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Chapter 12

The Statement of Cash Flows

Short Exercises

(10 min.) S 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 reasonably good predictors of

future cash receipts and payments.

b. Evaluate management decisions by reporting on how

managers got cash and how they used cash to run the

business.

Chapter 12 The Statement of Cash Flows 945

(10-15 min.) S 12-2

DATE: _______________

TO: Managers of U.S. Rondeau Inc.

FROM: Student Name

SUBJECT: Purposes of the statement of cash flows

The statement of cash flows is designed to help predict the future cash flows of a business. The statement of cash flows measures past cash flows, which are a reasonably 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 on how well he or she uses cash. This information is given in the statement of cash flows.

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

Student responses may vary.

Financial Accounting 8/e Solutions Manual946

S 12-3

Three things that could cause operating cash flows to be

positive (under the indirect method) are:

1. Increase in net income

2. Decreases rather than increases in current assets other

than cash

3. Increases rather than decreases in current liabilities

4. Depreciation and amortization

Students need to identify 3 items.


(15-30 min.) S 12-4

DATE: _______________

TO: Managers of Tranquility Inns

FROM: Student Name

SUBJECT: Assessment of 2010 and Outlook for the Future

2010 was not a good year. Most of the increase in net income

resulted from the extraordinary gain on the insurance proceeds

from fire damage to a building, 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

used cash, which is bad news. Over the long run, operations

should provide the bulk of the cash if the business expects to

succeed.


(continued) S 12-4

During 2010, 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 2010 net cash flows from investing activities

were positive, which means that net investments were negative.

Although the net cash flow provided by 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 provided a net cash inflow, which is

normal. However, coupled with the net cash used for

operations and the net cash provided by investing activities,

the additional debt created in 2010 may be hard to pay back.

Unless next year turns out to be much better than 2010, the

outlook for the company is not bright.

Student responses may vary. The key conclusion is that 2010

was not a good year, and the outlook is not bright.


(5-10 min.) S 12-5

Cash flows from operating activities:Net income……………………………………………….. $12,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation…………………………………………... 8,000Loss on sale of land…………………………………. 2,000Decrease in accounts receivable, inventory,

and prepaid expenses ($58,000 − $55,000)…... 3,000Increase in current liabilities ($32,000 − $20,000). 12,000

Net cash provided by operating activities:…... $37,000


(10 min.) S 12-6

O+ a. Increase in accounts O− h. Decrease in accruedpayable liabilities

I b. Purchase of F i. Issuance of commonequipment stock

O+ c. Decrease in prepaid O− j. Gain on sale of expense building

N d. Collection of cash O+ k. Loss on sale of landfrom customers O+ l. Depreciation expense

O+ e. Net income O− m. Increase in inventory N f. Retained earnings O+ n. Decrease in accounts F g. Payment of dividends receivable

(10 min.) S 12-7

Ethan CorporationStatement of Cash Flows (partial)

Year ended June 30, 2010Cash flows from operating activities:

Net income……………………………………….. $ 68,000*Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation…………………………………... $ 11,000Decrease in current assets other than

cash…………………………………………. 35,000Increase in current liabilities……………… 7,000 53,000

Net cash provided by operating activities….. $ 121,000 _____*$228,000 − $116,000 − $33,000 − $11,000 = $68,000


(15 min.) S 12-8

Ethan CorporationStatement of Cash Flows Year ended June 30, 2010

Cash flows from operating activities:Net income……………………………………….. $ 68,000*Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation…………………………………... $ 11,000Increase in current assets other than

cash…………………………………………. 35,000Decrease in current liabilities……………… 7,000 53,000

Net cash provided by operating activities….. 121,000

Cash flows from investing activities:Purchase of equipment………………………… $(43,000)Proceeds from sale of land……………………. 29,000 Net cash provided by investing activities….. (14,000)

Cash flows from financing activities:Proceeds from issuance of common stock… $ 26,000Payment of note payable………………………. (32,000)Payment of dividends………………………….. (5,600)Purchase of treasury stock……………………. (6,000 )Net cash used for financing activities………. (17,600 )

Net increase in cash……………………………….. $ 89,400 _____

*$228,000 − $116,000 − $33,000 − $11,000 = $68,000


(10 min) S 12-9

a. Acquisitions of plant assets = $71,000, as follows:Plant Assets, netBeg.

+ Acquisitions − Depreciation −Book value of

=End.

bal. assets sold bal.

$188,000 + X − $ 30,000 − $0 = $229,000

X = $229,000 − $188,000 + $30,000

X = $ 71,000

Plant Assets, netBeg. bal. 188,000Acquisitions 71,000 Depreciation 30,000End. bal. 229,000

b. Proceeds from the sale of long-term investments = $25,000, as follows:Long-term investments

Beg. bal. + Purchases −Book value of

= End. bal.investments sold

$79,000 + 0 − X = $54,000

X = $79,000 − $54,000

X = $25,000

With no gain or loss, proceeds from the sale must be the same as the book value of the investments sold, $25,000.

Long-Term InvestmentsBeg. bal. 79,000 Book value of

investments sold 25,000End. bal. 54,000


(15 min.) S 12-10

a. New borrowing on long-term notes payable = $15,000 ($69,000 − $54,000)This is clear from the increase in long-term notes payable.

b. Issuance of common stock = $10,000 ($48,000 − $38,000)This is clear from the increase in common stock.

c. Payment of dividends(same as amount of = $196,000, as follows:dividends declared)

BeginningNet

incomeDividend

declarations

Endingretained + − = retainedearnings earnings

$237,000 + $200,000 − X = $241,000

X = $237,000 + $200,000 − $241,000

X = $196,000

Retained EarningsDividend declarations Beg. bal. 237,000 (same amount paid) 196,000 Net income 200,000

End. bal. 241,000


(15 min.) S 12-11

a. Collections from customers = $759,000, as follows:

Collections=

Sales− Increase in Accounts Receivable

from customers Revenue

= $770,000 − $11,000 ($54,000 − $43,000)

= $759,000

Accounts ReceivableBeg. Bal. 43,000Sales 770,000 Collections 759,000End. Bal. 54,000

b. Payments for inventory = $313,000, as follows:

Payments forinventory

Cost ofDecrease ininventory

Increase inAccounts Payable

= Goods − −Sold

= $330,000 − $12,000 $5,000($89,000 − $77,000) ($48,000 − $43,000)

= $313,000

Inventory Accounts PayableBeg. bal. 89,000 Payments for Beg. bal. 43,000Purchases 318,000 Cost of goods sold 330,000 inventory 313,000 Purchases 318,000End. bal. 77,000 End. bal. 48,000


(10 min.) S 12-12

a. Payments to employees = $38,000, as follows:

Payments to=

Salary−

Increase inemployees expense Salary Payable

= $40,000 − $2,000($26,000 − $24,000)

= $38,000

Salary PayablePayments to Beg. bal. 24,000

employees 38,000 Salary expense 40,000End. bal. 26,000

b. Payments for other expenses = $174,000, as follows:

Payments of other

expenses

Otherexpenses

Increase in Decrease in= + prepaid + accrued

expenses liabilities

= $170,000 + $1,000 + $3,000 ($6,000 − $5,000) ($19,000 − $16,000)

= $174,000


(15 min.) S 12-13

Horse Heaven Horse Farm, Inc.Statement of Cash Flows

Year 2010Cash flows from operating activities:

Collections from customers………………… $ 480,000Payments to suppliers and employees…… (310,000 )Net cash provided by operating activities.. $ 170,000

Cash flows from investing activities:Purchase of equipment……………………… $(136,000 )Net cash used for investing activities……. (136,000)

Cash flows from financing activities:Issued note payable to borrow money……. $ 26,000Payment of dividends………………………... (49,000 )Net cash used for financing activities…….. (23,000 )

Net increase in cash…………………………... $ 11,000Cash balance, beginning……………………….. 170,000 Cash balance, ending…………………………… $ 181,000


(5 min.) S 12-14

Middleton Golf Club, Inc.Statement of Cash Flows (partial)Year ended September 30, 2010

Cash flows from operating activities:Collections from customers………………… $203,000Payments to suppliers……………………….. (90,000)Payments to employees……………………… (75,000)Payment of income tax………………………. (14,000 )Net cash provided by operating activities... $24,000


