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Chapter 12: The Statement of Cash Flows
210. Review the data for Eastern Corp.
Required:
(A) What amount was paid to retire bonds payable during 2017?
(B) How would the transaction to retire bonds by issuing common stock be reported on the statement of cash flows for
2017 for Eastern Corp.?
ANSWER:
(A) $ -0-
Cash was not paid to retire the bonds; stock was issued to retire the bonds.
Both the Bonds Payable and Common Stock accounts changed by $50,000
($100,000 – $50,000 = $50,000; $150,000 – $100,000 = $50,000).
(B) The transaction to retire bonds by issuing common stock should be shown as a noncash
investing and financing activity.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-04 - LO: 12-04
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
211. Review the data for Eastern Corp.
Required:
(A) What amount of cash was collected from customers during 2017?
(B) What is the amount paid for purchases of merchandise during 2017?
(C) What is the amount paid for operating expenses during 2017?
ANSWER:
(A) $426,000
$420,000 (Sales) + $42,000 (Beginning Accounts Receivable) – $36,000 (Ending Accounts
Receivable) = $426,000
(B) $307,000
$300,000 (Cost of goods sold) + $28,000 (Ending Inventories) – $25,000 (Beginning
inventories) + $35,000 (Beginning Accounts payable) – $31,000 (Ending Accounts payable)
= $307,000
(C) $83,000
$84,000 (Operating expenses) + $1,000 (Beginning Salaries payable) – $2,000 (Ending
Salaries payable) = $83,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
212. Review the data for Eastern Corp.
Required:
(A) What amount was paid to acquire equipment during 2017?
(B) What amount was recorded as depreciation expense during 2017?
(C) What amount was declared and paid for dividends during 2017?
ANSWER:
(A) $35,000
$60,000 (Equipment—2017) – [$40,000 (Equipment—2016) – $15,000 (Equipment sold
during 2017)] = $35,000
(B) $8,000
$15,000 – $3,000 = $12,000 Accumulated depreciation on equipment sold $12,000 –
($16,000 – $12,000) = $8,000
(C) $12,000
$20,000 (Retained earnings—2016) + $30,000 (Net income—2017) – $38,000 (Retained
earnings—2017) = $12,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
213. Review the data for Eastern Corp.
Required:
Prepare the operating activities section of statement of cash flows for Eastern Corp. for 2017 if the direct method is used
to determine net cash flow from operating activities.
ANSWER:
Operating activities:
Collections from customers
$426,000
Payments for merchandise
(307,000)
Payments for operating expenses
(83,000)
Net cash inflow from operating activities
$ 36,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
214. Review the data for Eastern Corp.
Required:
(A) Prepare the investing activities section of a statement of cash flows for 2017 for Eastern Corp.
(B) Prepare the financing activities section of a statement of cash flows for 2017 for Eastern Corp.
ANSWER:
A. Investing activities:
Proceeds from selling equipment
$ 5,000
Purchase of equipment
(35,000)
Net cash used by for investing activities
$(30,000)
B. Financing activities:
Payment of dividends
$(12,000)
Net cash used by for financing activities
$(12,000)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
215. Review the data for Eastern Corp.
Required:
Prepare the operating activities section of a statement of cash flows for Eastern Corp. for 2017 if the indirect method is
used to determine net cash flow from operating activities.
ANSWER:
Operating activities:
Net income
$30,000
Adjustments to net income:
Add: Depreciation
8,000
Decrease in accounts receivable
6,000
Increase in salaries payable
1,000
Less: Gain on sale equipment
(2,000)
Increase in inventories
(3,000)
Decrease in accounts payable
(4,000)
Net cash provided from operating activities
$36,000
216. Selected data from the financial statements of Zayri Corporation for the years ended December 31, 2016 and 2017,
are presented below.
(In thousands)
2017
2016
Cash and cash equivalents
$ ?
