Chapter 12

Chapter 12

The Statement of Cash Flows

Short Exercises

(10 min.) S 12-1

The statement of cash flows helps investors and creditors:

a. Predict future cash flows by reporting past cash receipts

and payments, which are reasonably good predictors of

future cash receipts and payments.

b. Evaluate management decisions by reporting on how

managers got cash and how they used cash to run the

business.

Chapter 12 The Statement of Cash Flows 747

(5-10 min.) S 12-2

4 things that could cause operating cash flows to be negative

(under the indirect method) are:

1. Net loss

2. A large gain on the sale of assets

3. Increases in current assets other than cash

4. Decreases in current liabilities

Students need to identify only 3 items.

(5-10 min.) S 12-3

Cash flows from operating activities:Net income……………………………………………….. $80,000Adjustments to reconcile net income to net cash provided by operating activities:

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

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

Net cash provided by operating activities:…... $70,000

Financial Accounting 7/e Solutions Manual748

(10 min.) S 12-4

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

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

receivable F l. Issuance of common I f. Purchase of stock

equipment O− m. Gain on sale of N g. Collection of cash building

from customers N n. Retained earnings

(10 min.) S 12-5

Edwards CorporationStatement of Cash Flows (partial)

Year ended June 30, 20X8Cash flows from operating activities:

Net income……………………………………….. $ 81,000*Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation…………………………………... $ 8,000Increase in current assets other than

cash…………………………………………. (30,000)Decrease in current liabilities……………… (5,000 ) (27,000 )

Net cash provided by operating activities….. $ 54,000 _____*$224,000 − $100,000 − $35,000 − $8,000 = $81,000


(15 min.) S 12-6

Edwards CorporationStatement of Cash Flows Year ended June 30, 20X8

Cash flows from operating activities:Net income……………………………………….. $ 81,000*Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation…………………………………... $ 8,000Increase in current assets other than

cash…………………………………………. (30,000)Decrease in current liabilities……………… (5,000 ) (27,000 )

Net cash provided by operating activities….. 54,000

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

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

Net increase in cash……………………………….. $ 53,000 _____*$224,000 − $100,000 − $35,000 − $8,000 = $81,000


(10 min) S 12-7

a. Acquisitions of plant assets = $60,000, as follows:Plant Assets, netBeg.

+ Acquisitions − Depreciation −Book value of

=End.

bal. assets sold bal.

$185,000 + X − $ 20,000 − $0 = $225,000

X = $225,000 − $185,000 + $20,000

X = $ 60,000

Plant Assets, netBeg. bal. 185,000Acquisitions 60,000 Depreciation 20,000End. bal. 225,000

b. Proceeds from the sale of long-term investments = $20,000, as follows:Long-term investments

Beg. bal. + Purchases −Book value of

= End. bal.investments sold

$75,000 + 0 − X = $55,000

X = $75,000 − $55,000

X = $20,000

With no gain or loss, proceeds from the sale must be the same as the book value of the investments sold, $20,000.

Long-Term InvestmentsBeg. bal. 75,000 Book value of

investments sold 20,000End. bal. 55,000


(15 min.) S 12-8

a. Now borrowing on long-term notes payable = $10,000 ($68,000 − $58,000)This is clear from the increase in long-term notes payable.

b. Issuance of common stock = $8,000 ($40,000 − $32,000)This is clear from the increase in common stock.

c. Payment of dividends(same as amount of = $146,000, as follows:dividends declared)

BeginningNet

incomeDividend

declarations

Endingretained + − = retainedearnings earnings

$246,000 + $150,000 − X = $250,000

X = $246,000 + $150,000 − $250,000

X = $146,000

Retained EarningsDividend declarations Beg. bal. 246,000 (same amount paid) 146,000 Net income 150,000

End. bal. 250,000


(15 min.) S 12-9

Tally-Ho Horse Farm, Inc.Statement of Cash Flows

Year 20X6Cash flows from operating activities:

Collections from customers………………… $ 510,000Payments to suppliers and employees…… (400,000 )Net cash provided by operating activities.. $ 110,000

Cash flows from investing activities:Purchase of equipment……………………… $(100,000 )Net cash used for investing activities……. (100,000)

Cash flows from financing activities:Issued note payable to borrow money……. $ 20,000Payment of dividends………………………... (50,000 )Net cash used for financing activities…….. (30,000 )

Net (decrease) in cash…………………………... $ (20,000)Cash balance, beginning……………………….. 44,000 Cash balance, ending…………………………… $ 24,000


(5 min.) S 12-10

Millbrook Golf Club, Inc.Statement of Cash Flows (partial)

Year ended June 30, 20X9Cash flows from operating activities:

Collections from customers………………… $180,000Payments to suppliers……………………….. (87,000)Payments to employees……………………… (70,000)Payment of income tax………………………. (10,000 )Net cash provided by operating activities... $13,000


(15 min.) S 12-11

Millbrook Golf Club, Inc.Statement of Cash Flows Year ended June 30, 20X9

Cash flows from operating activities:Collections from customers…………………….. $180,000Payments to suppliers…………………………… (87,000)Payments to employees…………………………. (70,000)Payment of income tax…………………………... (10,000 )Net cash provided by operating activities……. $ 13,000

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

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

Net increase in cash…………………………………. $ 12,000


(15 min.) S 12-12

a. Collections from customers = $699,000, as follows:

Collections=

Sales− Increase in Accounts Receivable

from customers Revenue

= $710,000 − $11,000 ($59,000 − $48,000)

= $699,000

Accounts ReceivableBeg. Bal. 48,000Sales 710,000 Collections 699,000End. Bal. 59,000

b. Payments for inventory = $326,000, as follows:

Payments forinventory

Cost ofDecrease ininventory

Increase inAccounts Payable

= Goods − −Sold

= $340,000 − $9,000 − $5,000($84,000 − $75,000) ($47,000 − $42,000)

= $326,000

Inventory Accounts PayableBeg. bal. 84,000 Payments for Beg. bal. 42,000Purchases 331,000 Cost of goods sold 340,000 inventory 326,000 Purchases 331,000End. bal. 75,000 End. bal. 47,000


(10 min.) S 12-13

a. Payments to employees = $68,000, as follows:

Payments to=

Salary−

Increase inemployees expense Salary Payable

= $70,000 − $2,000($23,000 − $21,000)

= $68,000

Salary PayablePayments to Beg. bal. 21,000

employees 68,000 Salary expense 70,000End. bal. 23,000

b. Payments for other expenses = $134,000, as follows:

Payments of other

expenses

Otherexpenses

Increase in Decrease in= + prepaid + accrued

expenses liabilities

= $130,000 + $1,000 + $3,000 ($3,000 − $2,000) ($11,000 − $8,000)

= $134,000


Exercises

(10-15 min.) E 12-14

DATE: _______________

TO: Managers of U.S. Plating, Inc.