(15 min.) S 12-15

Middleton Golf Club, Inc.Statement of Cash Flows Year ended June 30, 2009

Cash flows from operating activities:Collections from customers…………………….. $203,000Payments to suppliers…………………………… (90,000)Payments to employees…………………………. (75,000)Payment of income tax…………………………... (14,000 )Net cash provided by operating activities……. $ 24,000

Cash flows from investing activities:Purchase of equipment………………………….. $ (42,000)Proceeds from sale of land……………………… 61,000 Net cash provided by investing activities……. 19,000

Cash flows from financing activities:Proceeds from issuance of common stock….. $ 16,000Payment of note payable………………………… (15,000)Payment of dividends……………………………. (8,000)Purchase of treasury stock……………………... (5,700 )Net cash used for financing activities………… (12,700 )

Net increase in cash…………………………………. $ 30,300


ExercisesGroup A

( (10-15 min.) E 12-16A

I+ a. Sale of long-term F– k. Payment of long-term debtinvestment

F+ b. Issuance of long-term note N l. Accrual of salary expensepayable to borrow cash

I+ m. Cash sale of landO- c. Increase in prepaid

expenses I– n. Purchase of long-terminvestment

F– d. Payment of cash dividend

I– o. Acquisition of building by O+ e. Loss on the sale of cash payment

equipmentF– p. Purchase of treasury stock

O+ f. Decrease in merchandiseinventory F+ q. Issuance of common stock

for cashNIF g. Acquisition of equipment

by issuance of note O– r. Decrease in accrued payable liabilities

O+ h. Increase in accounts O+ s. Depreciation of equipmentpayable

O+ i. Amortization of intangibleassets

O+ j. Net income


(5-10 min.) E 12-17A

a. Operating h. Operating

b. Financing i. Financing

c. Investing j. Financing

d. Investing k. Financing

e. Operating l. Operating

f. Investing m. Investing

g. Noncash investing andfinancing


(10-15 min.) E 12-18A

Cash flows from operating activities:Net income…………………………………. $ 38,000Adjustments to reconcile net income to net cash used for operating activities:

Depreciation…………………………….. $ 17,000Loss on sale of land…………………… 22,000Increase in current assets other

than cash……………………………… (24,000)Decrease in current liabilities………... (19,000 ) (4,000 )

Net cash provided by operatingactivities…………………………………….. $34,000

Evaluation: Operating cash flow is positive, but relatively weak,

as shown by the fact that net cash provided by

operating activities was less than net income.

Normally, cash provided by operations is more than

net income because of the depreciation add-back.


(15-20 min.) E 12-19A

Cash flows from operating activities:Net income…………………………………….. $20,000Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation………………………………. $ 5,000 Increase in accounts receivable……... (100,000) Increase in inventory……………………. (102,000) Increase in accounts payable…………. 111,000 Decrease in accrued liabilities………… (6,000 ) (92,000)

Net cash used by operatingactivities………………………………………… $(72,000)

Wilderness seems to be having a very difficult time collecting

receivables and selling its inventory. There are large build-ups

in both Accounts Receivable and Inventory. All of the inventory

buildup is being financed by those companies supplying the

inventory as reflected in the growth of accounts payable. While

Wilderness is earning net income, cash flow from operations is

negative.


(20-30 min.) E 12-20A

Req. 1

Newbury Travel Products, Inc.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Net income…………………………………………... $ 68,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 26,000 Decrease in accounts receivable……………. 17,000 Decrease in inventory………………………….. 61,000 Increase in prepaid expenses………………… (700) Increase in accounts payable………………… 11,000 Decrease in accrued liabilities……………….. (81,000 ) 33,300 Net cash provided by operating activities…. 102,200

Cash flows from investing activities: Acquisition of plant assets……………………….. $(160,000) Proceeds from sale of land……………………….. 27,000 Net cash used for investing activities………. (133,000)

Cash flows from financing activities: Proceeds from issuance of common stock…… $ 80,000 Payment of long-term note payable…………….. (17,000) Payment of dividends …………………………….. (13,000 ) Net cash provided by financing activities….. 50,000 Net increase in cash…………………………………… $ 19,200Cash balance, December 31, 2009………………….. 10,800 Cash balance, December 31, 2010………………….. $ 30,000

Noncash investing and financing activities:

Acquisition of plant assets by issuing note payable $ 52,000


(continued) E 12-20A

Req. 2

Evaluation: Newbury’s 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.

(5-10 min.) E 12-21A

Case A - Issuing stock generated the cash to acquire plant assets. Operations used cash while in cases B and

C operations provided cash.

Case B - A combination of operations and issuing stock generated most of the cash for acquisition of plant assets. Operations provided more cash than did cases A or C.

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

Most healthy financially - Case B

Mid-range - Case C

Least healthy financially - Case A


(10-15 min.) E 12-22A

a. Cash proceeds of sale = Book value of asset sold, $28,000*− Loss on sale, $4,000

= $24,000

_____*$110,000 + $33,000 − $9,000 − Book value sold (X) = $106,000 Book value sold = $28,000

Plant Assets, Net

Beginning balance 110,000 Depreciation 9,000

Purchases 33,000 Book value sold 28,000

Ending balance 106,000

b. Cash dividend payments = $26,000

$49,000 + $58,000 − $7,000 − Cash dividends (X) = $74,000Cash dividends = $26,000

Retained Earnings

Stock dividends 7,000 Beginning balance 49,000

Cash dividends 26,000 Net income 58,000



(10-15 min.) E 12-23A

Cash flows from operating activities:Receipts:

Collections from customers($50,000 + $33,000)……………….. $ 83,000

Collection of dividend revenue……. 10,000 Total cash receipts……………….. 93,000

Payments:To suppliers…………………………… $(58,000)To employees…………………………. (35,000)For interest……………………………. (17,000)For income tax………………………... (24,000 )

Total cash payments……………... (134,000 )Net cash used by operating activities. $ (41,000 )

Evaluation: Operating cash flow is weak as shown by the net

cash used by operating activities.


(5-10 min.) E 12-24A

Salary Payable — Report cash payments to employees as an

operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds

from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes

payable as financing cash flows.


(20-30 min.) E 12-25AReq. 1

Cobbs Hill, Inc.Statement of Cash FlowsYear Ended April 30, 2010

Cash flows from operating activities: Receipts: Collections from customers ($232,000 + $13,000)………………………….. $ 245,000 Dividends received………………………………. 11,000 Total cash receipts…………………………… 256,000 Payments: To suppliers ($108,000 + $11,500 - $1,300)…. $(118,200) To employees ($46,000 + $2,000)……………… (48,000) For income tax……………………………………. (9,000) For interest………………………………………… (2,100 ) Total cash payments………………………… (177,300 ) Net cash provided by operating activities…… 78,700

Cash flows from investing activities: Acquisition of plant assets………………………… $(100,000) Proceeds from sale of land………………………… 28,000 Net cash used for investing activities………... (72,000)

Cash flows from financing activities: Proceeds from issuance of common stock……... $ 93,000 Payment of long-term note payable………………. (17,000) Payment of dividends……………………………….. (8,500 ) Net cash provided by financing activities…… 67,500 Net increase in cash…………………………………….. $ 74,200Cash balance, April 30, 2009………………………….. 21,000 Cash balance, April 30, 2010………………………….. $ 95,200

Noncash investing and financing activities: Acquisition of plant assets by issuing note payable $ 43,000


(continued) E 12-25A

Req. 2

Evaluation: Cobb Hill’s cash flows look strong. Operations are


in new plant assets without having to borrow. Cobb

Hill 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 12-26A

$5,000 decrease ina. Cash collections = $ 62,000 + Accounts Receivable

($25,000 − $20,000)

= $ 67,000

Cash paymentsfor inventory

$3,000 increase in $2,000 decrease inb. = $79,000 + Inventory + Accounts Payable

($29,000 − $26,000) ($11,000 − $9,000)

= $84,000


ExercisesGroup B

(10-15 min.) E 12-27B

I– a. Acquisition of building by I+ k. Sale of long-termcash payment investment

O+ b. Decrease in merchandise F+ l. Issuance of common stockinventory for cash

O+ c. Depreciation of equipment O+ m. Increase in accountspayable

O– d. Decrease in accrued liabilities O+ n. Amortization of intangible

assets F– e. Payment of cash

dividend O+ o. Loss on sale of equipment

I– f. Purchase of long-term F– p. Payment of long-term debtinvestment

I+ q. Cash sale of landF+ g. Issuance of long-term note

payable to borrow cash F– r. Purchase of treasury stock

O– h. Increase in prepaid O+ s. Net incomeexpenses

N i. Accrual of salary expense

NIF j. Acquisition of equipmentby issuance of notepayable


(5-10 min.) E 12-28B

a. Financing h. Financing

b. Investing i. Operating

c. Operating j. Noncash investing andfinancing

d. Investingk. Financing

e. Operatingl. Operating

f. Investingm. Financing

g. Investing


(10-15 min.) E 12-29B

Cash flows from operating activities:Net income…………………………………. $ 40,000Adjustments to reconcile net income to net cash used for operating activities:

Depreciation…………………………….. $ 15,000Loss on sale of land…………………… 19,000Decrease in current assets other

than cash……………………………… 28,000Increase in current liabilities………... 23,000 85,000

Net cash provided by operating

activities…………………………………….. $125,000

Evaluation: Operating cash flow is strong, as shown by the net

cash provided by operating activities.