$ 4,506
Total current assets (except cash)
149,978
132,335
Income taxes paid
2,142
767
Interest paid
5,073
5,597
Net cash provided by operating activities
3,103
5,221
Net cash used by investing activities
2,853
3,278
Net cash provided by financing activities
1,323
6,891
Depreciation and amortization
3,479
2,770
Total stockholders' equity
103,253
94,843
Net income
1,877
1,223
Required:
What is the amount of cash and cash equivalents at the end of 2017?
ANSWER:
Net cash provided by operating activities
$ 3,103
Net cash used by investing activities
(2,853)
Net cash used by financing activities
1,323
Net increase in cash
$ 1,573
Cash & cash equivalents—beginning of year
4,506
Cash & cash equivalents—end of year
$ 6,079
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
217. Grasso Corp. reported accounts receivable of $38,000 on its December 31, 2016, balance sheet. On December 31,
2017, accounts receivable had decreased to $29,000. Sales for the year amounted to $57,000. What is the amount of cash
collections that Grasso will report in the Operating Activities section of its 2017 statement of cash flows assuming that the
direct method is used?
ANSWER:
Cash collections to be reported in the Operating Activities section of Grasso’s 2017 statement
of cash flows (direct method):
Accounts receivable, December 31, 2016
$38,000
Add sales during 2017
57,000
Less cash collections during 2017
(X)
Accounts receivable, December 31, 2017
$29,000
$38,000 + $57,000 – X = $29,000
X = $66,000
218. Springfield Company’s comparative balance sheets included inventory of $89,700 at December 31, 2016, and
$73,300 at December 31, 2017. Springfield’s comparative balance sheets also included accounts payable of $54,400 at
December 31, 2016, and $38,100 at December 31, 2017. Springfield’s accounts payable balances are composed solely of
amounts due to suppliers for purchases of inventory on account. Cost of goods sold, as reported by Springfield on its 2017
income statement, amounted to $750,800. What is the amount of cash payments for inventory that Springfield will report
in the Operating Activities section of its 2017 statement of cash flows assuming that the direct method is used?
ANSWER:
Cash payments for inventory to be reported in the Operating Activities section of Springfield
Company’s 2017 statement of cash flows (direct method):
Inventory, December 31, 2016
$ 89,700
Plus purchases during 2017
X
Less cost of goods sold during 2017
(750,800)
Inventory, December 31, 2017
$ 73,300
$89,700 + X – $750,800 = $73,300
X = $734,400
Accounts payable, December 31, 2016
$ 54,400
Plus purchases during 2017
734,400
Less cash payments during 2017
(X)
Accounts payable, December 31, 2017
$ 38,100
$54,400 + $734,400 – X = $38,100
X = $750,700
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
219. Columbus Company prepays the rent on various office facilities. The beginning balance in Prepaid Rent was $9,500,
and the ending balance was $7,200. The income statement reports Rent Expense of $45,800.
Required:
Under the direct method, what amount would appear for cash paid in rent in the Operating Activities section of the
statement of cash flows? Show your work.
ANSWER:
An analysis of the Prepaid Rent account can be used to find the amount of cash paid for rent:
Beginning prepaid rent
$ 9,500
+ Cash payments
X
– Rent expense
(45,800)
Chapter 12: The Statement of Cash Flows
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Iowa Industries Inc.
Selected data from the financial statements of Iowa Industries Inc. for the years ended December 31, 2017 and 2016, are
presented below. Also, certain assumptions are presented. Use these data and assumptions to answer the questions that
follow.
(In millions)
2017
2016
Property, plant and equipment
$11,142.3
$10,868.4
Accumulated depreciation
3,519.0
3,461.0
Investments
375.1
394.4
Long-term debt
1,440.2
1,242.6
Short-term debt
44.0
45.2
Common stock
594.5
567.2
Treasury - common stock
(20.6)
(20.6)
Reinvested income (retained earnings)
3,522.9
3,425.9
Net income
770.4
712.7
Assumptions:
(1)
Cash additions to property, plant, and equipment during 2017 were $550.0.
An additional $86.2 of plant assets were acquired through debt in a noncash
transaction. Depreciation expense for 2017 was $343.3. Gains on disposals of
property, plant and equipment during 2018 were $27.7.
