by that excess amount.Exercise 7-4 (30 minutes)a.Beginning balance of accounts receivable$ 305,000Net sales 1,937,000Total potential receipts$2,242,000Ending balance of accounts receivable - 295,000Cash collected from sales$1,947,000b.Ending balance of inventory$ 549,000Cost of sales+1,150,000Total$1,699,000Beginning balance of inventory- 431,000Purchases$1,268,000Beginning balance of accounts payable$ 563,000Purchases (from above) 1,268,000Total potential payments$1,831,000Ending balance of accounts payable- 604,000Cash payments for accounts payable$1,227,000c.Issuance of common stock$ 81,000Issuance of treasury stock 17,000Total nonoperating cash receipts$ 98,000d.Increase in land$ 150,000Increase in plant and equipment 18,000Total payments for noncurrent assets$ 168,000Exercise 7-5 (20 minutes)SourceUseAdjustmentCategorya.XXOb.XFc.XFd.XIe.XFf.NCNg.XIh.NCSi.XFj.XXOExercise 7-6 (20 minutes)SourceUseAdjustmentCategorya.XXOb. XFc.NCNd.XIe.NCSf.NCNg.XIh.NCSi.NEj. NEExercise 7-7 (30 minutes)NetCash fromCashIncomeoperationsposition1.NENE+2.NENE+3.+4a.-NENE4b.NE(1)+(2)+(2)4c.-+(2)+(2) 5.NE+6.-+ (long-run -)+ (long-run -)7.-(5)+8.+NENE9.+(3)+(4)+(4)10. NE + +11. + + +12. NE NE +13. NE NE +(1) Deferred tax accounting.(2) Depends on whether tax savings are realized in cash.(3) If profitable.(4) If accounts receivable collected.(5) Depends on whether interest is paid or accrued.Further explanations (listed by proposal number):1.Substituting payment in stock for payment in cash for its dividends will not affect income or CFO but will increase cash position.2.In the short run, postponement of capital expenditures will save cash but have no effect on income or CFO. In the long term, both income and CFO may suffer due to lower operating efficiency.Exercise 7-7continued3.Cash not spent on repair and maintenance will increase all three measures. However, the skimping on necessary discretionary costs will adversely impact future operating efficiency and, hence, profitability.4.Managers advocating an increase in depreciation may have spoken in the mistaken belief that depreciation is a source of cash and that consequently increasing it would result in a higher cash inflow. In fact, the level of depreciation expense has no effect on cash flowthe same amount of depreciation deducted in arriving at net income is added back in arriving at CFO. On the other hand, increasing depreciation for tax purposes will in all cases result in at least a shortterm savings.5.Quicker collections will not affect income but will increase CFO because of lower accounts receivable. Cash will also increase by the speedier conversion of receivables into cash. In the longer run this stiffening in the terms of sale to customers may result in sales lost to competition.6.Payments stretchedout will lower income because of lost discounts but does positively affect CFO by increasing the level of accounts payable. Cash conservation will result in a higher cash position. Relations with suppliers may be affected adversely. Note: Long-term cash outflow will be higher because of the lost discount.7.Borrowing will result in interest costs that will decrease income and CFO. Cash position will increase.8.This change in depreciation method will increase income in the early stages of an assets life. The opposi