(15-20 min.) E 12-30B

Cash flows from operating activities:Net income…………………………………….. 35,000Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation………………………………. $ 9,000 Increase in accounts receivable……... (1,000) Increase in inventory……………………. (3,000) Increase in accounts payable…………. 109,000 Decrease in accrued liabilities………… (6,000 ) 108,000

Net cash provided by operatingactivities………………………………………… $143,000

Lawrence Fur Traders shows no sign of trouble collecting

receivables or selling inventory. There is no large build-up in

either Accounts Receivable or Inventory. Lawrence Fur Traders

have done an excellent job getting their suppliers to finance

their costs. Also, cash flow from operations is positive and

exceeds net income.


(20-30 min.) E 12-31B

Req. 1

Norton Travel Products, Inc.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Net income…………………………………………... $ 32,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 33,000 Decrease in accounts receivable……………. 16,000 Decrease in inventory………………………….. 39,000 Increase in prepaid expenses………………… (900) Increase in accounts payable………………… 15,000 Decrease in accrued liabilities……………….. (29,000 ) 73,100 Net cash provided by operating activities…. 105,700

Cash flows from investing activities: Acquisition of plant assets……………………….. $(140,000) Proceeds from sale of land……………………….. 48,000 Net cash used for investing activities………. (92,000)

Cash flows from financing activities: Proceeds from issuance of common stock…… $ 31,000 Payment of long-term note payable…………….. (16,000) Payment of dividends …………………………….. (10,000 ) Net cash provided by financing activities….. 5,000 Net increase in cash…………………………………… $ 18,700Cash balance, December 31, 2009………………….. 13,300 Cash balance, December 31, 2010………………….. $ 32,000

Noncash investing and financing activities:

Acquisition of plant assets by issuing note payable $ 30,000


(continued) E 12-31B

Req. 2

Evaluation: Norton’s 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.

(5-10 min.) E 12-32BCase A - The sale of plant assets generated the cash needed

to acquire new plant assets. Operations provided more cash that Case B but less than Case C.

Case B - Issuing stock generated the cash to acquire plant Assets but operations did not provide positive

cash flow.

Case C - A combination of operations and issuing stock generated most of the cash for acquisition of plant assets. Operations provided more cash than did cases A and B.

Most healthy financially - Case C

Mid-range - Case B

Least healthy financially - Case A


(10-15 min.) E 12-33B

a. Cash proceeds of sale = Book value of asset sold, $23,000*+ Gain on sale, $5,000

= $28,000

_____*$102,000 + $30,000 − $12,000 − Book value sold (X) = $97,000 Book value sold = $23,000

Plant Assets, Net

Beginning balance 102,000 Depreciation 12,000

Purchases 30,000 Book value sold 23,000


b. Cash dividend payments = $13,000

$46,000 + $48,000 − $11,000 − Cash dividends (X) = $70,000Cash dividends = $13,000

Retained Earnings

Stock dividends 11,000 Beginning balance 46,000

Cash dividends 13,000 Net income 48,000



(10-15 min.) E 12-34B


Collections from customers($80,000 + $36,000)……………….. $ 116,000

Collection of dividend revenue……. 7,000 Total cash receipts……………….. 123,000

Payments:To suppliers…………………………… $(51,000)To employees…………………………. (40,000)For interest……………………………. (13,000)For income tax………………………... (8,000 )

Total cash payments……………... (112,000 )Net cash provided by operating activities. $ 11,000

Evaluation: Operating cash flow is satisfactory, but not great,

as shown by the net cash provided by operating

activities.


(5-10 min.) E 12-35B

Salary Payable — Report cash payments to employees as an

operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds

from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes

payable as financing cash flows.


(20-30 min.) E 12-36BReq. 1

Happy Life, Inc.Statement of Cash Flows

Year Ended November 30, 2010Cash flows from operating activities: Receipts: Collections from customers ($223,000 + $16,500)………………………….. $ 239,500 Dividends received………………………………. 10,500 Total cash receipts…………………………… 250,000 Payments: To suppliers ($102,000 + $14,000 + $1,200)…. $(117,200) To employees ($42,000 - $1,700)……………… (40,300) For income tax……………………………………. (8,000) For interest………………………………………… (4,500 ) Total cash payments………………………… (170,000 ) Net cash provided by operating activities…… 80,000

Cash flows from investing activities: Acquisition of plant assets………………………… $(108,000) Proceeds from sale of land………………………… 21,000 Net cash used for investing activities………... (87,000)

Cash flows from financing activities: Proceeds from issuance of common stock……... $ 86,000 Payment of long-term note payable………………. (13,000) Payment of dividends……………………………….. (9,000 ) Net cash provided by financing activities…… 64,000 Net increase in cash…………………………………….. $ 57,000Cash balance, November 30, 2009…………………… 23,000 Cash balance, November 30, 2010…………………… $ 80,000

Noncash investing and financing activities: Acquisition of plant assets by issuing note payable $ 46,000


(continued) E 12-36B

Req. 2

Evaluation: Happy Life’s cash flows look strong. Operations are


in new plant assets without having to borrow.

Happy Life 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 12-37B

$3,000 decrease ina. Cash collections = $ 61,000 − Accounts Receivable

($20,000 − $17,000)

= $ 64,000

Cash paymentsfor inventory

$4,000 decrease in $1,000 increase inb. = $79,000 − Inventory - Accounts Payable

($28,000 − $24,000) ($12,000 − $13,000)

= $74,000


Challenge ExercisesGroup A

(20-30 min.) E 12-38

(All amounts in thousands)Decrease in

Sales + Accounts Receivablea. Collections = $23,995 = $23,984 + ($614 − $603)

Cost Increase in Increase inb. Payments for of sales + Inventory − Accounts Payable

inventory = $18,114 = $18,026 + $268* − $180** *$3,140 − $2,872 = $ 268 **$1,551 − 1,371 = $ 180

Other Operating Increase inc. Payments for Expenses − Accrued Liabilities

other operating = $3,572 = $3,875 − ($935 − $632)expenses

Income Increase ind. Payment of Tax Expense − Income Tax Payable

income tax = $532 = $536 − ($197 − $193)

e. Proceeds from Beg. Common End. CommonIssuance of Stock + Issuance = Stockstock = $70 = $445 + X = $515

X = $ 70

Beg. Ret. Net End. Ret.f. Payment of Earnings + Income − Dividends = Earnings

dividends = $682: $3,828 + $1,281 − X = $4,427

X = $682


(20 min.) E 12-39

a.

(All in thousands)

Loss on sale ofProceeds from

dispositionsBook value

soldproperty and = −equipment

$80 = $740 − $820

Property & Equipment, NetBal., 12/31/09 9,630Capital Depreciation 1,950

expenditures 4,090 Book value ofproperty andequipment sold X = 820

Bal., 12/31/10 10,950

b.

