Ch12 Solutions akun

7/27/2019 Ch12 Solutions akun

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CHAPTER 12

Statement of Cash Flows

Study Objectives

1.Indicate the usefulness of the statement of cash flows.2.Distinguish among operating, investing, and financing activities.3.Explain the impact of the product life cycle on a companys cash flows.4.Prepare a statement of cash flows using the indirect method.5.Use the statement of cash flows to evaluate a company.*6.Prepare a statement of cash flows using the direct method.

Summary of Questions by Study Objectives and Blooms Taxonomy

Item SO BT Item SO BT Item SO BT Item SO BT Item SO B

Questions

1. 1 C 6. 2 K 11. 2 C 16. 4 C 21. 6*

2. 1 C

7. 4 C 12. 4 C 17. 1 K 22. 6* A

3. 2 C

8. 3 K 13. 4 C 18. 2 C 23. 6* C

4. 2 K 9. 3 C 14. 4 C 19. 5 C

5. 2 C 10. 4, 6* C 15. 4 K 20. 6* C

Brief Exercises

1. 2 K 4. 3 C 7. 4 AP 10. 5 AP 13. 6* A

2. 2 C 5. 4 AP 8. 4 AN 11. 5 AP 14. 6* A

3. 2 AP

6. 4 AP

9. 5 AP 12. 5 AN 15. 6* A

Do It! Review Exercises

1. 2 C

2. 3 AP

3. 5 AP

Exercises

1. 2 C 4. 4 AP 7. 4 AN 10. 5 AN 13. 6* A

2. 2 C 5. 4 AP 8. 4, 5 AP 11. 6* AP 14. 6* A

3. 3 C

6. 4 AP

9. 5 AN 12. 6* AP 15. 6* A

Problems: Set A

1. 2 C 4. 6* AP 7. 4, 5 AP 9. 4 AP 11. 4 A

2. 4 AN

5. 4 AP

8. 5, 6* AP 10. 6* AP 12. 5 C3. 4 AP 6. 6* AP

Problems: Set B

1. 2 C

4. 6* AP

7. 4, 5 AP

9. 4 AP 11. 4 A

2. 4 AN 5. 4 AP 8. 5, 6* AP 10. 6* AP

3. 4 AP 6. 6* AP

Copyright 2009 John Wiley & Sons, Inc. Kimmel,Financial Accounting,5/e, Solutions Manual ( For Instructor Use Only) 12-1


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ASSIGNMENT CHARACTERISTICS TABLE

ProblemNumber Description

DifficultyLevel

TimeAllotted (min.)

1A Distinguish among operating, investing, and financingactivities.

Simple 1015

2A Determine cash flow effects of changes in equity accounts. Simple 1015

3A Prepare the operating activities sectionindirect method. Simple 2030

*4A Prepare the operating activities sectiondirect method. Simple 2030

5A Prepare the operating activities sectionindirect method. Simple 2030

*6A Prepare the operating activities sectiondirect method. Simple 2030

7A Prepare a statement of cash flowsindirect method, and

compute cash-based ratios.

Moderate 4050

*8A Prepare a statement of cash flowsdirect method, andcompute cash-based ratios.

Moderate 4050

9A Prepare a statement of cash flowsindirect method. Moderate 4050

*10A Prepare a statement of cash flowsdirect method. Moderate 4050

11A Prepare a statement of cash flowsindirect method. Moderate 4050

12A Identify the impact of transactions on ratios. Moderate 2535

1B Distinguish among operating, investing, and financingactivities.

Simple 1015

2B Determine cash flow effects of changes in plant assetaccounts.

Simple 1015

3B Prepare the operating activities sectionindirect method. Simple 2030

*4B Prepare the operating activities sectiondirect method. Simple 2030

5B Prepare the operating activities sectionindirect method. Simple 2030

*6B Prepare the operating activities sectiondirect method. Simple 2030

7B Prepare a statement of cash flowsindirect method, andcompute cash-based ratios.

Moderate 4050

2-2 Copyright 2009 John Wiley & Sons, Inc. Kimmel,Financial Accounting,5/e, Solutions Manual ( For Instructor Use Only)


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ASSIGNMENT CHARACTERISTICS TABLE (Continued)

ProblemNumber Description

DifficultyLevel

TimeAllotted (min.)

*8B Prepare a statement of cash flowsdirect method, andcompute cash-based ratios.

Moderate 4050

9B Prepare a statement of cash flowsindirect method. Moderate 4050

*10B Prepare a statement of cash flowsdirect method. Moderate 4050

11B Prepare a statement of cash flowsindirect method. Moderate 4050



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ANSWERS TO QUESTIONS

1. (a) The statement of cash flows reports the cash receipts, cash payments, and net change in cashresulting from the operating, investing, and financing activities of a company during a period in aformat that reconciles the beginning and ending cash balances.

(b)Disagree. The statement of cash flows is required. It is the fourth basic financial statement.

2. The statement of cash flows answers the following questions about cash: (a) Where did the cashcome from during the period? (b) What was the cash used for during the period? and (c) What wasthe change in the cash balance during the period?

3. The three activities are:Operating activitiesinclude the cash effects of transactions that create revenues and expenses andthus enter into the determination of net income.Investing activitiesinclude: (a) purchasing and disposing of investments and productive long-livedassets and (b) lending money and collecting loans.Financing activitiesinclude: (a) obtaining cash from issuing debt and repaying amounts borrowedand (b) obtaining cash from stockholders, repurchasing shares, and paying them dividends.

4. (a) Major sources of cash in a statement of cash flows include cash from operations; issuance ofdebt; collection of loans; issuance of capital stock; sale of investments; and the sale of property,plant, and equipment.

(b) Major uses of cash include purchase of inventory, payment of cash dividends; redemption ofdebt; purchase of investments; making loans; redemption of capital stock; and the purchase ofproperty, plant, and equipment.

5. The statement of cash flows presents investing and financing activities so that even noncashtransactions of an investing and financing nature are disclosed in the financial statements. If they

affect financial conditions significantly, the FASB requires that they be disclosed in either a separateschedule at the bottom of the statement of cash flows or in a separate note or supplementaryschedule to the financial statements.

6. Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion ofbonds into common stock, (3) issuance of bonds or notes for assets, and (4) noncash exchanges ofproperty, plant, and equipment.

7. Comparative balance sheets, a current income statement, and certain transaction data all provideinformation necessary for preparation of the statement of cash flows. Comparative balance sheetsindicate how assets, liabilities, and equities have changed during the period. A current incomestatement provides information about the amount of cash provided or used by operations. Certain

transactions provide additional detailed information needed to determine how cash was provided orused during the period.

8. (a)The phases of the corporate life cycle are the introductory phase, growth phase, maturity phase,and decline phase.

(b) During the introductory phase, cash from operations and investing would be expected to benegative, and cash from financing would be positive.



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Questions Chapter 12(Continued)

During the growth phase, a company would be expected to show some small amounts of cfrom operations while continuing to show negative cash from investing and positive cash ffinancing.

During the maturity phase, cash from operations, investing, and financing would all be expecto be positive while in the decline phase, cash from operations and investing would continube positive while cash from financing would be negative.

9. Tootsie Roll has positive cash from operations that exceeds its net income. Cash from operatexceeded its investing needs and it retired shares of stock and paid dividends. Tootsie Roll appeto be in the middle to late maturity phase.

10. The advantage of thedirect methodis that it presents the major categories of cash receipts cash payments in a format that is similar to the income statement and familiar to statement usersprincipal disadvantage is that the necessary data can be expensive and time-consumingaccumulate.

The advantage of theindirect methodis it is often considered easier to prepare, and it providereconciliation of net income to net cash provided by operating activities. It also tends to reveal company information to competitors. Its primary disadvantage is the difficulty in understanding adjustments that comprise the reconciliation.

Both methods are acceptable but the FASB expressed a preference for the direct method. Yet,indirect method is the overwhelming favorite of companies.

11. When total cash inflows exceed total cash outflows, the excess is identified as a net increascash near the bottom of the statement of cash flows.

12. The indirect method involves converting accrual net income to net cash provided by operaactivities. This is done by starting with accrual net income and adjusting for items that do not a

cash. Examples of adjustments include depreciation and other noncash expenses, gains and loson the sale of noncurrent assets, and changes in the balances of current asset and current liabaccounts from one period to the next.

13. It is necessary to convert accrual-based net income to cash-basis income because the unadjustedincome includes items that do not provide or use cash. An example would be an increase accounts receivable. If accounts receivable increased during the period, revenues reported on accrual basis would be higher than the actual cash revenues received. Thus, accrual-basis income must be adjusted to reflect the net cash provided by operating activities.

14. A number of factors could have caused an increase in cash despite the net loss. These are (1) cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sale

investments; (4) issuance of debt or capital stock, and (5) differences between cash and accaccounting, e.g. depreciation.

15. Depreciation expense.Gain or loss on sale of a noncurrent asset.Increase/decrease in accounts receivable.Increase/decrease in inventory.Increase/decrease in accounts payable.



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Questions Chapter 12(Continued)

16.Under the indirect method, depreciation is added back to net income to reconcile net income to netcash provided by operating activities because depreciation is an expense but not a cash payment.

17.The statement of cash flows is useful because it provides information to the investors, creditors, andother users about: (1) the companys ability to generate future cash flows, (2) the companys ability topay dividends and meet obligations, (3) the reasons for the difference between net income and net

cash provided by operating activities, and (4) the cash and noncash financing and investingtransactions during the period.

18.This transaction is reported in the note or schedule entitled Noncash investing and financing activitiesas follows: Retirement of bonds payable through issuance of common stock, $1,700,000.

19.(a)The current ratio is an accrual-based ratio that measures liquidity while the current cash debtcoverage ratio is a cash-based ratio that measures liquidity.

(b)Solvency can be measured by the debt to total assets ratio (accrual-based) or the cash debtcoverage ratio (cash-based).

20.Net cash provided by operating activities under the direct approach is the difference between cashrevenues and cash expenses. The direct approach adjusts the revenues and expenses directly toreflect the cash basis. This results in cash net income, which is equal to net cash provided byoperating activities.

+ Decrease in accounts receivable21.(a)Cash receipts from customers = Revenues from sales

Increase in accounts receivable

+ Increase in inventory(b)Purchases = Cost of goods sold

Decrease in inventory

+ Decrease in accounts payableCash payments to suppliers = Purchases Increase in accounts payable

22.Sales...................................................................................................................... $2,000,000Add: Decrease in accounts receivables................................................................. 100,000Cash receipts from customers................................................................................ $2,100,000

23.Depreciation expense is not listed in the direct method operating activities section because it is not acash flow itemit does not affect cash.



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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 12-1

(a)Cash inflow from financing activity, $200,000.

(b)Cash outflow from investing activity, $150,000.(c)Cash inflow from investing activity, $20,000.(d)Cash outflow from financing activity, $50,000.

BRIEF EXERCISE 12-2

(a)Investing activity. (d)Operating activity.(b)Investing activity. (e)Financing activity.

(c)Financing activity. (f) Financing activity.

BRIEF EXERCISE 12-3

Cash flows from financing activitiesProceeds from issuance of bonds payable......................... $300,000)Payment of dividends........................................................... (70,000)

Net cash provided by financing activities................... $230,000)

BRIEF EXERCISE 12-4

(a)Cash from operations would be lower than net income during the growphase because inventory must be purchased for future projected salSince sales during the growth phase are projected to be increasing,ventory purchases must increase and inventory expensed on an accrbasis would be less than inventory purchased on a cash basis. Alcollections on accounts receivable would lag behind sales; thus, accrsales would exceed cash collections during the period.

(b)Cash from investing is often positive during the late maturity phase athe decline phase because the firm may sell off excess long-term assthat are no longer needed for productive purposes.



