FinMan 5e Chapter 12 SM

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Solutions Manual, Chapter 12 667

Chapter 12 Reporting and Analyzing Cash Flows

QUESTIONS

1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and cash payments (outflows) during a period. It helps users to answer questions such as:

How does a company obtain its cash?

Where does a company spend its cash?

What explains the change in the cash balance?

2. On a statement of cash flows, investing activities include cash outflows from purchases of long-term investments such as stocks and bonds, from purchases of plant assets such as land, buildings, and machinery, and from purchases of other noncurrent assets such as natural resources and intangible assets. When these types of assets are sold, the cash inflows from the sales are also reported as investing activities.

3. On a statement of cash flows, financing activities include cash inflows such as those that result from issuing preferred or common stock, and from borrowing by issuing bonds or signing long-term or short-term notes payable. Financing activities also include cash outflows such as dividend payments to stockholders, purchases of treasury stock, and repayments of debt.

4. The direct method of reporting cash flows from operating activities itemizes the major classes of cash receipts such as sales to customers, and also itemizes the major classes of cash payments such as for merchandise, interest, taxes, and other operating expenses.

5. On a statement of cash flows prepared according to the direct method, operating activities generally include cash receipts from the sale of goods and services, cash dividends received from stock investments in other entities, and interest on loans to others. Operating activities also include cash outflows such as payments for merchandise, salaries, rent, income taxes, utilities, and other operating expense items.

6. The indirect method of reporting cash flows from operating activities begins with net income and then adjusts it for items that are necessary to reconcile net income to the net cash provided or used by operating activities.

7. Payments of cash dividends should be reported on the statement of cash flows as financing activities.

8. The amount of the land purchase that was paid for in cash ($400,000) should be reported on the statement of cash flows as an investing activity. Also, a schedule of noncash investing and financing activities or the notes to the statement should show the $1,000,000 land investment, the $600,000 financing in the form of a long-term note payable, and the net $400,000 cash outflow.


Financial & Managerial Accounting, 5th Edition 668

9. Since this cash inflow results from borrowing money, it is reported on the statement of cash flows as a financing activity.

10. Yes; even though a company reports positive net income for the year, it may still show a net cash outflow from operating activities. When net income is reconciled to the net cash flow from operating activities, the net effect of all the adjustment items may be a subtraction from net income (examples of such adjustments are accrued revenues, prepaid expenses, and other gains). If the amount of this net subtraction is larger than the net income, the result is net cash used by operating activities.

11. Depreciation is not a source or a use of cash, even though it must be added to net income when the net cash flow from operating activities is calculated by the indirect method. (Note: When depreciation is deducted on the tax return of a corporation, the effect is to reduce taxable income and reduce the cash outflow for income taxes.)

12. (a) Indirect method. (b) The increase in accounts (trade) receivable represents an amount by which the company had cash tied up in accounts (trade) receivable versus being held in cash. More cash was tied up in accounts (trade) receivable since the prior year. If accounts (trade) receivable had decreased, less cash would have been tied up in accounts (trade) receivable and cash would have increased.

13. Arctic Cat’s statement of cash flows shows several major financing activities for the year ended March 31, 2011 ($ thousands):

Proceeds from short-term borrowings........................................................................ $1,012,000 Payments on short-term borrowings .......................................................................... (1,012,000) Proceeds from issuance of common stock ................................................................ 728,000 Tax benefit from stock option exercise ....................................................................... 745,000 Repurchase of common stock ..................................................................................... (2,419,000) Net cash provided by (used in) financing activities .................................................. $ (946,000)

14. KTM’s net cash (all is Euro thousands) from operating activities is €70,348; its net cash used in investing activities is €(37,271), and its net cash used in financing activities is €(27,060).

15. Piaggio’s investing activities yielding cash outflows and inflows for the year ended December 31, 2011, follow. Its cash outflows are listed in parentheses (€ in thousands):

Investment in property, plant and equipment ............................................................ € (61,790) Sale price, or repayment value, of property, plant and equipment .......................... 6,542 Investment in intangible assets ................................................................................... (64,300) Sale price, or repayment value, of intangible assets ................................................. 122 Sale price of financial assets ....................................................................................... 23,051 Collected interests ......................................................................................................... 11,666



QUICK STUDIES Quick Study 12-1 (20 minutes) 1. The statement of cash flows reports the cash (and cash equivalent)

activities of a business for a specific accounting period. The cash flows are classified into operating, investing, and financing activities. The net change in cash as well as the beginning and ending cash balances are also reported on the statement.

2. Examples of transactions classified as investing activities

Plant asset purchases

Plant asset sales

Investment in debt and equity securities (except trading securities)

Intangible asset acquisitions and disposals

Purchases and sales of natural resources 3. Examples of transactions classified as financing activities

Bond retirement and issuance

Issuance and settlement of notes payable

Common stock issuance

Cash paid for dividends

Treasury stock acquisitions

Owner contributions and withdrawals 4. Examples of significant noncash financing and investing activities

Exchange of stock or debt securities for noncash assets

Conversion of bonds into stock

Purchase of long-term assets by issuing notes payable to seller

Settle debt with noncash assets (such as giving equipment to pay off loan)

Quick Study 12-2 (10 minutes)

1. Investing 6. Financing 2. Operating 7. Operating 3. Operating 8. Operating 4. Operating 9. Investing* 5. Financing 10. Operating

* For the “indirect” method, the loss is reported as an adjustment (add-

back) to net income in the operating section.



Quick Study 12-3 (10 minutes) Cash flows from operating activities

Net income .................................................................................. $18,200 Adjustments to reconcile net income to operating cash flow

Depreciation ............................................................................. $36,000 Accounts receivable decrease ............................................... 7,000 Inventory increase ................................................................... (5,900) Accounts payable increase .................................................... 4,700 Income taxes payable decrease ............................................. (150) 41,650

Net cash provided from operating activities ........................... $59,850

Quick Study 12-4 (10 minutes) Computation of cash inflow from sale of furniture Cost of furniture sold (given) ...................................................... $52,500

Accumulated depreciation at beginning of year (given) .......... $110,700

Increase from depreciation expense (given) ............................. 18,000

Total “expected” accumulated depreciation ............................. 128,700

Actual accumulated depreciation at end of year (given) ......... (88,700)

Accumulated depreciation on sold furniture ............................ 40,000

Cash received from sale of furniture at book value ................. $12,500

Quick Study 12-5 (10 minutes) Part 1

Computation of cash received from the sale of common stock

Increase in Common stock ($105,000 - $100,000) ........................................ $ 5,000

Increase in Paid-in capital in excess of par ($567,000-$342,000) ............... 225,000

Cash received from the sale of common stock ......................................... $230,000

Part 2

Computation of cash paid for dividends

Beginning retained earnings ....................................................................... $287,500

Net income .................................................................................................... 48,000

Total “expected” retained earnings............................................................ 335,500

Actual ending retained earnings ................................................................. (313,500)

Cash paid for dividends ............................................................................... $ 22,000



Quick Study 12-6 (10 minutes) Cash flows from operating activities

Net income .................................................................................. $30,000 Adjustments to reconcile net income to operating cash flow

Depreciation ............................................................................. $37,600 Accounts receivable decrease ............................................... 10,000 Inventory decrease .................................................................. 10,000 Prepaid expense increase ....................................................... (1,200) Accounts payable decrease ................................................... (6,000) Wages payable increase ......................................................... 4,000 Income taxes payable decrease ............................................. (1,200) 53,200

Net cash provided from operating activities ........................... $83,200 Quick Study 12-7 (15 minutes) Computation of cash inflow from sale of furniture

Cost of furniture sold (given) .................................................. $55,000

Accumulated depreciation at beginning of year (given) .......... $ 9,000

Increase from depreciation expense (given) ............................. 37,600

Total “expected” accumulated depreciation ............................. 46,600

Actual accumulated depreciation at end of year (given) ......... (17,000)

Accumulated depreciation on sold furniture ............................ 29,600

Cash received from sale of furniture at book value ................. $25,400

Quick Study 12-8 (15 minutes) 1. Computation of cash paid for dividends Beginning retained earnings ............................................ $ 8,400 Net income ......................................................................... 30,000 Total “expected” retained earnings................................. 38,400 Actual ending retained earnings ...................................... (35,600) Decrease from (cash paid for) dividends ........................ $ 2,800 2. Computation of cash payments for notes Beginning notes payable .................................................. $69,000 Increases to notes (given) ................................................ 0 Total “expected” notes payable ....................................... 69,000 Actual ending notes payable ............................................ (29,000) Decrease from (cash) payments toward notes .............. $40,000



Quick Study 12-9B (10 minutes) 1. Cash received from customers = Sales + Accounts receivable decrease = $488,000 + ($51,000 - $41,000) = $498,000

2. Net increase in cash = $94,800 - $24,000 = $70,800 Quick Study 12-10B (10 minutes)

1. Cash paid for merchandise

= Cost of goods sold - Inventory decrease + Accounts payable decrease

= $314,000 - ($95,800 - $85,800) + ($21,000 - $15,000)

= $310,000

2. Cash paid for operating expenses

= Operating expenses (excluding depreciation)

+ Prepaid expenses increase - Wages payable increase

= $89,100 + ($5,400 - $4,200) - ($9,000 - $5,000)

= $86,300 Quick Study 12-11B (10 minutes) Cash flows from operating activities

Receipts from sales to customersa ...................................... $ 498,000

Payments for merchandise inventoryb ................................ (310,000)

Payments for other expensesc ............................................. (86,300)

Payments for taxesd .............................................................. (18,500)

Net cash provided by operating activities ............................. $ 83,200

a From QS 12-9B

b From QS 12-10B c From QS 12-10B

d $17,300 (income tax expense) + $1,200 (decrease in income taxes payable)



Quick Study 12-12 (10 minutes) 1. Moore is probably in the strongest position of the three competing companies

on the basis of the statement of cash flows. Moore’s cash flows from operations are able to finance reinvestment in operating assets as well as help in paying down some debt. Sykes is in the second strongest position as it is able to reinvest 57% of its operating cash flows into new productive assets. Kritch is the weakest as it experienced negative cash flows from operations and generates cash by selling productive assets and by taking on new debt.

