Chapter 12

Chapter 12

The Statement of Cash Flows

Questions

1. The statement of cash flows reports the reasons for the changes in cash during the period. In the process, it shows the cash impact of the entity’s operating, investing, and financing activities.

2. Four purposes of the statement of cash flows are to (a) predict future cash flows, (b) evaluate management decisions, (c) determine the company’s ability to pay dividends to stockholders and interest to creditors, and (d) show the relationship between net income and changes in cash.

3. a. Operating activities create revenues and expenses in the entity’s major line of business. Operating activities are related to the transactions that make up net income.

b. Investing activities increase and decrease the long-term assets of the business.

c. Financing activities obtain from investors and creditors the cash needed to launch and sustain the business.

4. The statement of cash flows is dated “Period ended XXX” because it reports the reasons for the changes in cash that occurred during the period — for example, “Year Ended December 31, 19XX” or “Month Ended June 30, 19XX.”

Chapter 12 The Statement of Cash Flows 807

5. The check figure for the statement of cash flows is the change in cash during the period. This amount is obtained by subtracting the beginning cash balance from the ending cash balance (taken from the comparative balance sheet). The change in cash is compared to the net change in cash shown at the bottom of the statement of cash flows. The two amounts should be equal.

6. The largest source of cash for most successful companies is operations. Within this category, collections from customers are most important.

7. Cash may decrease during a year when income is high because the entity may be using cash to invest in long-term assets. Cash may increase in a bad year because the entity may be borrowing heavily. The cash flow statement reports these activities to show where cash came from and how it was spent.

8. a. Financing activitiesb. Operating activitiesc. Operating activitiesd. Not reported because cash is unaffectede. Operating activities

9. Depreciation, depletion, and amortization expenses are not reported on a cash flow statement prepared by the direct method because they do not affect cash. They are reported on a statement prepared by the indirect method because the first item, net income, includes a deduction for them. Because they do not affect cash, they must be added back to net income to cancel the effect of their subtraction in computing income.

10. Net cash inflow from operations = $61,000 ($92,000 + $6,000 $24,000 $13,000). The dividend payments and the loan to another company are excluded because the dividends are a financing activity and the loan is an investing activity.

Financial Accounting 4/e Solutions Manual808

11. OPERATING ACTIVITIES:Cash Receipts Cash PaymentsCollections from customers Payments to suppliersReceipts of interest and dividends Payments of interest and taxes

on investments Other operating disbursementsOther operating receipts

INVESTING ACTIVITIES:Cash Receipts Cash PaymentsSale of plant assets Acquisition of plant assetsSale of investments that Acquisition of investments that

are not cash equivalents are not cash equivalentsCash receipts on loans receivable Making loans

FINANCING ACTIVITIES:Cash Receipts Cash PaymentsIssuing stock Payment of dividendsSelling treasury stock Purchase of treasury stockBorrowing money Paying principal amounts of

debts

12. Payments to employees ($X) are $59,000, computed as follows:

$10,000 + $51,000 $X = $2,000 $X = $2,000 $10,000 $51,000 $X = $59,000 $X = $59,000

This amount is reported as a cash payment under operating activities.

Salary Payable

Payments to employees X Beginning balance 10,000

Salary expense 51,000

Ending balance 2,000


13. Acquisitions of plant assets ($X) are $29,000, computed as follows:

$193,000 + $X $37,000 $9,000 = $176,000$X = $176,000 $193,000 +

$37,000 + $9,000$X = $29,000

This amount is reported as a cash payment under investing activities.

Plant Assets, Net

Beginning balance 193,000 Depreciation expense 37,000

Acquisitions XBook value of plant assets disposed of 9,000


14. Issuance of a note payable to purchase land should be reported as a noncash investing and financing activity. This category of transactions can be included in a schedule that accompanies the statement of cash flows. Three other transactions in this category are issuance of stock to acquire a building, issuance of stock to pay long-term debt, and issuance of a note payable to retire stock. Note: Students may list other examples that are acceptable.

15. Cash flows from operating activities:Net income………………………………………….. $ XXXAdd (subtract) items that affect net income and cashflow differently:

Gain on sale of investments……………………… (15,000)

Cash flows from investing activities:Sale of investments…………………………………. $ 80,000


16. An increase in another current asset is a decrease in cash.A decrease in another current asset is an increase in cash.An increase in a current liability is an increase in cash.A decrease in a current liability is a decrease in cash.

17. Net cash inflow from operations = $64,000 ($38,000 + $22,000 + $13,000 $9,000).

18. Free cash flow is the amount of cash available from operations after paying for planned investments in plant, equipment, and other long-term assets.


Check Points

(10 min.) CP 12-1

The statement of cash flows helps investors and creditors:

a. Predict future cash flows by reporting past cash receipts and

payments, which are a reasonably good predictor of future cash

receipts and disbursements.

b. Evaluate management decisions by reporting on managers’

investments. Wise investments help companies prosper. Unwise

investments cause businesses to suffer financially.

c. Predict the company’s ability to pay dividends and interest by

reporting where its cash came from and how the cash was spent.

This information helps investors and creditors predict whether the

business can make dividend and debt payments.


(5 min.) CP 12-2

Main danger signal:

Operating activities generated a net cash outflow.

(5 min.) CP 12-3

End of 20X0: Millions

Cash balance ($31 $19 $19)…………………………… $(7)

Likely result: Bankruptcy

(5 min.) CP 12-4

Mid America Resources, Inc.Statement of Cash Flows (partial)

Year ended June 30, 20X0Cash flows from operating activities:

Collections from customers $190,000Payments to suppliers (80,000)Payments to employees (70,000)Payment of income tax (10,000 )Net cash inflow from operating activities $30,000


(15 min.) CP 12-5

Mid America Resources, Inc.Statement of Cash Flows

Year ended June 30, 20X0Cash flows from operating activities:

Collections from customers $190,000Payments to suppliers (80,000)Payments to employees (70,000)Payment of income tax (10,000 )Net cash inflow from operating activities $30,000

Cash flows from investing activities:Purchase of equipment $(40,000)Proceeds from sale of land 60,000 Net cash inflow from investing activities 20,000

Cash flows from financing activities:Proceeds from issuance of common stock $20,000Payment of note payable (30,000)Payment of dividends (6,000)Purchase of treasury stock (5,000 )Net cash outflow from financing activities (21,000 )

Net increase in cash $29,000


(15 min.) CP 12-6

1. Net income = $180,000 ($600,000 $420,000)

2. Ending cash = $94,000 ($104,000 + $590,000 $410,000 $140,000 $50,000)

3.Wellness Health Laboratories

Statement of Cash Flows Year 20X1

Cash flows from operating activities:Collections from customers $590,000Payments to suppliers and employees (410,000 )Net cash inflow from operating activities $180,000

Cash flows from investing activities:Purchase of equipment $(140,000 )Net cash outflow from investing activities (140,000)

Cash flows from financing activities:Payment of dividends $ (50,000 )Net cash outflow from financing activities (50,000 )

Net decrease in cash $(10,000)Cash balance, beginning 104,000 Cash balance, ending $ 94,000


(15 min.) CP 12-7

a. Collections from customers = $704,000, as follows:

Collections=

Sales Increase in Accounts Receivablefrom customers Revenue

= $710,000 $6,000 ($54,000 $48,000)

= $704,000

Accounts ReceivableBeg. Bal. 48,000Sales 710,000 Collections 704,000End. Bal. 54,000

b. Payments for inventory = $331,000, as follows:

Payments forinventory

Cost ofDecrease inInventory

Increase inAccounts Payable

= goods sold

= $340,000 $4,000 $5,000($84,000 $80,000) ($47,000 $42,000)

= $331,000

Inventory Accounts PayableBeg. bal. 84,000 Payments for Beg. bal. 42,000Purchases 336,000 Cost of goods sold 340,000 inventory 331,000 Purchases 336,000End. bal. 80,000 End. bal. 47,000


(10 min.) CP 12-8

a. Payments to employees = $48,000, as follows:

Payments to=

Salary Increase inemployees expense Salary Payable

= $50,000 $2,000(23,000 $21,000)

= $48,000

Salary PayablePayments to Beg. bal. 21,000

employees 48,000 Salary expense 50,000End. bal. 23,000

b. Payments for other expenses = $154,000, as follows:

Payments ofother expenses

Otherexpenses

Increase in Decrease in= + prepaid + accrued

expenses liabilities

= $150,000 + $1,000 + $3,000($3,000 $2,000) ($11,000 $8,000)

= $154,000


(10 min.) CP 12-9

a. Acquisitions of plant assets = $100,000, as follows:Plant Assets, net

Beg.+ Acquisitions Depreciation Book value of

=End.

bal. assets sold bal.