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BRIEF EXERCISE 12-5

Net cash provided by operating activities is $2,680,000. Using the indirectapproach, the solution is:

Net income.................................................... $2,500,000Adjustments to reconcile net income

to net cash provided by operating

activitiesDepreciation expense........................... $110,000)Accounts receivable decrease............. 350,000)Accounts payable decrease................. (280,000) 180,000

Net cash provided by operatingactivities

............................................. $2,680,000

BRIEF EXERCISE 12-6

Cash flows from operating activitiesNet income.................................................... $280,000Adjustments to reconcile net incometo net cash provided by operatingactivitiesDepreciation expense........................... $70,000Loss on sale of plant assets................ 22,000 92,000


............................................. $372,000

BRIEF EXERCISE 12-7

Net income............................................................ $200,000Adjustments to reconcile net income to netcash provided by operating activitiesDecrease in accounts receivable................ $80,000)Increase in prepaid expenses...................... (28,000)Increase in inventories................................. (40,000) 12,000Net cash provided by operatingactivities

..................................................... $212,000



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BRIEF EXERCISE 12-8

Original cost of equipment sold.................................................. $22,000Less: Accumulated depreciation................................................ 5,500

Book value of equipment sold..................................................... 16,500Less: Loss on sale of equipment............................................... 3,500Cash flow from sale of equipment............................................... $13,000

BRIEF EXERCISE 12-9

(a)Free cash flow = $127,260,000 $221,160,000 $0 = ($93,900,000)

(b)Current cash debt coverage ratio = $127,260,000 $243,668,000 =.52 times

(c)Cash debt coverage ratio = $127,260,000 $928,464,500 = .14 times

BRIEF EXERCISE 12-10

(a)Free cash flow = $405,000 $200,000 $0 = $205,000

(b)Current cash debt coverage ratio = $405,000 $150,000 = 2.7 times

(c)Cash debt coverage ratio = $405,000 $225,000 = 1.8 times


Free cash flow = $123,100,000 $20,800,000 = $102,300,000


Free cash flow is cash provided by operations less capital expenditures acash dividends paid. For Payne Inc. this would be $364,000 ($734,000

$280,000 $90,000). Since it has positive free cash flow that far exceeds dividend, an increase in the dividend might be possible. However, othfactors should be considered. For example, it must have adequate retainearnings, and it should be convinced that a larger dividend can be sustainover future years. It should also use the free cash flow to expand operations or pay down its debt.



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+ Decrease in accounts receivableReceipts fromcustomers

=Salesrevenues

Increase in accounts receivable

$1,285,759,000 = $1,287,672,000 $1,913,000 (Increase in accounts receivable)


+ Decrease in income taxes payableCash paymentor income taxes

=Income TaxExpense

Increase in income taxes payable

$125,000,000 = $370,000,000 $245,000,000*

$522,000,000 $277,000,000 = $245,000,000 (Increase in income taxes payable)


+ Increase in prepaid expenses

Cashpayments for

operatingexpenses

=

Operatingexpenses,

excludingdepreciation

Decrease in prepaid expenses

and

+ Decrease in accrued expenses payable

Increase in accrued expenses payable

$79,000 = $90,000 $6,600 $4,400

SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 12-1

1) Financing activity2) Operating activity3) Financing activity4) Investing activity5) Investing activity



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DO IT! 12-2

Cash flows from operating activitiesNet income................................................................... $100,000Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation expense............................................ $6,000

Patent amortization expense................................ 2,000Gain on sale of equipment.................................... (3,600)Decrease in accounts receivable.......................... 6,000Increase in accounts payable............................... 3,200 13,600Net cash provided by operating activities..... $113,600

DO IT! 12-3

(a) Free cash flow = $73,700 $27,000 $15,000 = $31,700

(b) Cash provided by operating activities fails to take into account thacompany a must invest in new plant assets just to maintain the currelevel of operations. Companies must also maintain dividends at currlevels to satisfy investors. The measurement of free cash flow providadditional insight regarding a companys cash-generating ability.



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SOLUTIONS TO EXERCISES

EXERCISE 12-1

a)Noncash investing and financing activities.b)Financing activities.c)Noncash investing and financing activities.d)Financing activities.e)Investing activities.f) Operating activities.g)Operating activities.

EXERCISE 12-2

a)b)

c)d)e)f)

g)

Operating activity.Noncash investing andfinancing activity.Investing activity.Financing activity.Operating activity.Noncash investing andfinancing activity.Operating activity.

(h)(i)(j)

(k)(l)(m)

(n)

Financing activity.Operating activity.Noncash investing and financingactivity.Investing activity.Operating activity.Operating activity (loss); investingactivity (cash proceeds from sale).Financing activity.

EXERCISE 12-3

Point in Time Phase

ABCD

Introductory phaseDecline phaseMaturity phaseGrowth phase

During the introductory phase (point A), cash from operations and investingare expected to be negative while cash from financing would be positive. In thegrowth phase (point D), a company would continue to show negative cash fromoperations and investing and positive cash from financing.



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EXERCISE 12-3 (Continued)

During the maturity phase (point C), cash from operations and net incowould be approximately the same. Cash from operations would exceinvesting needs. In the decline phase (point B), cash from operations wodiminish while cash from financing would be negative.

EXERCISE 12-4

JEREZ COMPANYPartial Statement of Cash Flows

For the Year Ended December 31, 2010

Cash flows from operating activitiesNet income......................................................... $190,000

Adjustments to reconcile net income to netcash provided by operating activitiesDepreciation expense................................ $35,000Loss on sale of equipment....................... 5,000

Increase in accounts payable................... 17,000Decrease in accounts receivable............. 15,000Decrease in prepaid expenses................. 4,000

76,000

Net cash provided by operatingactivities .................................................. $266,000



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EXERCISE 12-5

KITSELTON INC.Partial Statement of Cash Flows


Cash flows from operating activitiesNet income......................................................... $153,000Adjustments to reconcile net income to netcash provided by operating activities

Depreciation expense................................ $34,000)Increase in accrued expenses payable.... 10,000)Decrease in inventory............................... 4,000Increase in prepaid expenses................... (5,000 )Decrease in accounts payable.................. (7,000)Increase in accounts receivable............... (11,000) 25,000

Net cash provided by operatingactivities .................................................. $178,000



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EXERCISE 12-6

FELIX CORPORATIONStatement of Cash FlowsIndirect MethodFor the Year Ended December 31, 2010

Cash flows operating activitiesNet income.................................................................... $284,100Adjustments to reconcile net income to net cashprovided by operating activities

