11. A company sells equipment with a carrying value of $10,000 for $7,000. Where, and for what
amounts, would this transaction appear on a statement of cash flows using the indirect method?
12. Malzone Enterprises is preparing a statement of cash flows using the indirect method. Indicate whether
each item is an operating activity, an investing activity, a financing activity, a noncash transaction, or
an item that would not appear on or with Malzone’s statement.
a. The change in Accounts Payable during the period
b. Depreciation expense
c. Exchange of stock for a building
d. Purchase of equipment
e. Purchases of treasury stock
f. Borrowing by issuing bonds
g. A gain on the sale of equipment
h. Collections from customers
i. Dividends paid
j. Income taxes paid
k. Proceeds from sale of long-term investments at a loss
l. The change in Inventory for the period
13. York Company’s cash balance at December 31, 2012, was $338,000. Calculate the company’s cash
balance at December 31, 2013, given the following information for the year ended December 31, 2013.
Show your work.
Net Income
$740,000
Depreciation and Amortization Expense
196,000
Increase in Accounts Receivable (net)
28,000
Decrease in Inventory
50,000
Increase in Accounts Payable
40,000
Net Cash Flows from Investing Activities
266,000
Net Cash Flows from Financing Activities
(1,200,000)
MATCHING
Match each definition with the correct term below.
a.
The method of preparing the operating section of the statement of cash flows that adjusts
each item on the income statement from the accrual basis to the cash basis.
b.
The amount of cash that remains after deducting the funds a company must commit to
continue operating at its planned level.
c.
Activities of a business that involve obtaining resources from stockholders and creditors,
providing stockholders with a return on their investments, and repaying the amounts
borrowed from creditors.
d.
Investments that can be quickly converted into cash.
e.
Activities of a business that involve the purchase and sale of property, plant, and
equipment and other long-term assets.
f.
The ratio of net cash flow from operating activities to average total assets.
g.
Activities of a business that involve the cash inflows and outflows that enter into the
determination of net income.
h.
The ratio of net cash flow from operating activities to net income.
i.
The method of preparing the operating section of the statement of cash flows that does not
require the adjustment of each item on the income statement.
j.
The ratio of net cash flow from operating activities to net sales.
1. Cash equivalents
2. Operating activities
3. Investing activities
4. Financing activities
5. Cash flows to sales
6. Cash flow yield
7. Free cash flow
8. Cash flow to assets
9. Indirect method
10. Direct method
PROBLEM
1. Why does the acquisition of land in exchange for common stock qualify as a noncash investing and
financing transaction?
2. During the year, Ollie’s Outdoor Outfitters issued 20,000 shares of common stock in exchange for a
prime piece of land. Two employees of the accounting department, Audrey and Neil, disagree as to the
appearance of this particular transaction on the statement of cash flows. Audrey believes it to be a
significant noncash transaction, and it therefore should be presented as such at the bottom of the
statement. Neil contends that because this transaction did not cause any cash to flow in or out of the
company, it has no place on the statement of cash flows. Who is correct and why?
3. For 2013, Dorchester Corporation had average total assets of $520,000, sales of $450,000, net income
of $50,000, net cash flows from operating activities of $75,000, dividend payments of $25,000,
purchases of plant assets of $60,000, and sales of plant assets of $55,000. Using this information,
compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free cash flow.
Round amounts to one decimal place.
4. For 2013, Fairfield Corporation had average total assets of $1,300,000, net sales of $1,125,000, net
income of $125,000, net cash flows from operating activities of $150,000, dividend payments of
$62,500, purchases of plant assets of $150,000, and sales of plant assets of $137,500. Using this
information, compute (a) cash flow yield, (b) cash flows to sales, (c) cash flows to assets, and (d) free
cash flow. Round amounts to one decimal place.
5. Following are the income statement and other information for Pickens Corporation.
Pickens Corporation
Income Statement
For the Year Ended December 31, 2013
Sales
$9,000
Cost of goods sold
4,500
Gross margin
$4,500
Operating expenses
$1,800
Depreciation expense
900
2,700
Income before income taxes
$1,800
Income taxes expense
450
Net income
$1,350
Accounts receivable (net) decreased by $2,250 during the year. Inventory increased by $1,350, and
Accounts Payable decreased by $1,800 during the year. Income Taxes Payable increased by $450
during the year.
Prepare a schedule of cash flows from operating activities using the indirect method.
Pickens Corporation
Schedule of Cash Flows from Operating Activities
For the Year Ended December 31, 2013
6. Following are the income statement and other information for Polk Corporation.
Polk Corporation
Income Statement
For the Year Ended December 31, 2013
Sales
$6,000
Cost of goods sold
3,000
Gross margin
$3,000
Operating expenses
$1,200
Depreciation expense
600
1,800
Income before income taxes
$1,200
Income taxes expense
300
Net income
$ 900
Accounts receivable (net) decreased by $1,500 during the year. Inventory increased by $900, and
Accounts Payable decreased by $1,200 during the year. Income Taxes Payable increased by $300
during the year.