(2)
The cash proceeds from the sale of investments in 2017 were $82.7. There
was a $17.8 gain on the sale of the investments.
(3)
Proceeds from long-term debt issued during 2017 were $167.7.
(4)
The issuance of common stock totaled $28.6 in 2017.
(5)
During 2017, $389.4 in cash was used to purchase and retire common stock.
A total of $365.4 of the cost was recorded as an increase to Reinvested
Income.
(6)
Net income, dividends declared/paid, and the $365.4 amount in (5) were the
only items that affected reinvested income during 2017.
220. Review the data and assumptions for Iowa Industries Inc.
Required:
(A) What was the cost of the property, plant and equipment which was disposed of during 2017?
(B) What was the amount of accumulated depreciation on the property, plant and equipment disposed of during 2017?
(C) Assuming that the book value of the property, plant and equipment disposed of during 2017 was $76.9, what were the
cash proceeds from the disposal of property, plant and equipment for 2017?
ANSWER:
(A) $362.3
$10,868.4 (Property, plant, and equipment, 2016) + $550.0 (Additions during 2017) + $86.2
(Non cash plant assets acquisitions) – $11,142.3 (Property, plant and equipment, 2017) =
$362.3
(B) $285.3
$3,461.0 (Accumulated depreciation, 2016) + $343.3 (Depreciation expense, 2017) –
$3,519.0 (Accumulated depreciation, 2017) = $285.3
(C) $104.6
$76.9 (Book value of disposed equipment, 2018) + $27.7 (Gain on disposal of equipment) =
$104.6
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
221. Review the data and assumptions for Iowa Industries Inc.
Required:
(A) What was the cost of the investments purchased during 2017?
(B) What was the amount paid to retire long-term debt during 2017?
ANSWER:
(A) $45.6
$394.4 (Investments balance, 2016) – [$82.7 (2017 Investments sales) – $17.8 (2017 gain on
sales)] – $375.1 (Investments balance, 2017) = $45.6
(B) $56.3
$1,242.6 (Long-term debt balance, 2016) + $167.7 (Proceeds, 2017) + $86.2 (Additional
Long-term debt issued) – $1,440.2 (Long-term debt, 2017) = $56.3
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
222. Craft Corp. began operations on January 1, 2016. The statement of cash flows for the first year reported dividends
paid of $160,000. The balance sheet at the end of the first year reported $40,000 in dividends payable and $580,000 in
ending retained earnings. Determine Craft’s net income for its first year of operations.
ANSWER:
Since the company paid dividends during its first year of $160,000 and has a balance of
$40,000 in dividends payable at the end of the year, dividends declared during the year were
$160,000 + $40,000 = $200,000. Since the ending balance in retained earnings is $580,000,
the net income for the year was $580,000 + $200,000 = $780,000.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
223. Ultra-lite Corp. began operations on January 1, 2016. The statement of cash flows for the first year reported
dividends paid of $180,000. The balance sheet at the end of the first year reported $60,000 in dividends payable and
$600,000 in ending retained earnings. Determine Ultra-lite’s net income for its first year of operations.
ANSWER:
Since the company paid dividends during its first year of $180,000 and has a balance of
$60,000 in dividends payable at the end of the year, dividends declared during the year were
$180,000 + $60,000 = $240,000. Since the ending balance in retained earnings is $600,000,
the net income for the year was $600,000 + $240,000 = $840,000.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
224. Use the selected data from the consolidated statements of cash flows for Vancouver Corporation for the years ended
December 31, 2017 and 2016, to answer the questions that follow.
(in thousands)
2017
2016
Operating Activities:
Net income
$ 6,328
$ 6,093
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
4,475
4,018
Amortization of software
517
983
Effect of restructuring charges
(355)
(445)
Deferred income taxes
(606)
358
Gain on the disposal of fixed assets and other assets
(261)
(273)
Changes in assets and liabilities (net of businesses acquired)
Accounts receivable
(2,736)
(3,727)
Inventories
73
432
Other assets
880
(1,087)
Accounts payable and accrued liabilities
362
699
Other liabilities
596
1,814
Net cash provided by operating activities
$ 9,273
$ 8,865
Net cash used by investing activities
$(6,131)
$(6,155)
Net cash provided by financing activities
$(4,993)
$(3,090)
Cash and cash equivalents at end of year
$ 5,375
$ 7,106
Required:
(A) What method does Vancouver use to calculate the net cash provided by operating activities?