$185,000 + X $ 60,000 $0 = $225,000

X = $225,000 $185,000 + $60,000

X = $100,000

Plant Assets, netBeg. bal. 185,000Acquisitions 100,000 Depreciation 60,000End. bal. 225,000

b. Proceeds from the sale of long-term investments + $15,000, as follows:Long-term investments

Beg. bal. + Purchases Book value of= End. bal.

investments sold

$90,000 + 0 X = $75,000

X = $90,000 $75,000

X = $15,000

Since there was no gain or loss, the proceeds from the sale must be the same as the investments’ book value, $15,000.

Long-Term InvestmentsBeg. bal. 90,000 Book value of

investments sold 15,000End. bal. 75,000


(15 min.) CP 12-10

a. Payment of long-term note payable = $2,000 ($68,000 $66,000)This is clear from the decrease in long-term debt.

b. Issuance of common stock = $3,000 ($40,000 $37,000)This is clear from the increase in common stock.

c. Payment of dividends(same as amount of = $84,000, as follows:dividends declared)

BeginningNet

incomeDividend

declarations

Endingretained + = retainedearnings earnings

$246,000 + $110,000 X = $272,000

X = $272,000 + $246,000 + $110,000

= $ 84,000

Retained EarningsDividend declarations Beg. bal. 246,000 (same amount paid) 84,000 Net income 110,000

End. bal. 272,000


(10-15 min.) CP 12-11

1. Cost of plant asset acquisitions = $252,000, as follows:

Plant Assets, netBeg.

+ Acquisitions Depreciation Book value of=

End.bal. assets sold bal.

$219,000 + X $ 18,000 $0 = $453,000

X = $453,000 $219,000 + $18,000

X = $252,000

Plant Assets, netBeg. bal. 219,000Acquisitions 252,000 Depreciation 18,000End. bal. 453,000

2.

JournalDATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Plant Assets……………………………... 252,000Note Payable, Long-Term…………… 83,000Cash………………………………….. 169,000

Acquisition of plant assets.

3.Cash flows from investing activities:

Acquisition of plant assets………………………….. $(169,000)

Noncash investing and financing activities:Acquisition of plant assets by

issuing long-term note payable………………….. $ 83,000


(10 min.) CP 12-12

O+ a. Loss on sale of land O+ h. Increase in accounts O+ b. Depreciation expense payable O c. Increase in inventory N i. Sales revenue O+ d. Decrease in prepaid F j. Payment of dividends

expense O k. Decrease in accrued O+ e. Decrease in accounts liabilities

receivable F l. Issuance of common stock I f. Purchase of O m.Gain on sale of building

equipment N n. Retained earnings N g. Collection of cash

from customers

(5-10 min.) CP 12-13

Cash flows from operating activities:Net income……………………………………………… $81,000Add (subtract) items that affect net incomeand cash flows differently:

Depreciation…………………………………………. 9,000Gain on sale of land………………………………….. (4,000)Increase in accounts receivable, inventory,

and prepaid expenses ($78,000 $65,000)………. (13,000)Decrease in current liabilities ($42,000 $40,000)…. (2,000 )

Net cash inflow from operating activities:………... $71,000


(20-30 min.) CP 12-14

Grace Chemical CompanyStatement of Cash Flows

Year Ended December 31, 20X2(In Thousands)

Cash flows from operating activities:Net income $110Add (subtract) items that affect net incomeand cash flows differently:

Depreciation $ 60Increase in accounts receivable (6)Decrease in inventory 4Increase in prepaid expenses (1)Increase in accounts payable 5Increase in salary payable 2Decrease in accrued liabilities (3 ) 61

Net cash inflow from operating activities 171

Cash flows from investing activities:Acquisition of plant assets

($225 $185 + $60) $(100)Sale of long-term investments ($90 $75) 15

Net cash outflow from investing activities (85)

Cash flows from financing activities:Payment of long-term note payable ($68 $66) $ (2)Issuance of common stock ($40 $37) 3Payment of dividends ($246 + $110 $272) (84 )

Net cash outflow from financing activities (83 )Net increase in cash $ 3Cash balance, beginning 16 Cash balance, ending $ 19


(10 min.) CP 12-14

1. The statement of cash flows indicates why the company’s cash balance

changed. It reports where cash came from and how cash was spent.

Thus, the statement of cash flows explains the causes of the changes in

the cash balance.

Cash flows are important because it takes cash to pay the bills. The

W.T. Grant Company case shows that a company can be profitable and

still go bankrupt if it runs out of cash.

2. The indirect method starts with net income and shows the

reconciliation from net income to operating cash flows.

3. Nike’s 19X7 cash flows look very strong. Virtually all the increase in

cash came from operations — a sign of strength. During the year, Nike

invested in new plant and equipment and paid off some debt.

To evaluate a company’s cash flows, look for:

a. Net cash inflow from operating activities.

b. Investment in assets such as plant and equipment.


Exercises

(10-15 min.) E 12-1

DATE: _______________

TO: Managers of NEI Datacom

FROM: Student Name

SUBJECT: Purposes of the statement of cash flows

The statement of cash flows is designed to help management predict the future cash flows of a business. The statement of cash flows measures historical cash flows, which are a good predictor of future cash flows. Net income is an important measure of management performance, but it takes cash to pay the bills. Also, a manager’s performance should be evaluated in part on the basis of how well he or she uses cash, information given in the statement of cash flows.

In evaluating a borrower’s ability to repay a loan, a creditor examines the statement of cash flows to learn how the borrower has gained and spent cash. As NEI’s situation indicates, income may increase while cash decreases, so the statement of cash flows should be used in conjunction with the income statement and the balance sheet in evaluating a company.

Note: Student responses may vary.


(10-15 min.) E 12-2

O a. Collection of account NIF k. Acquisition of equipmentreceivable by issuance of note

payable

F b. Issuance of long-term note F l. Payment of long-term debtpayable to borrow cash

N c. Depreciation of equipment NIF m. Acquisition of building byissuance of common stock

F d. Purchase of treasury stock N n. Accrual of salary expense

F e. Issuance of common stock I o. Purchase of long-termfor cash investment

O f. Payment of account O p. Payment of wages topayable employees

F g. Issuance of preferred O q. Collection of cash intereststock for cash

F h. Payment of cash dividend I r. Cash sale of land

I i. Sale of long-term N s. Distribution of stock investment dividend

N j. Amortization of bonddiscount


(5-10 min.) E 12-3

a. Investing activities h. Operating activities

b. Investing activities i. Financing activities

c. Financing activities j. Financing activities

d. Noncash investing and k. Not reportedfinancing activities

e. Operating activities l. Operating activities

f. Financing activities m. Investing activities

g. Noncash investing and n. Operating activitiesfinancing activities


(10-15 min.) E 12-4

Cash flows from operating activities: Receipts: Collections from customers ($93,000 + $9,000)………………… $ 102,000 Dividends received on investments in stock……………….. 7,000 Total cash receipts………………….. 109,000

Payments: To suppliers…………………………… $(54,000) To employees………………………….. (34,000) For interest…………………………….. (16,000) For income tax………………………… (13,000) Total cash payments……………….. (117,000) Net cash outflow from operating activities. $ (8,000)

Evaluation: Operating cash flow is weak, as shown by the net cash outflow from operating activities.


(5-10 min.) E 12-5

Dividends Receivable — Report cash receipts of dividends as an

operating cash flow.

Investment in Land — Report acquisitions of investments and the

proceeds from sales of investments* as investing cash flows.

Long-Term Debt — Report issuance and payments of long-term debt as

financing cash flows.

_____*Amount of sale proceeds is not determinable. We would need the gain or

loss to combine with the book value of investments sold.


