CHAPTER 13
STATEMENT OF CASH FLOW
S
Brief Learning
Exercises Objectives Skills
B. Ex. 13.1 Cash flows from operations (direct) 13-3 Analysis
B. Ex. 13.2 Cash flows from operations (indirect) 13-7 Analysis
B. Ex. 13.3 Cash flows from operations (direct) 13-3 Analysis
B. Ex. 13.4 Cash flows from operations (indirect) 13-7 Analysis
B. Ex. 13.5 Cash flows from investing activities 13-4 Analysis
B. Ex. 13.6 Cash flows from financing activities 13-4 Analysis
B. Ex. 13.7 Cash payment for merchandise 13-3 Analysis
B. Ex. 13.8 Determining beginning cash balance 13-2 Analysis
B. Ex. 13.9 Analysis
13-6
B. Ex. 13.10 Prepare statement of cash flows 13-2 Analysis
Skills
13.1 Usin
g
a cash flow statement 13-1
,
13-2 Anal
y
sis
,
communicatio
n
13.2 Using a cash flow statement 13-1, 13-2,
13-6
Analysis, communication
13.3 13-4 Anal
y
sis
13.4 13-3
,
13-6 Anal
y
sis
,
communicatio
n
13.5 Accrual versus cash flows 13-3 Anal
y
sis
13.6 13-3
,
13-6 Communicatio
n
13.7 Format of a cash flow statement 13-2 Anal
y
sis
13.8 13-8
13.9 Indirect metho
d
13-6
,
13-7 Anal
y
sis
,
communicatio
n
13.10 Indirect metho
d
13-7 Anal
y
sis
13.11 Classification of cash flows 13-2 Anal
y
sis
13.12 Classification of cash flows 13-2 Anal
y
sis
13.13 Cash flows from operating activities 13-4
13.14 Cash flows from financing activities 13-4
13.15 Real World: Home Depot, Inc. 13-1, 13-2,
13-4
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Investing activities and interest revenue
Relationship between accrual and cash
flows
Analysis, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment, research
Analysis, communication,
judgment
Cash effects of business strategies
Learning
Objectives
Using noncash accounts to compute cash
flows
Topic
Topic
Reconciling net income to cash from
operations
Problems Learning
Sets A, B Objectives Skills
13.1 A,B 13-2–13-4 Analysis
13.2 A,B 13-4 Analysis
13.3 A,B 13-4 Analysis, communication,
judgment
13.4 A,B 13-3, 13-8 Analysis, communication,
judgment
13.5 A,B 13-6, 13-7
13.6 A,B 13-2–13-4,
13-6, 13-8
Analysis, communication,
judgment
13.7 A,B 13-1–13-9
13.8 A,B 13-1–13-9
13.1 Using a statement of cash flows 13-1
13.2 Budgeting at a personal level 13-1, 13-8
13.3
13.4 Peak pricing 13-8
13.5 13-3
governance)
13.6 13-2–13-4
(Internet)
Analytical, communication,
judgment
Analytical, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment
Cash flow from operating
activities—direct method
Preparing a statement of cash
flows—direct method (short)
Investing activities
Investing activities
Preparing a worksheet and statement
of cash flows; evaluate the
company’s financial
position—indirect method.
Preparing a worksheet and statement
of cash flows; evaluate the
company’s liquidity-indirect method.
Cash flow from operating
activities—indirect method
Preparing a statement of cash
flows—direct method; comprehensive
Critical Thinking Cases
Window dressing; effects on net
income and net cash flow
13-1, 13-4,
13-8
Improving the Statement of Cash
Flows (Ethics, fraud & corporate
Real World: Coca-Cola,
Amazon.com Cash Flow Analysis
Analytical, communication,
judgment
Analytical, communication,
judgment
Analytical, communication,
judgment
Analytical, communication,
judgment, research
Topic
Hill Education.
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASE
S
Problems (Sets A and B)
45 Stron
g
Prepare the investing activities section of a statement of cash
flows by analyzing changes in balance sheet accounts and gains
and losses reported in the income statement.
25 EasyHolmes Export Co./RPZ Imports
25 Medium
13.6 A,B 21st Century Technologies/Foxboro Technologies
Prepare the operating activities section of a statement of cash
flows from accounting records maintained using the accrual basis
of accounting. Students also are to explain how more efficient
asset management could increase cash flow provided by
operating activities. Uses the direct method. (Problem 13–5 uses
the same data but requires use of the indirect method. )
A comprehensive problem covering conversion from the accrual
basis to the cash basis and preparation of a statement of cash
flows. Uses the direct method.
Using the data provided in Problem 13.4 A,B, prepare the
operating activities section of a statement of cash flows using the
indirect method.
30 Medium
13.5 A,B
25 Easy
Treece, Inc. (Indirect)/Royce Interiors, Inc. (Indirect)
Prepare a statement of cash flows. Emphasis is on format of the
statement, with computations held to a minimum. However,
sufficient computations are required to assure that students are
able to distinguish between cash flows and accrual basis
measurements. Uses the direct method.
30 Medium13.1 A,B
13.4 A,B
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume
use of the partially filled-in working papers.
Treece, Inc./Royce Interiors, Inc.
13.2 A,B
Lambert Company/Welch Company
13.3 A,B
Prepare the investing activities section of a statement of cash
flows. Problem demonstrates how this section of the financial
statement can be prepared by analyzing income statement
amounts and changes in balance sheet accounts.
Hampton Inc./Mary’s Fashions
Education.
Problems (cont’d)
60 Stron
g
(
P13.7A
)
40 Strong (P13.7B)
13.7 A,B Satellite World/LGIN
A comprehensive problem covering all learning objectives.
