ch15

CHAPTER 15STATEMENT OF CASH FLOWS

CLASS DISCUSSION QUESTIONS

1. It is costly to accumulate the data needed.2. It focuses on the differences between net in-

come and cash flows from operating activi-ties, and the data needed are generally more readily available and less costly to ob-tain than is the case for the direct method.

3. In a separate schedule of noncash investing and financing activities accompanying the statement of cash flows.

4. a. No effectb. No

5. The $25,000 increase must be added to in-come from operations because the amount of cash paid to merchandise creditors was $25,000 less than the amount of purchases included in the cost of goods sold.

6. The $10,000 decrease in salaries payable should be deducted from income to deter-mine the amount of cash flows from operat-ing activities. The effect of the decrease in the amount of salaries owed was to pay $10,000 more cash during the year than had been recorded as an expense.

7. a. $5,000 gainb. Cash inflow of $80,000

c. The gain of $5,000 would be deducted from net income in determining net cash flow from operating activities; $80,000 would be reported as cash flow from in-vesting activities.

8. Cash flow from financing activities—is-suance of bonds, $5,250,000

9. a. Cash flow from investing activities—dis-posal of fixed assets, $5,000The $5,000 gain on asset disposal should be deducted from net income in determining cash flow from operating activities under the indirect method.

b. No effect10. The same. The amount reported as the net

cash flow from operating activities is not af-fected by the use of the direct or indirect method.

11. Cash received from customers, cash pay-ments for merchandise, cash payments for operating expenses, cash payments for in-terest, cash payments for income taxes.

12. Reported in a separate schedule, as follows:Schedule of noncash financing activities:Issuance of stock for

acquisitions.........................$438 million

641641

EXERCISES

Ex. 15–1

There were net additions, such as depreciation and amortization of intangible as-sets, of $155 million to the net loss reported on the income statement to convert the net loss from the accrual to the cash basis. For example, depreciation is an expense in determining net income, but it does not result in a cash outflow. Thus, depreciation is added back to the net loss in order to determine cash flow from operations.

Ex. 15–2

a. Cash payment, $30,000

b. Cash payment, $501,000

c. Cash payment, $37,500

d. Cash receipt, $101,000

e. Cash payment, $250,000

f. Cash payment, $120,000

g. Cash receipt, $41,000

h. Cash receipt, $225,000

Ex. 15–3

a. financing

b. financing

c. investing

d. financing

e. financing

f. financing

g. operating

h. investing

i. financing

j. investing

k. investing

642642

Ex. 15–4

a. added

b. deducted

c. deducted

d. added

e. added

f. added

g. deducted

h. deducted

i. added

j. deducted

k. added

l. added

Ex. 15–5

a. Cash flows from operating activities:

Net income, per income statement............. $167,900Add: Depreciation......................................... $41,300

Decrease in prepaid expenses........... 200Increase in accounts payable............ 1,900 43,400

$211,300Deduct: Increase in accounts receivable... $ 4,850

Increase in inventories.................. 9,500Decrease in salaries payable........ 800 15,150

Net cash flow from operating activities...... $196,150

b. Yes. The amount of cash flows from operating activities reported on the statement of cash flows is not affected by the method of reporting such flows.

643643

Ex. 15–6

Cash flows from operating activities:Net income, per income statement................ $489,000Add: Depreciation......................................... $135,700

Decrease in accounts receivable....... 68,100Increase in wages payable................. 5,600 209,400

$698,400Deduct: Increase in merchandise inventory $ 19,900

Increase in prepaid expenses........ 1,500Decrease in accounts payable....... 19,800 41,200

Net cash flow from operating activities......... $657,200

Ex. 15–7

Dividends declared............................................................ $280,000Less increase in dividends payable................................. 10,000 Dividends paid to stockholders during the year............. $270,000

The company probably had four quarterly payments—the first one being $60,000 declared in the preceding year and three payments of $70,000 each—of divi-dends declared and paid during the current year. Thus, $270,000 [$60,000 + (3 × $70,000)] is the amount of cash payments to stockholders.

Ex. 15–8

Cash flows from investing activities:Cash received from sale of equipment....................... $125,000

[The gain on the sale, $20,000 ($125,000 proceeds from sale less $105,000 book value), would be deducted from net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.]

Ex. 15–9

Cash flows from investing activities:Cash received from sale of equipment....................... $24,000

[The loss on the sale, $3,000 ($24,000 proceeds from sale less $27,000 book value), would be added to net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from oper-ations is used.]

644644

Ex. 15–10

Cash flows from investing activities:Cash received from sale of land.................................. $105,000Less: Cash paid for purchase of land......................... 200,000

(The gain on the sale of land, $25,000, would be deducted from net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.)

Ex. 15–11

Cash flows from financing activities:Cash received from sale of common stock................ $300,000Less: Cash paid for dividends..................................... 180,000

Note: The stock dividend is not disclosed on the statement of cash flows.

Ex. 15–12

Cash flows from investing activities:Cash paid for purchase of land................................... $210,000

A separate schedule of noncash investing and financing activities would report the purchase of $250,000 land with a long-term mortgage note, as follows:

Purchase of land by issuing long-term mortgage note..... $250,000

Ex. 15–13

Net cash flow from operating activities.............. $ 93,200Add: Increase in accounts receivable............... $ 4,850

Increase in prepaid expenses................... 1,500Decrease in income taxes payable........... 1,600Gain on sale of investments..................... 2,350 10,300

$103,500Deduct: Depreciation.......................................... $12,500

Decrease in inventories........................ 7,400Increase in accounts payable.............. 3,200 23,100

Net income, per income statement..................... $ 80,400

Note to Instructors: The net income must be determined by working backward through the cash flows from operating activities section of the statement of cash flows. Hence, those items which were added (deducted) to determine net cash flow from operating activities must be deducted (added) to determine net in-come.

645645

Ex. 15–14

Operating activities:*

Net income, per income statement................................................ $6,068Add: Depreciation.......................................................................... $2,807

Loss on sale of property, plant, and equipment................ 282Other noncash expenses..................................................... 242Decrease in inventories........................................................ 167Decrease in other operating assets.................................... 37

3,535 $9,603

Deduct: Increase in accounts receivable...................................... $ 38Decrease in income tax payable...................................... 211Decrease in accounts payable and accrued expenses. 163

412 Net cash flow from operating activities......................................... $9,191

*Dollars in millions

Ex. 15–15

a. Sales............................................................................. $685,000Plus decrease in accounts receivable balance........ 38,000 Cash received from customers.................................. $723,000

b. Income tax expense.................................................... $ 72,000Plus decrease in income tax payable........................ 4,500 Cash payments for income tax.................................. $ 76,500

Ex. 15–16

Cost of merchandise sold................................................. $8,191*Deduct: Decrease in merchandise inventories............... 562

Increase in accounts payable............................. 135 Cash paid for merchandise............................................... $7,494

*In millions.

