Morrissey Corporation
Statement of Cash Flows
For the Year Ended December 31, Year 8
Operations
Net Income
$1,204
Depreciation
370
Gain on Sale of Equipment
(60)
Increase in Accounts Receivable
(160)
Increase in Prepayments
(70)
Decrease in Income Tax Payable
(25)
Decrease in Other Current Liabilities
(150)
Decrease in Inventories
140
Increase in Accounts Payable-Merchandise
175
Cash Flow from Operations
$1,424
Investing
Sale of Equipment
$ 310
Acquisition of Property, Plant and Equipment
(610)
Acquisition of Marketable Securities
(1,300)
Cash Flow from Investing
$(1,600)
Financing
Decrease in Short-term Borrowing
$(120)
Increase in Long-term Debt
550
Increase in Common Stock
400
Decrease in Long-term Debt
(200)
Dividends
(390)
Cash Flow from Financing
$ 240
Change in Cash
$ 64
Cash-January 1, Year 8
850
Cash-December 31, Year 8
$ 914
Required:
Respond to each of the following questions.
a.
Compute the amount of cash collected from customers during Year 8.
b.
Compute the amount of cash paid to suppliers for merchandise during Year 8.
c.
Compute the amount of income taxes paid to governmental agencies during Year
8.
d.
Property, plant and equipment (at cost) had a balance of $3,700 on January 1,
Year 8 and $3,940 on December 31, Year 8. Accumulated depreciation had a
balance of $1,290 on January 1, Year 8 and $1,540 on December 31, Year 8. Give
the journal entry that Morrissey Corporation made in its accounting records during
Year 8 to record the sale of the equipment.
e.
The balance in the retained earnings account on December 31, Year 8 after closing
entries was $1,154. Compute the balance in the retained earnings account on
January 1, Year 8.
a.
Sales Revenue
Increase in Accounts Receivable
Cash Collected from Customers
b.
Cost of Goods Sold
Decrease in Inventories
Purchases of Merchandise
Increase in Accounts Payable
Cash Payments to Suppliers
c.
Income Tax Expense
Decrease in Income Tax Payable
Income Taxes Paid
d.
Cash
310
Accumulated Depreciation ($1,290 + $370 – $1,540)
120
Prop., Plant, and Equip. ($3,700 + $610 – $3,940)
Gain on Sale of Equipment
e.
X + $1,204 – $390 = $1,154
X = $340
131. At different points in their existence, companies will have different cash inflow and outflow requirements.
Such differences make intercompany comparisons difficult, even within the same industry.
Required:
a.
Consider a start-up company in the software development industry. What might its operating, investing,
and financing cash flows look like in general? Provide examples where appropriate.
b.
Consider a mature auto dealership. What might its operating, investing, and financing cash flows look
like in general? Provide examples where appropriate.
132. Why is a Statement of Cash Flows needed?
NEED FOR A STATEMENT OF CASH FLOWS
A profitable firm may run out of cash because of the relationship between cash and income which are described
as follows.
1. Net income for a particular period does not equal cash flow from operations. Most firms use the accrual basis
of accounting to measure operating performance. For example, firms typically recognize revenue at the time of
2. Firms receive cash inflows and disburse cash outflows because of investing and financing activities, which
the income statement does not report directly. Firms building their productive capacity generally use cash to
133. How does the statement of cash flows explain the reasons for the change in cash between balance sheet
dates?
THE STATEMENT EXPLAINS THE REASONS FOR THE CHANGE IN CASH BETWEEN BALANCE
SHEET DATES
134. The inflows and outflows of cash during the year appear in the statement of cash flows in one of three
categories: operating, investing, and financing. Explain each category.
1. Operations
equipment, pay dividends, retire long-term debt, and conduct other investing and financing activities.
2. Investing
3. Financing
135. Cash flows do not always fit unambiguously into only one of the three categories: operating, investing and
financing. Explain.
Ambiguities in Classifying Cash Flows
Cash flows do not always fit unambiguously into only one of the three categories: operating, investing and
financing. For example, you might not think of cash received from investments in securities—received in the
136. Describe the various presentation formats for the Statement of Cash Flows.
PRESENTATION FORMATS FOR THE STATEMENT OF CASH FLOWS
Both U.S. GAAP and IFRS permit considerable flexibility with respect to the display of information in the
statement of cash flows. There are, however, the following requirements:
137. Describe the various sections of the statement of cash flows.
Overview of the Statement of Cash Flows
1. Direct Method
The direct method reports the amounts of cash received from customers less cash disbursed to suppliers,
employees, lenders, and taxing authorities.
2. Indirect Method
The indirect method begins with net income for a period and then shows adjustments to net income to convert
revenues to cash received from customers and to convert expenses to cash disbursed to various suppliers of
goods and services. Most companies use this method.
138. The statement of cash flows provides information that helps the reader in (1) assessing the impact of
operations on liquidity and (2) assessing the relations among cash flows from operating, investing, and
financing activities. Explain.
USING INFORMATION FROM THE STATEMENT
OF CASH FLOWS
The statement of cash flows provides information that helps the reader in (1) assessing the impact of operations
on liquidity and (2) assessing the relations among cash flows from operating, investing, and financing activities.
IMPACT OF OPERATIONS ON LIQUIDITY
Perhaps the most important omission from the balance sheet and the income statement is how the operations of
RELATIONS AMONG CASH FLOWS FROM OPERATING,
INVESTING, AND FINANCING ACTIVITIES
The relations among the cash flows from each of the three principal business activities differ depending on the
characteristics of the firm’s products and the maturity of its industry.
139. Some analysts focus attention on cash flow from operations, thinking it as important as, or more important
than, net income as a performance measure. Interpreting cash from operations as a measure of operating
performance requires considering cash flows along two dimensions: (1) their timing and (2) their classification
and disclosure in the statement and related notes. Explain.
INTERPRETATIVE ISSUES INVOLVING THE STATEMENT OF CASH FLOWS
Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than,
net income as a performance measure. Interpreting cash from operations as a measure of operating performance
or other agreements that preclude delayed payments, this business practice is legal; however, sufficiently
delayed payments might harm a firm’s reputation or its credit rating.
CLASSIFICATION AND DISCLOSURE OF TRANSACTIONS
There are certain ambiguities in the classification of cash
flows. Many such items involve complex financial instruments. An analyst who wishes to use cash flows from
operations as an indicator of performance should be aware that classification decisions can affect cash from
operations, perhaps significantly.
140. How does the statement of cash flows helps readers understanding?
To prepare the statement of cash flows requires analyzing changes in balance sheet accounts during the
accounting period, as represented by the Cash Change Equation. As an outcome of correct double-entry
recording of all transactions, the net change in cash will equal the net change in all noncash accounts.