Depreciation expense........................................... $187,000Increase in income tax payable........................... 4,700Decrease in accounts payable............................. (3,700)Increase in accounts receivable.......................... (8,200)Increase in inventory............................................ (11,000) 168,800Net cash provided by operating activities.... 452,900

Cash flows from investing activitiesSale of land............................................................ 35,000Purchase of building............................................ (129,000)Net cash used by investing activities........... (94,000)

Cash flows from financing activitiesIssuance of bonds................................................ 200,000

Payment of dividend............................................. (12,000)Purchase of treasury stock.................................. (32,000)Net cash provided by financing activities.... 156,000

Net increase in cash.................................................... 514,900Cash at beginning of period........................................ 45,000Cash at end of period.................................................. $559,900



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EXERCISE 12-7

TOVAR CORPPartial Statement of Cash Flows


Cash flows from operating activitiesNet income......................................................... $72,000)Adjustments to reconcile net incometo net cash provided by operating

activitiesDepreciation expense................................ $28,000)Loss on sale of equipment....................... 8,000 ) 36,000 )Net cash provided by operatingactivities .................................................. 108,000)

Cash flows from investing activitiesSale of equipment............................................. 11,000*Purchase of equipment..................................... (70,000)Construction of equipment............................... (53,000)

Net cash used by investing activities...... (112,000)

Cash flows from financing activitiesPayment of cash dividends.............................. (19,000)

*Cost of equipment sold................................... $49,000)*Accumulated depreciation.............................. (30,000 ))*Book value........................................................ 19,000)*Loss on sale of equipment.............................. (8,000) )*Cash proceeds................................................. $11,000)



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EXERCISE 12-8

(a) MATSUI COMPANYStatement of Cash Flows


Cash flows from operating activitiesNet income................................................. $ 93,000)Adjustments to reconcile net incometo net cash provided by operating

activitiesDepreciation expense........................ $34,000)Decrease in inventory........................ 19,000)Increase in accounts receivable....... (9,000)Decrease in accounts payable.......... (8,000) 36,000 )Net cash provided by operating

activities

.......................................... 129,000)

Cash flows from investing activitiesSale of land................................................. 20,000)Purchase of equipment............................. (60,000)

Net cash used by investingactivities .......................................... (40,000)

Cash flows from financing activities

Issuance of common stock....................... 42,000)Payment of cash dividends....................... (35,000)Redemption of bonds................................ (50,000)

Net cash used by financingactivities

.......................................... (43,000 )

Net increase in cash.......................................... 46,000

)Cash at beginning of period............................. 22,000 )Cash at end of period........................................ $68,000)



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EXERCISE 12-8 (Continued)

b)1. Current cash debt coverage ratio:

Net cash providedby operating activities

Average currentliabilities

$129,000

[Per Part (a)]$47,000+$39,000

2 =3.0 times

2. Cash debt coverage ratio:

Net cash providedby operating activities

Average totalliabilities

$129,000 $247,000*+$189,000**2

= .59 times

*$47,000 + $200,000 **$39,000 + $150,000

EXERCISE 12-9

PepsiCo Coca-Cola

(a) LiquidityCurrent cash debt

coverage ratio

$6,084

$8,133= .75 times

$5,957

$9,363= .64 times

(b)Solvency

Cash debt coverage ratio$6,084

$16,019= .38 times

$5,957

$13,058= .46 times

Free cash flow$6,084 $2,068 $1,854

= $2,162

$5,957 $1,407 $2,911

= $1,639

PepsiCos liquidity is higher (better) than Coca-Colas. PepsiCos current cashdebt coverage ratio is 17% higher than Coca-Colas. Coca-Colas solvency isslightly higher than PepsiCos since its cash debt coverage ratio is higher butts free cash flow smaller.



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EXERCISE 12-10

HoytCorporation

RexCorporation

(a) Liquidity

Current cash debt

coverage ratio

$100,000

$50,000

= 2.0 times$100,000

$100,000

= 1.0 times

(b) Solvency

Cash debt

coverage ratio

$100,000

$200,000= .50 times

$100,000

$250,000= 0.40 times

Free cash flow$100,000 $40,000 $5,000

= $55,000

$100,000 $70,000 $10,000

= $20,000

Hoyts liquidity and solvency ratios are higher (better) than Rexs compara

ratios. In particular, Hoyts current cash debt coverage ratio is twice as highRexs. This ratio indicates that Hoyt is substantially more liquid than Rex. Hoysolvency, as measured by the cash debt coverage ratio and free cash flowalso better than Rexs.

*EXERCISE 12-11

Revenues.................................................................. $192,000)

Deduct: Increase in accounts receivable............. (70,000)Cash receipts from customers*...................... $122,000Operating expenses................................................ 83,000

)Deduct: Increase in accounts payable.................. (23,000)

Cash payments for operating expenses**..... 60,000

Net cash provided by operating activities............. $62,000

** Accounts ReceivableBalance, Beginning of year 0

Revenues for the year 192,000 Cash receipts for year 122,000Balance, End of year 70,000

** Accounts Payable

Payments for the year 60,000Balance, Beginning of year 0

Operating expenses for year 83,000Balance, End of year 23,000



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EXERCISE 12-12

a)Cash payments to suppliersCost of goods sold......................... $5,349.7millionAdd: Increase in inventory........... 4.7

Cost of purchases.......................... $5,354.4millionDeduct: Increase in accounts

payable............................ (156.1 )Cash payments to suppliers......... $5,198.3million

b)Cash payments for operating expensesOperating expenses exclusiveof depreciation($11,791.6 $1,249.9)

................. $10,541.7millionDeduct: Decrease in prepaid

expenses......................... $(204.5)

Increase in accruedexpenses payable

....................... (37.0) (241.5)Cash payments for operatingexpenses ..................................... $10,300.2million

EXERCISE 12-13

Cash flows from operating activitiesCash receipts from

Customers.................................................. $240,000*Dividend revenue....................................... 18,000

*258,000*

Less cash payments:To suppliers for merchandise................... $105,000For salaries and wages............................. 53,000For operating expenses............................ 28,000For income taxes....................................... 12,000For interest................................................. 10,000 208,000*