2. Sykes’s cash flow on total assets ratio is slightly stronger than that for Moore.

Sykes has a 9.6% ratio ($60,000/$625,000) compared to Moore’s 8.9% ratio ($70,000/$790,000).

Quick Study 12-13A (10 minutes) The balance sheet equation can be arranged so that the algebraic total of all noncash items is equal to cash (see Exhibit 12.8 or similar). It follows that when all changes in noncash balance sheet items are explained, the corresponding change in cash is also explained. On the spreadsheet, when the changes in all noncash balance sheet items have been accounted for, we can be confident that the change in cash also has been fully accounted for.

Quick Study 12-14 (20 minutes) Cash Flows from Operations (Indirect) Case X Case Y Case Z

Net Income ............................................................ $ 4,000 $100,000 $72,000 Adjustments to reconcile net income to net cash provided by operations Depreciation ......................................................... 30,000 8,000 24,000 Changes in assets and liabilities Accounts receivable ............................................ (40,000) (20,000) 4,000 Inventories ............................................................ 20,000 10,000 (10,000) Accounts payable ................................................ 24,000 (22,000) 14,000 Accrued liabilities ................................................ (44,000) 12,000 (8,000) Cash provided by (used for) operations ............ $ (6,000) $ 88,000 $96,000


Investing Activities

Purchase of used equipment ...................................................................... $(5,000)

Sale of short-term investments .................................................................. 6,000

Cash provided by investing activities ....................................................... $ 1,000



Quick Study 12-16 (15 minutes) Financing Activities

Additional short-term borrowings .............................................................. $20,000

Cash dividends paid .................................................................................... (16,000)

Cash provided by financing activities ....................................................... $ 4,000


Part 1

MONTGOMERY, INC. Statement of Cash Flows (Indirect Method)

For Year Ended December 31, 2014

Cash flows from operating activities Net income .................................................................................... $ 10,500 Adjustments to reconcile net income to net cash

provided by operating activities

Decrease in accounts receivable ............................................... 2,100 Increase in inventory ................................................................... (19,950) Decrease in accounts payable ................................................... (1,500) Decrease in salaries payable ...................................................... (100) Depreciation expense .................................................................. 7,200 Net cash used in operating activities ........................................ $ (1,750)

Cash flows from investing activities Cash paid for equipment (Note 1) .............................................. (8,400) Net cash used in investing activities ......................................... (8,400)

Cash flows from financing activities Cash received from stock issuance ........................................... 10,000 Net cash used in financing activities ......................................... 10,000

Net decrease in cash ...................................................................... $ (150) Cash balance at beginning of year ............................................... 30,550 Cash balance at end of year .......................................................... $ 30,400

Note 1

Equipment

Bal., 12/31/2013 41,500 Purchase “plug” Sale 0 plug = $8,400

Bal., 12/31/2014 49,900



Quick Study 12-17 (Concluded)

Part 2

The company’s operating cash flows are negative, $(1,750). This is not a good

omen. However, much of this is attributed to a huge increase in inventory.

Thus, an assessment of the saleable nature of that inventory, and why it is

being built up, is crucially important. Also, the level of cash has only

marginally declined, from $30,550 to $30,400. Thus, there seems to be

sufficient cash. However, one should question why so much of its assets is in

the form of cash (more than 19%) as this is not a productive use of assets.


1. Under IFRS (as with U.S. GAAP), both the indirect method and direct

method of reporting operating cash flows are acceptable.

2. IFRS and US GAAP differ on the classification of the following cash flows

as operating, investing or financing:

Cash flow source U.S. GAAP IFRS _

a. Interest paid Operating Financing or Operating

b. Dividends paid Financing Financing or Operating

c. Interest received Operating Operating or Investing

d. Dividends received Operating Operating or Investing



EXERCISES Exercise 12-1 (25 minutes) Statement of Cash Flows Noncash

Operating Activities


Financing Activities

Investing & Financing Activities

Not Reported on Statement or in Notes

a. Declared and paid a cash dividend

X

b. Recorded depreciation expense

X

c. Paid cash to settle long-term note payable

X

d. Prepaid expenses increased in the year

X

e. Accounts receivable decreased in the year

X

f. Purchased land by issuing common stock

X

g. Paid cash to purchase inventory

X

h. Sold equipment for cash, yielding a loss

X X

i. Accounts payable decreased in the year

X

j. Income taxes payable increased in the year

X



Exercise 12-2B (15 minutes) Statement of Cash Flows Noncash

Operating Activities


Financing Activities

Investing & Financing Activities

Not Reported on Statement

or in Notes

a. Retired long-term notes payable by issuing stock

X

b. Paid cash toward accounts payable

X

c. Sold inventory for cash X

d. Paid cash dividend that was declared in a prior period

X

e. Accepted six-month note receivable in exchange for plant assets

X

f. Recorded depreciation expense

X

g. Paid cash to acquire treasury stock

X

h. Collected cash from sales X

i. Borrowed cash from bank by signing a 9-month note payable

X

j. Paid cash to purchase a patent

X



Exercise 12-3 (20 minutes)

Cash flows from operating activities

Net income .............................................................................. $374,000

Adjustments to reconcile net income to net cash provided by operating activities

Decrease in accounts receivable ....................................... 17,100

Decrease in merchandise inventory .................................. 42,000

Increase in prepaid expenses ............................................ (4,700)

Decrease in accounts payable ........................................... (8,200)

Increase in other payables ................................................. 1,200

Depreciation expense ......................................................... 44,000

Amortization expense ......................................................... 7,200

Gain on sale of plant assets ............................................... (6,000)

Net cash provided by operating activities ............................. $466,600



Net income ............................................................................... $400,000

Adjustments to reconcile net income to operating cash flow

Depreciation .......................................................................... $80,000

Accounts receivable increase ............................................. (40,000)

Prepaid expense decrease ................................................... 12,000

Accounts payable increase .................................................. 6,000

Wages payable decrease...................................................... (2,000)

Gain on sale of machinery ................................................... (20,000) 36,000

Net cash provided from operating activities ........................... $436,000



Exercise 12-5B (15 minutes) Case X: Sales revenue ........................................................... $515,000 Accounts receivable, Dec. 31, 2013 ........................ $ 27,200 Accounts receivable, Dec. 31, 2014 ........................ (33,600) Less increase in accounts receivable .................... (6,400) Cash received from customers ............................... $508,600 Case Y: Rent expense ............................................................ $139,800 Rent payable, Dec. 31, 2013 .................................... $ 7,800 Rent payable, Dec. 31, 2014 .................................... (6,200) Plus decrease in rent payable ................................. 1,600 Cash paid for rent ..................................................... $141,400 Case Z: Cost of goods sold ................................................... $525,000 Merchandise inventory, Dec. 31, 2014.................... $130,400 Merchandise inventory, Dec. 31, 2013.................... (158,600) Less decrease in merch. inventory ........................ (28,200) Cost of goods purchased ........................................ 496,800

Accounts payable, Dec. 31, 2014 ............................ 82,000

Accounts payable, Dec. 31, 2013 ............................ (66,700)

Less increase in accounts payable ........................ (15,300)

Cash paid for merchandise ..................................... $481,500


Cash flows from operating activities Net income .............................................................................. $ 481,540 Adjustments to reconcile net income to net cash provided by operating activities

Increase in accounts receivable ........................................ (30,500) Increase in merchandise inventory ................................... (25,000) Decrease in accounts payable ........................................... (12,500) Decrease in salaries payable ............................................. (3,500)

Depreciation expense ......................................................... 44,200

Amortization expense—Patents ........................................ 4,200

Gain on sale of equipment ................................................. (6,200)

Net cash provided by operating activities ............................. $ 452,240



Exercise 12-7B (20 minutes)