FROM: Student Name

SUBJECT: Purposes of the statement of cash flows

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

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

Student responses may vary.


(10-15 min.) E 12-15

O+ a. Net income NIF k. Acquisition of equipmentby issuance of notepayable

F– b. Payment of cash dividend F– l. Payment of long-term debt

I+ c. Sale of long-term I– m. Acquisition of building byinvestment cash payment

O+ d. Loss on sale of equipment N n. Accrual of salary expense

O+ e. Amortization of intangible I– o. Purchase of long-termassets investment

F+ f. Issuance of long-term note O+ p. Decrease in merchandisepayable to borrow cash inventory

O+ g. Depreciation of equipment O– q. Increase in prepaid expenses

F– h. Purchase of treasury stock I+ r. Cash sale of land

F+ i. Issuance of common stock O– s. Decrease in accrued for cash liabilities

O+ j. Increase in accountspayable


(5-10 min.) E 12-16

a. Investing g. Investing

b. Investing h. Financing

c. Financing i. Financing

d. Noncash investing and j. Operatingfinancing

k. Operating e. Operating

l. Investingf. Financing

m. Operating


(10-15 min.) E 12-17

Cash flows from operating activities:Net income…………………………………. $ 35,000Adjustments to reconcile net income to net cash used for operating activities:

Depreciation…………………………….. $ 18,000Loss on sale of land…………………… 5,000Increase in current assets other

than cash……………………………… (27,000)Decrease in current liabilities………... (20,000 ) (24,000 )

Net cash provided by operatingactivities…………………………………….. $(11,000)

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

cash provided by operating activities.


(15-20 min.) E 12-18

Cash flows from operating activities:Net income…………………………………….. $41,000Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation………………………………. $ 3,000 Decrease in accounts receivable……... 4,000 Increase in inventory……………………. (2,000) Increase in accounts payable…………. 5,000 Decrease in accrued liabilities………… (3,000 ) 7,000

Net cash provided by operatingactivities………………………………………… $48,000

Saskatoon shows no sign of trouble collecting receivables or

selling inventory. There is no large build-up in either Accounts

Receivable or Inventory. Also, cash flow from operations is

positive, and it exceeds net income.


(20-30 min.) E 12-19

Req. 1

Noel Travel Products, Inc.Statement of Cash Flows

Year Ended December 31, 20X6Cash flows from operating activities: Net income…………………………………………... $ 57,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 29,000 Decrease in accounts receivable……………. 15,000 Increase in inventory…………………………... (6,000) Increase in prepaid expenses………………… (1,000) Increase in accounts payable………………… 13,000 Decrease in accrued liabilities……………….. (8,000 ) 42,000 Net cash provided by operating activities…. 99,000

Cash flows from investing activities: Acquisition of plant assets……………………….. $(100,000) Proceeds from sale of land……………………….. 24,000 Net cash used for investing activities………. (76,000)

Cash flows from financing activities: Proceeds from issuance of common stock…… $ 30,000 Payment of long-term note payable…………….. (15,000) Payment of dividends …………………………….. (11,000 ) Net cash provided by financing activities….. 4,000 Net increase in cash…………………………………… $ 27,000Cash balance, December 31, 20X5………………….. 20,000 Cash balance, December 31, 20X6………………….. $ 47,000

Noncash investing and financing activities:

Acquisition of plant assets by issuing note payable $ 50,000


(continued) E 12-19

Req. 2

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

main source of cash. The company is investing in

new plant assets without having to borrow. It was

able to issue stock and pay off a long-term note

payable — both financing transactions. All of these

signs are favorable.

(5-10 min.) E 12-20

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

Case B - The sale of plant assets generated the cash needed to acquire new plant assets. Operations provided the least amount of cash, compared to cases A and C.

Case C - Issuing stock generated the cash to acquire plant assets.

Most healthy financially - Case A

Mid-range - Case C

Least healthy financially - Case B


(10-15 min.) E 12-21

a. Cash proceeds of sale = Book value of asset sold, $1,500*− Loss on sale, $1,000

= $500

_____*$103,000 + $27,000 − $21,500 − Book value sold (X) = $107,000 Book value sold = $1,500

Plant Assets, Net

Beginning balance 103,000 Depreciation 21,500

Purchases 27,000 Book value sold 1,500

Ending balance 107,000

b. Cash dividend payments = $11,000

$45,000 + $47,000 − $8,000 − Cash dividends (X) = $73,000Cash dividends = $11,000

Retained Earnings

Stock dividends 8,000 Beginning balance 45,000

Cash dividends 11,000 Net income 47,000

Ending balance 73,000


(10-15 min.) E 12-22

F– a. Purchase of treasury stock NIF k. Acquisition of equipmentby issuance of notepayable

F+ b. Issuance of common stock F– l. Payment of long-term debtfor cash

O– c. Payment of accounts I– m. Acquisition of building bypayable payment of cash

F+ d. Issuance of preferred N n. Accrual of salary expensestock for cash

F– e. Payment of cash dividend I– o. Purchase of long-terminvestment

I+ f. Sale of long-term O– p. Payment of wages toinvestment employees

N g. Amortization of patent O+ q. Collection of cash interest

O+ h. Collection of accounts I+ r. Cash sale of landreceivable

F+ i. Issuance of long-term note N s. Distribution of stock payable to borrow cash dividend

N j. Depreciation of equipment


(5-10 min.) E 12-23

a. Investing h. Not reported

b. Investing i. Operating

c. Financing j. Investing

d. Investing k. Operating

e. Operating l. Operating

f. Financing m. Financing

g. Noncash investing and n. Financingfinancing


(10-15 min.) E 12-24

Cash flows from operating activities:Receipts:

Collections from customers($93,000 + $38,000)……………….. $ 131,000

Collection of dividend revenue……. 7,000 Total cash receipts……………….. 138,000

Payments:To suppliers…………………………… $(54,000)To employees…………………………. (34,000)For interest……………………………. (16,000)For income tax………………………... (13,000 )

Total cash payments……………... (117,000 )Net cash provided by operating activities. $ 21,000

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

cash provided by operating activities.


(5-10 min.) E 12-25

Salary Payable — Report cash payments to employees as an

operating cash flow.

