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Problem 16-7B (35 minutes)
SALT LAKE COMPANY
Cash Flows from Operating Activities—Indirect Method
For Year Ended December 31, 2013
Cash flows from operating activities
Net income ………………………………………………………………….…
$ 20,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation expense ……………………………………………….…
$32,000
Increase in accounts receivable ………………………………..…
(600
)
Decrease in merchandise inventory …………………………..
120
Decrease in accounts payable ………………………………….…
(200
)
Increase in salaries payable ……………………………………..…
300
Increase in utilities payable …………………………………………
200
Decrease in prepaid insurance ………………………………….…
40
Decrease in prepaid rent …………………………………………..…
100
31,960
Net cash provided by operating activities …………………….…
$ 51,960
Problem 16-8BB (35 minutes)
SALT LAKE COMPANY
Cash Flows from Operating Activities—Direct Method
For Year Ended December 31, 2013
$ 155,400
(72,080
)
(19,700
)
(4,900
)
(2,560
)
(1,800
)
(2,400
)
$ 51,960
Supporting calculations
(1) Sales – Increase in receivables = $156,000 – ($3,600 – $3,000) = $155,400
(2) Cost of Decrease in Decrease in
goods sold inventory accounts payable =
$72,000 – ($980 – $860) + ($2,600 – $2,400) = $72,080
–
+
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SERIAL PROBLEM — SP 16
Serial Problem — SP 16, Success Systems (45 minutes)
SUCCESS SYSTEMS
Statement of Cash Flows (Indirect)
For Quarter Ended March 31, 2014
Cash flows from operating activities
Net income ………………………………………………………………………………
$ 18,686
Adjustments to reconcile net income to net
cash provided by operating activities
Increase in accounts receivable ($22,720 – $5,668) ………….……
(17,052)
Increase in inventory ($704 – $0) ……………………………………..……
(704)
Increase in computer supplies ($2,005 – $580) ………………..……
(1,425)
Decrease in prepaid insurance ($1,665 – $1,110) ……………..……
555
Decrease in accounts payable ($1,100 – $0) …………………….……
(1,100)
Increase in wages payable ($875 – $500) ………………………..…
375
Decrease in unearned computer service revenue ………………
(1,500)
Depreciation expense–Office Equipment …………………………..
400
Depreciation expense–Computer Equipment ……………….……
1,250
Net cash used by operating activities ……………………………….……
$ (515)
Cash flows from investing activities
Net cash used in investing activities ………………………………………
0
Cash flows from financing activities
Cash received from stock issuance ………………………………….……
25,000
Cash paid for dividends …………………………………………………….…
(4,800)
Net cash provided by financing activities …………………………..
20,200
Net increase in cash ……………………………………………………………..……
$ 19,685
Cash balance at December 31, 2013 …………………………………….……
58,160
Cash balance at March 31, 2014 …………………………………………..……
$ 77,845
Reporting in Action — BTN 16-1
1. Polaris uses the indirect method of reporting operating cash flows. We
2. In all three years, Polaris’s cash flows from operating activities markedly
exceed the cash dividends paid, as can be seen from the table below:
($ thousands)
2011
2010
2009
Cash provided by operating activities ..….
$302,530
$297,619
$193,201
Cash dividends paid …………………………..
(61,585)
(53,043)
(50,177)
3. In 2011, the largest item in reconciling the difference between net income
and cash flow from operations was the change (increase) in accrued
expenses of $80,668 thousand.
4. In 2011, the largest cash inflow from investing activities was $11,950
In 2011, the largest cash inflow from financing activities was $100,000
thousand from borrowings under credit agreement/senior notes. The
In 2010, the largest cash inflow from financing activities was $68,105
5. Answer depends on the financial statement information obtained.
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Comparative Analysis — BTN 16-2
1. Polaris’s cash flow on total assets ratio ($ thousands)
Current Year = Operating cash flows/Average total assets
= $302,530 / [($1,228,024 + $1,061,647)/2]
= $302,530 / $1,144,836 = 26.4%
Arctic Cat’s cash flow on total assets ratio ($ thousands)
2. The cash flow on total assets ratio reflects the return on average assets by
using actual operating cash flows instead of net income. This return
3. For both years, Polaris has a higher cash flow on total assets ratio than
Arctic Cat.
4. Many business decision makers (such as analysts) feel that the cash flow
Ethics Challenge — BTN 16-3
1. The business actions available include
a. Encourage early collection of receivables to reduce the accounts
receivable balance.
2. As a business owner, Katie Murphy certainly can exercise discretion over
business actions. However, the underlying economic realities should
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Communicating in Practice — BTN 16-4
Here is a sample of what the body of the memorandum might include:
TO: Diana Wood
FROM: (Your Name)
SUBJECT: Statement of Cash Flows
DATE: _________________
I am pleased to hear your business is more profitable this year than last.
However, I have been thinking about what you said regarding the statement of
cash flows and have some thoughts as to why you found it confusing.
The statement of cash flows (operating section) can be prepared using either
of two methods—the direct or the indirect method. From what you describe,
your statement is probably prepared using the indirect method. This method
shows a determination of net cash flows in the operating (first) section by
listing the net income number and applying a series of accounting
adjustments. These adjustments often do not make sense to those that do
not have an accounting or finance background.