.................................................. $50,000*

$48,000 + $192,000



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*EXERCISE 12-14

MOSQUITO HOLLOW CORP.Statement of Cash FlowsDirect MethodFor the Year Ended December 31, 2010

Cash flows form operating activitiesCash receipts from customers............................ $566,100Less: Cash payments:For goods and services................................. $279,100For income taxes............................................ 93,000For operating expenses................................. 77,000For interest..................................................... 22,400 471,500Net cash provided by operatingactivities................................................ 94,600

Cash flows form investing activitiesSale of building.............................................. 202,400Purchase of equipment................................. (113,200)Net cash provided by investingactivities................................................ 89,200

Cash flows from financing activitiesIssuance of common stock........................... 355,000Payment of cash dividend............................. (21,800)

Purchase treasury stock............................... (57,300)Cash paid to redeem bonds at maturity....... (200,000)Net cash provided by financingactivities................................................ 75,900

Net increase in cash................................................... 259,700Cash at beginning of period...................................... 11,000Cash at end of period................................................. $270,700



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EXERCISE 12-15

Cash payments for rentalsRent expense................................................................ $ 30,000*Add: Increase in prepaid rent.................................... 3,100

*Cash payments for rent............................................... $ 33,100*

Cash payments for salariesSalaries expense.......................................................... $ 54,000*Add: Decrease in salaries payable............................ 2,000 *Cash payments for salaries........................................ $ 56,000*

Cash receipts from customersRevenue from sales..................................................... $160,000*Add: Decrease in accounts receivable..................... 9,000 *Cash receipts from customers................................... $169,000*



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SOLUTIONS TO PROBLEMS

PROBLEM 12-1A

Transaction Where Reported

Cash Inflow,Outflow, or NoEffect?

(a)Recorded depreciationexpense on the plant assets.

O No cash flow effect

(b)Recorded and paid interestexpense.

O Cash outflow

(c)Recorded cash proceeds froma sale of plant assets.

I Cash inflow

(d)Acquired land by issuingcommon stock. NC No cash flow effect

(e)Paid a cash dividendto preferred stockholders.

F Cash outflow

(f) Distributed a stock dividendto common stockholders.

NC No cash flow effect

(g)Recorded cash sales. O Cash inflow(h)Recorded sales on account. O No cash flow effect(i) Purchased inventory for cash. O Cash outflow(j) Purchased inventory on

account. O No cash flow effect



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PROBLEM 12-2A

a)Net income can be determined by analyzing the retained earningsaccount.

Retained earnings beginning of year...........................$270,000Add: Net income (plug)................................................. 60,500*330,500

Less: Cash dividends................................................... 20,000Stock dividends.................................................. 10,500

Retained earnings, end of year....................................$300,000

*($300,000 + $10,500 + $20,000 $270,000)

b)Cash inflow from the issue of stock was $14,500 ($165,000 $140,000

$10,500).

Common Stock140,00010,500 Stock Dividend14,500 Shares Issued for Cash165,000

Cash outflow for dividends was $20,000. The stock dividend does not

use cash.

c)Both of the above activities (issue of common stock and payment ofdividends) would be classified as financing activities on the statement ofcash flows.



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PROBLEM 12-3A

GRIDER COMPANYPartial Statement of Cash Flows

For the Year Ended November 30, 2010

Cash flows from operating activitiesNet income............................................................. $1,650,000Adjustments to reconcile net income

to net cash provided by operatingactivitiesDepreciation expense..............................$ 80,000Decrease in inventory.............................. 500,000Decrease in accrued expenses payable.... (100,000)

Increase in prepaid expenses.................(150,000)Increase in accounts receivable.............(300,000)Decrease in accounts payable................ (350,000) (320,000)Net cash provided by operating

activities............................................ $1,330,000



26/50

*PROBLEM 12-4A

GRIDER COMPANYPartial Statement of Cash Flows

For the Year Ended November 30, 2010

Cash flows from operating activitiesCash receipts from customers......... $7,400,000(1)Less cash payments:

To suppliers................................ $4,750,000(2)For operating expenses............. 1,320,000(3) 6,070,000


.......................................... $1,330,000

Computations:

1)Cash receipts from customersSales................................................................... $7,700,000Deduct: Increase in accounts receivable....... (300,000 )Cash receipts from customers......................... $7,400,000

2)Cash payments to suppliersCost of goods sold............................................ $4,900,000

Deduct: Decrease in inventories..................... (500,000

)Cost of purchases............................................. 4,400,000Add: Decrease in accounts payable............... 350,000Cash payments to suppliers............................. $4,750,000

3)Cash payments for operating expensesOperating expenses, exclusiveof depreciation

................................ $1,070,000*Add: Increase in prepaid

expenses................................... $150,000

Decrease in accrued

expenses payable

.................... 100,000 250,000

Cash payments for operatingexpenses

......................................... $1,320,000



27/50

*$450,000 + ($700,000 $80,000)



28/50

PROBLEM 12-5A

JANTZEN COMPANYPartial Statement of Cash Flows


Cash flows from operating activitiesNet income......................................................... $230,000Adjustments to reconcile net incometo net cash provided by operating

activities

Depreciation expense................................ $70,000Loss on sale of equipment....................... 16,000Increase in accounts payable................... 13,000

Increase in income taxes payable............ 6,000

Increase in accounts receivable............... (10,000) 95,000Net cash provided by operatingactivities .................................................. $325,000



29/50

*PROBLEM 12-6A

JANTZEN COMPANYPartial Statement of Cash Flows


Cash flows from operating activitiesCash receipts from customers......... $960,000(1)Less cash payments:

For operating expenses............. $601,000(2)For income taxes........................ 34,000

(3) 635,000Net cash provided by operatingactivities

.......................................... $325,000

(1)Computation of cash receipts from customersRevenues.......................................................................... $970,000Deduct: Increase in accounts receivable

($70,000 $60,000)........................................... (10,000)Cash receipts from customers....................................... $960,000

(2)Computation of cash payments for operating expensesOperating expenses per income statement.................. $614,000Deduct: Increase in accounts payable

($41,000 $28,000)........................................... (13,000)Cash payments for operating expenses........................ $601,000

(3)Computation of cash payments for income taxesIncome tax expense per income statement.................. $ 40,000Deduct: Increase in income taxes payable