Buildings — Report acquisitions of buildings and the proceeds

from sales of buildings as investing cash flows.

Notes Payable — Report issuance and payments of notes

payable as financing cash flows.


(20-30 min.) E 12-26Req. 1

Floral World, Inc.Statement of Cash FlowsYear Ended June 30, 20X6

Cash flows from operating activities: Receipts: Collections from customers ($229,000 + $30,000)………………………….. $ 259,000 Dividends received………………………………. 15,000 Total cash receipts…………………………… 274,000 Payments: To suppliers ($103,000 + $11,000 + $1,000)…. $(115,000) To employees ($45,000 + $1,000)……………… (46,000) For income tax……………………………………. (9,000) For interest………………………………………… (2,000 ) Total cash payments………………………… (172,000 ) Net cash provided by operating activities…… 102,000

Cash flows from investing activities: Acquisition of plant assets………………………… $(101,000) Proceeds from sale of land………………………… 24,000 Net cash used for investing activities………... (77,000)

Cash flows from financing activities: Proceeds from issuance of common stock……... $ 30,000 Payment of long-term note payable………………. (15,000) Payment of dividends……………………………….. (11,000 ) Net cash provided by financing activities…… 4,000 Net increase in cash…………………………………….. $ 29,000Cash balance, June 30, 20X5………………………….. 20,000 Cash balance, June 30, 20X6………………………….. $ 49,000

Noncash investing and financing activities: Acquisition of plant assets by issuing note payable $ 49,000


(continued) E 12-26

Req. 2

Evaluation: Floral World’s cash flows look strong. Operations

are the main source of cash. The company is

investing in new plant assets without having to

borrow. Floral World was able to issue stock and

pay off a long-term note payable — both financing

transactions. All of these signs are favorable.


(10-15 min.) E 12-27

$10,000 increase ina. Cash collections = $ 60,000 − Accounts Receivable

($32,000 − $22,000)

= $ 50,000

Cash paymentsfor inventory

$4,000 decrease in $6,000 decrease inb. = $111,000 − Inventory + Accounts Payable

($25,000 − $21,000) ($14,000 − $8,000)

= $113,000


(20-30 min.) E 12-28

(All amounts in thousands)Decrease in

Sales + Accounts Receivablea. Collections = $24,637 = $24,623 + ($615 − $601)

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

inventory = $18,134 = $18,048 + $269* − $183** *$3,100 − $2,831 = $ 269 **$1,547 − $1,364 = $ 183

Other Operating Increase inc. Payments for Expenses − Accrued Liabilities

other operating = $3,576 = $3,883 − ($938 − $631)expenses

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

income tax = $530 = $537 − ($201 − $194)

e. Proceeds from Beg. Common End. CommonIssuance of Stock + Issuance = Stockstock = $73: $446 + X = $519

X = $ 73

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

dividends = $1,294: $3,788 + $1,886 − X = $4,380

X = $1,294


(20 min.) E 12-29

Req. 1

(All in thousands)

Gain on sale ofProceeds from

dispositionsBook value

soldproperty and = −equipment

$120 = $770 − $650

Property & Equipment, NetBal., 12/31/X7 9,590Capital Depreciation 1,920

expenditures 4,130 Book value ofproperty andequipment sold X = 650

Bal., 12/31/X8 11,150

Req. 2

Long-Term Notes PayableBal., 12/31/X7 3,080

Repayment 110 Proceeds fromissuance 1,190

LT debt issuedfor somethingother than cash X = 240

Bal. 12/31/X8 4,400


Practice Quiz

Q12-30 cQ12-31 aQ12-32 bQ12-33 bQ12-34 dQ12-35 cQ12-36 cQ12-37 Paying dividends financing Earning dividends

operatingQ12-38 c [Book value = $12,000 ($20,000 − $8,000; Gain =

$3,000; Proceeds = $15,000 ($12,000 + $3,000)]Q12-39 dQ12-40 bQ12-41 aQ12-42 c Gain Depr. A / Rec Invy.

[$47,000 − $8,000 + $6,000 + ($11,000 − $7,000) − ($10,000 − $ 9,000)

A / Pay Accr. Liab. − ($7,000 − $6,000) + ($7,000 − $3,000) = $51,000]

Q12-43 aQ12-44 a Cash received = $28,000 ($20,000 + $8,000)

Cash paid = $50,000 ($69,000 − $20,000 − $6,000+ $X = $93,000; X = $50,000)

Net cash used = $22,000 ($50,000 − $28,000)Q12-45 AQ12-46 DQ12-47 d Cash received from issuance of stock = $10,000

($20,000 − $10,000)Cash paid for dividends (X) = $36,000 ($70,000 +

net income $47,000 − $X = $81,000; Dividends = $36,000)Net cash used = $26,000 ($36,000 − $10,000)

Q12-48 a ($800,000 − $40,000 = $760,000)Q12-49 a [$59,100 − ($5,000 − $2,800) = $56,900]


Problems

Group A

(15-30 min.) P 12-50A

DATE: _______________

TO: Managers of Relax Inns

FROM: Student Name

SUBJECT: Assessment of 20X9 and Outlook for the Future

20X9 was not a good year. Most of the increase in net income

resulted from the extraordinary gain, which means that normal

operations were not very profitable. This is confirmed by the

increase in receivables, which hints that collections are

lagging.

The cash-flow data paint a similar picture. Operating

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

operations should provide the bulk of the cash if the business

expects to succeed.


(continued) P 12-50A

During 20X9, the insurance recovery helped investing

activities produce a net cash inflow. Ordinarily, investing

activities should produce net cash outflows as the business

invests in new assets. Growth is usually indicated by

investments in new assets, but during 20X9 net cash flows

from investing activities were positive, which means that net

investments were negative. Although the net cash flow

provided by investing activities may be temporary, it does not

reflect especially well on the company. It means that, in part at

least, the company is maintaining its cash position by

liquidating fixed assets. This is a bad sign.

Financing activities provided a net cash inflow, which is

normal. However, coupled with the net cash used for

operations and the net cash provided by investing activities,

the additional debt created in 20X9 may be hard to pay back.

Unless next year turns out to be much better than 20X9, the

outlook for the company is not bright.

Student responses may vary. The key conclusion is that20X9 was not a good year, and the outlook is not bright.