(20-30 min.) E 12-6Req. 1

Crawford Properties, Inc.Statement of Cash Flows

Year Ended June 30, 20X1

Cash flows from operating activities: Receipts: Collections from customers ($229,000 + $15,000)……………………… $ 244,000 Dividends received on investments in stock…... 8,000 Total cash receipts…………………………. 252,000 Payments: To suppliers ($103,000 + $11,000 $9,000)…. $(105,000) To employees ($45,000 + $1,000)…………….. (46,000) For income tax…………………………………. (9,000) For interest…………………………………….. (2,000) Total cash payments………………………... (162,000) Net cash inflow from operating activities……... 90,000

Cash flows from investing activities: Acquisition of plant assets………………………… $(101,000) Proceeds from sale of land………………………... 14,000 Net cash outflow from investing activities……. (87,000)

Cash flows from financing activities: Proceeds from issuance of common stock………... $ 30,000 Payment of long-term note payable………………. (15,000) Dividends paid……………………………………. (11,000) Net cash inflow from financing activities……... 4,000Net increase in cash…………………………………... $ 7,000

Noncash investing and financing activities: Acquisition of plant assets by issuing note payable. $ 15,000


(continued) E 12-6

Req. 2

Evaluation: Crawford Properties’ cash flows look strong. Operations are

the main source of cash. The company is investing in new

plant assets without having to borrow. It was able to issue

stock and pay off a long-term note payable — both financing

transactions. All of these signs are favorable.


(10-15 min.) E 12-7

$4,000 decrease ina. Cash collections = $81,000 + Accounts Receivable

($22,000 $18,000)

= $85,000

Cash paymentsfor inventory

$4,000 decrease in $3,000 decrease inb. = $90,000 Inventory + Accounts Payable

($25,000 $21,000) ($11,000 $8,000)

= $89,000


(10-15 min.) E 12-8

a. Cash dividend payments = $26,000

$45,000 + $62,000 $8,000 Cash dividends (X) = $73,000 Cash dividends = $73,000 $45,000 $62,000 + $8,000

Cash dividends = $26,000

Retained Earnings

Stock dividends 8,000 Beginning balance 45,000

Cash dividends 26,000 Net income 62,000


b. Cash proceeds of sale = Book value of asset sold, $7,000* Loss on sale, $1,000

= $6,000_____*$103,000 + $27,000 $16,000 Book value sold (X) = $107,000 Book value sold = $107,000 $103,000 $27,000 + $16,000

Book value sold = $7,000

Plant Assets, Net

Beginning balance 103,000 Depreciation 16,000

Purchases 27,000 Book value sold 7,000



(10-15 min.) E 12-9

Cash flows from operating activities: Net income…………………………………… $27,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………. $ 12,000 Loss on sale of land……………………….. 5,000 Increase in current assets other than cash… (17,000) Decrease in current liabilities……………... (23,000) (23,000 ) Net cash inflow from operating activities……. $ 4,000

Evaluation: Operating cash flow is a little weak. Net cash inflow from operating activities is much less than net income. It should be near the level of net income.

(10-15 min.) E 12-10

1. Direct method:a. Report the cash receipt of $17,000 as an investing activity.b. Report the $50,000 cash payment as an investing activity.

Report issuance of the $160,000 note payable to acquire land as a noncash investing and financing activity in a schedule to accompany the statement of cash flows.

2. Indirect method:a. Subtract the $7,000 gain from net income in the operating activities

section. Report cash receipt of $17,000 as an investing activity.b. Same as answer to 1b.


(20-30 min.) E 12-11Req. 1

Crawford Properties, Inc.Statement of Cash Flows

Year Ended June 30, 20X1Cash flows from operating activities: Net income……………………………………… $ 38,000 Add (subtract) items that affect net income and cash flow differently: Depreciation…………………………………. $ 29,000 Decrease in accounts receivable……………... 15,000* Increase in inventory………………………… (6,000)* Increase in prepaid expenses………………… (1,000)* Increase in accounts payable………………… 13,000** Increase in accrued liabilities………………… 2,000 ** 52,000 Net cash inflow from operating activities……. 90,000

Cash flows from investing activities: Acquisition of plant assets ……………………… $(101,000) Proceeds from sale of land………………………. 14,000 Net cash outflow from investing activities…... (87,000)

Cash flows from financing activities: Proceeds from issuance of common stock………. $ 30,000 Payment of long-term note payable…………….. (15,000) Dividends paid………………………………….. (11,000 ) Net cash inflow from financing activities……. 4,000 Net increase in cash………………………………… $ 7,000

Noncash investing and financing activities:

Acquisition of plant assets by issuing note payable $ 15,000

_____* These amounts can be combined into a single total and reported as

“Decrease in current assets other than cash……………………………… 8,000.”** These amounts can be combined into a single total and reported as

“Increase in current liabilities……………………………………………. 15,000.”


(continued) E 12-11

Req. 2

Evaluation: Crawford Properties’ cash flows look strong. Operations are

the main source of cash. The company is investing in new

plant assets without having to borrow. It was able to issue

stock and pay off a long-term note payable — both financing

transactions. All of these signs are favorable.


(15-20 min.) E 12-12

Cash flows from operating activities: Net income…………………………………….. $69,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………... $ 3,000 Decrease in accounts receivable……………. 4,000 Increase in inventory……………………….. (2,000) Increase in accounts payable……………….. 5,000 Decrease in accrued liabilities……………… (3,000) 7,000 Net cash inflow from operating activities... $76,000

Ochoa shows no sign of trouble collecting receivables or selling nventory. There is no large build-up in either account.

(5-10 min.) E 12-13

Case A - New borrowing generated the cash to acquire plant assets.

Case B - A combination of operations and new borrowing generated most of the cash for acquisition of plant assets.

Case C - The sale of plant assets generated the cash needed to acquire new plant assets.


(15-20 min.) E 12-14

(All amounts in millions)

1. Indirect method

19X8 19X7 19X62. Largest source of cash Operations Long-term Operations

borrowing $2,711.6 $2,799.6 $2,110.0

3. Inventories increased, as shown by the decrease in cash. Income taxes payable decreased, as shown by the decrease in cash.

4. Cash……………………………………. 89.0Property, Plant, and Equipment…….. 64.3Gain on Sale of Plant Assets………... 24.7


Problems

Group A

(15-30 min.) P 12-1A

DATE: _______________

TO: Top Managers of Henry’s Interiors, Inc.

FROM: Student Name

SUBJECT: Assessment of 20X4 and outlook for the future

20X4 was a good year. Net income increased by 15% and would have been even higher without the nonrecurring loss, which cannot be expected to happen every year. Operations appear to be generating increasing amounts of profit. The increases in plant assets are consistent with a growing, prospering company. No unhealthy relationships are apparent among the assets or liabilities.

The cash-flow data paint a similar picture. Operating activities produced the bulk of the year’s increase in cash, which is healthy. Over the long run, successful companies generate the bulk of their cash through operations.

The five-year expansion program is generating net cash outflows from investing activities. The company appears to be making the long-term investments to lay the foundation for strong future operations. Financing activities resulted in a net cash inflow of $70,000. This amount is insignificant in relation to cash flows from operating and investing activities. Overall, the cash-flow data reveal a healthy set of relationships.

On balance, there are no obvious danger signals, so the outlook is fair to good.

Note: Student responses may vary. The key conclusion is that 20X4 was a good year, and the outlook is not clouded by any obvious difficulties.


(40 min.) P 12-2AReq. 1

Dohn CorporationIncome Statement

Year Ended December 31, 20X2 Sales revenue (2,800 $200) $560,000

Cost of goods sold $120,000 + (1,800

$160,000 264,0002,000

Salary expense 90,000Rent expense 12,000Depreciation expense ($50,000 / 5) 10,000Income tax expense 64,000

Net income $120,000Req. 2

Dohn CorporationBalance Sheet

December 31, 20X2ASSETS LIABILITIES

Current: Current:Cash $191,000* Accounts payableAccounts receivable ($160,000 $140,000) $ 20,000

(2,800 $200 .10) 56,000 Salary payable 3,000Inventory Total current liabilities 23,000

$160,000 (3,0002,800) 16,000

Total liabilities 2,000

Total current assets 263,000STOCKHOLDERS’ EQUITY

Property, plant, and equipment: Common stock 200,000Store fixtures $50,000 Retained earningsLess Accumulated ($120,000 $40,000) 80,000

depreciation (10,000 )

40,000 280,000

Total liabilities andTotal assets $303,000 stockholders' equity $303,000_____


*$200,000 $50,000 $120,000 $12,000 $140,000 + $504,000 $87,000 $64,000 $40,000 = $191,000.