($13,000 $7,000)............................................. (6,000)Cash payments for income taxes.................................. $ 34,000



30/50

PROBLEM 12-7A

a) TRAHAN COMPANYStatement of Cash Flows


Cash flows from operating activitiesNet income................................................... $32,000Adjustments to reconcile net incometo net cash provided by operating

activities

Depreciation expense........................... $17,500*Increase in accounts payable............... 9,000Decrease in income taxes payable...... (1,000)

Increase in merchandise inventory...... (7,000)Increase in accounts receivable.......... (19,000) (500)Net cash provided by operatingactivities .............................................. 31,500

Cash flows from investing activitiesSale of equipment....................................... 8,500

Cash flows from financing activities

Issuance of common stock........................ 4,000Redemption of bonds.................................. (6,000)Payment of dividends................................. (20,000)Net cash used by financingactivities.............................................. (22,000)

Net increase in cash........................................... 18,000Cash at beginning of period.............................. 20,000Cash at end of period......................................... $38,000

*$32,000 ($24,000 $9,500(A)) = $17,500

(A)$18,000 (cost of equipment) $8,500 (book value) = $9,500 (accumulateddepreciation for equipment sold)



31/50

PROBLEM 12-7A (Continued)

(b)1.$31,500

[Per Part (a)]$23,000*+$31,000**

2= 1.17 times

*$15,000 + $8,000 **$24,000 + $7,000

2. $31,500 $56,000*+$58,000**

2= .55 times

*$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000

3. $31,500 $0 $20,000 = $11,500



32/50

*PROBLEM 12-8A

a) TRAHAN COMPANYStatement of Cash Flows


Cash flows from operating activitiesCash receipts from customers...... $223,000(1)Less cash payments:

To suppliers............................. $173,000(2)For operating expenses.......... 6,500

(3)For interest............................... 3,000

For income taxes..................... 9,000

(4) 191,500Net cash provided by

operating activities

.............. 31,500

Cash flows from investing activitiesSale of equipment........................... 8,500

Cash flows from financing activitiesIssuance of common stock............ 4,000Redemption of bonds..................... (6,000)Payment of dividends.....................

(20,000)

Net cash used by financingactivities

............................... (22,000)

Net decrease in cash.............................. 18,000Cash at beginning of period.................. 20,000Cash at end of period............................. $38,000

Computations:

1)Cash receipts from customersSales......................................................................... $242,000Deduct: Increase in accounts receivable............. (19,000)

Cash receipts from customers....................................... $223,000



33/50

*PROBLEM 12-8A (Continued)

(2)Cash payments to suppliersCost of goods sold........................................................ $175,000Add: Increase in inventory........................................... 7,000

Cost of purchases......................................................... 182,000Deduct: Increase in accounts payable........................ 9,000

Cash payments to suppliers......................................... $173,000

(3)Cash payments for operating expensesOperating expenses...................................................... $24,000Deduct: Depreciation

$32,000 ($24,000 $9,500*)......................... 17,500Cash payments for operating expenses...................... $ 6,500

*$18,000 $8,500 = $9,500

(4)Cash payments for income taxesIncome tax expense....................................................... $8,000Add: Decrease in income taxes payable..................... 1,000Cash payments for income taxes................................. $9,000

(b)1.$31,500

[Per Part (a)]$23,000**+$31,000***

2= 1.17 times

**$15,000 + $8,000 ***$24,000 + $7,000

2. $31,500 $56,000*+$58,000**

2= .55 times

*$15,000 + $8,000 + $33,000 **$24,000 + $7,000 + $27,000

3. $31,500 $0 $20,000 = $11,500



34/50

PROBLEM 12-9A

CIPRA INC.Statement of Cash Flows


Cash flows from operating activitiesNet income......................................................... $158,900Adjustments to reconcile net incometo net cash provided by operating

activities

Depreciation expense................................ $46,500Increase in accounts payable................... 34,700

Loss on sale of plant assets..................... 7,500

Decrease in accrued expenses payable.... (500

)Increase in prepaid expenses................... (2,400)Increase in inventory................................. (9,650)Increase in accounts receivable............... (54,800) 21,350Net cash provided by operatingactivities

.................................................. 180,250

Cash flows from investing activitiesSale of plant assets........................................... 1,500

Purchase of investments.................................. (24,000)Purchase of plant assets.................................. (100,000)Net cash used by investingactivities .................................................. (122,500)

Cash flows from financing activitiesSale of common stock...................................... 45,000Payment of cash dividends.............................. (30,350)Redemption of bonds........................................ (40,000 )

Net cash used by financing

activities

.................................................. (25,350)

Net increase in cash................................................. 32,400

Cash at beginning of period..................................... 48,400Cash at end of period............................................... $80,800



35/50

*PROBLEM 12-10A

CIPRA INC.Statement of Cash Flows


Cash flows from operating activitiesCash receipts from customers.............. $337,980(1)Less cash payments:

To suppliers..................................... $110,410(2)For income taxes............................. 27,280

For operating expenses.................. 15,310

(3)For interest...................................... 4,730

157,730Net cash provided by operatingactivities

....................................... 180,250

Cash flows from investing activitiesSale of plant assets................................ 1,500Purchase of investments....................... (24,000)Purchase of plant assets....................... (100,000)

Net cash used by investingactivities

....................................... (122,500)

Cash flows from financing activitiesSale of common stock............................ 45,000

Payment of cash dividends................... (30,350)Redemption of bonds............................. (40,000 )

Net cash used by financingactivities ....................................... (25,350)

Net increase in cash....................................... 32,400Cash at beginning of period.......................... 48,400Cash at end of period..................................... $80,800

Computations:

(1)Cash receipts from customersSales.................................................................. $392,780



36/50

Deduct: Increase in accounts receivable...... (54,800)Cash receipts from customers....................... $337,980



37/50

*PROBLEM 12-10A (Continued)

(2)Cash payments to suppliersCost of goods sold.......................................................... $135,460Add: Increase in inventory............................................ 9,650

Cost of purchases........................................................... 145,110

Deduct: Increase in accounts payable......................... (34,700)Cash payments to suppliers.......................................... $110,410