(B) In 2017, why are depreciation and amortization expenses added back to net income in the operating activities section
of the statement of cash flows?
ANSWER:
(A) Indirect method
(B) These items are noncash expenses that were deducted in the determination of net income,
but do not use (or provide) cash flows. Therefore, they must be "added back" as part of the
process of calculating the net cash flow from operating activities.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-06 - LO: 12-06
KEYWORDS:
Bloom's: Analyzing
225. Twilight Corp. began the year with a balance in its Income Taxes Payable account of $13,000. The year-end balance
in the account was $18,000. The company uses the indirect method in the Operating Activities section of the statement of
cash flows. Therefore, it presents the amount of income taxes paid at the bottom of the statement as a supplemental
disclosure. The amount of taxes paid during the year was $15,000.
Required:
What amount of income tax expense will appear on Twilight’s income statement?
ANSWER:
Income Taxes Payable
Income tax paid in cash 15,000
13,000 Beginning balance
X Income taxes accrued
18,000 Ending balance
$13,000 + X – $15,000 = $18,000
X = $20,000
This means that the amount of cash paid to the government in taxes was $5,000 less ($20,000
– $15,000) than the amount of tax expense accrued. The amount of income tax expense on
the income statement is based on accrual accounting concepts. For example, any taxes owed
at the end of the year would be included in the tax expense, but would not be considered a
cash outflow.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-06 - LO: 12-06
KEYWORDS:
Bloom's: Analyzing
226. Singer Corp. began the year with a balance in its Income Taxes Payable account of $10,000. The year-end balance in
the account was $15,000. The company uses the indirect method in the Operating Activities section of the statement of
cash flows. Therefore, it presents the amount of income taxes paid at the bottom of the statement as a supplemental
disclosure. The amount of taxes paid during the year was $12,000. What amount of income tax expense will appear
on Singer’s income statement?
ANSWER:
Income Taxes Payable
Income tax paid in cash 12,000
10,000 Beg. Bal.
X = Income taxes accrued
15,000 End. Bal.
$10,000 + X – $12,000 = $15,000
X = $17,000
This means that the amount of cash paid to the government in taxes was $5,000 less ($17,000
– $12,000) than the amount of tax expense accrued. The amount of income tax expense on
the income statement is based on accrual accounting concepts. For example, any taxes owed
at the end of the year would be included in the tax expense, but would not be considered a
227. Fort Corp. began the year with a balance in its Income Taxes Payable account of $23,000. The year-end balance in
the account was $28,000. The company uses the indirect method in the Operating Activities section of the statement of
cash flows. Therefore, it presents the amount of income taxes paid at the bottom of the statement as a supplemental
disclosure. The amount of taxes paid during the year was $25,000. What amount of income tax expense will appear
on Fort’s income statement?
ANSWER:
Income Taxes Payable
Income tax paid in cash 25,000
23,000 Beg. Bal.
X = Income taxes accrued
28,000 End. Bal.
$23,000 + X – $25,000 = $28,000
X = $30,000
This means that the amount of cash paid to the government in taxes was $5,000 less ($30,000
– $25,000) than the amount of tax expense accrued. The amount of income tax expense on
the income statement is based on accrual accounting concepts. For example, any taxes owed
at the end of the year would be included in the tax expense, but would not be considered a
cash outflow.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-06 - LO: 12-06
KEYWORDS:
Bloom's: Analyzing
228. A company generated $1,830,000 from its operating activities and spent $1,200,000 on additions to its plant and
equipment during the year. The total amount of debt that matures in the next five years is $900,000. Compute the
company’s cash flow adequacy ratio for the year.