(40 min.) P 12-51A

Req. 1

Vintage Automobiles of Philadelphia, Inc.Income Statement

Year Ended December 31, 20X8Sales revenue…………………………........................... $500,000Cost of goods sold [$120,000 + (4 × $43,333.33)]…. 293,333Salary expense…………………………………………… 95,000Depreciation expense ($150,000 / 5)…………………. 30,000Rent expense……………………………………………... 20,000Income tax expense……………………………………... 10,000 Net income………………………………………………... $ 51,667

Req. 2

Vintage Automobiles of Philadelphia, Inc.Balance Sheet

December 31, 20X8ASSETS LIABILITIES

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

(500,000 × .20) 100,000 Salary payable 4,000 Inventory (2 × $43,333.33) 86,667 Total current liabilities 56,000

Total current assets 276,667STOCKHOLDERS’ EQUITY

Property, plant, and equipment: Common stock 300,000Equipment $150,000 Retained earningsLess Accumulated ($51,667 − $11,000) 40,667

depreciation (30,000 ) 120,000 Total equity 340,667

Total liabilities andTotal assets $396,667 stockholders' equity $396,667

_____*$300,000 − $150,000 − $120,000 − $20,000 − $208,000 + $400,000 − $91,000 − $10,000 − $11,000 = $90,000.



Req. 3

Vintage Automobiles of Philadelphia, Inc.Statement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities:

Net income………………………………………. $ 51,667Adjustments to reconcile net income tonet cash used for operating activities:

Depreciation………………………………….. $ 30,000Increase in accounts receivable………….. (100,000)Increase in inventory……………………….. (86,667)Increase in accounts payable…………….. 52,000Increase in salary payable………………… 4,000 (100,667 )

Net cash used for operating activities.. (49,000)

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

Net cash used for investing activities…… (150,000)

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

Net cash provided by financing activities 289,000 Net increase in cash………………………………. $ 90,000Cash balance, January 1, 20X8…………………. 0 Cash balance, December 31, 20X8……………... $ 90,000


(35-45 min.) P 12-52A

Primrose Software Corp.Statement of Cash Flows

Year Ended December 31, 20X7Cash flows from operating activities: Net income…………………………………………... $ 45,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation …………………………………….. $ 21,800 Amortization…………………………………….. 5,300 Loss on sale of equipment…………………… 11,700 Increase in accounts receivable…………….. (5,500) Increase in inventories………………………… (5,600) Increase in prepaid expenses………………… (1,200) Increase in accounts payable………………… 1,400 Increase in income tax payable……………… 1,900 Decrease in accrued liabilities……………….. (11,700 ) 18,100 Net cash provided by operating activities…. 63,200

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

Cash flows from financing activities: Issuance of common stock………………………. $ 41,200 Issuance of long-term note payable……………. 34,400 Payment of cash dividends………………………. (18,300) Purchase of treasury stock………………………. (14,300 ) Net cash provided by financing activities….. 43,000 Net increase in cash…………………………………… $ 16,000 Cash balance, December 31, 20X6………………….. 22,700 Cash balance, December 31, 20X7………………….. $ 38,700



Noncash investing and financing activities: Acquisition of land by issuing long-term note payable…… $ 95,000 Retirement of bonds payable by issuing common stock…. 65,000 Total noncash investing and financing activities………………. $160,000


(35-45 min.) P 12-53AReq. 1

Northern Movie Theater CompanyStatement of Cash Flows

Year Ended March 31, 20X9Cash flows from operating activities: Net income…………………………………………… $ 50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………… $ 15,300 Amortization……………………………………… 2,000 Decrease in accounts receivable…………….. 6,800 Increase in inventories…………………………. (2,600) Increase in prepaid expenses…………………. (200) Increase in accounts payable…………………. 2,700 Decrease in accrued liabilities………………... (400) Increase in income tax payable………………. 3,300 26,900 Net cash provided by operating activities….. 76,900

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

Cash flows from financing activities: Issuance of long-term note payable……………... $ 50,000 Issuance of common stock………………………... 11,000 Payment of cash dividend…………………………. (30,000 ) Net cash provided by financing activities…... 31,000 Net (decrease) in cash…………………………………. $ (4,100) Cash balance, March 31, 20X8………………….…….. 14,000 Cash balance, March 31, 20X9………………….……. $ 9,900

Noncash investing and financing activities: Acquisition of land by issuing note payable…… $101,000



Req. 2

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

the main source of cash. The company is investing

in new plant assets, and borrowing — a financing

cash flow — appears reasonable. All of these signs

are favorable.


(30-40 min.) P 12-54A

Req. 1

4 Seasons Supply Corp.Statement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities: Net income………………………………………………. $75,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation…………………………………………. $ 4,000 Decrease in accounts receivable………………… 400 Decrease in inventories……………………………. 3,600 Increase in prepaid expenses…………………….. (600) Increase in accounts payable…………………….. 2,100 Decrease in salary payable……………………….. (3,500) Decrease in other accrued liabilities……………. (1,100 ) 4,900 Net cash provided by operating activities….. 80,000

Cash flows from investing activities: Purchase of land……………………………………...... $(29,000) Purchase of equipment ($49,400 − depreciation expense of $4,000 = $45,400; $53,500 −

$45,400)………………………………………………... (8,100 ) Net cash used for investing activities………. (37,100)

Cash flows from financing activities: Payment of dividends ($2,700 + $75,100 − $48,600) $(29,200) Payment of note payable……………………………… (25,000) Issuance of common stock…………………………… 23,600 Net cash used for financing activities………. (30,600 )Net increase in cash……………………………………….. $12,300 Cash balance, December 31, 20X7……………………… 5,300 Cash balance, December 31, 20X8……………………… $17,600



Req. 2

This problem will help students learn how operating activities,

investing activities, and financing activities generate cash

receipts and cash payments. By solving this problem, students

will learn how companies prepare the statement of cash flows.

Students will thus be able to understand the meaning of cash

flows from the three basic categories of business activities.

This knowledge will aid their analysis of investments. For

example, students should know that net cash provided by

operating activities conveys a more positive signal about a

company than net cash used for operations.

Student responses will vary.