Long-Term Notes PayableBal., 12/31/09 3,040

Repayment 80 Proceeds fromissuance 1,250

LT debt issuedfor somethingother than cash X = 290

Bal. 12/31/10 4,500


Quiz

Q12-40 dQ12-41 dQ12-42 bQ12-43 cQ12-44 cQ12-45 cQ12-46 cQ12-47 Paying dividends financing Receiving dividends

operatingQ12-48 c [Book value = $12,000 ($21,000 − $9,000; Gain =

$1,000; Proceeds = $13,000 ($12,000 + $1,000)]Q12-49 cQ12-50 bQ12-51 cQ12-52 c Net inc. Gain Depr. A / Rec Invy.

[$41,500 − $9,000 + $6,500 + ($13,000 − $5,000) − ($11,000− $10,000)

A / Pay Accr. Liab. − ($9,000 − $8,000) + ($6,000 − $4,000) = $47,000]

Q12-53 dQ12-54 a Cash received = $30,000 ($21,000 + $9,000)

Cash paid = $50,000 ($71,000 − $21,000 − $6,500+ $X = $97,000; X = $53,500)

Net cash used = $23,500 ($53,500 − $30,000)Q12-55 dQ12-56 aQ12-57 a Cash received from issuance of stock = $9,000

($18,000 − $9,000)Cash paid for dividends (X) = $36,000 ($75,000 +

net income $41,500 − $X = $86,500; Dividends = $30,000)Net cash used = $21,000 ($30,000 − $9,000)

Q12-58 c ($820,000 − $50,000 = $770,000)Q12-59 b [$59,500 − ($4,500 − $3,000) = $58,000]


Problems

Group A (40 min.) P 12-60A

Req. 1

Antique Automobiles of Dallas, Inc.Income Statement

Year Ended December 31, 2010Sales revenue…………………………........................... $488,000Cost of goods sold [$203,000 + (1 × $40,000)]…. 243,000Salary expense…………………………………………… 125,000Depreciation expense ($180,000 / 5)…………………. 36,000Rent expense……………………………………………... 17,000Income tax expense……………………………………... 12,600 Net income………………………………………………... $ 54,400

Req. 2

Antique Automobiles of Dallas, Inc.Balance Sheet

December 31, 2010ASSETS LIABILITIES

Current: Current:Cash 231,800* Accounts payableAccounts receivable ($80,000 − $56,000) $ 24,000

(488,000 × .20) 97,600 Salary payable 7,000 Inventory (1 × $40,000) 40,000 Total current liabilities 31,000

Total current assets 369,400STOCKHOLDERS’ EQUITY

Property, plant, and equipment: Common stock 440,000Equipment $180,000 Retained earningsLess Accumulated ($54,400 − $12,000) 42,400

depreciation (36,000 ) 144,000 Total equity 482,400

Total liabilities andTotal assets $513,400 stockholders' equity $513,400

_____*$440,000 − $180,000 − $203,000 − $17,000 − $56,000 + $390,400 − $118,000 − $12,600 − $12,000 = $231,800.


(continued) P 12-60A

Req. 3

Antique Automobiles of Dallas, Inc.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities:

Net income………………………………………. $ 54,400Adjustments to reconcile net income tonet cash used for operating activities:

Depreciation………………………………….. $ 36,000Increase in accounts receivable………….. (97,600)Increase in inventory……………………….. (40,000)Increase in accounts payable…………….. 24,000Increase in salary payable………………… 7,000 (70,600 )

Net cash used for operating activities.. (16,200)

Cash flows from investing activities:Purchase of equipment……………………….. (180,000 )

Net cash used for investing activities…… (180,000)

Cash flows from financing activities:Issuance of common stock…………………… 440,000Payment of dividend…………………………… (12,000 )

Net cash provided by financing activities 428,000 Net increase in cash………………………………. $ 231,800Cash balance, January 1, 2010…………………. 0 Cash balance, December 31, 2010……………... $ 231,800


(40 min.) P 12-61A

Req. 1

Antique Automobiles of Dallas, Inc.Income Statement

Year Ended December 31, 2010Sales revenue…………………………........................... $488,000Cost of goods sold [$203,000 + (1 × $40,000)]…….. 243,000Salary expense…………………………………………… 125,000Depreciation expense ($180,000 / 5)…………………. 36,000Rent expense……………………………………………... 17,000Income tax expense……………………………………... 12,600 Net income………………………………………………... $ 54,400

Req. 2

Antique Automobiles of Dallas, Inc.Balance Sheet


Current: Current:Cash 231,800* Accounts payableAccounts receivable ($80,000 − $56,000) $ 24,000

(488,000 × .20) 97,600 Salary payable 7,000 Inventory (1 × $40,000) 40,000 Total current liabilities 31,000





_____*$440,000 − $180,000 − $203,000 − $17,000 − $56,000 + $390,400 − $118,000 − $12,600 − $12,000 = $231,800.



Req. 3Antique Automobiles of Dallas, Inc.

Statement of Cash FlowsYear Ended December 31, 2010

Cash flows from operating activities: Receipts: Collections from customers ($488,000- $97,600)…………………………… $ 390,400 Total cash receipts…………………………… 390,400 Payments: To suppliers ($-243,000 - $40,000 + $24,000) $(259,000) To employees ($-125,000 + $7,000)…………… (118,000) For income tax……………………………………. (12,600) For rent………………………………………..…… (17,000 ) Total cash payments………………………… (406,600 ) Net cash used by operating activities………… (16,200)

Cash flows from investing activities:Purchase of equipment………………………..... (180,000 )

Net cash used for investing activities…..… (180,000)

Cash flows from financing activities:Issuance of common stock……………….…… 440,000Payment of dividend………………………….… (12,000 )

Net cash provided by financing activities 428,000 Net increase in cash…………………………….…. $ 231,800Cash balance, January 1, 2010……………….…. 0 Cash balance, December 31, 2010…………….... $ 231,800


(35-45 min.) P 12-62A

Morgensen Software Corp.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Net income…………………………………………... $ 6,500 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation …………………………………….. $ 17,000 Amortization…………………………………….. 5,000 Loss on sale of equipment…………………… 5,000 Increase in accounts receivable…………….. (5,500) Decrease in inventories…………………… 71,400 Increase in prepaid expenses………………… (1,600) Increase in accounts payable……………… 1,400 Increase in income tax payable……………… 1,900 Decrease in accrued liabilities……………….. (11,700 ) 82,900 Net cash provided by operating activities…. 89,400

Cash flows from investing activities: Purchase of building………………………………. $(97,000) Purchase of long-term investment……………… (44,600) Proceeds from sale of equipment………………. 81,000 Collection of loan…………………………………... 10,600 Net cash used for investing activities………. (50,000)

Cash flows from financing activities: Issuance of common stock………………………. $36,500 Issuance of long-term note payable……………. 34,500 Payment of cash dividends………………………. (9,300) Purchase of treasury stock………………………. (10,700 ) Net cash provided by financing activities….. 51,000 Net increase in cash…………………………………… $ 90,400 Cash balance, December 31, 2009………………….. 30,000 Cash balance, December 31, 2010………………….. $ 120,400



Noncash investing and financing activities: Acquisition of land by issuing long-term note payable… $ 201,000 Retirement of bonds payable by issuing common stock 64,000 Total noncash investing and financing activities…………… $265,000

`


(35-45 min.) P 12-63AReq. 1

Maynard Movie Theater CompanyStatement of Cash FlowsYear Ended June 30, 2010

Cash flows from operating activities: Net income…………………………………………… $ 54,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………… $ 15,700 Amortization……………………………………… 9,000 Decrease in accounts receivable…………….. 7,100 Increase in inventories…………………………. (2,400) Decrease in prepaid expenses……………… 4,900 Increase in accounts payable…………………. 1,600 Increase in accrued liabilities………………... 20,000 Decrease in income tax payable……………… (1,000 ) 54,900 Net cash provided by operating activities….. 108,900

Cash flows from investing activities: Purchase of equipment…………………………….. $(79,000) Purchase of building……………………………….. (44,000) Sale of long-term investment……………………... 12,700 Net cash used for investing activities……….. (110,300)

Cash flows from financing activities: Issuance of long-term note payable……………... $ 42,000 Issuance of common stock………………………... 24,000 Payment of cash dividend…………………………. (29,000 ) Net cash provided by financing activities…... 37,000 Net increase in cash…………………………………. $ 35,600 Cash balance, June 30, 2009………………….…….. 17,000 Cash balance, June 30, 2010………………….……. $ 52,600

Noncash investing and financing activities: Acquisition of land by issuing note payable…… $100,000



Req. 2

Evaluation: Maynard’s cash flows look strong. Operations are


in new plant assets, and borrowing — a financing

cash flow — appears reasonable. All of these signs

are favorable.