Includes a worksheet, the indirect method, and analysis of the
company’s financial position. We assign this to groups and let
them deal with the worksheet mechanics on their own.
60 Strong
A comprehensive problem covering all learning objectives.
P13.7A includes a worksheet, the indirect method, and analysis
of the company’s financial position. P13.7B does not include a
worksheet and uses the indirect method. We assign this to groups
and let them deal with the worksheet mechanics on their own.
Miracle Tool, Inc./Purcells, Inc.13.8 A,B
Education.
Critical Thinking Cases
Another Look at Allison Corporation
Cash Budgeting for You as a Student
Lookin’ Good?
Peak Pricing
Improving the Statement of Cash Flows
Ethics, Fraud & Corporate Governance
Comparing Cash Flow Information from Two Companies
Internet
13.2
A simple case that illustrates the usefulness of cash budgeting in the
environment of a college student.
An automobile manufacturer is in serious financial difficulty, and
management is considering several proposals to increase reported net
income and net cash flow. Students are asked to evaluate the probable
effects of each proposal. This case can lead into an open-ended
discussion of “window dressing” in annual statements.
25 Strong
Visit a website that actually provides assistance in preparing cash
budgets and statements of cash flows.
30 Medium
15 Easy
Students are to discuss various aspects of peak pricing and discuss
how it might be applied in specific situations. Also, they are to
describe situations in which peak pricing might be considered
unethical.
15 Easy
13.1
45 Medium
Students are asked to review the cash flow statement of Allison
Corporation (the company used as an example throughout the
chapter) and to evaluate the company’s ability to maintain its present
level of dividends.
13.4
13.3
20 Medium
Students explore the website of the Securities & Exchange
Commission and locate a speech by an S.E.C. official in which
suggestions for improving the statement of cash flows are discussed.
13.5
13.6
Education.
SUGGESTED ANSWERS TO DISCUSSION QUESTION
S
1.
3.
a.
(2)
(3)
b. c.
(1) Purchases of investments. (1)
4.
5.
Investing activities: Financing activities:
The primary purpose of a statement of cash flows is to provide information about the cash
receipts and cash payments of a business. A related purpose is to provide information about the
The income statement provides the better measurement of profitability, especially when the
business is financially sound and short-run survival is not the critical issue. The statement of
Receipts: Receipts:
Payments:
Income taxes paid.
Dividends and interest received.
Payments: Payments:
Repayment of debt.
In the long run, it is most important for a business to have positive cash flows from operating
activities. To a large extent, the ability of a business to generate positive cash flows from
financing activities is dependent upon its ability to generate cash from operations. Investors are
Net cash flow from operating activities generally reflects the cash effects of transactions
2.
Receipts:
Examples of cash receipts and of cash payments in the three major classifications of a cash flow
statement are shown below (two receipts and two payments required):
Operating activities:
Education.
6.
8.
9.
10. The credit to the Land account indicates a sale of land and, therefore, a cash receipt. However, the
The direct method identifies the major operating sources and uses of cash, using such captions as
“Cash received from customers.” The indirect method, on the other hand, reconciles net income
One purpose of a statement of cash flows is to provide information about all the investing and
financing activities of a business. Although the acquisition of land by issuing capital stock does
Among the classifications shown in the cash flow statement, a successful and growing company is
least likely to report a positive cash flow from investing activities. A growing company is usually
increasing its investment in plant assets, which generally leads to a negative cash flow from
are attributable to investing or financing activities rather than to operating activities.
Education.
11.
42,500,000$
12.
4,500,000$
13.
Credits to paid-in capital accounts usually indicate the issuance of additional shares of capital stock.
Proceeds from issuance of capital stock ($15,000,000 + $27,500,000) ……………
Free cash flow is that portion of the net cash flow from operating activities that is available for
discretionary purposes after the basic obligations of the business have been met.
The amount of cash dividends paid during the current year may be determined as follows:
Dividends declared during the year …………………………………………….
From a short-term creditor’s point of view, free cash flow is a “buffer,” indicating that the business
Education.
B.Ex. 13.1
Cash received from customers $270,000
$470,000
Depreciation expense $67,000
$722,000
Increase in accounts receivable
B.Ex. 13.5
Cash paid for investments $(55,000)
Cash paid for plant assets (147,000)
Cash received for plant assets 66,000
Net cash used for investing activities $(136,000)
Cash used for investing activities:
SOLUTIONS TO BRIEF EXERCISES
Cash flows from operating activities:
Net income
B.Ex. 13.4
B.Ex. 13.2
Adjustments to reconcile net income to net cash from operations:
$(50,000)
Net income
Adjustments to reconcile net income to net cash from operations:
Education.
B.Ex. 13.6
Cash received from sale of common stock $560,000
Cash received from sale of preferred stock 56,000
Cash paid to purchase treasury stock
Cash paid for dividends
Net cash provided by financing activities $545,000
Cost of goods sold $100,800
Add: Increase in merchandise inventory
$67,000
B.Ex. 13.9
$68,000
Depreciation expense $15,000
Increase in accounts receivable
Decrease in inventory 6,000
Cash flows provided by operating activities $136,000
Cash flows used in investing activities
B.Ex. 13.10 Maines, Inc.
Statement of Cash Flows
For year ended _____________
Cash flows used in financing activities
(56,000)
(34,000)
B.Ex. 13.7
Cash provided by financing activities:
Adjustments to reconcile net income to net cash from
operations:
Cash payments for purchases:
(47,000)
(24,000)
(4,000)
Net income
Hill Education.