(35-45 min.) P 12-55A

Req. 1

Ethan Allen Furniture Gallery, Inc.Statement of Cash FlowsYear Ended April 30, 20X7

Cash flows from operating activities: Receipts: Collections from customers ($428,600 + $171,900)…………………….. $ 600,500 Interest received………………………………. 4,400 Dividends received…………………………… 4,100 Total cash receipts………………………... $ 609,000 Payments: To suppliers……………………………………. $(368,500) To employees………………………………….. (93,600) For interest……………………………………... (13,300) For income tax………………………………… (37,900 ) Total cash payments……………………... (513,300 ) Net cash provided by operating activities... 95,700 Cash flows from investing activities: Purchase of plant assets……………………....... $ (59,400) Sale of plant assets………………………………. 22,400 Collection of loans……………………………….. 12,800 Loan to another company………………………. (12,500) Sale of investments………………………………. 9,100 Net cash used for investing activities…….. (27,600)Cash flows from financing activities: Payments of long-term notes payable………... $ (50,000) Payment of dividends……………………………. (48,400) Issuance of note payable………………………... 19,600 Issuance of common stock……………………... 8,000 Net cash used for financing activities…….. (70,800 )Net (decrease) in cash………………………………. $ (2,700)Cash balance, April 30, 20X6……………………….. 39,300 Cash balance, April 30, 20X7……………………….. $ 36,600



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

Req. 2

Evaluation of 20X7: 20X7 was a strong year from a cash-flow

standpoint. Operations provided the bulk

of the company’s cash. The business

acquired additional plant assets to lay a

foundation for future operations. The

corporation also reduced its debt

position.


(40 min.) P 12-56A

Req. 1

Vintage Automobiles of Philadelphia, Inc.Income Statement

Year Ended December 31, 20X8Sales revenue……………………………………………... $500,000Cost of goods sold [$120,000 + (4 × $43,333.33)]…... 293,333Salary expense……………………………………………. 95,000Depreciation expense ($150,000 / 5)………………….. 30,000Rent expense……………………………………………… 20,000Income tax expense……………………………………… 10,000 Net income………………………………………………… $ 51,667

Req. 2Vintage Automobiles of Philadelphia, Inc.

Balance SheetDecember 31, 20X8

ASSETS LIABILITIESCurrent: Current:

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

($500,000 × .20) 100,000 Salary payable 4,000 Inventory (2 × $43,333.33) 86,667 Total current liabilities 56,000


Property, plant, and equipment: Common stock 300,000Equipment $150,000 Retained earningsLess Accumulated ($51,667 − $11,000) 40,667



_____*$300,000 − $150,000 − $120,000 − $20,000 − $208,000 + $400,000 − $91,000 − $10,000 − $11,000 = $90,000.



Req. 3

Vintage Automobiles of Philadelphia, Inc.Statement of Cash Flows


Collections from customers(500,000 × .80)……………………………………... $400,000

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

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

Net cash used for investing activities………… (150,000)

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

Net cash provided by financing activities……. 289,000 Net Increase in cash……………………………………. $ 90,000Cash balance, January 1, 20X8………………………. 0 Cash balance, December 31, 20X8…………………... $ 90,000


(30-40 min.) P 12-57A

Req. 1

4 Seasons Supply Corp.Statement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities: Cash receipts: Collections from customers ($228,700 + $400)…… $229,100 Cash payments: To suppliers: Inventory ($70,600 − $3,600 − $2,100)…………... $ (64,900) Operating expenses ($10,500 + $600 + $1,100).. (12,200) To employees ($27,800 + $3,500)……………………. (31,300) For interest……………………………………………… (11,600) For income tax………………………………………….. (29,100 ) Total cash payments………………………………. (149,100 ) Net cash provided by operating activities………… 80,000

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

Cash flows from financing activities: Payments of dividends ($2,700 + $75,100 − $48,600).. $ (29,200) Payment of note payable…………………………………. (25,000) Issuance of common stock………………………………. 23,600 Net cash used for financing activities……………… (30,600 )Net increase in cash…………………………………………... $ 12,300 Cash balance, December 31, 20X7…………………………. 5,300 Cash balance, December 31, 20X8…………………………. $ 17,600



Req. 2











Student responses will vary.


(45-60 min.) P 12-58AReq. 1

Franklin Electric CompanyStatement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities: Receipts: Collections from customers………………………… $ 661,700 Dividends received ………………………………….. 17,100 Total cash receipts………………………………… $ 678,800 Payments: To suppliers ($399,100 + $34,300)………………….. $(433,400) To employees………………………………………….. (143,800) For interest……………………………………………... (26,900) For income tax…………………………………………. (18,900 ) Total cash payments……………………………… (623,000 ) Net cash provided by operating activities………... 55,800

Cash flows from investing activities: Purchase of equipment…………………………………... $ (31,400) Sale of long-term investments………………………….. 21,200 Net cash used for investing activities……………... (10,200)

Cash flows from financing activities: Issuance of common stock……………………………… $ 47,300 Payment of long-term note payable…………………… (41,300) Payment of dividends……………………………………. (27,200) Purchase of treasury stock……………………………… (26,400 ) Net cash used for financing activities…………….. (47,600 )Net (decrease) in cash……………………………………….. $ (2,000) Cash balance, December 31, 20X7………………………… 53,600 Cash balance, December 31, 20X8………………………… $ 51,600

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



Req. 2

Franklin Electric CompanyCash Flows from Operating Activities


Net income…………………………………… $43,500Adjustments to reconcile net income to

net cash provided by operating activities: Depreciation……………………………… $ 19,300 Loss on sale of investments………….. 1,100 Increase in accounts receivable……… (27,600) Decrease in inventories………………… 11,800 Increase in prepaid expenses………… (600) Decrease in accounts payable………... (8,300) Increase in interest payable…………… 1,900 Increase in salary payable……………... 7,000 Increase in other accrued liabilities….. 10,400 Decrease in income tax payable……… (2,700 ) 12,300

Net cash provided by operating activities. $55,800


(45-60 min.) P 12-59A

Req. 1

Graphic Design Studio, Inc.Statement of Cash FlowsYear Ended June 30, 20X9

Cash flows from operating activities: Net income…………………………………………... $ 60,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………... $ 13,400 Loss on sale of land……………………………. 6,700 Decrease in accounts receivable……………. 3,100 Increase in inventories………………………… (8,400) Increase in prepaid expenses………………… (900) Increase in accounts payable………………… 2,100 Decrease in income tax payable……………... (700) Decrease in accrued liabilities……………….. (1,500) Increase in interest payable…………………... 800 Decrease in salary payable…………………… (1,700 ) 12,900 Net cash provided by operating activities…. 73,200

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

Cash flows from financing activities: Payment of long-term note payable…………….. $(61,000) Payment of cash dividends………………………. (38,100) Issuance of common stock………………………. 3,900 Net cash used for financing activities………. (95,200 ) Net increase in cash…………………………………… $ 20,000 Cash balance, June 30, 20X8………………………… 8,600 Cash balance, June 30, 20X9………………………… $ 28,600