(30-40 min.) P 12-64A

Req. 1

Affordable Supply Corp.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Net income………………………………………………. $62,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………………. $ 17,700 Increase in accounts receivable………………… (1,200) Increase in inventories……………………………. (14,400) Decrease in prepaid expenses…………………… 2,100 Increase in accounts payable…………………….. 8,300 Increase in salary payable……………………….. 10,900 Decrease in other accrued liabilities……………. (1,600 ) 21,800 Net cash provided by operating activities….. 84,700

Cash flows from investing activities: Purchase of land……………………………………...... $(46,500) Purchase of equipment ($49,500 − depreciation expense of $17,700 = $31,800; $53,100 −

$31,800)………………………………………………. (21,300 ) Net cash used for investing activities………. (67,800)

Cash flows from financing activities: Payment of dividends ($7,900 + $62,900 − $27,500) $(43,300) Issuance of note payable……………………………… 17,000 Issuance of common stock…………………………… 22,700 Net cash used for financing activities………. (3,600 )Net increase in cash……………………………………….. $13,300 Cash balance, December 31, 2009……………………… 4,000 Cash balance, December 31, 2010……………………… $17,300



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

and 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 net cash provided by operating

activities conveys a more positive signal about a company than

net cash used for operations.

Student responses will vary.


(30-40 min.) P 12-65AReq. 1

Affordable Supply Corp.Statement of Cash Flows

Year Ended December 31, 2010

Cash flows from operating activities: Receipts: Collections from customers ($446,000,000 - $1,200)…………………… $ 444,800 Total cash receipts………………………… $ 444,800 Payments: To suppliers ($-186,600 - $14,400 + $8,300) $(192,700) To employees ($-76,000 + $10,900)………… (65,100) For income tax……………………………………. (29,000) For Other operating expenses ($-49,700 + $2,100 – 1,600) (49,200) For interest…………………………………… (24,100 ) Total cash payments………………………… (360,100 ) Net cash provided by operating activities…… 84,700

Cash flows from investing activities: Purchase of land…………………………………….. $(46,500) Purchase of equipment ($49,500 − depreciation expense of $17,700 = $31,800; $53,100 −

$31,800)………………………………………… (21,300 ) Net cash used for investing activities… (67,800)

Cash flows from financing activities: Payment of dividends ($7,900 + $62,900 − $27,500)

$(43,300)

Issuance of note payable……………………… 17,000 Issuance of common stock……………………… 22,700 Net cash used for financing activities…… (3,600 )Net increase in cash…………………………………… $13,300Cash balance, December 31, 2009………………… 4,000 Cash balance, December 31, 2010………………… $17,300



Req. 2











Student responses will vary.


(35-45 min.) P 12-66A

Req. 1

Ramirez Furniture Gallery, Inc.Statement of Cash FlowsYear Ended May 31, 2010

Cash flows from operating activities: Receipts: Collections from customers ($428,500 + $191,300)…………………….. $ 619,800 Interest received………………………………. 4,600 Dividends received…………………………… 8,900 Total cash receipts………………………... $ 633,300 Payments: To suppliers……………………………………. $(368,000) To employees………………………………….. (78,000) For interest……………………………………... (13,400) For income tax………………………………… ( 38,300 ) Total cash payments……………………... (497,700 ) Net cash provided by operating activities... 135,600 Cash flows from investing activities: Purchase of plant assets……………………....... $ (72,100) Sale of plant assets………………………………. 22,600 Collection of loans……………………………….. 11,900 Loan to another company………………………. (12,300) Sale of investments………………………………. 9,500 Net cash used for investing activities…….. (40,400)Cash flows from financing activities: Payments of long-term notes payable………... $ (83,000) Payment of dividends……………………………. (48,300) Issuance of note payable………………………... 24,500 Issuance of common stock……………………... 7,000 Net cash used for financing activities…….. (99,800 )Net (decrease) in cash………………………………. $ (4,600)Cash balance, May 31, 2009……………………….. 19,100 Cash Balance, May 31, 2010…………………….. $ 14,500



Noncash investing and financing transactions: Payment of short-term note payable by issuing long-term note payable……………………. $ 94,000 Acquisition of equipment by issuing short-term note payable…………………………….. 16,000 Total noncash investing and financing transactions…. $ 110,000

Req. 2

Evaluation of 2010: Year 2010 was a strong year from a cash-

flow standpoint. Operations provided 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.


(45-60 min.) P 12-67AReq. 1

Daisy Electric CompanyStatement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Receipts: Collections from customers………………………… $ 661,800 Dividends received ………………………………….. 16,900 Total cash receipts………………………………… $ 678,700 Payments: To suppliers ($402,000+ $34,500)………………….. $(436,500) To employees………………………………………….. (143,600) For interest……………………………………………... (26,600) For income tax…………………………………………. (17,000 ) Total cash payments……………………………… (623,700 ) Net cash provided by operating activities………... 55,000

Cash flows from investing activities: Purchase of equipment…………………………………... $ (31,000) Sale of long-term investments………………………….. 14,600 Net cash used for investing activities……………... (16,400)

Cash flows from financing activities: Issuance of common stock……………………………… $ 61,000 Payment of long-term note payable…………………… (41,500) Payment of dividends……………………………………. (47,900) Purchase of treasury stock……………………………… (22,400 ) Net cash used for financing activities…………….. (50,800 )Net (decrease) in cash……………………………………….. $ (12,200) Cash balance, December 31, 2009………………………… 49,600 Cash balance, December 31, 2010………………………… $ 37,400

Noncash investing and financing activities: Acquisition of land by issuing common stock………. $ 80,800 Retirement of note payable by issuing common stock 20,000 Total noncash investing and financing activities………. $ 100,800



Req. 2

Daisy Electric CompanyCash Flows from Operating Activities


Net income……………………………… $127,900Adjustments to reconcile net income to

net cash provided by operating activities: Depreciation……………………………… $ 19,000 Loss on sale of investments………….. 22,100 Increase in accounts receivable……… (27,400) Increase in inventories………………… (59,700) Increase in prepaid expenses………… (600) Decrease in accounts payable………... (8,300) Increase in interest payable…………… 2,500 Decrease in salary payable……………. (7,800) Decrease in other accrued liabilities… (10,200) Decrease in income tax payable……… (2,500 ) (72,900)

Net cash provided by operating activities. $55,000


(45-60 min.) P 12-68A

Req. 1

Stephen Summers Design Studio, Inc.Statement of Cash FlowsYear Ended June 30, 2010

Cash flows from operating activities: Net income…………………………………………... $ 80,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 13,900 Loss on sale of land……………………………. 6,500 Increase in accounts receivable……………... (17,100) Decrease in inventories……………………..… 2,300 Increase in prepaid expenses………………… (900) Decrease in accounts payable……………..… (11,000) Decrease in income tax payable……………... (1,200) Decrease in accrued liabilities……………….. (5,700) Increase in interest payable…………………... 1,000 Decrease in salary payable…………………… (3,400 ) ( 15,600) Net cash provided by operating activities…. 65,100

Cash flows from investing activities: Sale of land………………………………………….. $ 54,900 Purchase of long-term investment……………… (4,700 ) Net cash provided by investing activities….. 50,200

Cash flows from financing activities: Payment of long-term note payable…………….. $(61,400) Payment of cash dividends………………………. (48,400) Issuance of common stock………………………. 2,400 Net cash used for financing activities………. (107,400 ) Net increase in cash…………………………………… $ 7,900 Cash balance, June 30, 2009………………………… 21,000 Cash balance, June 30, 2010………………………… $ 28,900



Req. 1

Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………... $14,600 Payment of short-term note payable by issuing common stock………………………….. 5,000 Total noncash investing and financing activities…... $19,600



Req. 2

Stephen Summers Design Studio, Inc.Statement of Cash FlowsYear Ended June 30, 2010


Collections from customers…………….. $ 241,700 Interest received…………………………… 1,700 Total cash receipts…………………….. $ 243,400

