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Chapter 16 - Reporting the Statement of Cash Flows
Chapter 16
Reporting the Statement of Cash Flows
QUESTIONS
1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and
cash payments (outflows) during a period. It helps users to answer questions such as:
2. On a statement of cash flows, investing activities include cash outflows from purchases
of long-term investments such as stocks and bonds, from purchases of plant assets
3. On a statement of cash flows, financing activities include cash inflows such as those
that result from issuing preferred or common stock, and from borrowing by issuing
4. The direct method of reporting cash flows from operating activities itemizes the major
5. On a statement of cash flows prepared according to the direct method, operating
activities generally include cash receipts from the sale of goods and services, cash
6. The indirect method of reporting cash flows from operating activities begins with net
7. Payments of cash dividends should be reported on the statement of cash flows as
financing activities.
8. The amount of the land purchase that was paid for in cash ($400,000) should be reported
on the statement of cash flows as an investing activity. Also, a schedule of noncash
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Chapter 16 - Reporting the Statement of Cash Flows
9. Since this cash inflow results from borrowing money, it is reported on the statement of
cash flows as a financing activity.
10. Yes; even though a company reports positive net income for the year, it may still show a
net cash outflow from operating activities. When net income is reconciled to the net
11. Depreciation is not a source or a use of cash, even though it must be added to net
12. (a) Indirect method. (b) The increase in accounts (trade) receivable represents an
amount by which the company had cash tied up in accounts (trade) receivable versus
13. Google’s statement of cash flows shows several major financing activities for the year
ended December 31, 2013 ($ millions):
14. Samsung’s net cash (all is KRW millions) from operating activities is 46,707,440; its₩
15. Samsung’s investing activities yielding cash outflows and inflows for the year ended
December 31, 2013, follow. Its cash outflows are listed in parentheses ( in millions):₩
Net decrease (increase) in short-term financial instruments................................. (19,391,643)₩
Net decrease (increase) in short-term available-for-sale financial assets............ 33,663
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Chapter 16 - Reporting the Statement of Cash Flows
QUICK STUDIES
Quick Study 16-1 (10 minutes)
* For the “indirect” method, the loss is reported as an adjustment (add-
back) to net income in the operating section.
Quick Study 16-2 (20 minutes)
Statement of cash flow items in sequential order 1 through 13 on left OR
textbook order on right:
Quick Study 16-3 (20 minutes)
Cash Flows from Operations (Indirect) Case X Case Y Case Z
Net Income............................................................ $ 4,000 $100,000 $72,000
Adjustments to reconcile net income to net
cash provided by operations
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Chapter 16 - Reporting the Statement of Cash Flows
Quick Study 16-4 (10 minutes)
Cash flows from operating activities
Net income................................................................................... $18,200
Adjustments to reconcile net income to operating cash flow
Income statement items not affecting cash
Quick Study 16-5 (10 minutes)
a. Reconstructed journal entry for equipment sale:
Cash............................................................................... 37,000
To record sale of equipment.
Company received $37,000 cash from sale.
b. We reconstruct the T-account for Accumulated Depreciation—Equipment
to determine its Depreciation Expense of $60,000.
Accumulated Depreciation—Equipment
Bal., 2014 210,000
Sale 170,000
c. We reconstruct the T-account for Equipment to determine its purchases of
equipment of $120,000.
Equipment
Bal., 2014 270,000
Sale 210,000
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Chapter 16 - Reporting the Statement of Cash Flows
Quick Study 16-6 (10 minutes)
a. Reconstructed journal entry for building sale:
Cash............................................................................... 130,000
Company received $130,000 cash from sale.
b. We reconstruct the T-account for Accumulated Depreciation—Building to
determine its Depreciation Expense of $45,000.
Accumulated Depreciation—Building
Bal., 2014 285,000
c. We reconstruct the T-account for Building to determine its purchases of
buildings of $280,000.
Building
Bal., 2014 400,000
Sale 300,000
Quick Study 16-7 (10 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given)..................................................... $52,500
Accumulated depreciation at beginning of year (given)..........$110,700
Increase from depreciation expense (given)............................. 18,000
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Chapter 16 - Reporting the Statement of Cash Flows
Quick Study 16-8 (15 minutes)
Investing Activities
Purchase of used equipment......................................................................$(5,000)
Quick Study 16-9 (10 minutes)
Part 1
Computation of cash received from the sale of common stock
Increase in Common stock ($105,000 - $100,000)........................................$ 5,000
Part 2
Computation of cash paid for dividends
Beginning retained earnings.......................................................................$287,500
Net income.................................................................................................... 48,000
Quick Study 16-10 (15 minutes)
Financing Activities
Quick Study 16-11 (10 minutes)
Cash flows from operating activities
Net income................................................................................... $30,000
Adjustments to reconcile net income to operating cash flow
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Education.
Chapter 16 - Reporting the Statement of Cash Flows
Inventory decrease................................................................10,000
Prepaid expense increase..................................................... (1,200)
Accounts payable decrease................................................. (6,000)
Quick Study 16-12 (15 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given).................................................. $55,000
Accumulated depreciation at beginning of year (given).......... $ 9,000
Quick Study 16-13 (15 minutes)
1. Computation of cash paid for dividends
Beginning retained earnings............................................ $ 8,400
2. Computation of cash payments for notes
Beginning notes payable................................................... $69,000
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Chapter 16 - Reporting the Statement of Cash Flows
Quick Study 16-14B (10 minutes)
1. Cash received from customers = Sales + Accounts receivable decrease
= $498,000
2. Net increase in cash = $94,800 - $24,000 = $70,800
Quick Study 16-15B (10 minutes)
1. Cash paid for inventory
2. Cash paid for operating expenses
= Operating expenses (excluding depreciation)
+ Prepaid expenses increase - Wages payable increase
Quick Study 16-16B (10 minutes)
Cash flows from operating activities
Receipts from sales to customersa...................................... $ 498,000
Payments for inventoryb....................................................... (310,000)
a From QS 16-14B
b From QS 16-15B
c From QS 16-15B
d $17,300 (income tax expense) + $1,200 (decrease in income taxes payable)
Quick Study 16-17 (10 minutes)
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Chapter 16 - Reporting the Statement of Cash Flows
1. Moore is probably in the strongest position of the three competing companies
on the basis of the statement of cash flows. Moore’s cash flows from
2. Sykes’s cash flow on total assets ratio is slightly stronger than that for Moore.
($70,000/$790,000).
Quick Study 16-18A (10 minutes)
The balance sheet equation can be arranged so that the algebraic total of all
noncash items is equal to cash (see Exhibit 16.9). It follows that when all
Quick Study 16-19 (25 minutes)
Part 1
MONTGOMERY, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2016
Cash flows from operating activities
Net income.................................................................................... $ 10,500
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
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Chapter 16 - Reporting the Statement of Cash Flows
Cash paid for equipment (Note 1)............................................... (8,400)
Net cash used in investing activities.......................................... (8,400)
Cash flows from financing activities
Note 1
Equipment
Bal., 12/31/2015 41,500
Purchase “plug” Sale 0 plug = $8,400
Bal., 12/31/2016 49,900
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