Req. 1

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



Req. 2

Graphic Design Studio, Inc.Cash Flows from Operating Activities

Year Ended June 30, 20X9Cash flows from operating activities:

Receipts: Collections from customers…………….. $ 261,800 Interest received…………………………… 1,300 Total cash receipts…………………….. $ 263,100

Payments: To suppliers………………………………… $(133,500) To employees………………………………. (40,500) For income tax……………………………... (10,600) For interest………………………………….. (5,300 ) Total cash payments………………….. (189,900 )

Net cash provided by operating activities… $ 73,200


Problems

Group B

(15-30 min.) P 12-60B

DATE: _______________

TO: Top Managers of Culinary Imports

FROM: Student Name

SUBJECT: Assessment of 20X7 and Outlook for the Future

20X7 was a good year. Net income increased by 15% and would

have been even higher without the nonrecurring loss, which

cannot be expected to happen every year. Operations are

generating increasing amounts of profit. The increases in plant

assets are consistent with a growing, prospering company. No

unhealthy relationships are apparent among the assets or

liabilities.

The cash-flow data paint a similar picture. Operating

activities produced the bulk of the year’s increase in cash,

which is healthy. Over the long run, successful companies

generate the bulk of their cash through operations.


(continued) P 12-60B

The five-year expansion program is generating net cash

outflows from investing activities. The company appears to be

investing in long-term assets to lay the foundation for future

operations. Financing activities provided a net cash inflow of

$50,000. This amount is insignificant in relation to cash flows

from operating activities and cash flows from investing

activities. Overall, the cash-flow data reveal a healthy set of

relationships.

On balance, there are no obvious danger signals, so the

outlook is fair to good.

Student responses may vary. The key conclusion is that 20X7 was a good year, and the outlook is not clouded by any obvious difficulties.


(40 min.) P 12-61BReq. 1

Cruise America Motorhomes, Inc.Income Statement

Year Ended December 31, 20X8Sales revenue…………………………………………….. $560,000Cost of goods sold [$120,000 + (2 × $53,333.33)]….. 226,667Salary expense…………………………………………… 90,000Rent expense……………………………………………... 12,000Depreciation expense ($50,000 / 5)…………………… 10,000Income tax expense……………………………………... 64,000 Net income………………………………………………... $157,333

Req. 2

Cruise America Motorhomes, Inc.Balance Sheet


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

($560,000 × .10) 56,000 Salary payable 3,000 Inventory 53,333 Total current liabilities 23,000


Property, plant, and equipment: Common stock 200,000Store fixtures $50,000 Retained earningsLess Accumulated ($157,333 − $40,000) 117,333



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



Req. 3

Cruise America Motorhomes, Inc.Statement of Cash Flows


Net income………………………………………… $157,333Adjustments to reconcile net income tonet cash provided by operating activities:

Depreciation……………………………………. $ 10,000Increase in accounts receivable……………. (56,000)Increase in inventory…………………………. (53,333)Increase in accounts payable………………. 20,000Increase in salary payable…………………... 3,000 (76,333 )

Net cash provided by operating activities. 81,000

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

Net cash used for investing activities……… (50,000)

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

Net cash provided by financing activities…. 160,000 Net increase in cash…………………………………. $191,000Cash balance, January 1, 20X8…………………….. 0 Cash balance, December 31, 20X8………………… $191,000


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

Crowne Plaza Products, Inc.Statement of Cash Flows

Year Ended December 31, 20X4Cash flows from operating activities: Net income……………………………………………. $ 31,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………. $ 29,200 Amortization………………………………………. 1,100 Gain on sale of investment……………………... (3,500) Decrease in accounts receivable……………… 3,600 Decrease in inventories…………………………. 5,900 Increase in prepaid expenses………………….. (1,100) Increase in accounts payable………………….. 4,100 Decrease in income tax payable………………. (900) Increase in accrued liabilities………………….. 5,100 43,500 Net cash provided by operating activities…… 74,500

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

Cash flows from financing activities: Issuance of long-term note payable……………… $ 71,000 Payment of cash dividends………………………… (48,300) Payment of long-term note payable………………. (47,800) Issuance of preferred stock………………………... 36,200 Net cash provided by financing activities…… 11,100 Net (decrease) in cash………………………………….. $ (5,700) Cash balance, December 31, 20X3…………………… 34,800 Cash balance, December 31, 20X4…………………… $29,100



Noncash investing and financing activities: Acquisition of building by issuing long-term note payable… $201,000 Payment of note payable by issuing common stock………… 89,400 Total noncash investing and financing activities………………… $290,400


(35-45 min.) P 12-63B

Req. 1

Crossbow Novelties Corp.Statement of Cash Flows

Year Ended December 31, 20X5Cash flows from operating activities: Net income……………………………………………. $ 52,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………………. $ 12,800 Amortization……………………………………… 5,000 Decrease in accounts receivable……………... 700 Decrease in inventories………………………… 1,400 Increase in prepaid expenses…………………. (500) Increase in accounts payable…………………. 3,100 Decrease in accrued liabilities………………… (2,500) Decrease in income tax payable……………… (3,300 ) 16,700 Net cash provided by operating activities…... 68,700

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

Cash flows from financing activities: Issuance of common stock………………………... $ 105,600 Issuance of long-term note payable……………... 32,000 Payment of cash dividends………………………... (17,000 ) Net cash provided by financing activities…... 120,600 Net increase in cash……………………………………. $ 16,300Cash balance, December 31, 20X4…………………… 12,500 Cash balance, December 31, 20X5…………………… $ 28,800

Noncash investing and financing activities:Retirement of note payable by issuing common stock. $ 30,000



Req. 2

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

a significant source of cash. The company is

investing heavily in new plant assets. Also the

company is financing the new investments more by

issuing stock than by borrowing. All of these signs

are favorable.