Cash flows from operating activities Receipts from customers (see note a) ............................................ $1,797,500 Payments for merchandise (see note b) ......................................... (1,028,500) Payments for salaries (see note c) .................................................. (249,035) Payments for rent ............................................................................ (49,600) Payments for utilities ...................................................................... (18,125)

Net cash provided by operating activities ....................................... $ 452,240

Note a: Sales – Increase in receivables $1,828,000 - $30,500 = $1,797,500

Note b: Cost of goods sold + Increase in inventory + Decrease in accounts payable $991,000 + $25,000 + $12,500 = $1,028,500

Note c: Salaries expense + Decrease in salaries payable $245,535 + $3,500 = $249,035

Exercise 12-8 (10 minutes) Cash flows from investing activities Cash received from the sale of equipment* .................................. $ 51,300 Cash paid for new truck ................................................................... (89,000) Cash received from the sale of land ............................................... 198,000 Cash received from the sale of long-term investments ............... 60,800 Net cash provided by investing activities ...................................... $221,100

* Cash received from sale of equipment = Book value - loss = $65,300 - $14,000 = $51,300 Exercise 12-9 (10 minutes) Cash flows from financing activities Sale of common stock ................................................................................. $ 64,000 Paid cash dividend ....................................................................................... (14,600) Repaid note payable .................................................................................... (50,000) Purchased treasury stock ........................................................................... (12,000) Net cash used by financing activities ........................................................ $(12,600)




Part 1

IKIBAN, INC. Statement of Cash Flows (Indirect Method)

For Year Ended June 30, 2013


Net income ..................................................................... $ 99,510


Increase in accounts receivable .................................. (14,000)

Decrease in merchandise inventory ........................... 22,700

Decrease in prepaid expenses .................................... 1,000

Decrease in accounts payable .................................... (5,000)

Decrease in wages payable ......................................... (9,000)

Decrease in income taxes payables ........................... (400)

Depreciation expense ................................................... 58,600

Gain on sale of plant assets ........................................ (2,000)

Net cash provided by operating activities .................. $151,410

Cash flows from investing activities

Cash received from sale of equip. (Note 1) ...... 10,000

Cash paid for equipment (Note 1—given) ........ (57,600)

Net cash used in investing activities ................ (47,600)

Cash flows from financing activities

Cash received from stock issuance .................. 60,000

Cash paid to retire notes (Note 2—given) ........ (30,000)

Cash paid for dividends (Note 3) ....................... (90,310)

Net cash used in financing activities ................ (60,310)

Net increase in cash .............................................. $ 43,500

Cash balance at prior year-end ............................ 44,000

Cash balance at current year-end ........................ $ 87,500

(Notes 1, 2, and 3 on next page.)



Exercise 12-10 (Part 1 continued) (1) Cost of equipment sold (Given) .................................................................... $ 48,600 Accumulated depreciation of equipment sold* ............................................ (40,600) Book value of equipment sold ...................................................................... 8,000 Gain on sale of equipment (Given) ............................................................... 2,000 Cash receipt from sale of equipment ............................................................ $ 10,000 Cost of equipment sold ................................................................................. $ 48,600 Plus net increase in the equipment account balance .................................. 9,000 Cash paid for new equipment (given) ........................................................... $ 57,600

Equipment Accumulated Depreciation, Equipment

Bal., 6/30/2012 115,000 Bal., 6/30/2012 9,000 Purchase 57,600 Sale 48,600 Sale (plug) *40,600 Depr. Expense 58,600

Bal., 6/30/2013 124,000 Bal., 6/30/2013 27,000

(2) Carrying value of notes retired ..................................................................... $ 30,000 Cash payment to retire notes ........................................................................ $ 30,000

(3)

Retained Earnings

Bal., 6/30/2012 24,100 Dividends (plug) 90,310 Net income 99,510

Bal., 6/30/2013 33,300

Part 2 Cash flow on total assets ratio = Operating cash flows / Average total assets

= $151,410 / [($317,700 + $292,900)/2]

= $151,410 / $305,300

= 49.6%

Interpretation: A 49.6% result on the cash flow on total assets ratio is indicative of very good performance. Also, this favorably compares to its return on assets figure of 32.6% (high-quality earnings).



Exercise 12-11B (40 minutes) Part 1

IKIBAN, INC. Statement of Cash Flows (Direct Method)

For Year Ended June 30, 2013


Cash received from customers (Note 1) ........... $664,000

Cash paid for merchandise (Note 2) ................. (393,300)

Cash paid for operating expenses (Note 3) ...... (75,000)

Cash paid for income taxes (Note 4) ................. (44,290)

Net cash provided by operating activities ........ $151,410


Cash received from sale of equip. (Note 5) ...... 10,000

Cash paid for equipment (Note 5—given) ........ (57,600)

Net cash used in investing activities ................ (47,600)


Cash received from stock issuance .................. 60,000

Cash paid to retire notes (Note 6) ..................... (30,000)

Cash paid for dividends (Note 7) ....................... (90,310)

Net cash used in financing activities ................ (60,310)

Net increase in cash .............................................. $ 43,500

Cash balance at prior year-end ............................ 44,000

Cash balance at current year-end ........................ $ 87,500

(See notes on next page)



Exercise 12-11B (continued)

Notes (1) Sales ............................................................................................................... $678,000 Less increase in accounts receivable .......................................................... (14,000) Cash received from customers ..................................................................... $664,000 (2) Cost of goods sold ......................................................................................... $411,000 Less decrease in merchandise inventory .................................................... (22,700) Purchases ....................................................................................................... 388,300 Plus decrease in accounts payable .............................................................. 5,000 Cash paid for merchandise ........................................................................... $393,300 (3) Other operating expenses ............................................................................. $ 67,000 Plus decrease in wages payable ................................................................... 9,000 Less decrease in prepaid expenses ............................................................. (1,000) Cash paid for other operating expenses ...................................................... $ 75,000 (4) Income taxes expense ................................................................................... $ 43,890 Plus decrease in income taxes payable ....................................................... 400 Cash paid for income taxes ........................................................................... $ 44,290 (5) Cost of equipment sold (Given) .................................................................... $ 48,600 Accumulated depreciation of equipment sold* ............................................ (40,600) Book value of equipment sold ...................................................................... 8,000 Gain on sale of equipment ............................................................................ 2,000 Cash receipt from sale of equipment ............................................................ $ 10,000 Cost of equipment sold ................................................................................. $ 48,600 Plus net increase in the equipment account balance .................................. 9,000 Cash paid for new equipment (given) ........................................................... $ 57,600

Equipment Accumulated Depreciation, Equipment

Bal., 6/30/2012 115,000 Bal., 6/30/2012 9,000 Purchase 57,600 Sale 48,600 Sale *40,600 Depr. Expense 58,600

Bal., 6/30/2013 124,000 Bal., 6/30/2013 27,000

(6) Carrying value of notes retired ..................................................................... $ 30,000 Cash payment to retire notes ........................................................................ $ 30,000 (7)

Retained Earnings

Bal., 6/30/2012 24,100 Dividends (plug) 90,310 Net income 99,510

Bal., 6/30/2013 33,300



Exercise 12-12 (20 minutes) Cash flows from operating activities—indirect method

Net income .................................................................................................... $ 24,000

Depreciation expense .................................................................................. 12,000

Accounts receivable increase .................................................................... (10,000 )

Inventory decrease ...................................................................................... 16,000

Salaries payable increase ........................................................................... 1,000

Net cash provided by operating activities ................................................. $ 43,000

Exercise 12-13 (30 minutes) 1. Cash flows from operating activities—indirect method

Net income (loss) ......................................................................................... $ (16,000 )

Depreciation expense .................................................................................. 14,600

Accounts receivable decrease ................................................................... 24,000

Salaries payable increase ............................................................................ 18,000

Accrued liabilities decrease ........................................................................ (8,000 )

Net cash provided by operating activities ................................................. $ 32,600

2. One reason for the net loss was depreciation expense. Depreciation expense is added to net income to adjust for the effects of a noncash expense that was deducted in determining net income. It does not involve an inflow of cash. Depreciation expense, along with a decrease in accounts receivable and an increase in salaries payable, turned the net loss into positive operating cash flow.

3. Differences between cash flow from operations and net income can be caused by various items. The most important causes for investors are differences arising from: (1) changes in management of operating activities and (2) changes in revenue and expense recognition.