Payments: To suppliers………………………………… $(118,600) To employees………………………………. (41,900) For income tax……………………………... (12,900) For interest………………………………….. (4,900 ) Total cash payments………………….. (178,300 )

Net cash provided by operating activities… $ 65,100


Problems

Group B

( (40 min.) P 12-69BReq. 1

Sweet Automobiles of Pepperell, Inc.Income Statement

Year Ended December 31, 2010Sales revenue…………………………………………….. $426,000Cost of goods sold [$175,000 + (1 × $47,000)]….. 222,000Salary expense…………………………………………… 90,000Rent expense……………………………………………... 19,000Depreciation expense ($140,000 / 5)………………… 28,000Income tax expense……………………………………... 14,000 Net income………………………………………………... $53,000

Req. 2

Sweet Automobiles of Pepperell, Inc.Balance Sheet


Current: Current:Cash $87,000* Accounts payableAccounts receivable ($282,000 − $197,400) $ 84,600

($426,000 × .10) 42,600 Salary payable 5,000 Inventory 235,000 Total current liabilities 89,600





_____*$350,000 − $140,000 − $175,000 − $19,000 − $197,400 + $383,400 − $85,000 − $14,000 − $16,000 = $87,000.


(continued) P 12-69B

Req. 3

Sweet Automobiles of Pepperell, Inc.Statement of Cash Flows


Net income……………………………………….… $53,000Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation……………………………………. $ 28,000Increase in accounts receivable……………. (42,600)Increase in inventory…………………………. (235,000)Increase in accounts payable…………….…. 84,600Increase in salary payable…………………... 5,000 (160,000 )

Net cash used by operating activities….. (107,000)

Cash flows from investing activities:Purchase of equipment……………………….….. (140,000 )

Net cash used for investing activities……… (140,000)

Cash flows from financing activities:Issuance of common stock……………………… 350,000Payment of dividend……………………………… (16,000 )

Net cash provided by financing activities…. 334,000 Net increase in cash…………………………………. $87,000Cash balance, January 1, 2009…………………….. 0 Cash balance, December 31, 2010………………… $87,000


(40 min.) P 12-70BReq. 1

Sweet Automobiles of Pepperell, Inc.Income Statement

Year Ended December 31, 2010Sales revenue…………………………………………….. $426,000Cost of goods sold [$175,000 + (1 × $47,000)]….. 222,000Salary expense…………………………………………… 90,000Rent expense……………………………………………... 19,000Depreciation expense ($140,000 / 5)………………… 28,000Income tax expense……………………………………... 14,000 Net income………………………………………………... $53,000

Req. 2

Sweet Automobiles of Pepperell, Inc.Balance Sheet

Year Ended December 31, 2010ASSETS LIABILITIES

Current: Current:Cash $87,000* Accounts payableAccounts receivable ($282,000 − $197,400) $ 84,600

($426,000 × .10) 42,600 Salary payable 5,000 Inventory 235,000 Total current liabilities 89,600


Property, plant, and equipment: Common stock 350,000Equipment $140,000 Retained earningsLess Accumulated ($53,000 − $16,000) 37,000)



_____*$350,000 − $140,000 − $175,000 − $19,000 − $197,400 + $383,400 − $85,000 − $14,000 − $16,000 = $87,000.



Req. 3

Sweet Automobiles of Pepperell, Inc.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Receipts: Collections from customers ($426,000 x .90).......................................... $ 383,400 Total cash receipts.................................... $ 383,400 Payments: To suppliers ($175,000 + $197,400) ……….. $(372,400) To employees ($90,000 - $5,000)…………… (85,000) For income tax................................................ (14,000) For rent............................................................ (19,000 ) Total cash payments................................. (490,400 ) Net cash used by operating activities........... (107,000)

Cash flows from investing activities:Purchase of equipment……………………….. (140,000 )

Net cash used for investing activities…… (140,000)

Cash flows from financing activities:Issuance of common stock…………………… 350,000Payment of dividend…………………………… (16,000 )

Net cash provided by financing activities 334,000 Net increase in cash……………………………… $87,000Cash balance, January 1, 2009………………… 0 Cash balance, December 31, 2010……………… $87,000


(35-45 min.) P 12-71B

Neighbor Software Corp.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Net income……………………………………………. $ 58,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………. $ 17,000 Amortization………………………………………. 6,000 Loss on sale of equipment……………………. 3,000 Decrease in accounts receivable……………… 42,100 Increase in inventories…………………………. (3,500) Increase in prepaid expenses………………….. (800) Increase in accounts payable………………….. 2,200 Increase in income tax payable………………. 12,100 Increase in accrued liabilities………………….. 7,900 86,000 Net cash provided by operating activities…… 144,000

Cash flows from investing activities: Purchase of building…………………………....... $(159,000) Purchase of long-term investment………………... (49,900) Sale of equipment………………………………….. 12,900 Collection of loan……………………………………. 11,000 Net cash used for investing activities………... (185,000)

Cash flows from financing activities: Issuance of long-term note payable……………… $ 34,000 Payment of cash dividends………………………… (18,800) Purchase of treasury stock………………. (14,400) Issuance of common stock………………………... 74,200 Net cash provided by financing activities…… 75,000 Net increase in cash………………………………….. $ 34,000 Cash balance, December 31, 2009…………………… 26,000 Cash balance, December 31, 2010…………………… $60,000



Noncash investing and financing activities: Acquisition of land by issuing long-term note payable… $198,000 Retirement of bonds payable by issuing common stock… 71,000 Total noncash investing and financing activities………………… $269,000


(35-45 min.) P 12-72B

Req. 1

Medford Movie Theater Company.Statement of Cash FlowsYear Ended June 30, 2010

Cash flows from operating activities: Net income……………………………………………. $ 50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………………. $ 15,600 Amortization……………………………………… 6,000 Decrease in accounts receivable……………... 7,700 Increase in inventories………………………… (2,200) Increase in prepaid expenses…………………. (9,200) Increase in accounts payable…………………. 2,100 Increase in accrued liabilities………………… 10,000 Decrease in income tax payable……………… (4,000 ) 26,000 Net cash provided by operating activities…... 76,000

Cash flows from investing activities: Purchase of building……………………………...... $(59,000) Purchase of equipment…………………………….. (45,600) Sale of long-term investment……………………… 13,400 Net cash used for investing activities……….. (91,200)

Cash flows from financing activities: Issuance of common stock………………………... $ 13,000 Issuance of long-term note payable……………... 26,000 Payment of cash dividends………………………... (34,000 ) Net cash provided by financing activities…... 5,000_ Net decrease cash……………………………………. $ (10,200)Cash balance, June 30, 2009…………………… 16,000 Cash balance, June 30, 2010…………………… $ 5,800

Noncash investing and financing activities:Acquisition of land by issuing note payable. $ 30,000



Req. 2

Evaluation: Medford’s cash flows look strong. Operations are a

significant source of cash. The company is

investing heavily in new plant assets. The company

is financing the new investments more by

borrowing than issuing stock.


(30-40 min.) P 12-73B

Req. 1

King Supply Corp.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Net income……………………………………………… $ 62,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………… $ 17,400 Increase in accounts receivable ………………… (1,000) Increase in inventories……………………………. (11,600) Decrease in prepaid expenses…………………... 3,900 Increase in accounts payable…………………... 10,200 Increase in salary payable………………………... 6.400 Decrease in other accrued liabilities…………… (1,300) 24,000 Net cash provided by operating activities…. 86,000 Cash flows from investing activities: Purchase of land……………………………………….. $(47,200) Purchase of equipment ($49,200 − depreciation expense of $17,400 = $31,800; $53,100 − $31,800)………………………………... (21,300 ) Net cash used for investing activities……… (68,500)Cash flows from financing activities:

Payment of dividends ($27,400 + $62,000 − $47,200)…………………….. $(42,200) Issuance of note payable…………………………… 13,000 Issuance of common stock…………………………... 24,300 Net cash used for financing activities….... (4,900 ) Net increase in cash……………………………………… $ 12,600Cash balance, December 31, 2009……………………... 5,000 Cash balance, December 31, 2010……………………... $ 17,600



Req. 2













(30-40 min.) P 12-74B

King Supply Corp.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Receipts: Collections from customers ($445,000 – 1,000)...................................... $ 444,000 Total cash receipts.................................... $ 444,000 Payments: To suppliers ($185,100 + $11,600 - $10,200) $(186,500) To employees ($76,400 - $6,400)…………… (70,000) For operating expenses ($49,800 - $3,900 +