(3)Cash payments for operating expensesOperating expenses exclusive of

depreciation............................................... $12,410Add: Increase in prepaid expenses................$2,400

Decrease in accrued expenses payable.................................................. 500 2,900

Cash payment for operatingexpenses.................................................... $15,310



38/50

PROBLEM 12-11A

MERCADO COMPANYStatement of Cash Flows


Cash flows from operating activitiesNet income............................................................. $ 37,000Adjustments to reconcile net incometo net cash provided by operating

activities

Depreciation expense.................................... $42,000Decrease in accounts receivable................. 12,000Decrease in prepaid expenses..................... 5,720

Increase in accounts payable....................... 4,730Loss on sale of equipment........................... 2,000Increase in inventory..................................... (9,450) 57,000Net cash provided by operatingactivities ...................................................... 94,000

Cash flows from investing activitiesSale of land............................................................ 25,000Sale of equipment................................................. 8,000

Purchase of equipment......................................... (95,000)Net cash used by investing activities.......... (62,000)

Cash flows from financing activitiesPayment of cash dividends.................................. (12,000)

Net cash used by financing activities.......... (12,000)

Net increase in cash..................................................... 20,000Cash at beginning of period......................................... 45,000Cash at end of period................................................... $65,000

Noncash investing and financing activitiesConversion of bonds by issuance

of common stock........................................... $40,000



39/50

PROBLEM 12-12A

Transaction

Free Cash

Flow($125,000)

CurrentCash DebtCoverage

Ratio(0.5 times)

Cash DebtCoverage

Ratio(0.3 times)

(a) Recorded credit sales$2,500.

NE NE NE

(b) Collected $1,500 owingfrom customers.

I I I

(c) Paid amount owingto suppliers, $2,750.

D D D

(d) Recorded sales returns

of $500 and credited thecustomers account.

NE NE NE

(e) Purchased newequipment $5,000;signed a long-term notepayable for the cost ofthe equipment.

D* NE D

(f) Purchased a patent andpaid $15,000 cash for theasset.

D NE NE

*Note to Instructor: If only cash capital expenditures are deducted, thanswer would be NE.



40/50

BYP 12-1 FINANCIAL REPORTING PROBLEM

a)Net cash provided by operating activities:

2007 $90,064

2006 $55,656

Some causes of the significant changes in net cash provided by operatingactivities during 2007 were the decrease in the accounts receivable, adecrease in inventories, and a decrease in income taxes payable anddeferred.

b)The increase in cash and cash equivalents for the year endedDecember 31, 2007 was $1,877,000.

c)Tootsie Roll uses the indirect method of computing and presenting thenet cash provided by operating activities.

d)According to the statement of cash flows, accounts receivable decreased$2,591,000 in 2007. Inventories decreased $6,506,000 in 2007. Accountspayable (and accrued liabilities) decreased $3,234,000 in 2007.

e)The net cash used by investing activities in 2007 was $43,345,000.

f) The supplemental disclosure of cash flow information disclosed interestpaid of $537,000 and income taxes paid of $11,343,000 in 2007.



41/50

BYP 12-2 COMPARATIVE ANALYSIS PROBLEM

(a) Hershey Tootsie Roll

1.Current cashdebt coverage

ratio

$778,836

($1,618,770+$1,453,538)2

= .51 times

$90,064

($57,972+$62,211)2

= 1.50 times

2.Cash debtcoverage ratio

$778,836

($3,623,593+$3,474,142)2

= .22 times

$90,064

($174,495*+$160,958**)2=

.54 times

**$57,972 + $116,523**$62,211 + $98,747

(b)Tootsie Rolls current cash debt coverage ratio provides a ratio of $1.50cash from operations for every dollar of current debt. It is a better reresentation of liquidity on an average day than the current ratio. TootRolls higher ratio (1.50 vs. .51) indicates Tootsie Roll was significantly moliquid in 2007 than Hershey but both measures are acceptable.

The cash debt coverage ratio shows a companys ability to repay iliabilities from cash generated from operating activities without having

liquidate the assets employed in its operations. Since Tootsie Rolls cadebt coverage ratio was more than twice as large (.54 vs. .22as Hersheys, Tootsie Rolls ability to repay liabilities with cash frooperations was significantly greater than Hersheys in 2007.



42/50

BYP 12-3 RESEARCH CASE

a)The article suggests that most people arent concerned about Searssliquidity. Instead, the concern is that the company wont have adequatecash to implement the changes it needs to make a return to profitability.

Also, some investors were concerned that a cash shortage will reduceSearss ability to carry out the treasury stock buyback program that ithad previously announced.

b) At the time of the article, Sears had not reported its cash flow numbers. Ithad, however, reported an estimate that by the end of the quarter thecompany would have $1 billion in cash on hand. This was lower thatanalysts had expected. Based upon estimates of amounts that thecompany had spent on treasury stock, debt repayment, and capitalexpenditures, analysts determined that it was likely that, to arrive at$1 billion in cash on hand, the companys cash flow must have declined.

c)Individuals who tried to defend Sears said that they thought it wasinappropriate to make such negative statements about the companybased on estimates. They suggested it would be better to wait until thecompany reports its actual cash flow numbers before evaluating thecompany.

d)The article suggests that, if, in fact, Searss cash flow is declining, it is abad time of year for that to be happening. Normally the fourth quarter wouldbe a period when cash flows would be strong, because of the holidayshopping season. In contrast, Sears frequently experiences negative cashfrom operations during the first three quarters of the year.



43/50

BYP 12-4 INTERPRETING FINANCIAL STATEMENTS

(a)Current ratio2001:$1,207.9$ 921.4= 1.312004:$2,539.4$1,620.4= 1.57

Current cash debtcoverage ratio2001:($119.8)$ 948.2= (.13) times

2004: $566.6$1,436.6= .39 times

Both Amazons current ratio and its current cash debt coverage raimproved dramatically from 2001 to 2004. Amazons current ratio creased by 20% (from 1.31 to 1.57) during the 3-year period. In additAmazons current cash debt coverage ratio improved by $.52 per dollarcurrent liabilities (from a negative $.13 per dollar in 2001 to a positive $

per dollar in 2004). Amazons liquidity improved greatly from 2001 2004.