(continued) P 12-2A

Req. 3

Dohn CorporationStatement of Cash Flows

Year Ended December 31, 20X2Cash flows from operating activities:

Collections from customers(2,800 $200 .90)

………………………………...$504,000

Payments:To suppliers ($120,000 + $12,000 + $140,000)……. (272,000)To employees ($90,000 $3,000)…………………. (87,000)For income tax……………………………………... (64,000 )Net cash inflow from operating activities………….. 81,000

Cash flows from investing activities:Purchase of store fixtures……………………………... (50,000 )

Net cash outflow from investing activities………… (50,000)

Cash flows from financing activities:Issuance of common stock…………………………….. 200,000Payment of dividend…………………………………... (40,000 )

Net cash inflow from financing activities………….. 160,000_______

Increase in cash…………………………………………... $191,000Cash balance, January 1, 20X2…………………………... 0 Cash balance, December 31, 20X2………………………. $191,000


(35-45 min.) P 12-3AReq. 1

Patio Haus, Inc.Statement of Cash Flows

Year Ended July 31, 20X2Cash flows from operating activities: Receipts: Collections from customers ($681,100 + $146,000) $ 827,100 Interest received......................................................... 11,700 Dividends received.................................................... 2,700 Total cash receipts................................................ $ 841,500 Payments: To suppliers............................................................... $(673,300) To employees............................................................. (104,000) For income tax........................................................... (56,400) For interest................................................................. (37,800) Total cash payments............................................. (871,500) Net cash outflow from operating activities................ (30,000)

Cash flows from investing activities: Acquisition of plant assets.............................................. $(181,000) Collection of loans.......................................................... 74,400 Proceeds from sale of plant assets.................................. 59,700 Loan to another company............................................... (35,000) Proceeds from sale of investments................................. 34,700 Net cash outflow from investing activities................ (47,200)

Cash flows from financing activities: Proceeds from issuance of common stock...................... $ 116,900 Payments of long-term debt............................................ (18,800) Payment of dividends..................................................... (50,500) Proceeds from issuance of short-term debt..................... 44,100 Net cash inflow from financing activities.................. 91,700 Net increase in cash............................................................. $ 14,500 Cash balance, July 31, 20X1................................................ 53,800Cash balance, July 31, 20X2................................................ $ 68,300

continued on next page


(continued) P 12-3A

Noncash investing and financing activities: Payment of long-term debt by issuing preferred stock. $107,300 Acquisition of equipment by issuing short-term note payable........................................... 35,500 Total noncash investing and financing activities......... $142,800

Req. 2

Evaluation of 20X2: 20X2 was a disappointing year from a cash-flow standpoint. Operations generated a net cash outflow. On the positive side, Patio Haus was able to issue $116,900 of new stock, which means the stockholders have faith in the company. The business invested heavily in plant assets, and cash increased by $14,500. But ultimately, operations must generate a net cash inflow for the company to remain in business.


(30-40 min.) P 12-4A

Req. 1

Genie Marketing, Inc.Statement of Cash Flows

Year Ended December 31, 20X3Cash flows from operating activities: Cash receipts: Collections from customers ($438,000 $3,400)…... $ 434,600 Receipts of interest ($11,700 + $300)………………. 12,000 Total cash receipts……………………………….. $ 446,600 Cash payments: To suppliers: Inventory ($205,200 + $4,400 + $1,500)………… $ (211,100) Operating expenses ($49,700 $500 + $600)…… (49,800) To employees ($76,400 $700)…………………….. (75,700) For interest ($24,600 + $400)……………………….. (25,000) For income tax ($16,900 $2,500)…………………. (14,400) Total cash payments……………………………… (376,000) Net cash inflow from operating activities…………… 70,600

Cash flows from investing activities: Acquisition of land……………………………………… $ (25,100) Acquisition of equipment ($93,700 depreciation expense of $15,300 = $78,400; $100,900 $78,400)………………………….. (22,500) Net cash outflow from investing activities………….. (47,600)

Cash flows from financing activities: Payment of dividends ($19,600 + $61,600 $52,500)…. $ (28,700) Payment of note payable………………………………... (10,000) Issuance of common stock……………………………… 8,800 Net cash outflow from financing activities………….. (29,900)Net decrease in cash………………………………………... $ (6,900)


(continued) P 12-4A

Req. 2

This problem will help students learn how operating activities, investing

activities, and financing activities generate cash receipts and cash

payments. By solving this problem, students will learn how companies

prepare the statement of cash flows. Students will thus be able to

understand the meaning of cash flows from the three basic categories of

business activities. This knowledge will aid their analysis of investments.

For example, students should know that a net cash inflow from operating

activities conveys a more positive signal about a company than a net cash

outflow from operations.


(30-40 min.) P 12-5AReq. 1

Genie Marketing, Inc.Statement of Cash Flows

Year Ended December 31, 20X3Cash flows from operating activities: Net income $ 61,600 Add (subtract) items that affect net income and cash flow differently: Depreciation $ 15,300 Increase in accounts receivable (3,400)* Decrease in interest receivable 300* Increase in inventories (4,400)* Decrease in prepaid expenses 500* Decrease in accounts payable (1,500)** Decrease in interest payable (400)** Increase in salary payable 700** Decrease in other accrued liabilities (600)** Increase in income tax payable 2,500** 9,000 Net cash inflow from operating activities 70,600 Cash flows from investing activities: Acquisition of land $ (25,100) Acquisition of equipment ($93,700 depreciation expense of $15,300 = $78,400; $100,900 $78,400) (22,500 ) Net cash outflow from investing activities (47,600)Cash flows from financing activities: Payment of dividends ($19,600 + $61,600 $52,500) $ (28,700) Payment of note payable (10,000) Issuance of common stock 8,800 Net cash outflow from financing activities (29,900)Net decrease in cash_____

$ (6,900)

*These amounts can be combined into a single total and reported as“Increase in current assets other than cash……………………………….. (7,000).”

**These amounts can be combined into a single total and reported as“Increase in current liabilities…………………………………………….. 700.”


(continued) P 12-5A

Req. 2











(40 min.) P 12-6A

Dohn CorporationIncome Statement

Year Ended December 31, 20X2 Sales revenue (2,800 $200) $560,000

Cost of goods sold $120,000 + (1,800

$160,000) 264,0002,000

Salary expense 90,000Rent expense 12,000Depreciation expense ($50,000 / 5) 10,000Income tax expense 64,000

Net income $120,000

Dohn CorporationBalance Sheet

December 31, 20X2ASSETS LIABILITIES

Current: Current:Cash $191,000* Accounts payableAccounts receivable ($160,000 $140,000) $ 20,000

(2,800 $200 .10) Salary payable 3,000Inventory Total current liabilities 23,000

$160,000 (3,000 2,800) 16,000




depreciation (10,000 )

40,000 280,000

Total liabilities andTotal assets $303,000 stockholders' equity $303,000_____


*$200,000 $50,000 $120,000 $12,000 $140,000 + $504,000 $87,000 $64,000 $40,000 = $191,000.

(continued) P 12-6A

Dohn CorporationStatement of Cash Flows


Net income……………………………………. $120,000Add (subtract) items that affect net incomeand cash flow differently:

Depreciation……………………………….. $ 10,000Increase in accounts receivable……………. (56,000)Increase in inventory………………………. (16,000)Increase in accounts payable………………. 20,000Increase in salary payable…………………. 3,000 (39,000 )

Net cash inflow from investing activities. 81,000

Cash flows from investing activities:Purchase of store fixtures……………………... (50,000 )

Net cash outflow from investing activities… (50,000)

Cash flows from financing activities:Issuance of common stock……………………. 200,000Payment of dividend………………………….. (40,000 )

Net cash inflow from financing activities…. 160,000________

Increase in cash………………………………….. $191,000Cash balance, January 1, 20X2………………….. 0 Cash balance, December 31, 20X2……………… $191,000


(35-45 min.) P 12-7AWWW.Smart, Inc.