646646

Ex. 15–17

a. Cost of merchandise sold.......................................... $315,000Add decrease in accounts payable........................... 3,400

$318,400Deduct decrease in inventories................................. 2,400 Cash payments for merchandise............................... $316,000

b. Operating expenses other than depreciation........... $ 87,600Add decrease in accrued expenses.......................... 400

$ 88,000Deduct decrease in prepaid expenses...................... 500 Cash payments for operating expenses................... $ 87,500

Ex. 15–18

Cash flows from operating activities:Cash received from customers...................... $375,0001

Deduct: Cash payments for merchandise... $182,3002

Cash payments for operatingexpenses..................................... 131,2003

Cash payments for income tax...... 9,700 4 323,200 Net cash flow from operating activities......... $ 51,800

Computations:1. Sales.................................................................................... $358,000

Add decrease in accounts receivable.............................. 17,000 Cash received from customers......................................... $375,000

2. Cost of merchandise sold................................................. $163,400Add: Increase in inventories............................................ $ 5,300

Decrease in accounts payable............................... 13,600 18,900 Cash payments for merchandise...................................... $182,300

3. Operating expenses other than depreciation.................. $142,600Deduct: Decrease in prepaid expenses.......................... $ 3,100

Increase in accrued expenses.......................... 8,300 11,400 Cash payments for operating expenses..........................$131,200

4. Income tax expense........................................................... $ 7,300Add decrease in income tax payable............................... 2,400 Cash payments for income tax......................................... $ 9,700

647647

Ex. 15–19


Deduct: Cash payments for merchandise... $540,8002


Cash payments for income tax...... 65,300 802,000 Net cash flow from operating activities......... $130,100

Computations:1. Sales.......................................................................................................... $935,600

Deduct increase in accounts receivable............................................... 3,500 Cash received from customers.............................................................. $932,100

2. Cost of merchandise sold....................................................................... $534,200Add increase in inventories.................................................................... 10,500

$544,700Deduct increase in accounts payable.................................................... 3,900 Cash payments for merchandise........................................................... $540,800

3. Operating expenses other than depreciation....................................... $195,700Add decrease in accrued expenses....................................................... 1,600

$197,300Deduct decrease in prepaid expenses.................................................. 1,400 Cash payments for operating expenses................................................ $195,900

648648

Ex. 15–20

a. Fiscal Years Ended

2000 1999

Cash provided from operating activities................ $6,141,000,000 $4,325,000,000Less: 40% of property and equipment acquisitions (434,400,000) (240,800,000)

20% of technology license acquisitions...... (88,800,000 ) (19,000,000 )Free cash flow........................................................... $ 5,617,800,000 $4,065,200,000

Note: Cisco Systems does not pay a dividend.

b. Cisco’s free cash flow is very strong. In both years, Cisco had over $4 billion in free cash flow. This places Cisco within the top 5% of all U.S. manufactur-ing companies for free cash flow. In addition, Cisco has been growing its free cash flow, from over $4 billion in fiscal year 1999 to over $5 billion in fiscal year 2000 (38% increase). Cisco’s free cash flow is so strong that it is able to fund most of its growth using internal resources. The balance sheet indi-cates that Cisco has no debt, while the statement of cash flows indicates that Cisco is issuing nearly $1 billion in common stock in 1999 and $1.56 billion in 2000. As can be seen from the statement of cash flows, most of Cisco’s cash flow is used toward purchases of investments. These investments are often in other companies that Cisco uses to grow into new markets and technolo-gies. Cisco does not pay a dividend, so free cash flow is not reduced to sup-port dividends.

649649

Ex. 15–21

MARIA’S MEMORIES INC.Statement of Cash Flows

For the Year Ended December 31, 2003

Cash flows from operating activities:Net income, per income statement........................ $25Add: Depreciation.................................................... $3

Decrease in accounts receivable.................. 4 7 $32

Deduct: Increase in inventories............................. $2Decrease in accounts payable................ 1Gain on sale of land.................................. 7 10

Net cash flow from operating activities................. $22

Cash flows from investing activities:Cash received from sale of land............................ $17Less cash paid for purchase of equipment.......... 14 Net cash flow from investing activities................. 3

Cash flows from financing activities:Cash received from sale of common stock........... $ 6Less cash paid for dividends................................. 11 *Net cash flow from financing activities................. (5 )

Increase in cash............................................................ $20Cash at the beginning of the year............................... 34 Cash at the end of the year.......................................... $54

*$13 + $6 – $8 = $11

Ex. 15–22

1. The increase in accounts receivable should be deducted from net income in the cash flows from operating activities section.

2. The gain from sale of investments should be deducted from net income in the cash flows from operating activities section.

3. The increase in accounts payable should be added to net income in the cash flows from operating activities section.

4. Cash paid for dividends should be deducted from cash received from the sale of common stock in the cash flows from financing activities section.

5. The correct amount of cash at the beginning of the year, $70,700, should be added to the increase in cash.

6. The final amount should be the amount of cash at the end of the year, $101,300.

Ex. 15–22 Concluded

A correct statement of cash flows would be as follows:

CYBER-MASTER GAMES INC.Statement of Cash Flows


Cash flows from operating activities:Net income, per income statement................... $100,500Add: Depreciation.............................................. $ 49,000

Increase in accounts payable.................. 4,400 53,400 $153,900

Deduct: Increase in accounts receivable........ $ 11,500Increase in inventories........................ 18,300Gain on sale of investments............... 7,000Decrease in accrued expenses.......... 1,600 38,400

Net cash flow from operating activities .......... $115,500

Cash flows from investing activities:Cash received from sale of investments.......... $ 85,000Less: Cash paid for purchase of land.............. $ 90,000

Cash paid for purchase of equipment... 150,100 240,100Net cash flow used for investing

activities......................................................... (155,100)

Cash flows from financing activities:Cash received from sale of common

stock............................................................... $107,000Less: Cash paid for dividends.......................... 36,800Net cash flow provided by financing

activities......................................................... 70,200Increase in cash....................................................... $ 30,600Cash at the beginning of the year.......................... 70,700Cash at the end of the year..................................... $101,300

PROBLEMS

Prob. 15–1A

EVERLAST FLOORING CO.Statement of Cash Flows

For the Year Ended June 30, 2003

Cash flows from operating activities:Net income, per income statement................ $126,000Add: Depreciation........................................... $ 20,500

Increase in accounts payable............... 8,600Increase in accrued expenses.............. 700Loss on sale of investments................. 8,000 37,800

$163,800Deduct: Increase in accounts receivable...... $ 4,800

Increase in inventories..................... 19,200 24,000 Net cash flow from operating activities......... $ 139,800

Cash flows from investing activities:Cash received from sale of investments....... $ 50,000Less: Cash paid for purchase of land........... $124,000

Cash paid for purchase ofequipment........................................ 172,000 296,000

Net cash flow used for investingactivities...................................................... (246,000)

Cash flows from financing activities:Cash received from sale of common stock. . $220,000Less cash paid for dividends......................... 57,500 *Net cash flow provided by financing

activities...................................................... 162,500 Increase in cash.................................................... $ 56,300Cash at the beginning of the year....................... 67,900 Cash at the end of the year.................................. $ 124,200