$1,300……………………………………….. (47,200) For income tax................................................ (29,500) For interest...................................................... (24,800 ) Total cash payments................................. (358,000 ) Net cash provided by operating activities.... 86,000

Cash flows from investing activities: Purchase of land…………………………………… $(47,200) Purchase of equipment ($49,200 − depreciation expense of $17,400 = $31,800; $53,100 − $31,800)……………………………… (21,300 ) Net cash used for investing activities… (68,500)Cash flows from financing activities:

Payment of dividends ($27,400 + $62,000 − $47,200)………………… $(42,200) Issuance of note payable……………………… 13,000 Issuance of common stock……………………… 24,300 Net cash used for financing activities (4,900 ) Net increase in cash…………………………… $ 12,600Cash balance, December 31, 2009……………… 5,000 Cash balance, December 31, 2010………………… $ 17,600



Req. 2













(35-45 min.) P 12-75BReq. 1

Dunleavy Furniture Gallery, Inc.Statement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Receipts: Collections from customers ($406,000 + $201,000)................................ $ 607,000 Interest received............................................. 4,200 Dividends received......................................... 4,000 Total cash receipts.................................... $ 615,200 Payments: To suppliers.................................................... $(387,200) To employees.................................................. (93,700) For income tax................................................ (36,800) For interest...................................................... (13,700 ) Total cash payments................................. (531,400 ) Net cash provided by operating activities.... 83,800

Cash flows from investing activities: Purchase of plant assets.................................... $(59,900) Collection of loans............................................... 12,100 Proceeds from sale of plant assets.................... 22,300 Loan to another company................................... (12,800) Proceeds from sale of investments................... 11,200 Net cash used for investing activities........... (27,100)

Cash flows from financing activities: Proceeds from issuance of common stock....... $ 7,000 Payments of long-term note payable................. (69,000) Payment of dividends.......................................... (48,000) Proceeds from issuance of note payable.......... 19,300 Net cash provided by financing activities.... (90,700) Net decrease in cash................................................ $ (34,000) Cash balance, December 31, 2009.......................... 40,000 Cash balance, December 31, 2010.......................... $ 6,000



Noncash investing and financing activities: Payment of short-term note payable by issuing long-term note payable…………………………… $68,000 Acquisition of equipment by issuing short-term note payable…………………………… 16,500 Total noncash investing and financing activities……. $84,500

Req. 2

Evaluation of 2010: Year 2010 was a satisfactory year from a

cash-flow standpoint. Operations provided

cash of $83,800. The company was able to

pay off a long-term note payable in the

amount of $69,000 as well as converting a

sort-term note in the amount of $68,000 to a

long-term note. The business invested

almost $60,000 in plant assets. They paid a

dividend of $48,000 and cash decreased

during the year by $34,000.


(45-60 min.) P 12-76B

Req. 1

Spencer Electric CompanyStatement of Cash Flows

Year Ended December 31, 2010Cash flows from operating activities: Receipts: Collections from customers…………...................... $ 661,600 Dividends received……………………………………. 16,800 Total cash receipts…………………………….….. $ 678,400 Payments: To suppliers…………………………………………….. $(434,400)* To employees…………………………………………... (143,300) For interest……………………………………………… (27,100) For income tax…………………………………………. (18,600 ) Total cash payments……………………………… (623,400 ) Net cash provided by operating activities…….….. 55,000 Cash flows from investing activities: Purchase of equipment…………………………………... $ (31,700)

Sale of long-term investments………………………….. 20,000 Net cash used for investing activities……………... (11,700)Cash flows from financing activities: Payment of long-term note payable…………………… $ (41,300) Issuance of common stock………………………….….. 22,200

Purchase of treasury stock………………………….….. (26,300) Payment of dividends……………………………………. (27,600 ) Net cash used for financing activities…………….. (73,000 )Net (decrease) in cash…………….……………………….… $ (29,700)Cash balance, December 31, 2009………………………… 71,500 Cash balance, December 31, 2010………………………… $ 41,800 _____*$399,500 + $34,900 = $434,400



Req. 1

Noncash investing and financing activities: Acquisition of land by issuing common stock……………… $ 61,700

Retirement of long-term note payable by issuing common stock……………………………………….. 17,000 Total noncash investing and financing activities………………. $ 78,700



Req. 2

Spencer Electric CompanyStatement of Cash Flows

Year Ended December 31, 2010

Cash flows from operating activities:Net income…………………………………….. $4,300Adjustments to reconcile net income to netcash flow provided by operating activities:

Depreciation………………………………. $16,400 Loss on sale of investments…………… 16,700 Decrease in accounts receivable……… 14,400 Decrease in inventories………………… 12,900 Decrease in prepaid expenses………… 6,000 Decrease in accounts payable…………. (7,800) Decrease in interest payable…………… (2,200) Increase in salary payable…………….. 7,200 Decrease in other accrued liabilities…. (10,400) Decrease in income tax payable………. (2,500 ) 50,700

Net cash provided by operating activities.. $55,000


(45-60 min.) P 12-77B

Req. 1

Franny Franklin Design Studio, Inc.Statement of Cash FlowsYear Ended June 30, 2010

Cash flows from operating activities: Net income…………………………………………… $ 73,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………$ 13,900 Loss on sale of land…………………………….. 7,000 Increase in accounts receivable…………..….. (36,700) Increase in inventories ……………………….. (57,800) Increase in prepaid expenses……………..….. (1,000) Increase in accounts payable……………..….. 1,000 Increase in accrued liabilities……………….... 88,100 Decrease in taxes payable………………….…. (1,100) Increase in interest payable…………………... 1,000 Decrease in salary payable ………………… (2,700 ) 11,700 Net cash provided by operating activities….. 85,100 Cash flows from investing activities: Sale of land…………………………………………… $ 33,800 Purchase of long-term investments…………....... (5,000 ) Net cash provided by investing activities…... 28,800 Cash flows from financing activities: Payment of cash dividends……………………….. $(47,800) Issuance of common stock……………………….. 21,100 Payment of long-term note payable……………... (60,700 ) Net cash used for financing activities……….. (87,400 ) Net increase in cash………………………………….… $ 26,500 Cash balance, June 30, 2009………………………….. 2,400 Cash balance, June 30, 2010…………………………. $ 28,900



Req. 1

Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………….. $ 15,200 Paid off short-term note by issuing common stock 7,000Total noncash investing and financing activities…….. $ 22,200



Req. 2

Franny Franklin Design Studio, Inc.Statement of Cash FlowsYear Ended June 30, 2010


Collections from customers………………. $ 272,300 Interest received…………………………….. 1,400 Total cash receipts……………………… $ 273,700

Payments: To suppliers………………………………….. $(130,900) To employees………………………………… (40,000) For income tax……………………………….. (12,500) For interest…………………………………… (5,200 ) Total cash payments……………………. (188,600 )

Net cash provided by operating activities….. $ 85,100


Decision Cases

(45-60 min.) Decision Case 1

Req. 1 (indirect method for operating activities)

T-Bar-M Camp, Inc.Statement of Cash Flows

Year Ended December 31, 2011Cash flows from operating activities: (Thousands) Net income…………………………………………………. $ 97 Adjustments to reconcile net income to net cash provided by operating activities:

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)……….... 7Decrease in accrued liabilities ($17 − $12)………... (5 ) 35

Net cash provided by operating activities……………. 132

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

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

Net cash used for investing activities………….…. (141)

Cash flows from financing activities:Issuance of common stock ($149 − $61)…………….. $ 88 Payment of cash dividends ($156 + $97 − $213)……. (40) Payment of long-term notes payable ($264 − $179) (85 )

Net cash used for financing activities………..……. (37 )Net (decrease) in cash………………………….……………. $ (46)Cash balance, December 31, 2010………………………… 63 Cash balance, December 31, 2011………………………… $ 17


(continued) Decision Case 1

Req. 2

The cash balance at the end of 2011 is low because:

The camp paid $110,000 to buy new property, plant, and equipment.

The camp paid off $85,000 of notes payable.