(b)Cash debtcoverage ratio2001:($119.8)$3,090.0= (.04) times

2004: $566.6$4,773.4= .12 times

Debt to totalassets ratio2001:$3,077.5$1,637.5= 1.88

2004:$5,096.1$3,248.5= 1.57

Amazons solvency also improved significantly from 2001 to 2004. cash debt coverage ratio increased by $.16 per dollar of total liabilitduring the 3-year period. Amazons debt to total assets ratio also proved (decreased) by 16% from 2001 to 2004.

(c)Free cash flow2001:($119.8)$50.3 $0= ($170.1)

2004: $566.6$89.1 $0= $477.5

Amazons free cash flow increased by almost $650 million from 200to 2004. The increase was caused by Amazon finally generating a profit2004. If Amazon is able to continue operating at a profit and producinglarge free cash flow, it should be able to finance an expansion of operations.



44/50

BYP 12-4 (Continued)

d)While these measures tell us a lot about Amazon.com, they dont tell uswhether the stock price is reasonable. Amazon.coms high stock price is areflection of a belief by investors that Amazon.com will continue to growincredibly fast. If this growth falters, its stock price will fall rather quickly.

Also, Amazon.coms heavy reliance on debt financing compounds the riskof investing in its stock because it may have a difficult time paying itsdebts if its growth does not continue.



45/50

BYP 12-5 FINANCIAL ANALYSIS ON THE WEB

Answers will vary depending on the company chosen by the student.



46/50

BYP 12-6 DECISION MAKING ACROSS THE ORGANIZATION

a) DEVITO COMPANYStatement of Cash Flows

For the Year Ended January 31, 2010

Cash flows from operating activitiesNet loss.................................................... $(35,000)*Adjustments to reconcile net incometo net cash provided by operatingactivitiesDepreciation expense..................... $55,000Gain from sale of investment......... (5,000

) 50,000


....................................... 15,000

Cash flows from investing activitiesSale of investment.................................. 80,000

Purchase of investment......................... (75,000)Purchase of fixtures and equipment..... (320,000)

Net cash used by investingactivities ....................................... (315,000)*

Cash flows from financing activitiesSale of capital stock............................... 405,000Purchase of treasury stock................... (10,000)

Net cash provided by financingactivities

....................................... 395,000Net increase in cash...................................... 95,000Cash at beginning of period.......................... 140,000Cash at end of period.................................... $235,000

Noncash investing and financing activitiesIssuance of note for truck...................... $20,000



47/50

BYP 12-6 (Continued)

*Computation of net income (loss)Sales of merchandise................................ $385,000Interest revenue......................................... 6,000

Gain on sale of investment

($80,000 $75,000)

................................. 5,000

Total revenues and gains.................. 396,000Merchandise purchased............................ $258,000Operating expenses($170,000 $55,000) ............................... 115,000Depreciation............................................... 55,000Interest expense........................................ 3,000

Total expenses................................... 431,000Net loss....................................................... $ (35,000)

(b)From the information given, it appears that from an operating standpoDevito Company did not have a superb first year, having suffered$35,000 net loss. Jill is correct; the statement of cash flows is nprepared in correct form. The sources and uses format is no longer acceptable form. The correct format classifies cash flows from thactivitiesoperating, investing, and financing; and it also presents snificant noncash investing and financing activities in a separate scheduJill is wrong, however, about the actual increase in cash not be$95,000; $95,000 is the correct increase in cash.



48/50

BYP 12-7 COMMUNICATION ACTIVITY

MEMO

To: Rick Darman

From: Student

Re: Statement of cash flows

The statement of cash flows provides information about the cash receipts andcash payments of a firm, classified as operating, investing, and financingactivities. The operating activities section of the companys statement of cashflows shows that cash increased by $172,000 as a result of transactions whichaffected net income. This amount is computed by adjusting net income for thosetems which affect net income, but do not affect cash, such as sales on accountwhich remain uncollected at year-end.

The investing activities section of the statement reports cash flows resulting fromchanges in investments and other long-term assets. The company had a cashoutflow from investing activities due to purchases of buildings and equipment.

The financing activities section of the statement reports cash flows resulting

rom changes in long-term liabilities and stockholders equity. The companyhad a cash inflow from financing activities due to the issuance of commonstock and an outflow due to the payment of cash dividends.

f you have any further questions, please do not hesitate to contact me.



49/50

BYP 12-8 ETHICS CASE

(a)The stakeholders in this situation are:Albert Roland, president of Christy Automotive Corporation.George Ellerby, controller.

The Board of Directors.The stockholders of Christy Automotive Corporation.

(b)The presidents statement, We must get that amount above $1 millioputs undue pressure on the controller. This statement along with statement, I know you wont let me down George, encourages Georgedo something unethical.

Controller George Ellerbys reclassification (intentional misclassification)

a cash inflow from a long-term note (financing activity) issuance to increase in payables (operating activity) is inappropriate aunethical.

(c)It is unlikely that any board members (other than board members who aalso officers of the company) would discover the misclassification. Boamembers generally do not have detailed enough knowledge of thcompanys transactions to detect this misstatement. It is possible thatofficer of the bank that made the loan would detect the misclassificat

upon close reading of Christy Automotive Corporations statementcash flows. It is also possible that close scrutiny of the balance shshowing an increase in notes payable (long-term debt) would reveal tthere is no comparable financing activity item (proceeds from note payabin the statement of cash flows.



50/50

BYP 12-9 ALL ABOUT YOU ACTIVITY

a)The article describes three factors that determine how much money youshould set aside. (1)Your willingness to take risk.You need to evaluate how

willing you are to experience wide swings in your financial position. (2)Yourneeds.Your need to carefully evaluate your situation and evaluate thepossibility of various events and what the financial implications would be.This is also impacted by the number of dependents you have. (3)Yourupcoming expenses.Here you need to look further out into the horizon andconsider the implications of larger events such as a big trip, a wedding, oreducation costs.

b)They recommend having at least three months of living expenses setaside, and up to six months.

c)Responses to this question will vary. What is most important is thatstudents begin the process of considering their cash needs anddeveloping a plan to set aside enough money to provide a cushion in theevent of a financial hiccup.

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