Exercise 12-14A (30 minutes)

SCORETECK CORPORATION Spreadsheet for Statement of Cash Flows


December 31, 2012

Analysis of Changes December 31, 2013 Debit Credit

Balance sheet—debit bal. accounts

Cash .......................................................... $ 80,000 $ 60,000

Accounts receivable .............................. 120,000 (f) $ 70,000 190,000

Merchandise inventory .......................... 250,000 (g) $ 20,000 230,000

Plant assets ............................................. 600,000 (d) 70,000 670,000

$1,050,000 $1,150,000

Balance sheet—credit bal. accounts

Accum. depreciation—Plant assets .... $ 100,000 (c) 70,000 $ 170,000

Accounts payable ................................... 150,000 (h) 10,000 140,000

Notes payable .......................................... 370,000 (e) 20,000 390,000

Common stock ........................................ 200,000 200,000

Retained earnings................................... 230,000 (b) 80,000 (a) 100,000 250,000

$1,050,000 $1,150,000

Statement of cash flows

Operating activities

Net income ............................................... (a) 100,000

Increase in accounts receivable ......... (f) 70,000

Decrease in merch. inventory .............. (g) 20,000

Decrease in accounts payable ............. (h) 10,000

Depreciation expense ............................ (c) 70,000

Investing activities

Payment for plant assets....................... (d) 70,000

Financing activities

Paid cash dividends ............................... (b) 80,000

Issued note payable ............................... (e) 20,000 _______

$440,000 $440,000




FERRON COMPANY Statement of Cash Flows



Receipts from customers ........................................... $ 495,000

Receipts of interest..................................................... 3,500

Payments for merchandise ........................................ (254,500)

Payments for salaries ................................................. (76,500)

Payments for other expenses .................................... (20,000)

Net cash provided by operating activities ................ $147,500


Receipt from sale of equipment ................................ 60,250

Payment for store equipment .................................... (24,750)

Net cash provided by investing activities ................ 35,500


Payment to retire long-term notes payable .............. (100,000)

Receipt from borrowing on six-month note ............. 35,000

Payment of cash dividends ....................................... (10,000)

Net cash used in financing activities ........................ (75,000)

Net increase in cash and cash equivalents ................. $108,000

Cash and cash equivalents at prior year-end ............. 40,000

Cash and cash equivalents at current year-end ......... $148,000

Note No. ___ Noncash investing and financing activities (1) Issued common stock to retire $185,500 of bonds payable. (2) Purchased land financed with a $105,250 long-term note payable.




1. THOMAS CORPORATION Statement of Cash Flows


Cash flows from operating activities Cash received from customers ........................................ $5,000,000 Cash received from dividends ......................................... 208,400 Cash paid for merchandise .............................................. (2,590,000) Cash paid for wages ......................................................... (550,000) Cash paid for rent .............................................................. (320,000) Cash paid for interest ....................................................... (218,000) Cash paid for taxes ........................................................... (450,000) Net cash provided by operating activities ...................... $1,080,400

Cash flows from investing activities Cash paid for purchases of machinery ........................... (2,236,000) Cash paid for purchases of long-term investments ...... (1,260,000) Cash received from sale of land ...................................... 220,000 Cash received from sale of machinery ............................ 710,000 Net cash used in investing activities ............................... (2,566,000)

Cash flows from financing activities Cash received from issuing stock ................................... 1,540,000 Cash received from borrowing ........................................ 3,600,000 Cash paid for note payable .............................................. (386,000) Cash paid for dividends .................................................... (500,000) Cash paid for treasury stock purchases. ........................ (218,000) Net cash provided by financing activities ....................... 4,036,000

Net increase in cash............................................................ $2,550,400

Beginning balance of cash ................................................. 333,000

Ending balance of cash ...................................................... $2,883,400

2. a. (i) Financing section reported the largest cash inflow of $4,036,000. (ii) Investing section reported the largest cash outflow of $2,566,000.

b. The largest individual item among the investing cash outflows is the purchase of machinery at $2,236,000.

c. Proceeds for issuing notes are larger at $3,600,000 than for issuing stock equity at $1,540,000 (see financing section).

d. The company has a net cash inflow from borrowing. This is computed from the borrowing proceeds of $3,600,000 less the note payment of $386,000 (see financing section).



Exercise 12-17 (15 minutes) 2012: $102,920 / $1,240,000 = 8.3% 2013: $138,920 / $1,510,000 = 9.2% Interpretation: Both years’ ratios are good in that they are positive and at reasonable levels (that is, most businesses can survive with annual returns at ~10%). Further, the ratio improved from 8.3% to 9.2%, which is a good increase.


PEUGEOT S.A. Statement of Cash Flows (Indirect Method)



Net income ........................................................................ € 784


Net change (decrease) in working capital ..................... (1,183)

Depreciation and amortization ....................................... 3,037

Gains on disposals and other ........................................ (883)

Net cash from operating activities ................................. € 1,755


Cash from disposal of plant assets & intangibles........ 189

Cash paid for plant assets and intangibles ................... (3,921)

Net cash used in investing activities ............................. (3,732)


Cash from purchases of treasury stock ........................ (199)

Cash paid for dividends .................................................. (290)

Cash paid for other financing activities ........................ (2,282)

Net cash from financing activities ................................. (2,771)

Net decrease in cash .......................................................... € (4,748)

Cash and cash equivalents, Dec 31, 2010 ........................ 10,442

Cash and cash equivalents, Dec 31, 2011 ........................ € 5,694



PROBLEM SET A Problem 12-1A (50 minutes)

Part 1

FORTEN COMPANY Statement of Cash Flows



Net income .......................................................................................... $114,975

Adjustments to reconcile net income to net

cash provided by operating activities:

Increase in accounts receivable ($65,810 - $50,625) ................. (15,185)

Increase in inventory ($275,656 - $251,800) .................................... (23,856)

Decrease in prepaid expenses ($1,875 - $1,250) ........................ 625

Decrease in accounts payable ($114,675 - $53,141) .................. (61,534)

Depreciation expense ................................................................... 20,750

Loss on disposal of equipment .................................................. 5,125

Net cash provided by operating activities .................................... $ 40,900


Cash received from sale of equipment ......................................... 11,625

Cash paid for equipment .................................................................. (30,000)

Net cash used in investing activities ............................................. (18,375)


Cash borrowed on short-term note ............................................... 4,000

Cash paid on long-term note ........................................................... (50,125)

Cash received from issuing stock (2,500 x $20) ............................ 50,000

Cash paid for dividends ................................................................... (50,100)

Net cash used in financing activities ............................................. (46,225)

Net decrease in cash ........................................................................... $(23,700)

Cash balance at December 31, 2012 ................................................. 73,500 Cash balance at December 31, 2013 ................................................. $ 49,800

Noncash investing and financing activities Purchased equipment for $96,375 by signing a $66,375 long-term note payable and paying $30,000 in cash.



Problem 12-1A (Concluded)

Part 2

Forten Company's operations provide a positive net cash inflow of $40,900—a

good result. At the same time, the cash balance decreased by $23,700 (32%)

during the year. Two major cash outflows are the retirement of debt ($50,125)

and the dividend payment ($50,100), which together represent 87% of net

income. Also, the $30,000 cash investment in equipment is presumably

necessary to replace the older equipment sold.

Helping fund these cash outflows is $50,000 cash from issuance of stock.

Moreover, the company took on additional debt (more than 30% increase in

indebtedness); namely, $66,375 in long-term notes. The company must

recognize that that the debt must eventually be repaid with interest.

In summary, perhaps the company should review the wisdom of paying cash

dividends that are considerably larger than cash provided from operations,

especially when the payment also results in a deteriorating cash position and

when the company is taking on additional debt.



Problem 12-2AA (60 minutes)

FORTEN COMPANY Spreadsheet for Statement of Cash Flows

For Year Ended December 31, 2013 December

31, 2012 Analysis of Changes December

31, 2013 Debit Credit

Balance sheet—debits Cash ......................................................... $ 73,500 $ 49,800 Accounts receivable .............................. 50,625 (b) $15,185 65,810 Merchandise inventory ......................... 251,800 (c) 23,856 275,656 Prepaid expenses .................................. 1,875 (d) $ 625 1,250 Equipment ............................................... 108,000 (h) 96,375 (g) 46,875 157,500 $485,800 $550,016 Balance sheet--credits Accum. depreciation—Equip. .............. $ 46,000 (g) 30,125 (f) 20,750 $ 36,625 Accounts payable .................................. 114,675 (e) 61,534 53,141 Short-term notes payable ..................... 6,000 (j) 4,000 10,000 Long-term notes payable...................... 48,750 (k) 50,125 (i) 66,375 65,000 Common stock, $5 par value ............... 150,250 (l) 12,500 162,750 Paid-in capital in excess of par value, common stock .................. 0 (l) 37,500 37,500 Retained earnings .................................. 120,125 (m) 50,100 (a) 114,975 185,000 $485,800 $550,016 Statement of cash flows Operating activities Net income .............................................. (a) 114,975 Increase in accts. receivable ................ (b) 15,185 Increase in merch. inventory................ (c) 23,856 Decrease in prepaid expenses ............ (d) 625 Decrease in accounts payable............. (e) 61,534 Depreciation expense ........................... (f) 20,750 Loss on sale of equipment ................... (g) 5,125 Investing activities Receipt from sale of equipment .......... (g) 11,625 Payment to purchase equipment ........ (h) 30,000 Financing activities Borrowed on short-term note .............. (j) 4,000 Payment on long-term note.................. (k) 50,125 Issued common stock for cash ........... (l) 50,000 Payments of cash dividends ................ (m) 50,100 Noncash investing and

financing activities

Purchase of equip. financed by long-term note payable .........