ANSWER:
Cash flow adequacy = (Cash from operating activities – Capital expenditures)/
Average amount of debt maturing over next five years
($1,830,000 – $1,200,000)/($900,000/5) = $630,000/$180,000 = 3.5
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.12-07 - LO: 12-07
KEYWORDS:
Bloom's: Analyzing
229. On its most recent statement of cash flows, a company reported net cash provided by operating activities of
$16,000,000. Its capital expenditures for the same year were $6,000,000. A note to the financial statements indicated that
the total amount of debt that would mature over the next five years was $24,000,000.
Required:
1. Compute the company’s cash flow adequacy ratio.
2. If you were a banker considering loaning money to this company, why would you be interested in knowing its cash
flow adequacy ratio? Would you feel comfortable making a loan based on the ratio you computed in (1)? Explain your
answer.
ANSWER:
1. Cash flow adequacy ratio:
(Net cash provided by operations – Capital expenditures)/Average annual debt maturing over
next five years
= ($16,000,000 – $6,000,000)/($24,000,000/5)
= $10,000,000/$4,800,000
= 2.08
2. The cash flow adequacy ratio gives the user an indication of whether or not the company is
generating sufficient cash from its operations to repay its debts, after taking into
consideration the need to make necessary expenditures on new plant and equipment. It would
appear that a ratio of 2.08 is reasonable; however, other factors should be considered,
including how the ratio compares with prior years as well as with competitors.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-07 - LO: 12-07
KEYWORDS:
Bloom's: Analyzing
230. On its most recent statement of cash flows, a company reported net cash provided by operating activities of
$12,000,000. Its capital expenditures for the same year were $2,000,000. A note to the financial statements indicated that
the total amount of debt that would mature over the next five years was $20,000,000.
Required:
1. Compute the company’s cash flow adequacy ratio.
2. If you were a banker considering loaning money to this company, why would you be interested in knowing its cash
flow adequacy ratio? Would you feel comfortable making a loan based on the ratio you computed in part (1)? Explain
your answer.
ANSWER:
1. Cash flow adequacy ratio:
(Net cash provided by operations – Capital expenditures)/Average annual debt maturing
over next five years
= ($12,000,000 – $2,000,000)/($20,000,000/5)
= $10,000,000/$4,000,000
= 2.5
2. The cash flow adequacy ratio gives the user an indication of whether or not the company
231. On its most recent statement of cash flows, a company reported net cash provided by operating activities of
$29,000,000. Its capital expenditures for the same year were $5,000,000. A note to the financial statements indicated that
the total amount of debt that would mature over the next eight years was $96,000,000.
Required:
1. Compute the company’s cash flow adequacy ratio.
2. If you were a banker considering loaning money to this company, why would you be interested in knowing its cash
flow adequacy ratio? Would you feel comfortable making a loan based on the ratio you computed in part (1)? Explain
your answer.
ANSWER:
1. Cash flow adequacy ratio:
(Net cash provided by operations – Capital expenditures)/Average annual debt
maturing over next five years
= ($29,000,000 – $5,000,000)/($96,000,000/8)
= $24,000,000/$12,000,000
= 2.0
2. The cash flow adequacy ratio gives the user an indication of whether or not the
company is generating sufficient cash from its operations to repay its debts, after taking
into consideration the need to make necessary expenditures on new plant and equipment.
It would appear that a ratio of 2.0 is reasonable; however, other factors should be
considered, including how the ratio compares with prior years as well as with
competitors.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-07 - LO: 12-07
KEYWORDS:
Bloom's: Analyzing
232. A friend of yours says: “It’s easy to look at the statement of cash flows and see that a company has been profitable,
because positive cash flows are equal to profitability.” Is your friend right? Explain.
ANSWER:
No, he or she is not correct. It is possible to report a net loss and still experience a net
increase in cash. First, a company could report large noncash charges against net income,
such as depreciation and various types of losses. Thus, it is possible that net cash provided by
operating activities is positive even though a net loss is reported. Second, the net loss deals
only with operating activities. It is possible that a net cash inflow was provided by either
investing or financing activities, or both.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.12-01 - LO: 12-01
KEYWORDS:
Bloom's: Applying
233. Which category of cash flows—operating, investing, or financing activities—do you think is most likely to have a
net cash outflow over a number of years? Explain.
