Chapter 12 – Statement of Cash Flows
Chapter 12
Statement of Cash Flows
ANSWERS TO QUESTIONS
1. The income statement reports revenues earned and expenses incurred during a
period of time. It is prepared on an accrual basis. The balance sheet reports the
2. The statement of cash flows reports cash receipts and cash payments from three
broad categories of business activities: operating, investing, and financing. While
the income statement reports operating activities, it reports them on the accrual
basis: revenues when earned, and expenses when incurred, regardless of the
3. Cash equivalents are short-term, highly liquid investments that are purchased
within three months of the maturity date. The statement of cash flows does not
4. The major categories of business activities reported on the statement of cash flows
are operating, investing, and financing activities. Operating activities of a business
Chapter 12 – Statement of Cash Flows
Financial Accounting, 8/e 12-3
12. Noncash investing and financing activities are activities that would normally be
classified as investing or financing activities, except no cash was received or paid.
13. When equipment is sold, it is considered an investing activity, and any cash
received is reported as a cash inflow from investing activities. When using the
indirect method, the gain on sale of equipment must be reported as a deduction
ANSWERS TO MULTIPLE CHOICE
1. d)
2. d)
3. a)
4. c)
5. a)
6. b)
7. d)
8. b)
9. d)
10. c)
Chapter 12 – Statement of Cash Flows
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
5
1
10
1
35
1
35
1
20
2
5
2
10
2
35
2
35
2
15
3
5
3
15
3
35
3
35
3
25
4
5
4
15
4
40
4
45
5
5
5
15
5
40
5
35
6
5
6
15
6
45
6
35
7
5
7
20
7
*
8
20
9
20
10
10
11
15
12
10
Continuing Case
13
20
1
40
14
25
15
20
16
25
17
25
18
15
19
15
20
20
21
35
22
35
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open-ended project,
it is possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
Chapter 12 – Statement of Cash Flows
MINI–EXERCISES
M12–1.
Purchase of stock. (This involves repurchase of its own stock.)
Principal payment on long-term debt.
Proceeds from sale of properties.
Inventories (decrease).
Accounts payable (decrease).
Depreciation, depletion, and amortization.
M12–2.
Accrued expenses (increase).
Inventories (increase).
Accounts receivable (decrease).
Accounts payable (decrease).
Depreciation, depletion, and amortization.
M12–3.
Receipts from customers.
Dividends paid.
Payment for share buy-back.
Proceeds from sale of property, plant and equipment.
Repayments of borrowings (bank debt).
Net interest paid.
M12–4.
Quality of income ratio
=
Cash flow from operations
=
$86,500
=
0.85 (85%)
Net income
$102,000
M12–5.
Investing Activities
Sale of used equipment
$ 400
Purchase of short-term investments
(635)
Cash used in investing activities
$ (235)
M12–6.
Financing Activities
Additional short-term borrowing from bank
$1,200
Dividends paid
(700)
Cash provided by financing activities
$ 500
Chapter 12 – Statement of Cash Flows
EXERCISES
E12–1.
F
1. Dividends paid
F
2. Repayments of long-term debt
O
3. Depreciation and amortization
F
4. Proceeds from issuance of common stock to employees
O
5. [Change in] Accounts payable and accrued expenses
NA
6. Cash collections from customers
F
7. Net repayments of notes payable to banks
O
8. Net income
I
9. Payments to acquire property and equipment
O
10. [Change in] Inventory
E12–2.
I
1. Sales of short- and long-term available-for-sale securities.
O
2. Interest paid
I
3. Additions to property, plant, and equipment.
O
4. Income taxes paid.
F
5. Issuance of EMC’s common stock
F
6. Payment of long-term and short-term obligations
O
7. Dividends and interest received.
O
8. Cash received from customers.
I
9. Purchases of short- and long-term available-for-sale securities
NA
10. Net income
Chapter 12 – Statement of Cash Flows
E12–4.
1. NE Inventory
Accounts payable
2. – NCFO Prepaid expenses (rent)
Cash
3. NE Plant and equipment
Note payable
4. NE Expense
Prepaid expense
5. – NCFO Income tax expense
Cash
6. – NCFI Investment securities
Cash
8. + NCFO Cash
Accounts receivable
9. + NCFI Cash
Plant and equipment (net)
10. + NCFF Cash
Chapter 12 – Statement of Cash Flows
E12–6.
Cash flows from operating activities—indirect method
Net income …………………………………………………………………………………..
$23,125
Depreciation expense ……………………………………………………………………
6,000
Accounts receivable decrease ($10,500 – $11,000) ………………………….
500
Inventory increase ($13,000 – $8,000) ……………………………………………
(5,000)
Salaries payable increase ($2,250 – $800) ………………………………………
1,450
Net cash provided by operating activities …………………………………….
$26,075
E12–7.
Req. 1
Cash flows from operating activities—indirect method
Net loss ……………………………………………………………………………………….
($6,400
)
Depreciation expense ……………………………………………………………………
4,500
Amortization of copyrights ………………………………………………………………
200
Accounts receivable decrease ($8,000 – $13,000) …………………………...
5,000
Salaries payable increase ($12,000 – $1,000) ………………………………….
11,000
Other accrued liabilities decrease ($1,000 – $2,800) ………………………….
(1,800
)
Net cash provided by operating activities …………………………………….
$12,500
E12–8.
Cash flows from operating activities—indirect method
Net income …………………………………………………………………………………..
$ 14,000
Depreciation expense ……………………………………………………………………
8,500
Loss on sale of equipment …………………………………………………………….
Accounts receivable decrease ……………………………………………………….