*$60,000 + $12,500 – $15,000 = $57,500

Prob. 15–1A Concluded

EVERLAST FLOORING CO.Work Sheet for Statement of Cash Flows


Transactions Balance Balance

June 30, 2002 Debit Credit June 30, 2003

Cash................................................. 67,900 (m) 56,300 124,200Accounts receivable....................... 97,600 (l) 4,800 102,400Inventories...................................... 123,500 (k) 19,200 142,700Investments..................................... 58,000 (j) 58,000 0Land................................................. 0 (i) 124,000 124,000Equipment....................................... 201,400 (h) 172,000 373,400Accumulated depreciation—

equipment.................................. (58,900) (g) 20,500 (79,400)Accounts payable........................... (84,600) (f) 8,600 (93,200)Accrued expenses.......................... (12,300) (e) 700 (13,000)Dividends payable.......................... (12,500) (d) 2,500 (15,000)Common stock................................ (80,000) (c) 40,000 (120,000)Paid-in capital in excess of par—

common stock........................... (130,000) (c) 180,000 (310,000)Retained earnings........................... (170,100) (b) 60,000 (a) 126,000 (236,100)

Totals............................................... 0 436,300 436,300 0

Operating activities:Net income................................ (a) 126,000Increase in accrued expenses. (e) 700Increase in accounts payable.. (f) 8,600Depreciation.............................. (g) 20,500Loss on sale of investments.... (j) 8,000Increase in inventories............. (k) 19,200Increase in accounts receivable (l) 4,800

Investing activities:Purchase of equipment............ (h) 172,000Purchase of land....................... (i) 124,000Sale of investments.................. (j) 50,000

Financing activities:Declaration of cash dividends. (b) 60,000Sale of common stock.............. (c) 220,000Increase in dividends payable. (d) 2,500

Net increase in cash....................... (m) 56,300

Totals............................................... 436,300 436,300

Prob. 15–2A

BON VOYAGE LUGGAGE COMPANYStatement of Cash Flows


Cash flows from operating activities:Net income, per income statement................ $ 99,800Add: Depreciation........................................... $60,700

Amortization of patents......................... 2,600Decrease in inventories......................... 24,800 88,100

$ 187,900Deduct: Increase in accounts receivable...... $16,000

Increase in prepaid expenses.......... 2,500Decrease in accounts payable........ 15,300Decrease in salaries payable........... 2,300 36,100

Net cash flow from operating activities......... $ 151,800

Cash flows from investing activities:Cash paid for construction of building......... $ 135,000 Net cash flow used for investing activities... (135,000)

Cash flows from financing activities:Cash received from issuance of

mortgage note.............................................. $ 50,000Less: Cash paid for dividends...................... 46,000 *Net cash flow provided by

financing activities...................................... 4,000 Increase in cash.................................................... $ 20,800Cash at the beginning of the year....................... 134,600 Cash at the end of the year.................................. $ 155,400

Schedule of noncash financing and investing activities:Issuance of common stock to retire bonds. . $ 164,000

*$48,000 + $10,000 – $12,000 = $46,000

Prob. 15–2A Continued

BON VOYAGE LUGGAGE COMPANYWork Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2003


Dec. 31, 2002 Debit Credit Dec. 31, 2003

Cash................................................. 134,600 (p) 20,800 155,400Accounts receivable (net).............. 176,400 (o) 16,000 192,400Inventories...................................... 312,300 (n) 24,800 287,500Prepaid expenses........................... 6,000 (m) 2,500 8,500Land................................................. 100,000 100,000Buildings......................................... 415,000 (l) 135,000 550,000Accumulated depreciation—

buildings.................................... (176,000) (k) 25,500 (201,500)Machinery and equipment............. 295,700 295,700Accumulated depreciation—

machinery and equipment....... (84,600) (j) 35,200 (119,800)Patents............................................. 40,000 (i) 2,600 37,400Accounts payable........................... (146,700) (h) 15,300 (131,400)Dividends payable.......................... (10,000) (g) 2,000 (12,000)Salaries payable............................. (12,800) (f) 2,300 (10,500)Mortgage note payable................... — (e) 50,000 (50,000)Bonds payable................................ (164,000) (d) 164,000 —Common stock................................ (15,000) (c) 4,000 (19,000)Paid-in capital in excess of par—


Totals............................................... 0 403,900 403,900 0




Operating activities:Net income................................ (a) 99,800Decrease in salaries payable... (f) 2,300Decrease in accounts payable (h) 15,300Amortization of patents............ (i) 2,600Depreciation—machinery and

equipment............................ (j) 35,200Depreciation—buildings........... (k) 25,500Increase in prepaid expenses.. (m) 2,500Decrease in inventories........... (n) 24,800Increase in accounts receivable (o) 16,000

Investing activities:Construction of building.......... (l) 135,000

Financing activities:Declaration of cash dividends. (b) 48,000Issuance of mortgage note payable (e) 50,000Increase in dividends payable. (g) 2,000

Schedule of noncash investing andfinancing activities:Issuance of common stock to

retire bonds......................... (c) 164,000 (d) 164,000Net increase in cash....................... (p) 20,800

Totals............................................... 403,900 403,900

Prob. 15–3A

UNION WHOLESALE SUPPLY CO.Statement of Cash Flows


Cash flows from operating activities:Net income, per income statement............. $ 12,100Add: Depreciation......................................... $ 39,300

Increase in income tax payable......... 200Decrease in prepaid expenses........... 600 40,100

$ 52,200Deduct: Increase in accounts receivable... $ 18,500

Increase in inventories.................. 17,500Decrease in accounts payable...... 3,700Gain on sale of land....................... 14,000 53,700

Net cash flow from operating activities...... $ (1,500)

Cash flows from investing activities:Cash received from land sold...................... $ 34,000Less: Cash paid for acquisition

of building..................................... $110,000Cash paid for purchase

of equipment................................. 40,000 150,000 Net cash flow used for investing

activities................................................... (116,000)


bonds payable......................................... $ 50,000Cash received from issuance of

common stock......................................... 71,000 $121,000Less: Cash paid for dividends.................... 6,000 Net cash flow provided by financing

activities................................................... 115,000 Decrease in cash................................................ $ (2,500)Cash at the beginning of the year.................... 27,400 Cash at the end of the year............................... $ 24,900


UNION WHOLESALE SUPPLY CO.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2003



Cash................................................. 27,400 (p) 2,500 24,900Accounts receivable....................... 94,600 (o) 18,500 113,100Inventories...................................... 176,500 (n) 17,500 194,000Prepaid expenses........................... 4,000 (m) 600 3,400Land................................................. 80,000 (l) 20,000 60,000Buildings......................................... 155,000 (k) 110,000 265,000Accumulated depreciation—

buildings.................................... (43,500) (j) 12,300 (55,800)Equipment....................................... 185,600 (i) 40,000 (h) 30,000 195,600Accumulated deprecation—

equipment.................................. (74,500) (h) 30,000 (g) 27,000 (71,500)Accounts payable........................... (143,700) (f) 3,700 (140,000)Income tax payable........................ (3,800) (e) 200 (4,000)Bonds payable................................ 0 (d) 50,000 (50,000)Common stock................................ (25,000) (c) 1,000 (26,000)Paid-in capital in excess of par—


Totals............................................... 0 225,700 225,700 0




Operating activities:Net income................................ (a) 12,100Increase in income tax payable (e) 200Decrease in accounts payable (f) 3,700Depreciation—equipment........ (g) 27,000Depreciation—buildings........... (j) 12,300Gain on sale of land.................. (l) 14,000Decrease in prepaid expenses (m) 600Increase in inventories............. (n) 17,500Increase in accounts receivable (o) 18,500