ANSWER:
Companies cannot remain in business if they do not generate positive cash flows from
operating activities. Also, over a period of years, a company cannot continue to borrow more
than it repays, nor can it issue capital stock indefinitely. Thus, you would not expect a net
cash outflow from financing activities over a sustained period of time. However, many
companies regularly experience a net cash outflow from investing activities. A company
must at a minimum replace existing assets and in many cases acquire additional plant and
equipment to remain competitive. At the same time, disposals of long-term assets may be
fairly common, but usually they will not generate significant amounts of cash inflow.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.12-01 - LO: 12-01
FACC.PONO.13.12-03 - LO: 12-03
KEYWORDS:
Bloom's: Applying
234. If a company reports a net loss for the year, is it still possible that cash could actually increase during the year?
Explain your answer.
ANSWER:
Yes, it is possible to report a net loss and still experience a net increase in cash. First, a
company could report large noncash charges against net income, such as depreciation and
various types of losses. Thus, it is possible that net cash provided by operating activities is
positive even though a net loss is reported. Second, the net loss deals only with operating
activities. It is possible that a net cash inflow was provided by either investing or financing
activities, or both.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.12-03 - LO: 12-03
KEYWORDS:
Bloom's: Applying
235. Is it logical that interest paid is classified as a cash outflow in the Operating Activities section of the statement of
cash flows but that dividends paid are included in the Financing Activities section? Explain.
ANSWER:
An argument can be made that it is inconsistent to report interest paid in the Operating
section and dividends paid in the Financing section. Both represent returns to providers of
capital: interest to creditors and dividends to stockholders. Furthermore, the cash raised from
each of these sources—the amounts borrowed from creditors and the amounts contributed by
stockholders—is classified as an inflow in the Financing section of the statement. The
rationale normally given for this treatment is that interest enters into the determination of net
income; thus, the cash expended in interest should appear in the Operating section. Many
believe that this is illogical and that both interest paid and dividends paid belong in the
Financing section.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-04 - LO: 12-04
KEYWORDS:
Bloom's: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
236. Why do accounting standards require a company to separately disclose income taxes paid and interest paid if it uses
the indirect method?
ANSWER:
The requirement to separately disclose income taxes paid and interest paid when the indirect
method is used is a compromise. Accounting standards strongly encourage companies to use
the direct method because each major operating cash receipt and payment is reported in the
Operating Activities section of the statement. However, if a company chooses to use the
indirect approach, they are still required to report separately how much cash was actually
paid to the government in taxes and to creditors in interest.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.12-06 - LO: 12-06
KEYWORDS:
Bloom's: Applying
237. Use the selected data from the consolidated statements of cash flows for College Corporation for the years ended
December 31, 2017 and 2016, to answer the questions that follow.
(in thousands)
2017
2016
Operating Activities:
Net income
$ 6,328
$ 6,093
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
4,475
4,018
Amortization of software
517
983
Effect of restructuring charges
(355)
(445)
Deferred income taxes
(606)
358
Gain on the disposal of fixed assets and other assets
(261)
(273)
Changes in assets and liabilities (net of businesses acquired)
Accounts receivable
(2,736)
(3,727)
Inventories
73
432
Other assets
880
(1,087)
Accounts payable and accrued liabilities
362
699
Other liabilities
596
1,814
Net cash provided by operating activities
$ 9,273
$ 8,865
Net cash used by investing activities
$(6,131)
$(6,155)
Net cash provided by financing activities
$(4,993)
$(3,090)
Cash and cash equivalents at end of year
$ 5,375
$ 7,106
Required:
(A) What is the significance of the positive amounts shown above, for both years, for accounts payable and accrued
liabilities?
(B) At the end of each year, College’s cash balance was approximately $5 to $7 million. What does this indicate about
College’s cash management techniques?