(i)

66,375

(h)

66,375

$600,775 $600,775



Problem 12-2AA (Concluded)




Net income .......................................................................................... $114,975

Adjustments to reconcile net income to net

cash provided by operating activities:

Increase in accounts receivable ($65,810 - $50,625) ................. (15,185)

Increase in inventory ($275,656 - $251,800) .................................... (23,856)

Decrease in prepaid expenses ($1,875 - $1,250 ) ....................... 625




Net cash provided by operating activities .................................... $ 40,900










Net cash used in financing activities ............................................. (46,225)

Net decrease in cash ........................................................................... $(23,700)

Cash balance at beginning of 2013 ................................................... 73,500

Cash balance at end of 2013 .............................................................. $ 49,800




Problem 12-3AB (40 minutes)



Cash flows from operating activities Cash received from customers (Note 1) .................... $567,315 Cash paid for merchandise (Note 2) .......................... (370,390) Cash paid for other expenses (Note 3) ...................... (131,775) Cash paid for income taxes ....................................... (24,250) Net cash provided by operating activities ................ $ 40,900

Cash flows from investing activities Cash received from sale of equipment ..................... 11,625 Cash paid for equipment ............................................ (30,000) Net cash used in investing activities ........................ (18,375)

Cash flows from financing activities Cash borrowed on short-term note ........................... 4,000 Cash paid on long-term note ..................................... (50,125) Cash received from issuing stock (2,500 x $20) ........ 50,000 Cash paid for dividends ............................................. (50,100)

Net cash used in financing activities ....................... (46,225)

Net decrease in cash ..................................................... $(23,700) Cash balance at December 31, 2012 ............................ 73,500

Cash balance at December 31, 2013 ............................ $ 49,800


Supporting calculations

(1) Sales - Increase in receivables = $582,500 - ($65,810 - $50,625) = $567,315 (2) Cost of Increase in Decrease in goods sold inventory payables = $285,000 + ($275,656 - $251,800) + ($114,675 - $53,141) = $370,390 (3) Other expenses - Decrease in prepaid expenses = $132,400 - ($1,875 - $1,250)

= $131,775

+ +



Problem 12-4A (35 minutes)

GOLDEN CORPORATION Statement of Cash Flows



Net income ................................................................................... $136,000


Increase in accounts receivable ($83,000 - $71,000) ........... (12,000)

Increase in inventory ($601,000 - $526,000) ........................... (75,000)

Increase in accounts payable ($87,000 - $71,000) ................ 16,000

Increase in taxes payable ($28,000 - $25,000) ....................... 3,000

Depreciation expense ............................................................. 54,000



Cash paid for equipment ........................................................... (36,000)


Cash received from issuing stock (12,000 x $5) ..................... 60,000

Cash paid for cash dividends ................................................... (89,000)

Net cash used in financing activities ...................................... (29,000)

Net increase in cash...................................................................... $ 57,000

Cash balance at December 31, 2012 ......................................... 107,000

Cash balance at December 31, 2013 ......................................... $164,000



Problem 12-5AA (50 minutes)

GOLDEN CORPORATION Spreadsheet for Statement of Cash Flows


December 31, 2012


Balance sheet--debits

Cash .......................................................... $ 107,000 $ 164,000

Accounts receivable .............................. 71,000 (b) $ 12,000 83,000

Merchandise inventory .......................... 526,000 (c) 75,000 601,000

Equipment ............................................... 299,000 (g) 36,000 335,000

$1,003,000 $1,183,000

Balance sheet--credits

Accum. depreciation—Equip. .............. $ 104,000 (f) $ 54,000 $ 158,000

Accounts payable ................................... 71,000 (d) 16,000 87,000

Income taxes payable ............................ 25,000 (e) 3,000 28,000

Common stock, $2 par value ................ 568,000 (h) 24,000 592,000

Paid-in capital in excess of par value, common stock ...................

160,000

(h)

36,000

196,000

Retained earnings .................................. 75,000 (i) 89,000 (a) 136,000 122,000

$1,003,000 $1,183,000

Statement of cash flows

Operating activities

Net income ............................................... (a) 136,000

Increase in accounts receivable ......... (b) 12,000

Increase in merch. inventory ................ (c) 75,000

Increase in accounts payable ............... (d) 16,000

Increase in income tax payable ............ (e) 3,000

Depreciation expense ............................ (f) 54,000


Payment for equipment ......................... (g) 36,000


Issued common stock for cash ........... (h) 60,000

Paid cash dividends ............................... ________ (i) 89,000

$481,000 $481,000



Problem 12-5AA (Concluded)




Net income ................................................................................... $136,000


Increase in accounts receivable ($83,000 - $71,000) ........... (12,000)

Increase in inventory ($601,000 - $526,000) ........................... (75,000)

Increase in accounts payable ($87,000 - $71,000) ................ 16,000

Increase in taxes payable ($28,000 - $25,000) ....................... 3,000

Depreciation expense ............................................................. 54,000



Cash paid for equipment ........................................................... (36,000)


Cash received from issuing stock (12,000 x $5) ..................... 60,000

Cash paid for cash dividends ................................................... (89,000)

Net cash used in financing activities ...................................... (29,000)

Net increase in cash...................................................................... $ 57,000

Cash balance at beginning of 2013 ............................................ 107,000

Cash balance at end of 2013 ....................................................... $164,000







Cash received from customers (Note 1) ................. $1,780,000

Cash paid for merchandise (Note 2) ...................... (1,145,000)

Cash paid for other operating expenses .............. (494,000)

Cash paid for income taxes (Note 3) ...................... (19,000)

Net cash provided by operating activities ............ $122,000


Cash paid for equipment ......................................... (36,000)


Cash from issuing stock (12,000 x $5) .................... 60,000

Cash paid for cash dividends ................................ (89,000)

Net cash used in financing activities .................... (29,000)

Net increase in cash ................................................... $ 57,000

Cash balance at December 31, 2012 ......................... 107,000

Cash balance at December 31, 2013 ......................... $164,000

Supporting calculations (1) Sales - Increase in receivables = $1,792,000 - ($83,000 - $71,000) = $1,780,000 (2) Cost of Increase in Increase in goods sold inventory accounts payable = $1,086,000 + ($601,000 - $526,000) - ($87,000 - $71,000) = $1,145,000 (3) Income taxes expense - Increase in income taxes payable = $22,000 - ($28,000 - $25,000) = $19,000

+ -



Problem 12-7A (35 minutes)

LANSING COMPANY Cash Flows from Operating Activities—Indirect Method



Net income ............................................................................... $ 6,000


Depreciation expense ........................................................ $12,000

Decrease in accounts receivable ...................................... 200

Increase in merchandise inventory .................................. (440 )

Decrease in accounts payable .......................................... (200 )

Increase in salaries payable .............................................. 180

Increase in utilities payable ............................................... 60

Increase in prepaid rent ..................................................... (40 )

Decrease in prepaid insurance ......................................... 20 11,780

Net cash provided by operating activities ............................ $17,780




LANSING COMPANY Cash Flows from Operating Activities—Direct Method



Cash receipts from customers (1) ......................................................... $ 97,400

Cash payments to suppliers (2) ............................................................. (42,640) )

Cash payments for salaries (3) .............................................................. (17,820) )

Cash payments for rent (4) ..................................................................... (9,040) )

Cash payments for insurance (5) ........................................................... (3,780) )

Cash payments for utilities (6) ............................................................... (2,740) )

Cash payments for interest .................................................................... (3,600) )

Net cash provided by operating activities ............................................... $ 17,780

Supporting calculations

(1) Sales + Decrease in receivables = $97,200 + ($5,800 - $5,600) = $97,400 (2) Cost of Increase in Decrease in goods sold inventory accts payable = $42,000 + ($1,980 - $1,540) + ($4,600 - $4,400) = $42,640 (3) Salaries expense - Increase in salaries payable = $18,000 - ($880 - $700) = $17,820 (4) Rent expense + Increase in prepaid rent = $9,000 + ($220 - $180) = $9,040

(5) Insurance expense - Decrease in prepaid insurance = $3,800 - ($280 - $260) = $3,780

(6) Utilities expense - Increase in utilities payable = $2,800 - ($220 - $160) = $2,740

+ +



PROBLEM SET B Problem 12-1B (40 minutes)

Part 1

GAZELLE CORPORATION Statement of Cash Flows


Cash flows from operating activities Net income .......................................................................................... $158,100 Adjustments to reconcile net income to net cash provided by operating activities

Decrease in accounts receivable ($80,750 - $77,100) ................ 3,650

Decrease in inventory ($250,700 - $240,600) ........................ 10,100

Decrease in prepaid expenses ($17,000 - $15,100) .................... 1,900



Loss on disposal of equipment .................................................. 2,100 Net cash provided by operating activities .................................... $130,200

Cash flows from investing activities Cash received from sale of equipment ......................................... 26,050 Cash paid for equipment .................................................................. (43,250) Net cash used in investing activities ............................................. (17,200)

Cash flows from financing activities Cash borrowed on short-term note ............................................... 5,000



Cash paid for dividends ................................................................... (53,600) Net cash used in financing activities ............................................. (51,100)

) Net increase in cash............................................................................. $ 61,900 Cash balance at December 31, 2012 ................................................ 61,550

Cash balance at December 31, 2013 ................................................ $123,450




Problem 12-1B (Continued)

Part 2

Gazelle Corporation's dividend payments of $53,600 represent 34% of the

$158,100 net income for the year, and 41% of cash inflow provided by

operations of $130,200.