Investing activities:Purchase of equipment............ (i) 40,000Acquisition of building............. (k) 110,000Sale of land................................ (l) 34,000

Financing activities:Payment of cash dividends...... (b) 6,000Issuance of bonds payable...... (d) 50,000Issuance of common stock...... (c) 71,000

Net decrease in cash...................... (p) 2,500

Totals............................................... 209,700 209,700

Prob. 15–4A

GREEN THUMB NURSERY INC.Statement of Cash Flows


Cash flows from operating activities:Cash received from customers................... $1,231,9001

Deduct: Cash payments for merchandise............................... $760,9002


Cash payments for income tax..... 85,000 1,132,000 Net cash flow from operating activities...... $ 99,900

Cash flows from investing activities:Cash received from sale of investments.... $ 79,000Less: Cash paid for land.............................. $ 95,000

Cash paid for equipment................... 90,000 185,000 Net cash flow used for investing

activities................................................... (106,000)

Cash flows from financing activities:Cash received from sale of

common stock......................................... $ 78,000Less: Cash paid for dividends.................... 93,700 *Net cash flow used for

financing activities.................................. (15,700 )Decrease in cash................................................ $ (21,800)Cash at the beginning of the year.................... 176,500 Cash at the end of the year............................... $ 154,700

Schedule Reconciling Net Income with Cash Flows from Operating Activities:Net income, per income statement............. $ 115,000Add: Depreciation......................................... $20,500

Increase in accounts payable............ 12,600 33,100 $ 148,100

Deduct: Increase in accounts receivable... $18,100Increase in inventories.................. 14,500Decrease in accrued expenses..... 1,600Gain on sale of investments......... 14,000 48,200

Net cash flow from operating activities...... $ 99,900

*Dividends paid: $97,700 + $20,000 – $24,000 = $93,700


Computations:

1. Sales................................................................................. $ 1,250,000Deduct increase in accounts receivable....................... 18,100 Cash received from customers...................................... $ 1,231,900

2. Cost of merchandise sold............................................... $ 759,000Add increase in inventories............................................ 14,500

$ 773,500Deduct increase in accounts payable........................... 12,600 Cash payments for merchandise................................... $ 760,900

3. Operating expenses other than depreciation............... $ 284,500Add decrease in accrued expenses............................... 1,600 Cash payments for operating expenses....................... $ 286,100


GREEN THUMB NURSERY INC.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2004



Balance SheetCash................................................. 176,500 (q) 21,800 154,700Accounts receivable....................... 243,200 (p) 18,100 261,300Inventories...................................... 303,300 (o) 14,500 317,800Investments..................................... 65,000 (e) 65,000 0Land................................................. 0 (n) 95,000 95,000Equipment....................................... 275,000 (m) 90,000 365,000Accumulated depreciation............. (103,200) (c) 20,500 (123,700)Accounts payable........................... (235,700) (l) 12,600 (248,300)Accrued expenses.......................... (12,500) (k) 1,600 (10,900)Dividends payable.......................... (20,000) (j) 4,000 (24,000)Common stock................................ (12,000) (i) 3,000 (15,000)Paid-in capital in excess of par—

common stock........................... (110,000) (i) 75,000 (185,000)Retained earnings........................... (569,600) (h) 97,700 (g) 115,000 (586,900)

Totals............................................... 0 316,900 316,900 0




Income StatementSales................................................ (a) 1,250,000Cost of merchandise sold.............. (b) 759,000Depreciation expense.................... (c) 20,500Other operating expenses............. (d) 284,500Gain on sale of investments.......... (e) 14,000Income tax....................................... (f) 85,000Net income...................................... (g) 115,000

Cash FlowsOperating activities:

Cash received from customers (a)1,250,000 (p) 18,100Cash payments:

Merchandise........................ (l) 12,600 (b) 759,000(o) 14,500

Operating expenses............ (d) 284,500(k) 1,600

Income taxes....................... (f) 85,000Investing activities:

Purchase of equipment............ (m) 90,000Sale of investments.................. (e) 79,000Purchase of land....................... (n) 95,000

Financing activities:Declaration of cash dividends. (h) 97,700Increase in dividends payable. (j) 4,000Issuance of common stock...... (i) 78,000

Net decrease in cash...................... (q) 21,800

Totals............................................... 2,709,400 2,709,400

Prob. 15–5A

EVERLAST FLOORING CO.Statement of Cash Flows


Cash flows from operating activities:Cash received from customers................... $ 539,0001

Deduct: Cash payments for merchandise.. $208,8002


Cash payments for income tax..... 80,800 399,200 Net cash flow from operating activities...... $ 139,800

Cash flows from investing activities:Cash received from sale of investments.... $ 50,000Less: Cash paid for purchase of land........ $124,000

Cash paid for purchase ofequipment...................................... 172,000 296,000

Net cash flow used for investingactivities................................................... (246,000)

Cash flows from financing activities:Cash received from sale of common

stock......................................................... $ 220,000Less: Cash paid for dividends.................... 57,500 *Net cash flow provided by financing

activities................................................... 162,500 Increase in cash................................................. $ 56,300Cash at the beginning of the year.................... 67,900 Cash at the end of the year............................... $ 124,200

Schedule Reconciling Net Income with Cash Flows from Operating Activities:Net income, per income statement............. $126,000Add: Depreciation....................................... $ 20,500

Increase in accounts payable........... 8,600Increase in accrued expenses.......... 700Loss on sale of investments............. 8,000 37,800

$163,800Deduct: Increase in accounts receivable... $ 4,800

Increase in inventories.................. 19,200 24,000 Net cash flow from operating activities...... $139,800

*Dividends paid: $60,000 + $12,500 – $15,000 = $57,500


Computations:

1. Sales................................................................................. $543,800Deduct increase in accounts receivable....................... 4,800 Cash received from customers...................................... $539,000

2. Cost of merchandise sold............................................... $198,200Add increase in inventories............................................ 19,200

$217,400Deduct increase in accounts payable........................... 8,600 Cash payments for merchandise................................... $208,800

3. Operating expenses other than depreciation............... $110,300Deduct increase in accrued expenses.......................... 700 Cash payments for operating expenses....................... $109,600


EVERLAST FLOORING CO.Work Sheet for Statement of Cash Flows




Balance SheetCash................................................. 67,900 (q) 56,300 124,200Accounts receivable....................... 97,600 (p) 4,800 102,400Inventories...................................... 123,500 (o) 19,200 142,700Investments..................................... 58,000 (e) 58,000 0Land................................................. 0 (n) 124,000 124,000Equipment....................................... 201,400 (m) 172,000 373,400Accumulated depreciation............. (58,900) (c) 20,500 (79,400)Accounts payable........................... (84,600) (l) 8,600 (93,200)Accrued expenses.......................... (12,300) (k) 700 (13,000)Dividends payable.......................... (12,500) (j) 2,500 (15,000)Common stock................................ (80,000) (i) 40,000 (120,000)Paid-in capital in excess of par—