ANSWER:
(A) Under the indirect method, net income must be adjusted for the change in the current
accounts (other than cash). The positive amounts indicate that for both of the years, the year-
end balances for accounts payable and accrued liabilities have increased over that of the
previous year. It is added to net income because this means that some of its expenses were
not paid in cash by the end of each year.
(B) Companies such as College employ various cash management techniques. Cash balances
are often kept to a minimum, and excess funds temporarily invested to generate interest
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
238. Use the selected information from the statement of cash flows for three actual companies for the last three years to
answer the questions that follow.
All amounts are in millions of dollars
2018
2017
2016
Company X
Net cash provided by operating activities
$ 4,625
$ 3,510
$ 2,808
Net cash used by investing activities
$(13,464)
$(2,288)
$(2,887)
Net cash provided by (used by) financing
activities
$ 8,040
$ ( 332)
$ (97)
Company Y
Net cash provided by operating activities
$ 1,871
$ 1,416
$ 808
Net cash used by investing activities
$ (2,244)
$(1,366)
$ (700)
Net cash provided by (used by) financing
activities
$ 370
$ (27)
$ (98)
Company Z
Net cash provided by operating activities
$ 287
$ 214
$ 129
Net cash used by investing activities
$ (515)
$ (202)
$ (106)
Net cash provided by (used by) financing
activities
$ 242
$ 11
$ 6
Required:
Ignoring the differences in magnitude, comment on the similarities and differences in the cash flows of the three
companies.
ANSWER:
All three companies are generating increasingly positive amounts of cash from their
operating activities. All three companies are making significant cash investments into various
assets or other long-term assets. It would appear that Company X made a very substantial
investment in 2016, judging by the amount as compared with the two prior years.
The trend in financing activities is not identical for the three companies. In 2016 and 2017,
Companies X and Y used cash in their financing activities for things like the payment of
dividends, repurchase of stock, or net repayment of debt. In 2018, financing activities, such
as the issuance of stock or debt, provided substantial amounts of cash to Companies X and Y.
Such actions were probably needed to fund the investing activities for the year. For Company
Z, financing activities have provided cash for all three years although the amount increased
significantly in 2018, again probably to fund the investing activities for the year.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-06 - LO: 12-06
KEYWORDS:
Bloom's: Applying
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
239. Use the selected information from the statement of cash flows for three actual companies for the last three years to
answer the questions that follow.
All amounts are in millions of dollars
2018
2017
2016
Company X
Net cash provided by operating activities
$ 4,625
$ 3,510
$ 2,808
Net cash used by investing activities
$(13,464)
$(2,288)
$(2,887)
Net cash provided by (used by) financing activities
$ 8,040
$ (332)
$ (97)
Company Y
Net cash provided by operating activities
$ 1,871
$ 1,416
$ 808
Net cash used by investing activities
$ (2,244)
$(1,366)
$ (700)
Net cash provided by (used by) financing activities
$ 370
$ (27)
$ (98)
Company Z
Net cash provided by operating activities
$ 287
$ 214
$ 129
Net cash used by investing activities
$ (515)
$ (202)
$ (106)
Net cash provided by (used by) financing activities
$ 242
$ 11
$ 6
Required:
What is meant by the term "cash flow adequacy"? What other financial information would be necessary in order to make a
determination
of the cash flow adequacy for these three companies?
ANSWER:
The cash flow adequacy is a measure of a company's ability to generate cash to meet future
debt obligations after paying income taxes and interest and making capital expenditures.
Because capital expenditures for new plant and equipment are necessary for most companies,
analysts are concerned with the amount of cash available for dividends and debt repayments
after the company has replaced and updated its existing base of long-term assets.
A ratio for cash flow adequacy can be computed as follows:
240. Explain where to find the information needed to determine a company’s cash flow adequacy.
ANSWER:
The information needed to determine a company’s cash flow adequacy comes from two
sources. The numbers in the numerator of the ratio, net cash provided by operating activities
and capital expenditures, appear on the statement of cash flows. The amount of average
annual debt maturing over the next five years in the denominator can be found in a note to the
financial statements.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.12-07 - LO: 12-07
KEYWORDS:
Bloom's: Applying