Further analysis reveals that investing activities used a modest $17,200 and,

including the dividends, financing activities used $51,100. This resulted in a

$61,900 increase in the company's cash balance for the year, a 101% increase.

Companies usually pay dividends that are substantially less than net income.

The analysis of cash flows for this company indicates no reason to question

the amount of the current dividend. Indeed, the liquidity position of the

company did not deteriorate as a result of its cash dividend.



Problem 12-2BA (60 minutes)

GAZELLE CORPORATION Spreadsheet for Statement of Cash Flows


December 31, 2012


Balance sheet--debits Cash .......................................................... $ 61,550 $123,450 Accounts receivable .............................. 80,750 (b) $ 3,650 77,100 Merchandise inventory .......................... 250,700 (c) 10,100 240,600 Prepaid expenses ................................... 17,000 (d) 1,900 15,100 Equipment ............................................... 200,000 (h) $113,250 (g) 51,000 262,250 $610,000 $718,500 Balance sheet--credits Accum. depreciation—Equip. .............. $ 95,000 (g) 22,850 (f) 38,600 $110,750 Accounts payable ................................... 102,000 (e) 84,250 17,750 Short-term notes payable ...................... 10,000 (j) 5,000 15,000 Long-term notes payable ...................... 77,500 (k) 47,500 (i) 70,000 100,000 Common stock, $5 par value ................ 200,000 (l) 15,000 215,000 Paid-in capital in excess of par value, common stock ................... 0

(l)

30,000

30,000

Retained earnings .................................. 125,500 (m) 53,600 (a) 158,100 230,000 $610,000 $718,500 Statement of cash flows Operating activities Net income ............................................... (a) 158,100 Decrease in accounts receivable ......... (b) 3,650 Decrease in merch. inventory .............. (c) 10,100 Decrease in prepaid expenses ............. (d) 1,900 Decrease in accounts payable ............. (e) 84,250 Depreciation expense ............................ (f) 38,600 Loss on sale of equipment ................... (g) 2,100 Investing activities Receipt from sale of equipment ........... (g) 26,050 Payment to purchase equipment ........ (h) 43,250 Financing activities Borrowed on short-term note ............... (j) 5,000 Payment on long-term note .................. (k) 47,500 Issued common stock for cash ........... (l) 45,000 Payments of cash dividends ................ (m) 53,600

Noncash investing and financing activities

Purchase of equip. financed by long-term note payable .........

(i)

70,000

(h)

70,000

$681,950 $681,950



Problem 12-2BA (Concluded)




Net income .......................................................................................... $158,100


Decrease in accounts receivable ($80,750 - $77,100) ................ 3,650

Decrease in inventory ($250,700 - $240,600) ........................ 10,100

Decrease in prepaid expenses ($17,000 - $15,100) .................... 1,900




Net cash provided by operating activities .................................... $130,200










Net cash used in financing activities ............................................. (51,100) )

Net increase in cash............................................................................. $ 61,900

Cash balance at beginning of year 2013 .......................................... 61,550

Cash balance at end of year 2013 ..................................................... $123,450




Problem 12-3BB (40 minutes)




Cash received from customers (Note 1) ..................... $1,188,650

Cash paid for merchandise (Note 2) ........................... (669,150)

Cash paid for other expenses (Note 3) ....................... (360,950)

Cash paid for income taxes ........................................ (28,350)

Net cash provided by operating activities ................. $130,200


Cash received from sale of equipment ...................... 26,050

Cash paid for equipment ............................................. (43,250)

Net cash used in investing activities ......................... (17,200)


Cash borrowed on short-term note ............................ 5,000

Cash paid on long-term note ...................................... (47,500)

Cash received from issuing stock (3,000 x $15) ......... 45,000

Cash paid for dividends .............................................. (53,600)

Net cash used in financing activities ........................ (51,100)

Net increase in cash ....................................................... $ 61,900

Cash balance at December 31, 2012 ............................. 61,550

Cash balance at December 31, 2013 ............................. $123,450


Supporting calculations (1) Sales + Decrease in receivables = $1,185,000 + ($80,750 - $77,100) = $1,188,650 (2) Cost of Decrease in Decrease in goods sold inventory payables = $595,000 - ($250,700 – $240,600) + ($102,000 - $17,750) = $669,150 (3) Other expenses - Decrease in prepaid expenses = $362,850 - ($17,000 - $15,100)

= $360,950

- +



Problem 12-4B (35 minutes)

SATU COMPANY Statement of Cash Flows



Net income ............................................................................... $202,767


Decrease in accounts receivable ($25,860 - $20,222) ....... 5,638

Increase in inventory ($165,667 - $140,320) ........................ (25,347)

Decrease in accounts payable ($157,530 - $20,372) ......... (137,158)

Decrease in taxes payable ($6,100 - $2,100) ...................... (4,000)

Depreciation expense .......................................................... 15,700

Net cash provided by operating activities ......................... $ 57,600


Cash paid for equipment ....................................................... (30,250)


Cash received from issuing stock (3,000 x $21) ................. 63,000

Cash paid for dividends ........................................................ (60,000)

Net cash provided by financing activities ......................... 3,000

Net increase in cash .................................................................. $ 30,350

Cash balance at December 31, 2012 ...................................... 28,400

Cash balance at December 31, 2013 ...................................... $ 58,750



Problem 12-5BA (50 minutes)

SATU COMPANY Spreadsheet for Statement of Cash Flows

For Year Ended December 31, 2013 December

31, 2012 Analysis of Changes December

31, 2013 Debit Credit

Balance sheet--debits

Cash .......................................................... $ 28,400 $ 58,750

Accounts receivable .............................. 25,860 (b) $ 5,638 20,222

Merchandise inventory .......................... 140,320 (c) $ 25,347 165,667

Equipment ............................................... 77,500 (g) 30,250 107,750

$272,080 $352,389

Balance sheet--credits

Accum. depreciation—Equip. .............. $ 31,000 (f) 15,700 $ 46,700

Accounts payable ................................... 157,530 (d) 137,158 20,372

Income taxes payable ............................ 6,100 (e) 4,000 2,100

Common stock, $5 par value ................ 25,000 (h) 15,000 40,000

Paid-in capital in excess of par value, common stock ...................

20,000

(h)

48,000

68,000

Retained earnings .................................. 32,450 (i) 60,000 (a) 202,767 175,217

$272,080 $352,389

Statement of cash flows Operating activities

Net income ............................................... (a) 202,767

Decrease in accounts receivable ........ (b) 5,638

Increase in merch. inventory ................ (c) 25,347

Decrease in accounts payable ............. (d) 137,158

Decrease in income taxes payable ...... (e) 4,000

Depreciation expense ............................ (f) 15,700


Payment for equipment ......................... (g) 30,250


Issued common stock for cash ........... (h) 63,000

Paid cash dividends ............................... ________ (i) 60,000

$543,860 $543,860



Problem 12-5BA (concluded)




Net income ............................................................................... $202,767


Decrease in accounts receivable ($25,860 - $20,222) ....... 5,638

Increase in inventory ($165,667 - $140,320) ........................ (25,347)

Decrease in accounts payable ($157,530 - $20,372) ......... (137,158)

Decrease in taxes payable ($6,100 - $2,100) ...................... (4,000)

Depreciation expense .......................................................... 15,700

Net cash provided by operating activities ......................... $ 57,600


Cash paid for equipment ....................................................... (30,250)


Cash received from issuing stock (3,000 x $21) ................. 63,000

Cash paid for dividends ........................................................ (60,000)

Net cash provided by financing activities ......................... 3,000

Net increase in cash .................................................................. $ 30,350

Cash balance at beginning of 2013 ........................................ 28,400

Cash balance at end of 2013 ................................................... $ 58,750







Cash received from customers (Note 1) .................. $756,438

Cash paid for merchandise (Note 2) ........................ (431,705)

Cash paid for other operating expenses ................. (173,933)

Cash paid for income taxes (Note 3) ........................ (93,200)

Net cash provided by operating activities ............... $57,600


Cash paid for equipment ........................................... (30,250)


Cash received from issuing stock (3,000 x $21) ...... 63,000

Cash paid for cash dividends ................................... (60,000)

Net cash provided by financing activities ............... 3,000

Net increase in cash ...................................................... $30,350