Req. 3

Year 2011 was a good year. Net income was $97,000, and

operations were the largest source of cash. Also, the company

increased its property, plant, and equipment by $110,000 and

paid off $85,000 of debt. On this basis, business appears to

have been successful.


(15-25 min.) Decision Case 2

Four-Star Catering looks like the better investment because:

1. Operations provide far more cash for Four-Star than for

Applied Technology. Operations should be the main source

of cash for a healthy company.

2. Four-Star is investing more in long-term plant assets than

Applied is. Four-Star is laying a more solid foundation in

revenue-producing assets than Applied is.

3. Applied Technology’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. Four-Star is raising more cash by selling stock than Applied

is. This gives Four-Star more cash to invest in research and

development of new products and other innovations to

enhance the company’s competitiveness. Applied, on the

other hand, is paying off debt. That is not necessarily bad for

Applied, but Four-Star appears to be a step ahead in terms of

financing its operations with owners’ equity and investing

the cash in income-producing assets.


Ethical Issue

Req. 1

Cash flows from operating activities:

WithoutReclassification

WithReclassification

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

Net cash (used for) provided by operating activities…. $(43,000) $37,000

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

Req. 2

The issue is whether or not it is ethical to reclassify accounts

receivable from current assets to long-term assets.

Req. 3 and Req. 4

The stakeholders are Columbia, its officers, directors and

employees, as well as their present and future creditors.

Economic analysis: The plan to reclassify accounts receivable

would have an immediate positive impact on Columbia and its

employees because it might enable Columbia to obtain the loan

it desperately needs. However, this might be to the detriment

of present and future creditors, because if Columbia can’t


collect the receivables, it may not be able to pay off its loans to

creditors.

(continued) Ethical case

Legal analysis: To reclassify receivables when, in fact, they are

not truly collectible, even in the long run, might leave the

company open later to a lawsuit for damages suffered by

creditors who loan Columbia money based on false

information.

Ethical analysis: To reclassify receivables when, in fact, they

are not truly collectible in the long run, deprives the banks of

accurate information they need to make sound financial

decisions. Reclassification would be unethical if Columbia

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. It is not truthful and not

ethical. In the long run, no one benefits from this short-sighted

decision.

Req. 5

The receivables should be classified in the way that best

describes their collectability. In reality, most bank loan officers

who know financial accounting (and most do) will closely


examine these receivables classify them as long-term for their

own lender analysis.

Req. 6

The reclassification would be ethical if Columbia expects to

collect the receivables beyond the current operating cycle, or

one year if longer.


Focus on Financials: Amazon.com, Inc.

(40-50 min.)

Req. 1

Indirect method. The statement of cash flows begins with net

income. Also, Amazon.com, Inc. does not report collections

from customers, payments to suppliers, and so on, which are

reported under the direct method.

Req. 2 (Amounts in millions)

a. This problem requires an analysis of the activity in gross

accounts receivable. The account caption is listed as Accounts

receivable, net and other, meaning that several items (debit and

credit) were netted against one another in order to get the

balances listed on the balance sheet. It is necessary first to

isolate just the accounts receivable portion of these amounts.

In Footnote 1, under Accounts receivable, net and other, it

states: “Included in Accounts receivable, net, and other on our

consolidated balance sheets are amounts primarily related to

vendor receivables and customer receivables. At

December 31, 2008 and 2007, vendor receivables, net, were

$400 million and $280 million, and customer receivables, net,

were $311 million and $296 million.” Immediately below that,

under Allowance for doubtful accounts, we find the following:


“We estimate losses on receivables based on known troubled

accounts, if any, and historical experience of losses incurred.

The allowance for doubtful customer and vendor receivables

was $81 million and $64 million at December 31, 2008 and

2007.”

In order to calculate gross accounts receivable from vendors

and customers at the beginning and end of the year, it is

necessary to add those two amounts to both beginning and

ending balances of the allowance for doubtful accounts as

shown in the T-accounts below. Then, add sales revenue to the

beginning gross balance ($19,166 from the income statement) ,

subtract write-offs and subtract the ending balance ($657). The

write off figure is calculated by taking the beginning balance of

the allowance for doubtful accounts ($64), adding assumed

expense (.5% x 19,166) and subtracting the ending balance

($81).

Gross Accounts Receivable, Vendors and CustomersBeg.Bal ($400+311+$64) $775Sales (income statement)

19,166Write-offs (below) 79

Collections($775+19,166-79-657) 19,205

End.Bal.($280+296+$81) $657


Allowance for Doubtful AccountsBeg. Bal. $64

Write-offs Doubtful accounts expense:($64 + 96 - 81) 79 ($19,166 x .005) 96

End. Bal. $81

b. Using the format provided in Exhibit 12-15: (Amounts in millions)

Payments for=

Cost of+

Increase in−

Increase ininventory sales Inventory Accounts

Payable

$14,296 = $14,896 + ($1,399 − $1,200)

− ($3,594 - $2,795)


(continued) Focus on Financials: Amazon.com, Inc.

Req. 3 (Amounts in millions)From Note 3 of the Footnotes to Consolidated Financial Statements:

Property, Plant, and Equipment, NetBal., Dec. 31, 2007 ($1,023 – 480)

543

Capital spending (investing section, statement of cash flows)

333

Depreciation (Note 3) 311

Acquisitions of otherCompanies (diff) 289

Bal., Dec. 31, 2008 ($1,409 – 555)

854

Req. 4

In 2008, for Amazon.com, Inc.,

1. Net income increased from 2007 by $169 million ($645 -

$476).

2. Total assets increased from 2007 by $1,729 million ($8,314 -

$6,485).

3. Stockholders’ equity more than doubled from 2007 ($2,672 -

$1,197)

4. Cash flow from operations was almost 3 times net income

($1,697 - $645).

Overall, 2008 was a very good year for Amazon.com, Inc.


Focus on Analysis: Foot Locker, Inc.

(20-30 min.)(All amounts are in thousands)

Req. 1

The main source of cash is sales of short-term investments

($1,620). This indicates that Foot Locker, Inc.’s basic

operations are not generating enough cash to finance current

operations. Fortunately, the company owned trading securities,

which they sold in order to raise enough cash to operate during

2007.

The main use of cash is purchase of short-term investments

($1,378). This too indicates that Foot Locker’s core operations

are not generating enough cash. However, they still have

enough cash from operations to purchase short-term

investments which will be available next period if they need to

be sold. This strategy will work as long as there is excess cash

to invest in these types of securities. However, over the long-

run, if operations start to use cash rather than generate it, the

supply of these securities will be depleted, placing the

company in a position of having to borrow short-term funds for

operating purposes.


(continued) Focus on Analysis: Foot Locker, Inc.

Req. 2

Why net cash provided by operations differs from net income:

1. Non-cash impairment charges and store closing costs (+$124). These were expenses that did not use cash, so they were added back to net income.

2. Depreciation and amortization (+$166). These expenses decreased net income but didn’t decrease cash. Therefore, cash flow from operations always exceeds net income insofar as depreciation and amortization are concerned.

3. Decrease in deferred income taxes payable (-$129), meaning that the company had to pay these taxes in the current year in addition to its normal income tax expense.


(continued) Focus on Analysis: Foot Locker, Inc.

Req. 3

Foot Locker, Inc. bought more fixed assets ($148 million) than it sold (none listed) during fiscal 2007. The amount purchased comes from the investing section of the Consolidated Statements of Cash Flows for 2007.

Req. 4

Cash returned to stockholders during fiscal 2007 (in millions):Dividends……………………………………………… $77 Purchases of treasury stock……………………….. 50 Total…………………………………………………….. $127

Although profits were falling, management apparently felt compelled to

continue to pay a cash dividend to shareholders. Established

companies often feel this pressure during difficult economic times, in

order to bolster confidence on the part of shareholders in management’s

ability to lead. In addition, management apparently felt that the

purchase of the company’s own stock at a low price was a good use of

cash. As explained in Chapter 9, repurchasing treasury stock serves to

reduce the number of outstanding shares used in the earnings per share

(EPS) calculation, which in turn is a factor in helping increase the price

of the company’s common stock.


Group Projects

(2-3 hours)

Student responses will vary on this assignment.


hhtfa8e_ch12_sm

Documents

net cash flows

operating cash flows

cash decreases

collection of cash

cash position

past cash flows

net cash inflow

net cash outflows