Totals............................................... 0 436,300 436,300 0




Income StatementSales................................................ (a) 543,800Cost of merchandise sold.............. (b) 198,200Depreciation expense.................... (c) 20,500Other operating expenses............. (d) 110,300Loss on sale of investments.......... (e) (8,000)Income tax....................................... (f) 80,800Net income...................................... (g) 126,000


Cash received from customers (a)543,800 (p) 4,800Cash payments:

Merchandise........................ (l) 8,600 (b) 198,200(o) 19,200

Operating expenses............ (d) 110,300(k) 700

Income taxes....................... (f) 80,800Investing activities:



Net increase in cash....................... (q) 56,300

Totals............................................... 1,361,400 1,361,400

Prob. 15–1B

IDAHO AL’S GOLF SHOPS CO.Statement of Cash Flows


Cash flows from operating activities:Net income, per income statement............. $376,400Add: Depreciation......................................... $ 31,000

Increase in accounts payable............ 4,900 35,900 $412,300

Deduct: Increase in accounts receivable.. $ 5,800Increase in inventories................. 10,500Gain on sale of investments........ 24,000Decrease in accrued

expenses............................... 3,100 43,400 Net cash flow from operating activities...... $368,900

Cash flows from investing activities:Cash received from sale of investments.... $114,000Less: Cash paid for purchase of land........ $125,000

Cash paid for purchase ofequipment...................................... 220,000 345,000

Net cash flow used for investingactivities................................................... (231,000)

Cash flows from financing activities:Cash received from sale of

common stock......................................... $165,000Less cash paid for dividends...................... 92,000 *Net cash flow provided by financing

activities................................................... 73,000 Increase in cash................................................. $210,900Cash at the beginning of the year.................... 313,400 Cash at the end of the year............................... $524,300

*$96,000 + $20,000 – $24,000 = $92,000

Prob. 15–1B Concluded

IDAHO AL’S GOLF SHOPS CO.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2003



Cash................................................. 313,400 (m) 210,900 524,300Accounts receivable....................... 126,700 (l) 5,800 132,500Inventories...................................... 332,100 (k) 10,500 342,600Investments..................................... 90,000 (j) 90,000 0Land................................................. 0 (i) 125,000 125,000Equipment....................................... 535,000 (h) 220,000 755,000Accumulated depreciation—

equipment.................................. (158,000) (g) 31,000 (189,000)Accounts payable........................... (80,300) (f) 4,900 (85,200)Accrued expenses.......................... (7,400) (e) 3,100 (4,300)Dividends payable.......................... (20,000) (d) 4,000 (24,000)Common stock................................ (50,000) (c) 30,000 (80,000)Paid-in capital in excess of par—

common stock........................... (200,000) (c) 135,000 (335,000)Retained earnings........................... (881,500) (b) 96,000 (a) 376,400 (1,161,900)

Totals............................................... 0 671,300 671,300 0

Operating activities:Net income................................ (a) 376,400Decrease in accrued expenses (e) 3,100Increase in accounts payable.. (f) 4,900Depreciation.............................. (g) 31,000Gain on sale of investments.... (j) 24,000Increase in inventories............. (k) 10,500Increase in accounts receivable (l) 5,800

Investing activities:Purchase of equipment............ (h) 220,000Purchase of land....................... (i) 125,000Sale of investments.................. (j) 114,000

Financing activities:Declaration of cash dividends. (b) 96,000Sale of common stock.............. (c) 165,000Increase in dividends payable. (d) 4,000

Net increase in cash....................... (m) 210,900

Totals............................................... 695,300 695,300

Prob. 15–2B

GOLD MEDAL ATHLETIC APPAREL CO.Statement of Cash Flows


Cash flows from operating activities:Net income, per income statement................ $ 125,800Add: Depreciation.......................................... $ 92,000

Increase in accounts payable.............. 25,500Decrease in accounts receivable........ 34,700 152,200

$ 278,000Deduct: Increase in merchandise

inventory..................................... $ 13,900Increase in prepaid expenses ....... 2,000 15,900


Cash flows from investing activities:Cash paid for equipment................................ $ 244,500 Net cash flow used for investing

activities...................................................... (244,500)

Cash flows from financing activities:Cash received from sale of common stock. . $ 250,000Less: Cash paid for dividends....................... $ 88,000

Cash paid to retire mortgagenote payable.................................... 205,000 293,000

Net cash flow used in financingactivities...................................................... (43,000 )

Decrease in cash................................................... $ (25,400)Cash at the beginning of the year....................... 257,900 Cash at the end of the year.................................. $ 232,500


GOLD MEDAL ATHLETIC APPAREL CO.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2003



Cash................................................. 257,900 (l) 25,400 232,500Accounts receivable....................... 532,500 (k) 34,700 497,800Merchandise inventory................... 621,300 (j) 13,900 635,200Prepaid expenses........................... 15,000 (i) 2,000 17,000Equipment....................................... 600,000 (h) 244,500 (g) 124,500 720,000Accumulated depreciation—

equipment.................................. (297,500) (g) 124,500 (f) 92,000 (265,000)Accounts payable........................... (397,600) (e) 25,500 (423,100)Mortgage note payable................... (205,000) (d) 205,000 0Common stock................................ (70,000) (c) 50,000 (120,000)Paid-in capital in excess of par—


Totals............................................... 0 677,900 677,900 0

Operating activities:Net income................................ (a) 125,800Increase in accounts payable.. (e) 25,500Depreciation.............................. (f) 92,000Increase in prepaid expenses.. (i) 2,000Increase in merchandise

inventory.............................. (j) 13,900Decrease in accounts

receivables.......................... (k) 34,700Investing activities:

Purchase of equipment............ (h) 244,500Financing activities:

Payment of cash dividends...... (b) 88,000Sale of common stock.............. (c) 250,000Payment of mortgage note

payable................................. (d) 205,000Net decrease in cash...................... (l) 25,400

Totals............................................... 553,400 553,400

Prob. 15–3B

HANDYMAN’S HELPER HARDWARE COMPANYStatement of Cash Flows

For the Year Ended, December 31, 2003

Cash flows from operating activities:Net loss, per income statement................... $(114,200)Add: Depreciation....................................... $ 53,300

Decrease in prepaid expenses.......... 500 53,800 $ (60,400)

Deduct: Increase in accounts receivable.. $ 18,400Increase in inventory.................... 30,800Decrease in accounts payable.... 9,200Gain on sale of land...................... 13,000 71,400

Net cash flow from operating activities...... $ (131,800)

Cash flows from investing activities:Cash received from land sold...................... $ 38,000Less: Cash paid for acquisition

of building..................................... $120,000Cash paid for purchase

of equipment................................. 58,200 178,200 Net cash flow used for investing

activities................................................... (140,200)


bonds payable......................................... $ 60,000Cash received from issuance of

common stock......................................... 220,000 $ 280,000Less: Cash paid for dividends.................... 20,000 Net cash flow provided by financing

activities................................................... 260,000 Decrease in cash................................................ $ (12,000)Cash at the beginning of the year.................... 275,400 Cash at the end of the year............................... $ 263,400


HANDYMAN’S HELPER HARDWARE COMPANYWork Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2003