Statement of Cash FlowsYear Ended December 31, 20X4

Cash flows from operating activities: Net income………………………………………………. $50,500 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………….. $ 29,200 Amortization…………………………………………. 1,100 Gain on sale of investment…………………………… (3,500) Decrease in accounts receivable……………………… 3,600* Decrease in inventories………………………………. 5,900* Increase in prepaid expenses ………………………… (1,100)* Decrease in notes payable, short-term……………….. (500)** Increase in accounts payable…………………………. 4,600** Decrease in income tax payable……………………… (900)** Increase in accrued liabilities………………………… 5,100** 43,500 Net cash inflow from operating activities……………. 94,000

Cash flows from investing activities: Acquisition of equipment……………………………….. $(69,000) Acquisition of long-term investment……………………. (44,800) Sale of long-term investment……………………………. 12,200 Collection of loan……………………………………….. 10,300 Net cash outflow from investing activities…………… (91,300)

Cash flows from financing activities: Issuance of long-term debt………………………………. $ 71,000 Payment of cash dividends………………………………. (48,300) Payment of long-term debt………………………………. (47,800) Issuance of preferred stock………………………………. 36,200 Net cash inflow from financing activities……………. 11,100

Net increase in cash ($48,600 $34,800)………………….. $13,800



http://WWW.Smart/

(continued) P 12-7A

Noncash investing and financing activities: Acquisition of building by issuing long-term note payable… $118,000 Payment of long-term debt by issuing common stock……… 89,400Total noncash investing and financing activities………………. $207,400

_____*These amounts can be combined into a single total and reported as

“Decrease in current assets other than cash………………………………… 8,400.”**These amounts can be combined into a single total and reported as

“Increase in current liabilities ………………………………………………. 8,300.”


(35-45 min.) P 12-8AReq. 1

CNA InsuranceStatement of Cash Flows

Year Ended December 31, 20X5Cash flows from operating activities: Net income…………………………………………….. $ 31,600 Add (subtract) items that affect net income and cash flow differently: Depreciation……………………………………….. $ 12,800 Amortization……………………………………….. 5,000 Decrease in accounts receivable …………………… 700* Decrease in inventories…………………………….. 1,400* Increase in prepaid expenses……………………….. (500)* Increase in notes payable, short-term………………. 9,200** Decrease in accounts payable……………………… (6,100)** Decrease in accrued liabilities……………………… (2,500)** Decrease in income tax payable……………………. (3,300)** 16,700 Net cash inflow from operating activities………….. 48,300

Cash flows from investing activities: Acquisition of building………………………………… $(124,000) Acquisition of equipment……………………………… (55,000) Sale of long-term investment………………………….. 6,000 Net cash outflow from investing activities…………. (173,000)

Cash flows from financing activities: Issuance of common stock…………………………….. $ 105,600 Issuance of long-term note payable……………………. 32,000 Payment of cash dividends…………………………….. (17,000) Net cash inflow from financing activities………….. 120,600Net decrease in cash ($8,400 $12,500)…………………. $ (4,100)

Noncash investing and financing activities: Retirement of bonds payable by issuing common stock. $ 55,000 _____*These amounts can be combined into a single total and reported as

“Decrease in current assets other than cash…………………………………………… 1,600.”**These amounts can be combined into a single total and reported as

“Decrease in current liabilities………………………………………………………… (2,700).”


(continued) P 12-8A

Req. 2

Evaluation: CNA’s cash flows look strong. Operations are the main

source of cash. The company is investing heavily in new

plant assets and is financing the investments more by issuing

stock than by borrowing. All of these signs are favorable.


(45-60 min.) P 12-9AReq. 1

Rolex Paper CompanyStatement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities: Receipts: Collections from customers………………... $ 308,100 Interest received…………………………… 12,200 Dividends received………………………… 1,900 Total cash receipts……………………… $322,200 Payments: To suppliers ($101,600 + $46,100)………… $(147,700) To employees………………………………. (67,500) For interest…………………………………. (21,800) For income tax……………………………... (8,000) Total cash payments……………………. (245,000) Net cash inflow from operating activities…. 77,200 Cash flows from investing activities: Acquisition of equipment…………………….. $ (79,900) Collection of loan…………………………….. 18,500 Sale of investments…………………………… 9,900 Net cash outflow from investing activities… (51,500)Cash flows from financing activities: Payment of long-term debt……………………. $ (78,900) Issuance of common stock……………………. 34,600 Sale of treasury stock…………………………. 26,200 Purchase of treasury stock…………………….. (10,400) Payment of dividends…………………………. (1,800) Net cash outflow from financing activities… (30,300)Net decrease in cash ($82,500 $87,100)……….. $ (4,600)



(continued) P 12-9A

Req. 1

Noncash investing and financing activities: Acquisition of land by issuing common stock……………… $ 62,100 Retirement of long-term debt by issuing common stock…… 21,100Total noncash investing and financing activities………………. $ 83,200


(continued) P 12-9A

Req. 2

Rolex Paper CompanyCash Flows from Operating Activities

Year Ended December 31, 20X8Cash flows from operating activities: Net income……………………………………… $43,900 Add (subtract) items that affect net income and cash flow differently: Depreciation…………………………………. $20,900 Gain on sale of investments…………………. (700) Decrease in accounts receivable…………….. 16,300* Increase in inventories………………………. (5,700)* Decrease in prepaid expenses……………….. 1,900* Increase in accounts payable………………… 7,700** Increase in interest payable………………….. 2,300** Decrease in salary payable………………….. (700)** Decrease in other accrued liabilities………… (3,300)** Decrease in income tax payable……………... (5,400)** 33,300 Net cash inflow from operating activities…… $77,200


“Decrease in current assets other than cash………………… 12,500.”**These amounts can be combined into a single total and reported as

“Increase in current liabilities………………………………. 600.”


(45-60 min.) P 12-10AReq. 1

Heart O’Kansas Optical CorporationStatement of Cash Flows

Year Ended September 30, 20X4Cash flows from operating activities: Net income……………………………………………… $ 56,900 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………… $ 8,500 Gain on sale of land…………………………………. (10,900) Decrease in accounts receivable…………………….. 2,100* Increase in interest receivable………………………. (1,300)* Increase in inventories………………………………. (4,800)* Decrease in prepaid expenses……………………….. 700* Decrease in accounts payable……………………….. (8,500)** Decrease in income tax payable…………………….. (2,800)** Decrease in accrued liabilities………………………. (11,200)** Increase in interest payable…………………………. 1,300** Increase in salary payable

…………………………… 400** (26,500)

Net cash inflow from operating activities…………… 30,400 Cash flows from investing activities: Sale of land……………………………………………… $ 38,100 Acquisition of long-term investments…………………... (37,300) Net cash inflow from investing activities…………… 800 Cash flows from financing activities: Payment of cash dividends……………………………… $(64,300) Issuance of common stock……………………………… 51,900 Payment of long-term note payable…………………….. (24,700) Net cash outflow from financing activities…………. (37,100 ) Net decrease in cash……………………………………….. $ (5,900 )

continued on next page_____*These amounts can be combined into a single total and reported as

“Increase in current assets other than cash………………………………. (3,300).”**These amounts can be combined into a single total and reported as


“Decrease in current liabilities…………………………………………… (20,800).”


(continued) P 12-10A

Req. 1

Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………………. $ 26,300 Acquisition of equipment by issuing short-term note payable………………………………… 22,000Total noncash investing and financing activities……………… $ 48,300


(continued) P 12-10A

Req. 2

Heart O’Kansas Optical CorporationCash Flows from Operating Activities

Year Ended September 30, 20X4Cash flows from operating activities: Receipts: Collections from customers ($333,600 + $2,100)……………………. $ 335,700 Interest received ($7,300 $1,300)……….. 6,000 Total cash receipts……………………… $341,700 Payments: To suppliers: Inventory ($161,500 + $4,800 + $8,500).. $(174,800) Operating expenses ($29,600 $700 + $11,200)………… (40,100) To employees ($63,400 $400)…………… (63,000) For income tax ($18,400 + $2,800)……….. (21,200) For interest ($13,500 $1,300)……………. (12,200) Total cash payments…………………….. (311,300) Net cash inflow from operating activities….. $ 30,400


Problems

Group B

(15-30 min.) P 12-1BDATE: _______________

TO: Managers of Oasis Water

FROM: Student Name

SUBJECT: Assessment of 20X7 operations and outlook for the future

20X7 was not a good year. Most of the increase in net income resulted from the extraordinary gain, which means that normal operations were not very profitable. This is confirmed by the increase in receivables, which hints that collections are lagging.

The cash-flow data paint a similar picture. Operating activities resulted in net cash outflow, which is bad news. Over the long run, operations should generate the bulk of net cash inflow if the business expects to succeed.