2,500
10,000
Salaries payable increase ………………………………………………………………
11,000
Other accrued liabilities decrease ……………………………………………………
(2,000
)
Net cash provided by operating activities …………………………………….
$44,000
Chapter 12 – Statement of Cash Flows
E12–10.
Account
Change
Receivables
Increase
Inventories
Increase
Other current assets
Decrease
Payables
Increase
E12–11.
Account
Change
Accounts receivable
Decrease
Inventories
Decrease
Other current assets
Increase
Accounts payable
Increase
Deferred revenue
Increase
Other current liabilities
Increase
E12–12.
Req. 1
Cash flows from investing activities
Year 1
Year 2
Proceeds from sale of equipment ……..
$17,864
$12,163
The amount reported in the cash flow from investing activities section of the statement
Year 1
Year 2
Loss (Gain) on sale of equipment ……..
$16,751
Chapter 12 – Statement of Cash Flows
E12–14.
Req. 1
Cash flows from operating activities—indirect method
Net income …………………………………………………………………………………..
$6,462
Depreciation and amortization ………………………………………………………..
2,737
Increase in accounts receivable ………………………………………………………
(666
)
Increase in inventory ……………………………………………………………………..
(331
)
Increase in prepaid expense …………………………………………………………..
(27
)
Increase in accounts payable …………………………………………………………
520
Decrease in taxes payable ……………………………………………………………..
(340
)
Increase in other current liabilities …………………………………………………..
589
Cash flows from operating activities …………………………………………..
$8,944
Quality of income ratio
=
=
=
E12–15.
The investing and financing sections of the statement of cash flows for Oering’s
Furniture:
Cash flows from investing activities:
Purchase of property, plant & equipment ………………………
$(1,071)
Sale of marketable securities ………………………………………..
219
Proceeds from sale of property, plant & equipment ………
6,894
Net cash flows from investing activities ……………………
$6,042
Cash flows from financing activities:
Borrowings under line of credit ……………………………………..
1,117
Proceeds from issuance of stock …………………………………..
11
Payments on long-term debt …………………………………………
(46)
Payment of dividends ……………………………………………………
(277)
Purchase of treasury stock ……………………………………………
(2,583)
Net cash flows from financing activities ……………………
(1,778)
12-16 Solutions Manual
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E12–16.
SHALLOW WATERS COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Net income …………………………………………………………….
$ 700
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable ……………………………….
(500
)
Decrease in prepaid expenses ……………………………….
150
Decrease in wages payable …………………………………….
(450
)
Net cash provided by (used for) operating activities ..
(100
)
Cash flows from investing activities:
Cash paid for equipment
(700
)
Net cash provided by (used for) investing activities ..
(700
)
Cash flows from financing activities:
Cash proceeds from issuing stock …………………………….
200
Net cash provided by financing activities ………………..
200
Net increase (decrease) in cash during the year ……………….
(600
)
Cash balance, January 1, 2015 ………………………………………
4,500
Cash balance, December 31, 2015 …………………………………
$3,900
Chapter 12 – Statement of Cash Flows
E12–17.
Req. 1
The investing and financing sections of the statement of cash flows for Gibraltar
Industries:
Cash flows from investing activities:
Acquisitions (investments in other companies)
(109,248)
Proceeds from sale of other equity investments
69,368
Purchases of property, plant and equipment
(11,552)
Net proceeds from sale of property and equipment
1,226
Net cash provided by (used in) investing activities
(50,206)
Cash flows from financing activities:
Long-term debt reduction
(76,658)
Proceeds from long-term debt
73,849
Net proceeds from issuance of common stock
34
Net cash provided by (used in) financing activities
(2,775)
Req. 2
Capital acquisitions ratio
=
Cash flow from operations
=
$46,695
=
4.04
Cash paid for plant &
equipment
$11,552
The capital acquisitions ratio measures the company’s ability to finance plant and
equipment purchases from operations. Since this amount was more than 1 (4.04), the
company has generated more than enough to finance plant and equipment purchases
from operations.
Req. 3
Gibraltar’s management is using the cash proceeds from the sale of other equity
investments, along with the excess cash generated by operations (see Req. 2) mainly to
acquire (make investments in) other companies. It appears that the new long-term debt
Chapter 12 – Statement of Cash Flows
E12–19.
Cash flows from operating activities—direct method
Cash collected from customers1
$93,500
Cash payments to suppliers of inventory2
(56,875
)
Cash payments to employees 3
(10,550
)
Net cash provided by operating activities …………………………………….
$26,075
1. Cash collected from customers = Sales revenue + Decrease in Accounts receivable
$93,000 + $500 = $93,500
2. Cash payments to suppliers of inventory = Cost of goods sold + Increase in Inventory
$51,875 + $5,000 = $56,875
3. Cash payments to employees = Salaries expense – Increase in Salaries payable
$12,000 – $1,450= $10,550
E12–20.
Req. 1
Cash flows from operating activities—direct method
Cash collected from customers1
$59,000
Cash payments to employees2
(35,000
)
Cash paid for other expenses3
(11,500
)
Net cash provided by operating activities …………………………………….
$12,500
1. Cash collected from customers = Sales revenue + Decrease in Accounts receivable
$54,000 + $5,000 = $59,000
2. Cash payments to employees = Salaries expense – Increase in Salaries payable
$46,000 – $11,000 = $35,000
3. Cash paid for other expenses = Other expenses + Decrease in Other accrued liabilities
$9,700 + $1,800 = $11,500
Req. 2
The first reason for the net loss was the depreciation expense. This is a non-cash