Cash................................................. 275,400 (o) 12,000 263,400Accounts receivable....................... 356,800 (n) 18,400 375,200Inventories...................................... 512,400 (m) 30,800 543,200Prepaid expenses........................... 9,000 (l) 500 8,500Land................................................. 120,000 (k) 25,000 95,000Buildings......................................... 350,000 (j) 120,000 470,000Accumulated depreciation—

buildings.................................... (170,000) (i) 12,300 (182,300)Equipment....................................... 185,500 (h) 58,200 (g) 45,000 198,700Accumulated depreciation—

equipment.................................. (48,000) (g) 45,000 (f) 41,000 (44,000)Accounts payable........................... (377,100) (e) 9,200 (367,900)Bonds payable................................ 0 (d) 60,000 (60,000)Common stock................................ (70,000) (c) 20,000 (90,000)Paid-in capital in excess of par—

common stock........................... (250,000) (c) 200,000 (450,000)Retained earnings........................... (894,000) (a) 114,200 (759,800)

(b) 20,000

Totals............................................... 0 415,800 415,800 0

Operating activities:Net loss...................................... (a) 114,200Decrease in accounts payable (e) 9,200Depreciation—equipment........ (f) 41,000Depreciation—buildings........... (i) 12,300Gain on sale of land.................. (k) 13,000Decrease in prepaid expenses (l) 500Increase in inventories............. (m) 30,800Increase in accounts receivable (n) 18,400

Investing activities:Purchase of equipment............ (h) 58,200Acquisition of building............. (j) 120,000Sale of land................................ (k) 38,000

Financing activities:Payment of cash dividends...... (b) 20,000Issuance of bonds payable...... (d) 60,000Issuance of common stock...... (c) 220,000

Net decrease in cash...................... (o) 12,000

Totals............................................... 383,800 383,800

Prob. 15–4B

NATURE’S BOUNTY MARKETS, INC.Statement of Cash Flows



Deduct: Cash payments formerchandise............................... $293,9002


Cash payments for income tax...... 20,500 468,700 Net cash flow from operating activities......... $ 70,900

Cash flows from investing activities:Cash received from sale of investments....... $ 41,000Less: Cash paid for purchase of land........... $ 70,500

Cash paid for purchase ofequipment........................................ 90,000 160,500

Net cash flow used for investing activities... (119,500)

Cash flows from financing activities:Cash received from sale of common stock. . $ 52,000Less: Cash paid for dividends....................... 21,100 *Net cash flow provided by financing

activities...................................................... 30,900 Decrease in cash................................................... $ (17,700)Cash at the beginning of the year....................... 83,500 Cash at the end of the year.................................. $ 65,800

Reconciliation of Net Income with Cash Flows from Operating Activities:Net income, per income statement................ $ 53,700Add: Depreciation.......................................... $ 20,300

Increase in accounts payable.............. 6,800Loss on sale of investments................ 4,000 31,100

$ 84,800Deduct: Increase in accounts receivable.... $ 5,400

Increase in inventories................... 6,700Decrease in accrued expenses...... 1,800 13,900


*Dividends paid: $23,100 + $4,000 – $6,000 = $21,100

Prob. 15–4B Continued

Computations:1. Sales................................................................................. $545,000

Deduct increase in accounts receivable....................... 5,400 Cash received from customers...................................... $539,600

2. Cost of merchandise sold............................................... $294,000Add increase in inventories............................................ 6,700

$300,700Deduct increase in accounts payable........................... 6,800 Cash payments for merchandise................................... $293,900

3. Operating expenses other than depreciation............... $152,500Add decrease in accrued expenses............................... 1,800 Cash payments for operating expenses....................... $154,300


NATURE’S BOUNTY MARKETS, INC.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2004





Totals............................................... 0 197,500 197,500 0




Income StatementSales................................................ (a) 545,000Cost of merchandise sold.............. (b) 294,000Depreciation expense.................... (c) 20,300Other operating expenses............. (d) 152,500Loss on sale of investments.......... (e) 4,000Income tax....................................... (f) 20,500Net income...................................... (g) 53,700


Cash received from customers (a)545,000 (p) 5,400Cash payments:

Merchandise.............................. (l) 6,800 (b) 294,000(o) 6,700

Operating expenses................. (d) 152,500(k) 1,800

Income taxes............................. (f) 20,500

Investing activities:Purchase of equipment............ (m) 90,000Sale of investments.................. (e) 41,000Purchase of land....................... (n) 70,500



Totals............................................... 1,209,500 1,209,500

Prob. 15–5B

IDAHO AL’S GOLF SHOPS CO.Statement of Cash Flows


Cash flows from operating activities:Cash received from customers...................... $1,090,7001

Deduct: Cash payments for merchandise.... $406,8002

Cash payments for operatingexpenses...................................... 166,5003

Cash payments for income tax........ 148,500 721,800 Net cash flow from operating activities......... $368,900

Cash flows from investing activities:Cash received from sale of investments....... $ 114,000Less: Cash paid for land................................ $125,000

Cash paid for equipment...................... 220,000 345,000 Net cash flow used for investing activities... (231,000)

Cash flows from financing activities:Cash received from sale of common stock. . $ 165,000Less: Cash paid for dividends....................... 92,000 4

Net cash flow provided by financingactivities...................................................... 73,000

Increase in cash.................................................... $210,900Cash at the beginning of the year....................... 313,400 Cash at the end of the year.................................. $524,300

Reconciliation of Net Income with Cash Flows from Operating Activities:Net income, per income statement................ $ 376,400Add: Depreciation........................................... $ 31,000

Increase in accounts payable............... 4,900 35,900 $ 412,300

Deduct: Increase in accounts receivable...... $ 5,800Increase in inventories..................... 10,500Gain on sale of investments............ 24,000Decrease in accrued expenses....... 3,100 43,400



Computations:1. Sales................................................................................. $ 1,096,500

Deduct increase in accounts receivable....................... 5,800 Cash received from customers...................................... $ 1,090,700

2. Cost of merchandise sold............................................... $ 401,200Add increase in inventories............................................ 10,500

$ 411,700Deduct increase in accounts payable........................... 4,900 Cash payments for merchandise................................... $ 406,800

3. Operating expenses other thandepreciation................................................................ $ 163,400

Add decrease in accrued expenses............................... 3,100 Cash payments for operating expenses....................... $ 166,500

4. Cash dividends declared................................................ $ 96,000Deduct increase in dividends payable.......................... 4,000 Cash paid for dividends.................................................. $ 92,000


IDAHO AL’S GOLF SHOPS CO.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2003




common stock........................... (200,000) (i) 135,000 (335,000)Retained earnings........................... (881,500) (h) 96,000 (g) 376,400 (1,161,900)

Totals............................................... 0 671,300 671,300 0




Income StatementSales................................................ (a) 1,096,500Cost of merchandise sold.............. (b) 401,200Depreciation expense.................... (c) 31,000Other operating expenses............. (d) 163,400Gain on sale of investments.......... (e) 24,000Income tax....................................... (f) 148,500Net income...................................... (g) 376,400


Cash received from customers (a)1,096,500 (p) 5,800Cash payments:

Merchandise.............................. (l) 4,900 (b) 401,200(o) 10,500

Operating expenses................. (d) 163,400(k) 3,100

Income taxes............................. (f) 148,500Investing activities:




Total................................................. 2,504,900 2,504,900

SPECIAL ACTIVITIES

Activity 15–1

Although this situation might seem harmless at first, it is, in fact, a gross viola-tion of generally accepted accounting principles. The operating cash flow per share figure should not be shown on the face of the income statement. The in-come statement is constructed under accrual accounting concepts, while operat-ing cash flow “undoes” the accounting accruals. Thus, unlike Toni’s assertion that this information would be useful, more likely the information could be con-fusing to users. Some users might not be able to distinguish between earnings and operating cash flow per share—or how to interpret the difference. By agree-ing with Toni, Tom has breached his professional ethics because the disclosure would violate generally accepted accounting principles. On a more subtle note, Toni is being somewhat disingenuous. Apparently, Toni is not pleased with this year’s operating performance and would like to cover the earnings “bad news” with some cash flow “good news” disclosures. An interesting question is: Would Toni be as interested in the dual per share disclosures in the opposite scenario—with earnings per share improving and cash flow per share deteriorating? Probably not.