During 20X7, the insurance recovery helped investing activities produce a net cash inflow. Ordinarily, investing activities should produce net cash outflows as the business invests in new assets. Growth is usually indicated by investments in new assets, but during 20X7 net cash flows from investing activities was positive, which means that net investments were negative. Although the net cash inflow resulting from investing activities may be temporary, it does not reflect especially well on the company. It means that, in part at least, the company is maintaining its cash position by liquidating fixed assets. This is a bad sign.

Financing activities produced a net cash inflow, which is normal. However, coupled with the net cash outflow from operations and the net cash inflow from investing activities, the additional debt created in 20X7 may be hard to pay back.

Overall, the outlook for the future is not bright.

Note: Student responses may vary. The key conclusion is that 20X7 was not a good year, and the outlook is not bright.


(40 min.) P 12-2BReq. 1

Scott CorporationIncome Statement

Year Ended December 31, 20X1Sales revenue (2,500 $200) $500,000Cost of goods sold $120,000 + (1,500

$260,000) 315,0002,000

Salary expense 95,000Depreciation expense ($150,000 / 5) 30,000Rent expense 20,000Income tax expense 10,000Net income $ 30,000

Req. 2Scott Corporation

Balance SheetDecember 31, 20X1

ASSETS LIABILITIESCurrent: Current:

Cash $ 90,000* Accounts payableAccounts receivable ($260,000 $208,000) $ 52,000


$260,000 (3,0002,500) 65,000




depreciation (30,000 ) 120,000 319,000

Total liabilities andTotal assets $375,000 stockholders' equity $375,000_____*$300,000 $150,000 $120,000 $20,000 $208,000 + $400,000 $91,000 $10,000 $11,000 = $90,000.


(continued) P 12-2B

Req. 3

Scott CorporationStatement of Cash Flows


Collections from customers(2,500 $200 .80)

………………………………...$400,000

Payments:To suppliers ($120,000 + $20,000 + $208,000)……. (348,000)To employees ($95,000 $4,000)…………………. (91,000)For income tax……………………………………... (10,000 )Net cash outflow from operating activities………… (49,000)

Cash flows from investing activities:Purchase of equipment………………………………... (150,000)

Net cash outflow from investing activities………… (150,000)

Cash flows from financing activities:Issuance of common stock……………………………. 300,000Payment of dividend………………………………….. (11,000 )

Net cash inflow from financing activities………….. 289,000_______

Increase in cash…………………………………………... $ 90,000Cash balance, January 1, 20X1…………………………... 0 Cash balance, December 31, 20X1………………………. $ 90,000


(35-45 min.) P 12-3BReq. 1

Triad Associates, Inc.Statement of Cash Flows

Year Ended April 30, 20X5Cash flows from operating activities: Receipts: Collections from customers ($448,600 + $171,900)………………………… $ 620,500 Interest received…………………………………… 4,400 Dividends received………………………………… 4,100 Total cash receipts……………………………… $ 629,000 Payments: To suppliers……………………………………….. $(368,500) To employees……………………………………… (93,600) For interest………………………………………… (13,300) For income tax…………………………………….. (37,900) Total cash payments……………………………. (513,300) Net cash inflow from operating activities…………. 115,700 Cash flows from investing activities: Acquisition of plant assets……………………………. $ (59,400) Proceeds from sale of plant assets……………………. 22,400 Collection of loans……………………………………. 12,800 Loan to another company…………………………….. (12,500) Proceeds from sale of investments…………………… 9,100 Net cash outflow from investing activities………... (27,600)Cash flows from financing activities: Payments of long-term debt…………………………… $ (50,000) Payment of dividends…………………………………. (48,400) Proceeds from issuance of short-term debt…………… 19,600 Proceeds from issuance of common stock ……………. 8,000 Net cash outflow from financing activities………... (70,800)Net increase in cash……………………………………… $ 17,300 Cash balance, April 30, 20X4……………………………. 39,300Cash balance, April 30, 20X5……………………………. $ 56,600



(continued) P 12-3B.Noncash investing and financing transactions: Payment of short-term note payable by issuing long-term note payable………………………. $ 63,000 Acquisition of equipment by issuing short-term note payable………………………………. 16,400Total noncash investing and financing transactions………… $ 79,400

Req. 2

Evaluation of 20X5: 20X5 was a strong year from a cash-flow standpoint.

Operations generated the bulk of the company’s cash. The business

acquired additional plant assets to lay a foundation for future operations.

The corporation also reduced its debt position.


(30-40 min.) P 12-4B

Req. 1

Town East PressStatement of Cash Flows

Year Ended December 31, 20X5Cash flows from operating activities: Cash receipts: Collections from customers ($213,000 + $1,600)…….. $ 214,600 Receipts of interest ($8,600 $1,200)………………... 7,400 Total cash receipts…………………………………. $222,000 Cash payments: To suppliers: Inventory ($70,600 $3,600 $2,600)…………… $ (64,400) Operating expenses ($10,500 + $600 + $2,300)…… (13,400) To employees ($27,800 + $3,500)…………………….. (31,300) For interest ($11,600 + $500)…………………………. (12,100) For income tax ($29,100 $1,200)…………………… (27,900) Total cash payments……………………………….. (149,100) Net cash inflow from operating activities…………….. 72,900

Cash flows from investing activities: Acquisition of land……………………………………….. $ (29,000) Acquisition of equipment ($49,400 depreciation expense of $4,000 = $45,400; $53,500 $45,400)…………………………. (8,100) Net cash outflow from investing activities……………. (37,100)

Cash flows from financing activities: Payments of dividends ($2,700 + $68,000 $41,500)…… $ (29,200) Payment of note payable…………………………………. (25,000) Issuance of common stock……………………………….. 23,600 Net cash outflow from financing activities…………… (30,600)Net increase in cash………………………………………….. $ 5,200


(continued) P 12-4B

Req. 2











(30-40 min.) P 12-5BReq. 1

Town East PressStatement of Cash Flows

Year Ended December 31, 20X5Cash flows from operating activities: Net income……………………………………………… $ 68,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………….. $ 4,000 Decrease in accounts receivable ……………………... 1,600* Increase in interest receivable……………………….. (1,200)* Decrease in inventories……………………………… 3,600* Increase in prepaid expenses ………………………… (600)* Increase in accounts payable…………………………. 2,600** Decrease in interest payable………………………….. (500)** Decrease in salary payable…………………………… (3,500)** Decrease in other accrued liabilities…………………. (2,300)** Increase in income tax payable………………………. 1,200 ** 4,900 Net cash inflow from operating activities………… 72,900

Cash flows from investing activities: Acquisition of land……………………………………… $(29,000) Acquisition of equipment ($49,400 depreciation expense of $4,000 = $45,400; $53,500 $45,400)….. (8,100) Net cash outflow from investing activities………. (37,100)

Cash flows from financing activities: Payment of dividends ($2,700 + $68,000 $41,500)…… $(29,200) Payment of note payable………………………………… (25,000) Issuance of common stock………………………………. 23,600 Net cash outflow from financing activities………. (30,600)Net increase in cash………………………………………… $ 5,200 _____*These amounts can be combined into a single total and reported as

“Decrease in current assets other than cash…………………………………. 3,400.”**These amounts can be combined into a single total and reported as

“Decrease in current liabilities………………………………………………. (2,500).”


(continued) P 12-5B

Req. 2











(40 min.) P 12-6BReq. 1

Scott CorporationIncome Statement

Year Ended December 31, 20X1 Sales revenue (2,500 $200)……………………... $500,000Cost of goods sold $120,000 + (1,500

$260,000)315,000

2,000Salary expense…………………………………….. 95,000Depreciation expense ($150,000 / 5)……………… 30,000Rent expense………………………………………. 20,000Income tax expense ($7,000 + $3,000)……………. 10,000Net income………………………………………… $ 30,000

Req. 2Scott Corporation

Balance SheetDecember 31, 20X1

ASSETS LIABILITIESCurrent: Current:

Cash $ 90,000* Accounts payableAccounts receivable ($260,000 $208,000) $ 52,000


$260,000 (3,000 2,500) 65,000 2,000



depreciation (30,000 ) 120,000 319,000

Total liabilities andTotal assets $375,000 stockholders' equity $375,000_____*$300,000 $150,000 $120,000 $20,000 $208,000 + $400,000 $91,000 $10,000 $11,000 = $90,000.