I recommend that you request your accountant to provide you with a
statement of cash flows that is prepared using the direct method. This will
identify exactly how much cash came in from operating activities like sales. It
will also identify exactly how much cash went out for operating expenses like
merchandise, wages, interest, and taxes. It will determine your net operating
cash flow by directly subtracting the total of these operating outflows from the
inflows. You should find this format more understandable.
Note that good cash management is essential to business success and
growth. The statement of cash flows will provide you with a lot more
information regarding your cash than a balance sheet can offer. It will allow
you to see exactly where your cash came from, where it went, and how much
it changed. It organizes these amounts into categories of operating,
financing, and investing. This organization of cash information will allow you
to better project and plan for the future.
Please reconsider the value of the statement of cash flows for your business
decisions. If you wish to discuss this further, please call me.
Taking It to the Net — BTN 16-5
1. Mendocino Brewing Company uses the indirect method to construct the
consolidated statement of cash flows.
3. The following table shows the net income (or net loss) and the cash flows
from operations for Mendocino Brewing for 2010 and 2011. Over this two–
2010
2011
Net income (loss) …………………..………
$ 49,400
$(1,078,500)
Cash flows from operations …………….
1,412,600
1,011,700
4. For the recent period, the largest cash outflow for investing was $1,025,900
for purchases of property, equipment and leasehold improvements.
5. In the recent period, for supplementary cash flow information, the company
reports cash flows related to: Interest paid, and Income taxes paid.
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Teamwork in Action — BTN 16-6
Part 1
a. The reporting objective of the statement of cash flows is to provide
information about important cash inflows and outflows for business
decision makers. It answers specific questions such as:
b. The statement can be prepared using the direct method or the indirect
method for reporting cash flows from operating activities.
Similarities
• Both methods report the same net cash flow from operating activities.
Differences
• Cash flow from operating activities is determined differently. The direct
method determines all operating cash inflows and outflows, and then
Teamwork in Action (Continued)
c. Steps to prepare the statement of cash flows:
(i) Compute the net increase or decrease in cash using comparative
balance sheet data. This is the target number or the number the
statement will explain and prove.
d. Common analyses made from information in the statement of cash flows
include assessing a company’s:
• Ability to generate future cash flows.
• Ability to pay dividends.
Part 2
Adjusting Net Income to Cash Flow from Operating Activities
Items to Add
Items to Subtract
a.
Noncash expenses
Noncash revenues
b.
Losses
Gains
c.
Decreases in current assets
Increases in current assets
d.
Increases in current liabilities
Decreases in current liabilities
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Teamwork in Action (Concluded)
Part 3
a. Cash receipts from customers = Sales – Increase in Accounts Receivable,
or, + Decrease in Accounts Receivable.
Explanation: Sales reflects what is earned during the period. If Accounts
Receivable increases, that increase represents earnings not yet collected,
so we subtract it. If Accounts Receivable decreases, the entity collected
that much more than the period’s sales, so we add it.
the entity paid for less than the period’s purchases, so we subtract it.
c. Cash paid for wages and operating expenses = Wages and other operating
expenses [+ Increase in prepaid expenses, or, – Decrease in prepaid
expenses] and [+ Decrease in accrued liabilities, or, – Increase in accrued
liabilities].
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, – Increase in related payable.
Entrepreneurial Decision — BTN 16-7
1. It is common that small businesses must pay cash in advance for items such
as rent, advertising, supplies, and facilities expansion. Consequently, those
creditors, and others to whom it owes money.
2. As a privately held corporation, TOMS can potentially raise cash financing for
expansion by selling shares in the company or by borrowing the monies.
Entrepreneurial Decision — BTN 16-8
Memorandum
To: Jenna and Matt Wilder
From: Your name
Subject: Performance evaluation of Mountain High
Date: Current Date
I have completed my evaluation of your company, Mountain High. My conclusion
is that Mountain High is performing well. This is in spite of its reported net loss
and its negative net cash flow, which I explain in this memorandum.
Second, with respect to its net cash outflow of $(5,000), please note that this is
mainly due to Mountain High’s renovation and expansion activities. This is
reflected in its summarized statement of cash flows. Specifically, its cash flows
operating cash flows relative to income from continuing operations, special
scrutiny should be directed at identifying and assessing differences between
cash flow and accrual amounts for important individual operating activities.
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Hitting the Road — BTN 16-9
1. The Motley Fool’s Website defines cash flow as earnings before interest,
taxes, depreciation, and amortization (EBITDA). The school’s justification
for this definition includes: “Interest income and expense, as well as taxes, are
all tossed aside because cash flow is designed to focus on the operating business
2. Some analysts tend to focus on this particular earnings definition
(earnings before interest and taxes or EBIT) as it purportedly allows a
3. Answer depends on the links visited and chosen for the report.
Global Decision — BTN 16-10
1. Piaggio’s cash flow on total assets ratio follows (in Euro thousands):
Current Year = Operating cash flows / Average total assets
= €155,624 / [(€1,520,184 + €1,545,722)/2]
= €155,624 / €1,532,593 = 10.2%
2. For the current year, Piaggio’s ratio (10.2%) is lower than Polaris’s (26.4%)