Cash balance at December 31, 2012 ............................ 28,400

Cash balance at December 31, 2013 ............................ $58,750

Supporting calculations (1) Sales + Decrease in receivables = $750,800 + ($25,860 - $20,222) = $756,438 (2) Cost of Increase in Decrease in goods sold inventory accounts payable = $269,200 + ($165,667 - $140,320) + ($157,530 - $20,372) = $431,705 (3) Income taxes expense + Decrease in income taxes payable = $89,200 + ($6,100 - $2,100) = $93,200

+ +



Problem 12-7B (35 minutes)

SALT LAKE COMPANY Cash Flows from Operating Activities—Indirect Method



Net income ............................................................................... $ 20,000

Adjustments to reconcile net income to net cash

provided by operating activities

Depreciation expense .......................................................... $32,000

Increase in accounts receivable ......................................... (600 )

Decrease in merchandise inventory .................................. 120

Decrease in accounts payable ........................................... (200 )

Increase in salaries payable ............................................... 300

Increase in utilities payable ................................................ 200

Decrease in prepaid insurance ........................................... 40

Decrease in prepaid rent ..................................................... 100 31,960

Net cash provided by operating activities ............................ $ 51,960




SALT LAKE COMPANY Cash Flows from Operating Activities—Direct Method



Cash receipts from customers (1) ........................................................ $ 155,400

Cash payments to suppliers (2) ............................................................ (72,080 )

Cash payments for salaries (3) ............................................................. (19,700 )

Cash payments for rent (4) .................................................................... (4,900 )

Cash payments for insurance (5) .......................................................... (2,560 )

Cash payments for utilities (6) .............................................................. (1,800 )

Cash payments for interest ................................................................... (2,400 )

Net cash provided by operating activities ................................................ $ 51,960

Supporting calculations (1) Sales - Increase in receivables = $156,000 - ($3,600 - $3,000) = $155,400 (2) Cost of Decrease in Decrease in goods sold inventory accounts payable = $72,000 - ($980 - $860) + ($2,600 - $2,400) = $72,080 (3) Salaries expense - Increase in salaries payable = $20,000 - ($900- $600) = $19,700

(4) Rent expense - Decrease in prepaid rent = $5,000 - ($200- $100) = $4,900 (5) Insurance expense - Decrease in prepaid insurance = $2,600 - ($180- $140) = $2,560 (6) Utilities expense - Increase in utilities payable = $2,000 - ($200- $0) = $1,800

- +



SERIAL PROBLEM — SP 12 Serial Problem — SP 12, Success Systems (45 minutes)

SUCCESS SYSTEMS Statement of Cash Flows (Indirect) For Quarter Ended March 31, 2014


Net income .......................................................................................... $ 18,686


Increase in accounts receivable ($22,720 - $5,668) ................... (17,052)

Increase in inventory ($704 - $0) .................................................. (704)

Increase in computer supplies ($2,005 - $580) .......................... (1,425)

Decrease in prepaid insurance ($1,665 - $1,110) ....................... 555

Decrease in accounts payable ($1,100 - $0) ............................... (1,100)

Increase in wages payable ($875 - $500) ................................... 375

Decrease in unearned computer service revenue .................. (1,500)

Depreciation expense–Office Equipment ................................. 400

Depreciation expense–Computer Equipment ......................... 1,250

Net cash used by operating activities ........................................... $ (515)


Net cash used in investing activities ............................................. 0


Cash received from stock issuance .............................................. 25,000


Net cash provided by financing activities .................................... 20,200

Net increase in cash ............................................................................. $ 19,685

Cash balance at December 31, 2013 ................................................. 58,160

Cash balance at March 31, 2014 ........................................................ $ 77,845



Reporting in Action — BTN 12-1 1. Polaris uses the indirect method of reporting operating cash flows. We

readily know this because the operating activity section of the cash flow statement starts with net income, and makes adjustments for items such as depreciation and changes in working capital.

2. In all three years, Polaris’s cash flows from operating activities markedly exceed the cash dividends paid, as can be seen from the table below:

($ thousands) 2011 2010 2009

Cash provided by operating activities ...... $302,530 $297,619 $193,201 Cash dividends paid ................................... (61,585) (53,043) (50,177)

3. In 2011, the largest item in reconciling the difference between net income and cash flow from operations was the change (increase) in accrued expenses of $80,668 thousand.

In 2010, the largest item in reconciling the difference between net income and cash flow from operations was the change (increase) in accrued expenses of $107,363 thousand.

In 2009, the largest item in reconciling the difference between net income and cash flow from operations was depreciation and amortization of $64,593 thousand.

4. In 2011, the largest cash inflow from investing activities was $11,950 thousand from distributions from financing affiliate. The largest cash outflow from investing activities was for acquisitions of property and equipment, in the amount of $84,484 thousand.

In 2011, the largest cash inflow from financing activities was $100,000 thousand from borrowings under credit agreement/senior notes. The largest cash outflow from financing activities was $202,333 thousand repayments under credit agreement.

In 2010, the largest cash inflow from investing activities was $17,910 thousand from distributions from financing affiliate. The largest cash outflow from investing activities was for acquisition of property and equipment, in the amount of $55,718 thousand.

In 2010, the largest cash inflow from financing activities was $68,105 thousand from proceeds from stock issuances under employee plans. The largest cash outflow from financing activities was $53,043 thousand for cash dividends to shareholders.

5. Answer depends on the financial statement information obtained.



Comparative Analysis — BTN 12-2 1. Polaris’s cash flow on total assets ratio ($ thousands) Current Year = Operating cash flows/Average total assets = $302,530 / [($1,228,024 + $1,061,647)/2] = $302,530 / $1,144,836 = 26.4% Prior Year = Operating cash flows/Average total assets = $297,619 / [($1,061,647 + $763,653)/2] = $297,619 / $912,650 = 32.6%

Arctic Cat’s cash flow on total assets ratio ($ thousands) Current Year = Operating cash flows/Average total assets = $(5,123) / [($272,906 + $246,084)/2] = $(5,123) / $259,495 = (2.0%) Prior Year = Operating cash flows/Average total assets = $29,315 / ($246,084+ $251,165)/2] = $29,315 / $248,624.5 = 11.8%

2. The cash flow on total assets ratio reflects the return on average assets by using actual operating cash flows instead of net income. This return calculation is not affected by the accounting constraints of recognition and measurement of revenues and expenses. Instead, it is based solely on operating cash flows (which has its own strengths and weaknesses).

3. For both years, Polaris has a higher cash flow on total assets ratio than Arctic Cat.

4. Many business decision makers (such as analysts) feel that the cash flow on total assets ratio is one indicator of earnings quality in that it is a measure of the ability of the company to realize its net income in the form of cash for the period under analysis.



Ethics Challenge — BTN 12-3 1. The business actions available include

a. Encourage early collection of receivables to reduce the accounts

receivable balance.

b. Defer payments to vendors due as of year-end to increase the accounts

payable balance.

c. Defer any other payments of operating expenses due near the year-end

to improve the level of cash flow from operations.

Many other business actions are possible that would accelerate cash

receipts and/or delay cash payments.

2. As a business owner, Katie Murphy certainly can exercise discretion over

business actions. However, the underlying economic realities should

support any proposed actions. It is not ethical to pursue actions that

purposely mislead users of financial statements.

In addition, Katie Murphy’s actions may be transparent to the banker when

s/he reviews the financial records of the business. If so, her reputation

may suffer in the eyes of her banker and she may jeopardize her ability to

obtain bank financing in the future or increase the cost of that financing.



Communicating in Practice — BTN 12-4 Here is a sample of what the body of the memorandum might include:

TO: Diana Wood FROM: (Your Name) SUBJECT: Statement of Cash Flows DATE: _________________ I am pleased to hear your business is more profitable this year than last. However, I have been thinking about what you said regarding the statement of cash flows and have some thoughts as to why you found it confusing. The statement of cash flows (operating section) can be prepared using either of two methods—the direct or the indirect method. From what you describe, your statement is probably prepared using the indirect method. This method shows a determination of net cash flows in the operating (first) section by listing the net income number and applying a series of accounting adjustments. These adjustments often do not make sense to those that do not have an accounting or finance background. I recommend that you request your accountant to provide you with a statement of cash flows that is prepared using the direct method. This will identify exactly how much cash came in from operating activities like sales. It will also identify exactly how much cash went out for operating expenses like merchandise, wages, interest, and taxes. It will determine your net operating cash flow by directly subtracting the total of these operating outflows from the inflows. You should find this format more understandable. Note that good cash management is essential to business success and growth. The statement of cash flows will provide you with a lot more information regarding your cash than a balance sheet can offer. It will allow you to see exactly where your cash came from, where it went, and how much it changed. It organizes these amounts into categories of operating, financing, and investing. This organization of cash information will allow you to better project and plan for the future. Please reconsider the value of the statement of cash flows for your business decisions. If you wish to discuss this further, please call me.