(continued) P 12-6B

Req. 3

Scott CorporationStatement of Cash Flows


Net income……………………………………. $ 30,000Add (subtract) items that affect net incomeAnd cash flow differently:

Depreciation……………………………….. $ 30,000Increase in accounts receivable……………. (100,000)Increase in inventory………………………. (65,000)Increase in accounts payable………………. 52,000Increase in salary payable…………………. 4,000 (79,000 )

Net cash inflow from investing activities. (49,000)

Cash flows from investing activities:Purchase of equipment…………………….….. (150,000 )

Net cash outflow from investing activities… (150,000)

Cash flows from financing activities:Issuance of common stock……………………. 300,000Payment of dividend………………………….. (11,000 )

Net cash inflow from financing activities…. 289,000________

Increase in cash………………………………….. $ 90,000Cash balance, January 1, 20X1………………….. 0 Cash balance, December 31, 20X1……………… $ 90,000


(35-45 min.) P 12-7B

Datex CorporationStatement of Cash Flows

Year Ended December 31, 20X7Cash flows from operating activities: Net income…………………………………………….. $ 57,100 Add (subtract) items that affect net income and cash flow differently: Depreciation……………………………………….. $ 21,800 Amortization……………………………………….. 5,300 Loss on sale of equipment…………………………. 11,700 Increase in accounts receivable……………………. (5,500)* Increase in inventories……………………………... (5,600)* Increase in prepaid expenses………………………. (1,200)* Increase in notes payable, short-term……………… 4,300** Decrease in accounts payable……………………… (2,900)** Increase in income tax payable…………………….. 1,900** Decrease in accrued liabilities……………………… (11,700)** 18,100 Net cash inflow from operating activities………….. 75,200

Cash flows from investing activities: Acquisition of building………………………………… $(125,300) Acquisition of long-term investment………………….. (31,600) Sale of equipment……………………………………… 58,000 Collection of loan……………………………………… 8,700 Net cash outflow from investing activities………… (90,200)

Cash flows from financing activities: Issuance of common stock…………………………….. $ 41,200 Issuance of long-term note payable……………………. 34,400 Payment of cash dividends…………………………….. (18,300) Purchase of treasury stock…………………………….. (14,300) Net cash inflow from financing activities………….. 43,000Net increase in cash ($50,700 $22,700)………………… $ 28,000



(continued) P 12-7B

Noncash investing and financing activities: Acquisition of land by issuing long-term note payable….. $107,000 Retirement of bonds payable by issuing common stock… 65,000Total noncash investing and financing activities…………… $172,000


“Increase in current assets other than cash…………………………………. (12,300).”**These amounts can be combined into a single total and reported as

“Decrease in current liabilities……………………………………………… (8,400).”


(35-45 min.) P 12-8BReq. 1

Southern Bell CompanyStatement of Cash Flows

Year Ended March 31, 20X3Cash flows from operating activities: Net income……………………………………………… $ 70,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………… $ 15,300 Amortization………………………………………… 2,000 Decrease in accounts receivable…………………….. 6,800* Increase in inventories………………………………. (2,600)* Increase in prepaid expenses………………………… (200)* Increase in accounts payable………………………… 2,700** Decrease in accrued liabilities………………………. (400)** Increase in income tax payable……………………… 3,300** 26,900 Net cash inflow from operating activities…………… 96,900

Cash flows from investing activities: Acquisition of equipment………………………………. $(78,700) Acquisition of building…………………………………. (47,000) Sale of long-term investment…………………………… 13,700 Net cash outflow from investing activities………….. (112,000)

Cash flows from financing activities: Issuance of long-term note payable…………………….. $ 50,000 Issuance of common stock……………………………… 11,000 Payment of cash dividends……………………………… (30,000) Net cash inflow from financing activities…………… 31,000Net increase in cash ($19,900 $4,000)…………………… $ 15,900

Noncash investing and financing activities: Acquisition of land by issuing note payable……………. $ 76,000


“Decrease in current assets other than cash…………………………………………… 4,000.”**These amounts can be combined into a single total and reported as

“Increase in current liabilities…………………………………………………………. 5,600.”


(continued) P 12-8B

Req. 2

Evaluation: Southern Bell’s cash flows look strong. Operations are the

main source of cash. The company is investing in new plant

assets, and borrowing — a financing cash flow — appears

reasonable. All of these signs are favorable.


45-60 min.) P 12-9BReq. 1

Internet Guide, Inc.Statement of Cash Flows

Year Ended December 31, 20X3Cash flows from operating activities: Receipts: Collections from customers…………………………. $ 673,700 Interest received……………………………………... 12,600 Dividends received………………………………….. 4,500 Total cash receipts……………………………….. $ 690,800 Payments: To suppliers ($399,100 + $34,300)…………………. $(433,400) To employees……………………………………….. (143,800) For interest…………………………………………... (26,900) For income tax………………………………………. (18,900) Total cash payments……………………………… (623,000) Net cash inflow from operating activities…………… 67,800

Cash flows from investing activities: Acquisition of equipment……………………………….. $ (31,400) Collection of loans……………………………………… 13,000 Sale of investments……………………………………... 8,200 Net cash outflow from investing activities………….. (10,200)Cash flows from financing activities: Issuance of common stock……………………………… $ 47,300 Payment of long-term debt……………………………… (41,300) Payment of dividends…………………………………… (27,200) Purchase of treasury stock……………………………… (26,400) Net cash outflow from financing activities………….. (47,600)Net increase in cash ($63,600 $53,600)…………………. $ 10,000

Noncash investing and financing activities: Acquisition of land by issuing common stock………….. $ 80,100 Retirement of long-term debt by issuing common stock.. 19,000Total noncash investing and financing activities…………... $ 99,100


(continued) P 12-9B

Req. 2

Internet Guide, Inc.Cash Flows from Operating Activities

Year Ended December 31, 20X3

Cash flows from operating activities: Net income…………………………………….. $55,500 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………... $ 19,300 Loss on sale of investments………………... 1,100 Increase in accounts receivable…………….. (27,600)* Decrease in inventories…………………….. 11,800* Increase in prepaid expenses………………. (600)* Decrease in accounts payable……………… (8,300)** Increase in interest payable………………… 1,900** Increase in salary payable………………….. 7,000** Increase in other accrued liabilities………... 10,400** Decrease in income tax payable……………. (2,700)** 12,300 Net cash inflow from operating activities….. $67,800


“Increase in current assets other than cash……………………………. (16,400).”**These amounts can be combined into a single total and reported as

“Increase in current liabilities………………………………………… 8,300.”


(45-60 min.) P 12-10BReq. 1

Funny Bone Defensive Driving, Inc.Statement of Cash Flows

Year Ended June 30, 20X1Cash flows from operating activities: Net income…………………………………………….. $ 56,200 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………… $ 13,400 Loss on sale of land………………………………… 6,700 Decrease in accounts receivable……………………. 2,400* Decrease in interest receivable……………………... 700* Increase in inventories……………………………… (8,400)* Increase in prepaid expenses……………………….. (900)* Increase in accounts payable……………………….. 2,100** Decrease in income tax payable……………………. (700)** Decrease in accrued liabilities……………………… (1,500)** Increase in interest payable…………………………. 800** Decrease in salary payable…………………………. (1,700)** 12,900 Net cash inflow from operating activities………….. 69,100

Cash flows from investing activities: Sale of land…………………………………………….. $ 46,900 Acquisition of long-term investment………………….. (4,900) Net cash inflow from investing activities………….. 42,000

Cash flows from financing activities: Payment of long-term note payable…………………… $(61,000) Payment of cash dividends…………………………….. (38,100) Issuance of common stock…………………………….. 3,900 Net cash outflow from financing activities………… (95,200) Net increase in cash………………………………………. $ 15,900

continued on next page_____*These amounts can be combined into a single total and reported as

“Increase in current assets other than cash…………………………….. (6,200).”**These amounts can be combined into a single total and reported as

“Decrease in current liabilities………………………………………… (1,000).”