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

Req. 1

Riverbend Pools, Inc.Statement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities: Net income……………………………………………… $ 81,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ………………………………………… $ 15,300 Increase in accounts receivable ………………… (3,100) Increase in inventories……………………………. (4,400) Decrease in prepaid expenses…………………... 500 Decrease in accounts payable…………………... (1,900) Increase in salary payable………………………... 700 Increase in other accrued liabilities…………….. 1,900 9,000 Net cash provided by operating activities…. 90,600 Cash flows from investing activities: Purchase of land……………………………………….. $(25,100) Purchase of equipment ($93,700 − depreciation expense of $15,300 = $78,400; $100,900 − $78,400)………………………………... (22,500 ) Net cash used for investing activities……… (47,600)Cash flows from financing activities:

Payment of dividends ($19,600 + $81,600 − $72,500)…………………….. $(28,700) Payment of note payable……………………………... (10,000) Issuance of common stock…………………………... 8,800 Net cash used for financing activities….... (29,900 )Net increase in cash……………………………………… $ 13,100Cash balance, December 31, 20X7……………………... 15,600 Cash balance, December 31, 20X8……………………... $ 28,700



Req. 2













(35-45 min.) P 12-65BReq. 1

Rocco Gourmet Foods, Inc.Statement of Cash FlowsYear Ended July 31, 20X5

Cash flows from operating activities: Receipts: Collections from customers ($741,100 + $146,000)................................ $ 887,100 Interest received............................................. 11,700 Dividends received......................................... 2,700 Total cash receipts.................................... $ 901,500 Payments: To suppliers.................................................... $(673,300) To employees.................................................. (104,000) For income tax................................................ (56,400) For interest...................................................... (37,800 ) Total cash payments................................. (871,500 ) Net cash provided by operating activities.... 30,000

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

Cash flows from financing activities: Proceeds from issuance of common stock....... $ 50,000 Payments of long-term note payable................. (18,800) Payment of dividends.......................................... (50,500) Proceeds from issuance of note payable.......... 44,100 Net cash provided by financing activities.... 24,800 Net increase in cash................................................. $ 7,600 Cash balance, July 31, 20X4.................................... 23,800 Cash balance, July 31, 20X5.................................... $ 31,400



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

Req. 2

Evaluation of 20X5: 20X5 was an okay year from a cash-flow

standpoint. Operations provided cash of

$30,000, and the company was able to

issue $50,000 of new stock, which means

the stockholders have faith in the

company. The business invested heavily in

plant assets, and cash increased by $7,600.


(40 min.) P 12-66B

Req. 1

Cruise America Motorhomes, Inc.Income Statement

Year Ended December 31, 20X8 Sales revenue……………………………………………. $560,000 Cost of goods sold [$120,000 + (2 × $53,333.33)]…. 226,667Salary expense………………………………………….. 90,000Rent expense…………………………………………….. 12,000Depreciation expense ($50,000 / 5)………………….. 10,000Income tax expense…………………………………….. 64,000 Net income……………………………………………….. $157,333

Req. 2

Cruise America Motorhomes, Inc.Balance Sheet


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

($560,000 × .10) 56,000 Salary payable 3,000 Inventory 53,333 Total current liabilities 23,000


Property, plant, and equipment: Common stock 200,000Store fixtures $50,000 Retained earningsLess Accumulated ($157,333 − $40,000) 117,333



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



Req. 3

Cruise America Motorhomes, Inc.Statement of Cash Flows


Collections from customers(560,000 × .90)……………………………………... $504,000

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

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

Net cash used for investing activities………… (50,000)

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

Net cash provided by financing activities……. 160,000 Net increase in cash……………………………………. $191,000Cash balance, January 1, 20X8………………………. 0 Cash balance, December 31, 20X8…………………... $191,000


(30-40 min.) P 12-67B

Req. 1

Riverbend Pools, Inc.Statement of Cash Flows

Year Ended December 31, 20X8Cash flows from operating activities: Cash receipts: Collections from customers ($438,000 − $3,100)….. $ 434,900 Receipts of interest……………………………………... 11,700 Total cash receipts………………………………….. $ 446,600 Cash payments: To suppliers: Inventory ($185,200 + $4,400 + $1,900)………….. $(191,500) Operating expenses ($49,700 − $500 − $1,900)… (47,300) To employees ($76,400 − $700)……………………….. (75,700) For interest……………………………………………….. (24,600) For income tax…………………………………………… (16,900 ) Total cash payments………………………………... (356,000 ) Net cash provided by operating activities………….. 90,600

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

Cash flows from financing activities: Payment of dividends ($19,600 + $81,600 − $72,500)… $ (28,700) Payment of note payable………………………………….. (10,000) Issuance of common stock……………………………….. 8,800 Net cash used for financing activities………………. (29,900 )Net increase in cash……………………………………….….. $ 13,100Cash balance, December 31, 20X7………………………….. 15,600 Cash balance, December 31, 20X8………………………….. $ 28,700



Req. 3













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

Req. 1

Powers Art Gallery, Inc.Statement of Cash Flows

Year Ended December 31, 20X6Cash flows from operating activities: Receipts: Collections from customers…………...................... $ 308,100 Interest received……………………………………….. 12,200 Dividends received……………………………………. 1,900 Total cash receipts…………………………….….. $ 322,200 Payments: To suppliers…………………………………………….. $(147,700)* To employees…………………………………………... (67,500) For interest……………………………………………… (21,800) For income tax…………………………………………. (8,000 ) Total cash payments……………………………… (245,000 ) Net cash provided by operating activities…….….. 77,200 Cash flows from investing activities: Purchase of equipment…………………………………... $ (79,900) Collection of loan…………………………………………. 18,500 Sale of long-term investments………………………….. 9,900 Net cash used for investing activities……………... (51,500)Cash flows from financing activities: Payment of long-term note payable…………………… $ (78,900) Issuance of common stock………………………….….. 34,600 Sale of treasury stock……………………………………. 26,200 Purchase of treasury stock………………………….….. (10,400) Payment of dividends……………………………………. (1,800 ) Net cash used for financing activities…………….. (30,300 )Net (decrease) in cash…………….……………………….… $ (4,600)Cash balance, December 31, 20X5………………………… 87,100 Cash balance, December 31, 20X6………………………… $ 82,500 _____*$101,600 + $46,100 = $147,700



Req. 1

Noncash investing and financing activities: Acquisition of land by issuing common stock……………… $ 62,100

Retirement of long-term note payable by issuing common stock……………………………………….. 21,100 Total noncash investing and financing activities………………. $ 83,200



Req. 2

Powers Art Gallery, Inc.Cash Flows from Operating Activities


Net income…………………………………….. $43,900Adjustments to reconcile net income to netcash flow provided by operating activities:

Depreciation………………………………. $20,900 Gain on sale of investments…………… (700) Decrease in accounts receivable……… 16,300 Increase in inventories………………….. (5,700) Decrease in prepaid expenses………… 1,900 Increase in accounts payable………….. 7,700 Increase in interest payable……………. 2,300 Decrease in salary payable…………….. (700) Decrease in other accrued liabilities…. (3,300) Decrease in income tax payable………. (5,400 ) 33,300