Prepare a schedule of cash flows from operating activities using the indirect method.
Polk Corporation
Schedule of Cash Flows from Operating Activities
For the Year Ended December 31, 2013
Net income
Adjustments to reconcile net income to net cash
flows from operating activities
Depreciation
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
Increase in income taxes payable
Net cash flows from operating activities
7. The following comparative balance sheet and other information relate to Runnels Corporation.
Runnels Corporation
Comparative Balance Sheets
December 31, 2013 and 2012
Assets
2013
2012
Cash
$ 140
$ 140
Accounts receivable (net)
210
280
Inventory
350
420
Prepaid expenses
105
70
Equipment (net)
3,010
2,800
Investments and other assets
4,900
4,200
Total assets
$8,715
$7,910
Liabilities and Stockholders’ Equity
Net income
flows from operating activities
Depreciation
$600
Changes in current assets and current liabilities
Decrease in accounts receivable
Increase in inventory
Decrease in accounts payable
(1,200)
Increase in income taxes payable
Net cash flows from operating activities
Accounts payable
$ 350
$ 280
Income taxes payable
70
140
Long-term note payable
2,100
1,400
Common stock
1,400
1,400
Retained earnings
4,795
4,690
Total liabilities and stockholders’ equity
$8,715
$7,910
Additional information:
Depreciation expense $280
Cash dividends declared and paid 70
a. Compute net income, assuming net income and the cash dividends were the only items affecting
retained earnings. Show your work.
b. Compute net cash flows from operating activities using the indirect method.
8. How is it possible for a company to show a net loss for a given year, yet produce positive net cash
flows from operating activities?
Decrease in accounts receivable ($210 – $280)
9. The activity in the Plant Assets and related Accumulated Depreciation accounts for 2013 is shown
below. In addition, the income statement shows a gain on sale of plant assets of $16,000.
Plant Assets
Accumulated Depreciation
Beginning balance, 2013
$234,000
Beginning balance, 2013
$124,000
Purchases
120,000
2013 Depreciation
36,000
Disposals
(82,000)
Disposals
(26,000)
Ending balance, 2013
$272,000
Ending balance, 2013
$134,000
Based on the information given, compute the amounts to be shown and indicate how they would
appear on the statement of cash flows. Assume that the indirect method is being used and that the plant
assets were purchased for cash.
10. Give two explanations for why the amount of cash outflow for equipment for the year might not equal
the increase in the Equipment account balance from one balance sheet date to the next.
Purchases of plant assets
Sales of plant assets
Net cash flows from investing activities
($ 48,000)
*Cost
Accumulated depreciation
Carrying value
Gain on sale of plant assets
Sale price
11. The following 2012 information relates to Raddatz, Inc.:
Net Income
$365,000
Depreciation Expense
96,000
Amortization of Intangible Assets
11,000
Beginning Accounts Receivable
420,000
Ending Accounts Receivable
439,000
Beginning Inventory
516,000
Ending Inventory
560,000
Beginning Prepaid Expenses
48,000
Ending Prepaid Expenses
42,000
Beginning Accounts Payable
119,000
Ending Accounts Payable
146,000
Purchase of Long-Term Assets for Cash
616,000
Cash from Issuance of Long-Term Debt
200,000
Issuance of Stock for Cash
160,000
Issuance of Stock for Long-Term Assets
110,000
Purchase of Treasury Stock
64,000
Sale of Long-Term Investment at Cost
39,000
a. Calculate the net cash flows from operating activities. Show your work.
b. Calculate the net cash flows from investing activities. Show your work.
c. Calculate the net cash flows from financing activities. Show your work.
d. Calculate the net change in cash. Show your work.
12. The following information relates to Lonborg Corporation for the year ended December 31, 2012:
Net Income
$300,000
Depreciation Expense
72,000
Amortization of Intangible Assets
9,000
Beginning Accounts Receivable
336,000
Ending Accounts Receivable
351,000
Beginning Inventory
413,000
Ending Inventory
450,000
Beginning Prepaid Expenses
34,000
Ending Prepaid Expenses
38,000
Beginning Accounts Payable
95,000
Ending Accounts Payable
116,000
Purchase of Long-Term Assets for Cash
493,000
Cash from Issuance of Long-Term Debt
160,000
Issuance of Stock for Cash
128,000
Issuance of Stock for Long-Term Assets
88,000
Purchase of Treasury Stock
51,000
Sale of Long-Term Investment at Cost
31,000
a. Calculate the net cash flows from operating activities. Show your work.
b. Calculate the net cash flows from investing activities. Show your work.
c. Calculate the net cash flows from financing activities. Show your work.
d. Calculate the net change in cash. Show your work.