(continued) P 12-10B

Req. 1

Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable………………………………... $14,300 Payment of short-term note payable by issuing common stock………………………………… 4,700Total noncash investing and financing activities…………….. $19,000


(continued) P 12-10B

Req. 2

Funny Bone Defensive Driving, Inc.Cash Flows from Operating Activities

Year Ended June 30, 20X1Cash flows from operating activities: Receipts: Collections from customers ($245,300 + $2,400)……………………. $247,700 Interest received ($10,600 + $700)………… 11,300 Total cash receipts……………………… $ 259,000 Payments: To suppliers: Inventory ($82,800 + $8,400 $2,100)... $ (89,100) Operating expenses ($42,000 + $900 + $1,500)………….. (44,400) To employees ($38,800 + $1,700)…………. (40,500) For income tax ($9,900 + $700)…………... (10,600) For interest ($6,100 $800)……………….. (5,300) Total cash payments……………………. (189,900) Net cash inflow from operating activities…. $ 69,100


Decision Cases

(45-60 min.) Decision Case 1

Req. 1 (indirect method for operating activities)

UPACK, Inc.Statement of Cash Flows

Year Ended December 31, 20X6Cash flows from operating activities: (Thousands) Net income………………………………………………….. $105 Add (subtract) items that affect net income and cash flow differently:

Depreciation………………………………………………… $ 46 Amortization of patents…………………………………….. 11 Increase in accounts receivable ($72 $61)……………….. (11)* Increase in inventories ($194 $181)……………………… (13)* Increase in accounts payable ($63 $56)………………….. 7**Decrease in accrued liabilities ($17 $12)………………… (5)** 35Net cash inflow from operating activities………………….. 140

Cash flows from investing activities:Acquisition of property, plant, and

equipment ($369 $259)……………………………….. $(110) Acquisition of long-term investments ($31 $0)…………... (31)

Net cash outflow from investing activities……………… (141)

Cash flows from financing activities:Issuance of common stock ($149 $61)…………………… $ 88 Payment of short-term note payable ($101 $32)…………. (69) Payment of cash dividends ($156 + $105 $221)…………. (40) Payment of long-term note payable ($163 $147)………… (16)

Net cash outflow from financing activities……………… (37)Net decrease in cash ($25 $63)………………………………. $ (38)


“Increase in current assets other than cash…………………………………… ($24).”**These amounts can be combined into a single total and reported as

“Increase in current liabilities………………………………………………… $ 2.”


(continued) Decision Case 1

Req. 2

During 20X5, the company sold equipment for $33,000 and land for

$61,000. These two transactions, indicated by the gain and the loss on the

19X5 income statement, increased 20X5 cash by $94,000. During 20X6,

the company generated no cash by selling plant assets. The two largest

payments during 20X6 were the purchases of property, plant, and

equipment ($110,000) and the payment of short-term notes payable

($69,000), which came to a $179,000 outlay. Thus, compared to the 20X5

cash balance, the 20X6 amount looks low.

Req. 3

Overall, 20X6 was a good year. Net income was up from $50,000 to

$105,000, and operations were the largest source of cash. On this basis,

business appears to have been successful. Also, the company increased its

property, plant, and equipment by $110,000. UPACK should be able to

use these plant assets to earn profits in future years. The business

eliminated debt by $85,000 ($69,000 short-term and $16,000 long-term).

Reducing debt decreases future interest expense. Tell the board members

that the future looks bright for UPACK, Inc. The cash has been spent

wisely.


(15-25 min.) Decision Case 2

Abba Medical looks like the better investment because:

1. Operations generate far more cash for Abba than for Esquire.

Operations should be the main source of cash for a healthy company.

2. Abba is investing more in long-term plant assets than Esquire is. Abba

is laying a more solid foundation in revenue-producing assets than

Esquire is.

3. Esquire’s main source of cash is the sale of plant assets. This trend

cannot continue for long without hurting the company’s ability to

produce revenue.

4. Abba is raising more cash by selling stock than Esquire. This gives

Abba more cash to invest in research and development of new products

and other innovations to enhance the company’s competitiveness.

Esquire, on the other hand, is paying off debt. That is not bad for

Esquire, but Abba appears to be a step ahead in terms of financing its

operations with owners’ equity and investing the cash in income-

producing assets.


3 Ethical Issue

Req. 1

Cash flows from operating activities: WithoutReclassification

WithReclassification

Net income………………………… $ 37,000 $37,000Increase in accounts receivable……. (80,000 ) —

Net cash inflow (outflow) fromoperating activities……………... $(43,000) $37,000

Terminix looks better with the reclassification because net cash flow from operations is positive.

Req. 2

Cash flows from investing activities:Reclassification of (or long-terminvestment in) receivables……… — ( 80,000)

_______ _______Decrease in cash from all activities... $(43,000) ($43,000)

Praco is correct that reclassifying the receivables will increase the reported amount of cash inflow from operations. This will make Terminix look better. But reclassifying a receivable has no effect on overall cash from all activities, as shown in the final result above.

Req. 3

The reclassification would be ethical if Terminix expects to collect the receivables beyond the current operating cycle, or one year if longer. Reclassification would be unethical if Terminix expects to collect within the current period. In that case, the reclassification would appear to be designed to create a false picture of cash flow from operations.


3 Financial Statement Cases

(40-50 min.) Financial Statement Case 1

Req. 1

Indirect method. The statement of cash flows begins with net income for the year. Also, The Gap does not report collections from customers, payments to suppliers, and so on, which are reported under the direct method.

Req. 2 (All amounts in thousands)

a. Collections + Decrease in Receivablesfrom = Sales Revenue or

customers Increase in Receivables

$9,054,462 = $9,054,462 + 0


(continued) Financial Statement Case 1

b. (All amounts in thousands)

Payments for=

Cost of+

Increase in Increase ininventory goods sold Inventory Accounts Payable

$5,374,334 = $5,318,218 + ($1,056,444 $733,174) ($684,130 $416,976)

Cost of Goods Sold

Beg. inventory 733,174 End. inventory 1,056,444Purchases 5,641,488

Cost of goods sold 5,318,218

Accounts Payable

Beg. bal. 416,976Payments for inventory 5,374,334 Purchases 5,641,488

End. bal. 684,130


(continued) Financial Statement Case 1

Req. 3

Net income increased from $534 million to $825 million after increasing

during the preceding year. Total assets increased from $3,338 million to

$3,964 million, and stockholders’ equity decreased mostly due to large

purchases of treasury stock. The company’s debt ratio is 0.60, which is

manageable. Net cash flows from operating activities were up from $845

million to $1,394 million, and the company is investing heavily in

property and equipment. Overall, these results look very strong.

(30-50 min.) Financial Statement Case 2

Because the students will be using the annual reports of real companies, the answers to this problem will vary widely.


Solutions to Internet Exercise

COCA-COLA COMPANY

The numerical computations printed here are based on information from fiscal years 1996 through 1998. The figures for subsequent years will of course vary. Go to the http://www.prenhall.com/harrison/ Web site for updated solutions.

2. Coca-Cola uses the indirect method to prepare the statement of cash flows. One can tell by looking at the Operating Activities section of the statement of cash flows. If net income/(loss) is reported at the top of the section followed by reconciliation adjustments, the indirect method is being used. Only one activity section, operating activities, is affected by the choice of method.

3. 1998:Net cash provided by operating activities: + $ 3,433,000,000Net cash used in investing activities: (2,161,000,000)Net cash used in financing activities: (1,333,000,000)

Operating Activities is providing the most cash. This is considered favorable because operating activities must be the primary source of cash over the long term or the company will not survive.

4. 1998 Net income is $3,533,000,0001998 Net cash provided by operating activities is $3,433,000,000

These amounts differ. Both Net Income and Net Cash provided by Operating Activities report the results of operations. However, Net Income reports operating results using accrual-basis accounting, while Net Cash provided by Operating Activities reports operating results using cash-basis accounting.


http://www.prenhall.com/harrison/

5. In 1998, Coca-Cola purchased $809,000,000 ($863,000,000 $54,000,000) more in property, plant, and equipment (PPE) than it sold. Purchasing property, plant, and equipment is considered favorable since this indicates the company is growing. Purchases and sales of PPE are reported in the Investing Activities section.

6. In 1998, Coca-Cola issued $1,408,000,000 ($1,818,000,000 $410,000,000) more debt than it paid back. In 1998, Coca-Cola purchased $1,261,000,000 ($1,563,000,000 $302,000,000) more stock than it issued. In 1998, Coca-Cola paid $1,480,000,000 in cash dividends. Debt transactions, stock transactions, and cash dividends are all reported in the Financing Activities section.


Chapter 12

Economy & Finance

cash flow statement

statement of cash flows41

thestatement of cash

net cash inflow

ending cash balance

beginning cash balance

largest source of cash

operating activities