Net cash provided by operating activities.. $77,200


(45-60 min.) P 12-69B

Req. 1

Artes de Mexico, Inc.Statement of Cash Flows

Year Ended September 30, 20X9Cash flows from operating activities: Net income…………………………………………… $ 66,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ……………………………………… $ 8,500 Gain on sale of land…………………………….. (10,900) Decrease in accounts receivable…………….. 800 Increase in inventories ……………………….. (4,800) Decrease in prepaid expenses……………….. 700 Decrease in accounts payable……………….. (10,000) Decrease in accrued liabilities………………... (11,200) Increase in salary payable …………………….. 400 (26,500 ) Net cash provided by operating activities….. 40,400 Cash flows from investing activities: Sale of land…………………………………………… $ 38,100 Purchase of long-term investments…………....... (37,300 ) Net cash provided by investing activities…... 800 Cash flows from financing activities: Payment of cash dividends……………………….. $(64,300) Issuance of common stock……………………….. 51,900 Payment of long-term note payable……………... (24,700 ) Net cash used for financing activities……….. (37,100 ) Net increase in cash…………………………………… $ 4,100 Cash balance, September 30, 20X8………………….. 17,600 Cash balance, September 30, 20X9………………….. $ 21,700



Req. 1

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



Req. 2

Artes de Mexico, Inc.Cash Flows from Operating Activities

Year Ended September 30, 20X9Cash flows from operating activities:

Receipts: Collections from customers………………. $ 343,100 Interest received…………………………….. 8,600 Total cash receipts……………………… $ 351,700

Payments: To suppliers………………………………….. $(216,400) To employees………………………………… (63,000) For income tax……………………………….. (21,200) For interest…………………………………… (10,700 ) Total cash payments……………………. (311,300 )

Net cash provided by operating activities….. $ 40,400


Decision Cases

(45-60 min.) Decision Case 1

Req. 1 (indirect method for operating activities)

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

Year Ended December 31, 20X8Cash flows from operating activities: (Thousands) Net income…………………………………………………. $ 97 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation……………………………………….……. $ 46 Amortization of patents……………………………….. 11 Increase in accounts receivable ($72 − $61)……… (11) Increase in inventories ($194 − $181)………………. (13) Increase in accounts payable ($63 − $56)…………. 7Decrease in accrued liabilities ($17 − $12)………… (5 ) 35

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

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

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

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

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

Net cash used for financing activities……………… (37 )Net (decrease) in cash………………………….……………. $ (46)Cash balance, December 31, 20X7………………………… 63 Cash balance, December 31, 20X8………………………… $ 17


(continued) Decision Case 1

Req. 2

The cash balance at the end of 20X8 is low because:

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

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

Req. 3

20X8 was a good year. Net income was $97,000, and operations

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

its property, plant, and equipment by $110,000 and paid off

$85,000 of debt. On this basis, business appears to have been

successful.


(15-25 min.) Decision Case 2

Four-Star Catering looks like the better investment because:

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

Applied Technology. Operations should be the main source

of cash for a healthy company.

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

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

revenue-producing assets than Applied is.

3. Applied Technology’s main source of cash is the sale of

plant assets. This trend cannot continue for long without

hurting the company’s ability to produce revenue.

4. Four-Star is raising more cash by selling stock than Applied

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

development of new products and other innovations to

enhance the company’s competitiveness. Applied, on the

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

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

financing its operations with owners’ equity and investing

the cash in income-producing assets.


Ethical Issue

Req. 1

Cash flows from operating activities:

WithoutReclassification

WithReclassification

Net income………………….. $ 37,000 $37,000Increase in accounts

receivable…….…………... (80,000 ) — Net cash (used for) provided

by operating activities…. $(43,000) $37,000

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

Req. 2

The reclassification would be ethical if Columbia expects to

collect the receivables beyond the current operating cycle, or

one year if longer. Reclassification would be unethical if

Columbia expects to collect within the current period. In that

case, the reclassification would appear to be designed to create

a false picture of cash flow from operations.


Focus on Financials: YUM! Brands

(40-50 min.)

Req. 1

Indirect method. The statement of cash flows begins with net

income. Also, YUM does not report collections from customers,

payments to suppliers, and so on, which are reported under the

direct method.

Req. 2 (Amounts in millions)

a. Collectionsfrom = Total revenue + Decrease in Receivables

customersfranchises

and licenses

$9,577 = $9,561 + ($236 − $220)

b. (Amounts in millions)

Payments for=

Cost of+

Increase in−

Increase ininventory sales Inventory Accounts Payable

$2,476 = $2,549 + ($93 − $85) − ($554 − $473)


(continued) Focus on Financials: YUM: Brands

Req. 3 (Amounts in millions)

Property, Plant, and Equipment, NetBal., Dec. 31, 2005 3,356Capital spending 614 Depreciation (Note 9) 466Acquisitions of other Book value of assets sold 53

companies 180Bal., Dec. 30, 2006 3,631

Req. 4

1. Net income increased from 2005.

2. Total assets increased from 2005.

3. Stockholders’ equity decreased from 2005.

4. Cash flow from operations was higher than net income and

increased from 2005.

Overall, 2006 was a good year for YUM! Brands.


Focus on Analysis: Pier 1 Imports

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

Req. 1

The main source of cash is borrowing. This is a bad sign about the company because it indicates that Pier 1’s basic operations are not generating enough cash. The company must borrow heavily to stay afloat.

The main use of cash is paying off debt. This is bad news because it also indicates that Pier 1’s operations are not generating enough cash.

Req. 2

Why net cash provided by operations differs from net income:

1. Depreciation and amortization. These expenses decreased net income but didn’t decrease cash. Therefore, cash flow from operations always exceeds net income insofar as depreciation and amortization are concerned.

2. The sale of receivables in exchange for beneficial interest in securitized receivables cost Pier 1 $74.5 million.

3. Increase in accounts receivable, prepaid expenses, and other current assets. Pier 1 may be having trouble collecting its receivables, and the company may be stockpiling too much in other current assets.


(continued) Focus on Analysis: Pier 1 Imports

Req. 3

Pier 1 bought more fixed assets ($50,979) than it sold ($1,401) during 2006. These amounts come from the statement of cash flows.

Req. 4

Sale price………………………………………………. $ 1,401+ Loss on disposal of fixed assets…………….…….. 1,781 = Book value of fixed assets sold……………………. $ 3,182

Req. 5

Cash returned to stockholders during 2006:Dividends……………………………………………… $34,667Purchases of treasury stock……………………….. 4,047 Total…………………………………………………….. $38,714


Economy & Finance

Chapter 12