Taking It to the Net — BTN 12-5

1. Mendocino Brewing Company uses the indirect method to construct the consolidated statement of cash flows.

2. The largest reconciling item is for depreciation and amortization totaling $1,488,000.

3. The following table shows the net income (or net loss) and the cash flows from operations for Mendocino Brewing for 2010 and 2011. Over this two-year period, Mendocino has generated more positive cash flows from operations (relative to its net income); indeed, its operating cash flows have been consistently positive and markedly larger than net income over this period.

2010 2011

Net income (loss) ................................. $ 49,400 $(1,078,500)

Cash flows from operations ................ 1,412,600 1,011,700

4. For the recent period, the largest cash outflow for investing was $1,025,900 for purchases of property, equipment and leasehold improvements. For the recent period, the largest cash outflow for financing was $3,694,200 for repayment on long-term notes.

5. In the recent period, for supplementary cash flow information, the company reports cash flows related to: Interest paid, and Income taxes paid.

6. Yes, the company reports non-cash financing information related to “Common stock issued to satisfy liabilities.”



Teamwork in Action — BTN 12-6

Part 1

a. The reporting objective of the statement of cash flows is to provide information about important cash inflows and outflows for business decision makers. It answers specific questions such as:

How does a company obtain its cash?

Where does a company spend its cash?

What is the change in the cash balance?

b. The statement can be prepared using the direct method or the indirect method for reporting cash flows from operating activities.

Similarities

Both methods report the same net cash flow from operating activities.

Both methods classify cash flows into operating, financing, and investing categories.

Both methods provide exactly the same information in the financing and investing categories.

Both identify the change in cash, beginning cash, and ending cash.

Both are acceptable methods for financial reporting. Differences

Cash flow from operating activities is determined differently. The direct method determines all operating cash inflows and outflows, and then subtracts total operating outflows from inflows. The indirect method starts with net income and applies a series of adjustments to reconcile this accrual basis number to a cash basis number.

The direct method requires an extra section reconciling net income to cash flows from operating activities.

The direct method is recommended by the FASB.

The indirect method is more widely used. *



Teamwork in Action (Continued) c. Steps to prepare the statement of cash flows:

(i) Compute the net increase or decrease in cash using comparative

balance sheet data. This is the target number or the number the

statement will explain and prove.

(ii) Compute net cash flow in operating activities using the direct or

indirect method.

(iii) Compute net cash flows from investing activities.

(iv) Compute net cash flows from financing activities.

(v) Prove that the net cash flow from the three categories combined

equals the net change in cash. List the beginning and ending cash

balances to prove this.

Also, identify and list noncash financing and investing activities in a

separate schedule or note.

d. Common analyses made from information in the statement of cash flows

include assessing a company’s:

Ability to generate future cash flows.

Ability to pay dividends.

Ability to meet obligations.

Ability to expand operations.

Ability to obtain financing.

Cash flow on total assets ratio.

Sources and uses of cash flows.

Part 2

Adjusting Net Income to Cash Flow from Operating Activities

Items to Add Items to Subtract

a. Noncash expenses Noncash revenues

b. Losses Gains

c. Decreases in current assets Increases in current assets

d. Increases in current liabilities Decreases in current liabilities



Teamwork in Action (Concluded)

Part 3

a. Cash receipts from customers = Sales - Increase in Accounts Receivable, or, + Decrease in Accounts Receivable.

Explanation: Sales reflects what is earned during the period. If Accounts

Receivable increases, that increase represents earnings not yet collected, so we subtract it. If Accounts Receivable decreases, the entity collected that much more than the period’s sales, so we add it.

b. Cash paid for merchandise requires a two-step computation. (1) Purchases = Cost of goods sold + Increase in inventory, or, – Decrease

in inventory. (2) Cash paid for merchandise = Purchases + Decrease in Accounts

Payable, or, – Increase in Accounts Payable. Explanation for (1): If inventory increases, the entity bought more than was

sold, so we add it. If inventory decreases, the entity bought less than was sold, so we subtract it.

Explanation for (2): If Accounts Payable decreases, the entity paid for more than the period’s purchases, so we add it. If Accounts Payable increases, the entity paid for less than the period’s purchases, so we subtract it.

c. Cash paid for wages and operating expenses = Wages and other operating

expenses [+ Increase in prepaid expenses, or, – Decrease in prepaid expenses] and [+ Decrease in accrued liabilities, or, – Increase in accrued liabilities].

Explanation: If prepaid expenses increase, the entity paid for more than

was incurred, so we add it. If prepaid expenses decrease, the entity paid for less than was incurred, so we subtract it. Also, if the accrued liabilities increase, the expense includes an amount not yet paid for, so we subtract it. If the accrued liabilities decrease, the entity paid for more than the period’s expenses, so we add it.

d. Cash paid for interest and taxes = Interest and tax expense + Decrease in

related payable, or, – Increase in related payable. Explanation: If the related payable decreases, the entity paid for more than

was incurred, so we add it. If the related payable increases, the entity paid for less than was incurred, so we subtract it.



Entrepreneurial Decision — BTN 12-7

1. It is common that small businesses must pay cash in advance for items such as rent, advertising, supplies, and facilities expansion. Consequently, those costs are usually recorded before revenues are earned, and before those revenues are ultimately collected in cash. If the business does not carefully plan, it is possible that it could show a positive net income, but not be able to effectively operate because it has little or no cash to pay its suppliers, creditors, and others to whom it owes money.

2. As a privately held corporation, TOMS can potentially raise cash financing for

expansion by selling shares in the company or by borrowing the monies. TOMS is not a publicly traded company, so the potential to raise capital by selling stock is somewhat restricted. Moreover, potential lenders will want to evaluate the future profitability, cash flows, and solvency of the company before lending money.

Entrepreneurial Decision — BTN 12-8

Memorandum To: Jenna and Matt Wilder From: Your name Subject: Performance evaluation of Mountain High Date: Current Date

I have completed my evaluation of your company, Mountain High. My conclusion is that Mountain High is performing well. This is in spite of its reported net loss and its negative net cash flow, which I explain in this memorandum.

First, with respect to the net loss, please note that it includes an $85,000 extraordinary loss. Absent this extraordinary loss, Mountain High would report a $75,000 net income. Using year-end total assets, Mountain High’s return on assets would be roughly 9.4% (computed as $75,000 divided by $800,000). This return is reasonable for a company in its second year of operations.

Second, with respect to its net cash outflow of $(5,000), please note that this is mainly due to Mountain High’s renovation and expansion activities. This is reflected in its summarized statement of cash flows. Specifically, its cash flows provided by operating activities are an impressive $295,000. Again, using year-end total assets of $800,000, Mountain High’s operating cash flow on total assets ratio is roughly 36.9%. This return is especially good for a company’s second year of operations.

Consequently, my evaluation is positive. Operating cash flows are very good and attention should be directed at maintaining or increasing these amounts. Also, income from continuing operations is a reasonable $75,000. Still, given the high operating cash flows relative to income from continuing operations, special scrutiny should be directed at identifying and assessing differences between cash flow and accrual amounts for important individual operating activities.



Hitting the Road — BTN 12-9 1. The Motley Fool’s Website defines cash flow as earnings before interest,

taxes, depreciation, and amortization (EBITDA). The school’s justification for this definition includes: “Interest income and expense, as well as taxes, are all tossed aside because cash flow is designed to focus on the operating business and not secondary costs or profits… As for depreciation and amortization, these are called non-cash charges, as the company is not actually spending any money on them. Rather, depreciation is an accounting convention for tax purposes that allows companies to get a break on capital expenditures as plant and equipment ages and becomes less useful. Amortization normally comes in when a company acquires another company at a premium to its shareholder's equity -- a number that it accounts for on its balance sheet as goodwill and is forced to amortize over a set period of time, according to generally accepted accounting principles (GAAP). When looking at a company's operating cash flow, it makes sense to toss aside accounting conventions that might mask cash strength.”

2. Some analysts tend to focus on this particular earnings definition

(earnings before interest and taxes or EBIT) as it purportedly allows a focus on a company’s real operating situation. For example, taxes can depend on laws and can fluctuate from year to year. By using the earnings before interest and taxes, the “noise” caused by such fluctuations is minimized.

3. Answer depends on the links visited and chosen for the report.

Global Decision — BTN 12-10 1. Piaggio’s cash flow on total assets ratio follows (in Euro thousands): Current Year = Operating cash flows / Average total assets = €155,624 / [(€1,520,184 + €1,545,722)/2] = €155,624 / €1,532,593 = 10.2% Prior Year = Operating cash flows / Average total assets = €122,541 / [(€1,545,722 + €1,564,820)/2] = €122,541 / €1,555,271 = 7.9% 2. For the current year, Piaggio’s ratio (10.2%) is lower than Polaris’s (26.4%)

and higher than Arctic Cat’s (-2.0%) ratio. In the prior year, Piaggio’s ratio (7.9%) was also lower than Polaris’s (32.6%) and Arctic Cat’s (11.8%) ratio.

Documents

FinMan 5e Chapter 12 SM