Activity 15–2

Start-up companies are unique in that they frequently will have negative retained earnings and operating cash flows. The negative retained earnings are due to be-ing unable to earn revenues in excess of the start-up expenses. The negative op-erating cash flows are typical because growth requires cash. Growth must be fi-nanced with cash before the cash returns. For example, a company must expend cash to make the service in Period 1 before selling it and receiving cash in Pe-riod 2. The start-up company constantly faces spending cash today for the next period’s growth. For VideoToGo.com Inc., the money spent on salaries to de-velop the site is a cash outflow that must occur before the service provides rev-enues. In addition, the company must use cash to market its service to potential customers. In this situation, the only way the company stays in business is from the capital provided by the owners. This owner-supplied capital is the lifeblood of a start-up company. Banks will not likely lend money on this type of venture (except with assets as security). VideoToGo.com Inc. could be a good invest-ment. It all depends on whether the new service has promise. The financial fig -ures will not reveal this easily. Only actual sales will reveal if the service is a hit. Until this time the company is at risk. If the service is not popular, the company will have no cash to fall back on—it will likely go bankrupt. If, however, the ser-vice is successful, then VideoToGo.com Inc., should become self-sustaining and provide a good return for the shareholders.

Activity 15–3

The senior vice president is very focused on profitability but has been bleeding cash. The increase in accounts receivable and inventory is striking. Apparently, the new credit card campaign has found many new customers, since the ac-counts receivable is growing. Unfortunately, it appears as though the new cam-paign has done a poor job of screening creditworthiness in these new cus-tomers. In other words, there are many new credit card purchasers—unfortu-nately, they do not appear to be paying off their balances. The new merchandise purchases appear to be backfiring. The company has received some “good deals,” except that they are only “good deals” if it can resell the merchandise. If the merchandise has no customer appeal, then that would explain the inventory increase. In other words, the division is purchasing merchandise that sits on the shelf, regardless of pricing. The reduction in payables is the result of the division becoming overdue on payments. The memo reports that most of the past due payables have been paid. This situation is critical in the retailing business. A re -tailer cannot afford a poor payment history, or they will be denied future mer-chandise shipments. This is a signal of severe cash problems. Overall, the pic-ture is of a retailer having severe operating cash flow difficulties.

Note to Instructor: This scenario is essentially similar to W. T. Grant’s path to eventual bankruptcy. They reported earnings, while having significant negative cash flows from operations due to expanding credit too liberally (increases in ac-counts receivable) and purchasing too much unsaleable inventory (increases in inventory).

Activity 15–4

a. 1. Normal practice for determining the amount of cash flows from operat-ing activities during the year is to begin with the reported net income. This net income must ordinarily be adjusted upward and/or downward to determine the amount of cash flows. Although many operating expenses decrease cash, depreciation does not do so. The amount of net income understates the amount of cash flows provided by operations to the ex-tent that depreciation expense is deducted from revenue. Accordingly, the depreciation expense for the year must be added back to the re-ported net income in arriving at cash flows from operating activities.

2. Generally accepted accounting principles require that significant trans-actions affecting future cash flows should be reported in a separate schedule to the statement, even though they do not affect cash. Accord-ingly, even though the issuance of the common stock for land does not affect cash, the transaction affects future cash flows and must be re-ported.

3. The $42,500 cash received from the sale of the investments is reported in the cash flows from investing activities section. Since the sale in-cluded a gain of $7,500, to avoid double reporting of this amount, the gain is deducted from net income to remove it from the determination of cash flows from operating activities.

4. The balance sheets for the last two years will indicate the increase in cash but will not indicate the firm’s activities in meeting its financial obligations, paying dividends, and maintaining and expanding operating capacity. Such information, as provided by the statement of cash flows, assists creditors in assessing the firm’s solvency and profitability—two very important factors bearing on the evaluation of a potential loan.

b. The statement of cash flows indicates a strong liquidity position for Elite Cabinets, Inc. The increase in cash of $76,400 for the past year is more than adequate to cover the $50,000 of new building and store equipment costs that will not be provided by the loan. Thus, the statement of cash flows most likely will enhance the company’s chances of receiving a loan. However, other information, such as a projection of future earnings, a description of collateral pledged to support the loan, and an independent credit report, would normally be considered before a final loan decision is made.

Activity 15–5

The statements of cash flows for Philip Morris and Loral Space & Communica-tions, LTD. (LSC) for the most recent year available at this writing are shown on the following pages. The actual analyses may be different due to updated infor-mation. However, this answer shows the structure for a possible response.

Operating Activities

First, Philip Morris is an incredible generator of cash flows from operating activi-ties, over $8 billion per year. LSC, on the other hand, is having severe cash flow difficulties. The company moved from a positive toward a negative cash flow from operations. LSC is having trouble selling its satellite phone and Internet services, as evidenced from the net losses.

Investing Activities

Two striking features of Philip Morris’s cash flows from investing activities in-clude the amount of cash necessary to maintain and grow its business, an aver-age of $1.8 billion per year in capital expenditures. In addition, Philip Morris in-vested about $700 million in finance assets in 1998. LSC is making significant in-vestments in its satellite network. Its capital expenditures have been running around a half billion dollars per year, with additional cash invested in affiliates.

Financing Activities

The largest item is the huge sums that Philip Morris pays in dividends (nearly $4 billion in 1998 and 1997). Philip Morris has so much cash that it cannot profitably invest all of it in its operations, so the company chooses to pay dividends. Even so, Philip Morris’s cash balance is growing from $2.3 billion to over $4 billion in 1998. The cash is likely being accumulated in anticipation of tobacco-related set-tlements. LSC is trying to get its satellite network installed and sold. This is re-quiring huge cash amounts that are not available from operations. Thus, LSC must raise cash from financing activities. Its statement of cash flows indicates significant cash inflows from issuing debt and common stock.

