Question 11-1 (LO 11-1)
The three categories of cash flows are operating activities, investing activities, and financing
activities. Operating activities include cash receipts and cash payments for transactions relating
to revenue and expense activities, essentially the very same activities reported on the income
Question 11-2 (LO 11-1)
Changes in long-term asset accounts are used in determining net cash flows from investing
Question 11-3 (LO 11-1)
Noncash activities are investing and financing activities that do not result in the transfer of
cash. Examples of significant noncash investing and financing activities include:
1. Purchase of long-term assets by issuing debt.
2. Purchase of long-term assets by issuing stock.
Question 11-4 (LO 11-1)
The income statement provides important information in determining cash flows from
operating activities. The balance sheet provides changes in asset, liability, and stockholders’
Question 11-5 (LO 11-1)
The heading includes the company name, the title statement of cash
ows, and the period covered. Like the income statement, the statement of
cash ows is over a period of time. The three major categories are operating
Chapter 11
Statement of Cash FlowsREVIEW QUESTIONS
Question 11-6 (LO 11-1)
The four steps are to calculate net cash flows from operating activities using information
from the income statement and changes in current assets and current liabilities, determine the net
cash flows from investing activities by analyzing changes in long-term asset accounts, determine
Question 11-7 (LO 11-1)
Using the indirect method, we begin with net income and then list adjustments to net income
in order to arrive at operating cash flows. Using the direct method we adjust the items on the
income statement to directly show the cash inflows and outflows from operations such as cash
Question 11-8 (LO 11-2)
The most common adjustments to convert net income to net cash flows are adjustments for
noncash items such as depreciation expense, nonoperating items such as a gain or loss on sale of
Question 11-9 (LO 11-2)
It is possible to report a loss and still have positive operating cash flows. For example, if
depreciation expense was $500,000, a company could have a loss of $200,000 and positive
Question 11-10 (LO 11-2)
Depreciation expense is an addition to net income in arriving at net operating cash flows.
Depreciation expense reduces net income. Remember, though, this expense does not correspond
Question 11-11 (LO 11-2)
We subtract a gain on sale of assets and add a loss on sale of assets to
net income in arriving at net cash ows from operating activities. The sale of
Question 11-12 (LO 11-2)
We (a) subtract an increase in current assets, (b) add a decrease in current assets, (c) add an
Question 11-13 (LO 11-2)
An increase in accounts receivable indicates sales were more than cash collections from
customers during the period. Therefore, an increase in accounts receivable indicates net income
Question 11-14 (LO 11-3)
The purchase of land by issuing its own common stock is a noncash activity. Transactions
Question 11-15 (LO 11-2, 11-3)
The $1,000 loss on sale of the investment is added back to net income in arriving at net
Question 11-16 (LO 11-3)
Financing activities are related to changes in long-term debt and stockholders’ equity.
Question 11-17 (LO 11-4)
Return on assets has net income in the numerator while cash return on assets has cash flows
from operations in the numerator. Both ratios divide by average total assets. Analysts often
supplement their investigation of income statement and balance sheet amounts with cash flow
Question 11-18 (LO 11-4)
Companies have two primary strategies for increasing their cash return on assets. One
strategy, used by Apple, is to produce highly innovative products that yield very high cash
Question 11-19 (LO 11-5)
The primary cash inflows under the direct method are cash received from customers and cash
Question 11-20 (LO 11-5)
Depreciation expense has no effect on cash ows. It is merely an allocation in
the current period of a prior cash expenditure (to purchase the depreciable asset). Therefore,
BRIEF Exercises
Brief Exercise 11-1 (LO 11-1)
1. Financing activity.
2. Financing activity.
3. Operating activity.
4. Investing activity.
5. Operating activity.
Brief Exercise 11-2 (LO 11-1)
1. Financing activity.
2. Operating activity.
3. Financing activity.
4. Investing activity.
Brief Exercise 11-3 (LO 11-2)
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash
Beginning cash balance
Ending cash balance
Brief Exercise 11-4 (LO 11-2)
Cash Flows from Operating Activities
Net income $650,000
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation expense 50,000
Increase in accounts receivable (11,000)
Brief Exercise 11-5 (LO 11-2)
Cash Flows from Operating Activities
Net income $75,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 90,000
Increase in prepaid rent (70,000)
Brief Exercise 11-6 (LO 11-2)
Cash Flows from Operating Activities
Net income $70
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense 6
Loss (on sale of equipment) 2
Increase in accounts receivable (3)
Brief Exercise 11-7 (LO 11-2)
Cash Flows from Operating Activities
Net income $70
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation expense 6
Gain (on sale of land) (2)
Decrease in accounts receivable 3
Brief Exercise 11-8 (LO 11-3)
Cash Flows from Investing Activities
Sale of investments $40
Sale of land 16
Purchase equipment (26)
Brief Exercise 11-9 (LO 11-3)
Cash Flows from Financing Activities
Issuance of common stock $42
Net cash flows from financing activities $20
Brief Exercise 11-10 (LO 11-4)
Operating
Cash Flow ÷
Average
Total Assets =
Cash Return
on Assets
Operating
Cash Flow ÷ Sales =
Cash Flow
to Sales
Sales ÷
Average
Total Assets =
Asset
Turnover
Brief Exercise 11-11 (LO 11-4)
Operating Cash Flow
Operating Cash Flow
*Brief Exercise 11-12 (LO 11-5)
Net sales $73
+ Decrease in accounts receivable 9
Cash received from customers $82
*Brief Exercise 11-13 (LO 11-5)
Cost of goods sold $45
+ Increase in inventory 5
− Increase in accounts payable (7)
*Brief Exercise 11-14 (LO 11-5)
Operating expenses $985,000
+ Increase in prepaid rent 30,000
− Increase in salaries payable (20,000)
*Brief Exercise 11-15 (LO 11-5)
Income tax expense $340,000
− Increase in income taxes
payable
(15,000)
Exercise 11-1 (LO 11-1, 11-2, 11-3, 11-4, 11-5)
Items
__e__ 1. Operating activities
__f__ 2. Investing activities
__d__3. Financing activities
__g__4. Noncash activities
EXERCISES
__a__ 5. Indirect method
__h__6. Direct method
__b__7. Depreciation expense
__c__ 8. Cash return on assets
Descriptions
a. Begins with net income and then lists adjustments to net income in order to
arrive at operating cash flows.
b. Item included in net income, but excluded from net operating cash flows.
c. Net cash flows from operating activities divided by average total assets.
d. Cash transactions involving lenders and investors.
Exercise 11-2 (LO 11-1)
The $25,000 increase in notes payable should be properly recorded as an increase
in cash from financing activities. While most changes in current assets and current
Ethics come into play because, by recording the increase in notes payable as an
Nicole should insist that the $25,000 increase in notes payable be recorded as an
increase in cash from financing activities. Classroom discussion might consider
Exercise 11-3 (LO 11-1)
1. Investing activities
2. Operating activities
3. Operating activities
4. Financing activities
5. Operating activities
6. Investing activities
7. Investing activities
8. Noncash activities
9. Operating activities
10. Financing activities
Exercise 11-4 (LO 11-1)
1. Financing activities
2. Investing activities
3. Operating activities
4. Operating activities
5. Noncash activities
6. Financing activities
7. Investing activities
8. Operating activities
Exercise 11-5 (LO 11-1)
1. Investing activities, Operating activities (Gain on sale of land)
2. Financing activities
3. Investing activities
4. Operating activities
Exercise 11-6 (LO 11-1)
1. Investing activities
2. Investing activities
3. Financing activities
4. Financing activities