Activity 15–5 Continued

LORAL SPACE & COMMUNICATIONS, LTD.Statement of Cash Flows

For Years Ended December 31, 1999 and 1998

1999/12/31 1998/12/31 Operating activities:

Net income (loss)....................................................................................................... $(201,916,000) $(138,798,000)Non-cash items:

Gain on investments, net..................................................................................... $ (5,494,000)Equity in net loss of affiliates.............................................................................. $ 177,819,000 120,417,000Minority interest................................................................................................... (5,525,000) (3,376,000)Deferred taxes...................................................................................................... (39,864,000) (5,940,000)Non-cash interest and investment income........................................................ (22,877,000) (14,249,000)Non-cash interest expense.................................................................................. 33,758,000 20,474,000Depreciation and amortization............................................................................ 174,906,000 135,029,000Loss on ChinaSat agreement (Note 13).............................................................. 35,492,000Loss on disposal of property, plant and equipment......................................... 12,696,000

Changes in operating assets and liabilities, net of acquisitions:Accounts receivable, net..................................................................................... $ (19,360,000) $ (4,086,000)Contracts-in-process........................................................................................... (84,725,000) (72,413,000)Inventories............................................................................................................ 67,117,000 (90,897,000)Other current assets............................................................................................ (13,098,000) 14,450,000Deposits................................................................................................................ (54,350,000) 14,000,000Long-term receivables......................................................................................... (5,486,000) 6,662,000Other assets......................................................................................................... (63,739,000) (16,056,000)Accounts payable................................................................................................. (7,517,000) 9,048,000Accrued expenses and other current liabilities................................................. 8,128,000 19,432,000Income taxes payable.......................................................................................... 6,914,000 (8,322,000)Customer advances............................................................................................. (90,547,000) 54,090,000Long-term liabilities............................................................................................. 61,000,000 51,844,000Other...................................................................................................................... 4,769,000 980,000

Cash (used in) provided by operating activities..................................................... $ (26,405,000 ) $ 86,795,000 Activity 15–5 Continued

1999/12/31 1998/12/31 Investing activities:

Cash acquired in connection with Loral CyberStar acquisition............................ $ 53,801,000Acquisition of businesses, net of cash acquired.................................................... $ (10,790,000) (6,877,000)Proceeds from the sale of investment in affiliates, net.......................................... 246,867,000Investments in and advances to affiliates............................................................... (335,377,000) (624,079,000)Other assets...............................................................................................................Use and transfer of restricted and segregated cash.............................................. 156,381,000 264,123,000Capital expenditures.................................................................................................. (469,747,000 ) (489,448,000 )Cash used in investing activities.............................................................................. $ (659,533,000 ) $

(555,613,000 )Financing activities:

Proceeds from the issuance of 9.5% senior notes, net.......................................... $ 343,875,000Proceeds from sale of common stock, net.............................................................. $ 601,816,000Proceeds from other stock issuances..................................................................... 20,095,000 32,121,000Borrowings (repayments) under revolving credit facility, net............................... 70,000,000 150,000,000Borrowings under note purchase facility................................................................ 12,581,000 38,423,000Proceeds from issuance of term loan......................................................................Repayments under term loan.................................................................................... (18,750,000)Repayments under Export-Import facility................................................................ (2,146,000) (2,146,000)Repayments of other long-term obligations............................................................ (1,896,000) (7,819,000)Contributions from minority partners...................................................................... 21,398,000Preferred dividends................................................................................................... (44,728,000 ) (44,750,000 )Cash provided by financing activities...................................................................... $ 379,031,000 $ 789,043,000

Decrease (increase) in cash and cash equivalents...................................................... $(306,907,000) $ 320,225,000Cash and cash equivalents—beginning of period........................................................ 546,772,000 226,547,000 Cash and cash equivalents—end of period................................................................... $ 239,865,000 $ 546,772,000

Activity 15–5 Continued

PHILIP MORRIS COMPANIESStatement of Cash Flows

For the Years Ended December 31, 1998 and 1997

1998/12/31 1997/12/31 Cash Provided By (Used In) Operating ActivitiesNet earnings—Consumer products................................................................................ $5,255,000,000 $ 6,152,000,000

—Financial services.................................................................................. 117,000,000 158,000,000 Net earnings............................................................................................................... $5,372,000,000 $ 6,310,000,000

Adjustments to reconcile net earnings to operating cash flows:Consumer products:

Depreciation and amortization.................................................................................. 1,690,000,000 1,629,000,000International food realignment.................................................................................. 630,000,000Deferred income tax provision (benefit).................................................................. 11,000,000 (188,000,000)Gain on sale of Brazilian ice cream businesses..................................................... (774,000,000)Gains on sales of other businesses......................................................................... (196,000,000)Cash effects of changes, net of the effects from acquired and divested companies:

Receivables, net................................................................................................... (352,000,000) (168,000,000)Inventories............................................................................................................ (192,000,000) (531,000,000)Accounts payable................................................................................................. (150,000,000) 37,000,000Income taxes........................................................................................................ 565,000,000 48,000,000Accrued liabilities and other current assets...................................................... 254,000,000 726,000,000Other...................................................................................................................... 671,000,000 653,000,000

Financial services:Deferred income tax provision................................................................................. 265,000,000 257,000,000Gain on sale of business........................................................................................... (103,000,000)Other............................................................................................................................ (14,000,000 ) 10,000,000

Net cash provided by operating activities......................................................... $8,120,000,000 $ 8,340,000,000

Activity 15–5 Concluded

1998/12/31 1997/12/31 Cash Provided By (Used In) Investing ActivitiesConsumer products:

Capital expenditures.................................................................................................. $(1,804,000,000) $(1,874,000,000)Purchase of businesses, net of acquired cash....................................................... (17,000,000) (630,000,000)Proceeds from sales of businesses......................................................................... 16,000,000 1,784,000,000Other............................................................................................................................ (154,000,000) 42,000,000

Financial services:Investments in finance assets.................................................................................. (736,000,000) (652,000,000)Proceeds from finance assets.................................................................................. 141,000,000 287,000,000Proceeds from sale of business............................................................................... 424,000,000

Net cash used in investing activities.................................................................. $ (2,554,000,000 ) $ (619,000,000 )

Cash Provided By (Used In) Financing ActivitiesConsumer products:

Net issuance (repayment) of short-term borrowings.............................................. $ 61,000,000 $(1,482,000,000)Long-term debt proceeds.......................................................................................... 2,065,000,000 2,893,000,000Long-term debt repaid............................................................................................... (1,616,000,000) (1,987,000,000)

Financial services:Net repayment of short-term borrowings................................................................. (173,000,000)Long-term debt proceeds.......................................................................................... 174,000,000Long-term debt repaid............................................................................................... (178,000,000) (387,000,000)

Repurchase of common stock........................................................................................ (307,000,000) (805,000,000)Dividends paid................................................................................................................. (3,984,000,000) (3,885,000,000)Issuance of common stock............................................................................................. 265,000,000 205,000,000Other................................................................................................................................. (200,000,000 ) (74,000,000 )

Net cash used in financing activities....................................................................... $ (3,894,000,000 ) $ (5,521,000,000 )Effect of exchange rate changes on cash and cash equivalents................................ $ 127,000,000 $ (158,000,000 )Cash and cash equivalents:

Increase (decrease)................................................................................................... $ 1,799,000,000 $ 2,042,000,000

Balance at beginning of year.................................................................................... 2,282,000,000 240,000,000 Balance at end of year............................................................................................... $ 4,081,000,000 $ 2,282,000,000

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