Chapter 12
Reporting and Analyzing 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
the cash inflows from the sales are also reported as investing activities.
3. On a statement of cash flows, financing activities include cash inflows such as those
treasury stock, and repayments of debt.
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
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
8. The amount of the land purchase that was paid for in cash ($400,000) should be reported
QUICK STUDIES
Quick Study 12-1 (20 minutes)
1. The statement of cash flows reports the cash (and cash equivalent)
activities of a business for a specific accounting period. The cash flows
2. Examples of transactions classified as investing activities
• Plant asset purchases
3. Examples of transactions classified as financing activities
• Bond retirement and issuance
4. Examples of significant noncash financing and investing activities
• Exchange of stock or debt securities for noncash assets
Quick Study 12-2 (10 minutes)
1. Investing 6. Financing
* For the “indirect” method, the loss is reported as an adjustment (add–
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Quick Study 12-3 (10 minutes)
Cash flows from operating activities
Net income …………………………………………………………………….…
$18,200
Adjustments to reconcile net income to operating cash flow
Depreciation ………………………………………………………………..…
$36,000
Accounts receivable decrease ……………………………………..…
7,000
Inventory increase ……………………………………………………….
(5,900)
Accounts payable increase ………………………………………….…
4,700
Income taxes payable decrease ………………………………………
(150)
41,650
Net cash provided from operating activities ………………………
$59,850
Quick Study 12-4 (10 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given) ……………………………………………...
$52,500
Accumulated depreciation at beginning of year (given) ……….
Increase from depreciation expense (given) ………………………..
Total “expected” accumulated depreciation ………………………..
Actual accumulated depreciation at end of year (given) ……...
(88,700)
Accumulated depreciation on sold furniture ……………………….
40,000
Cash received from sale of furniture at book value ……………..
$12,500
Quick Study 12-5 (10 minutes)
Part 1
Computation of cash received from the sale of common stock
Increase in Common stock ($105,000 – $100,000) …………………………….……
$ 5,000
Increase in Paid-in capital in excess of par ($567,000-$342,000) ……………
225,000
Cash received from the sale of common stock ……………………………..……
$230,000
Part 2
Computation of cash paid for dividends
Beginning retained earnings ………………………………………………………..……
$287,500
Net income …………………………………………………………………………………...
48,000
Total “expected” retained earnings……………………………………………………
335,500
Actual ending retained earnings …………………………………………………..…..
(313,500)
Cash paid for dividends …………………………..…………………………………..……
$ 22,000
Quick Study 12-6 (10 minutes)
Cash flows from operating activities
Net income …………………………………………………………………….…
$30,000
Adjustments to reconcile net income to operating cash flow
Depreciation ………………………………………………………………..…
$37,600
Accounts receivable decrease ……………………………………..…
10,000
Inventory decrease ……………………………………………………….
10,000
Prepaid expense increase …………………………………………….…
(1,200)
Accounts payable decrease ……………………………………………
(6,000)
Wages payable increase …………………………………………………
4,000
Income taxes payable decrease ………………………………………
(1,200)
53,200
Net cash provided from operating activities ………………………
$83,200
Quick Study 12-7 (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
Increase from depreciation expense (given) ………………………..
37,600
Total “expected” accumulated depreciation ………………………..
46,600
Actual accumulated depreciation at end of year (given) ……...
(17,000)
Accumulated depreciation on sold furniture ……………………....
29,600
Cash received from sale of furniture at book value ……………..
$25,400
Quick Study 12-8 (15 minutes)
1. Computation of cash paid for dividends
Beginning retained earnings ……………………………………..
$ 8,400
Net income ……………………………………………………………….
30,000
Total “expected” retained earnings…………………………...
38,400
Actual ending retained earnings ………………………………..
(35,600)
Decrease from (cash paid for) dividends ……………………
$ 2,800
2. Computation of cash payments for notes
Beginning notes payable …………………………………………..
$69,000
Increases to notes (given) …………………………………………
0
Total “expected” notes payable …………………………………
69,000
Actual ending notes payable ……………………………………..
(29,000)
Decrease from (cash) payments toward notes …………..
$40,000
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Quick Study 12-9B (10 minutes)
1. Cash received from customers = Sales + Accounts receivable decrease
Quick Study 12–10B (10 minutes)
1. Cash paid for merchandise
= Cost of goods sold – Inventory decrease + Accounts payable decrease
2. Cash paid for operating expenses
= Operating expenses (excluding depreciation)
Quick Study 12–11B (10 minutes)
Cash flows from operating activities
Receipts from sales to customersa ………………………………..
$ 498,000
Payments for merchandise inventoryb …………………………..
(310,000)
Payments for other expensesc ……………………………………...
(86,300)
Payments for taxesd ……………………………………………………..
(18,500)
Net cash provided by operating activities ………………………..
$ 83,200
a From QS 12-9B
b From QS 12–10B
c From QS 12–10B
d $17,300 (income tax expense) + $1,200 (decrease in income taxes payable)
Quick Study 12-12 (10 minutes)
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.
Quick Study 12–13A (10 minutes)
The balance sheet equation can be arranged so that the algebraic total of all
noncash items is equal to cash (see Exhibit 12.8 or similar). It follows that when
all changes in noncash balance sheet items are explained, the corresponding
change in cash is also explained. On the spreadsheet, when the changes in all
noncash balance sheet items have been accounted for, we can be confident that
the change in cash also has been fully accounted for.
Quick Study 12-14 (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
Depreciation …………………………………………………
30,000
8,000
24,000
Changes in assets and liabilities
Accounts receivable ……………………………..………
(40,000)
(20,000)
4,000
Inventories ……………………………………………………
20,000
10,000
(10,000)
Accounts payable …………………………………………
24,000
(22,000)
14,000
Accrued liabilities …………………………………………
(44,000)
12,000
(8,000)
Cash provided by (used for) operations ………...
$ (6,000)
$ 88,000
$96,000
Quick Study 12-15 (15 minutes)
Investing Activities
Purchase of used equipment ……………………………………………………….
$(5,000)
Sale of short-term investments …………………………………………………..…..
6,000
Cash provided by investing activities ……………………………………………….
$ 1,000
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Quick Study 12-16 (15 minutes)
Financing Activities
Additional short-term borrowings ……………………………………………….…….
$20,000
Cash dividends paid …………………………………………………………………..…….
(16,000)
Cash provided by financing activities ……………………………………………….
$ 4,000
Quick Study 12-17 (25 minutes)
Part 1
MONTGOMERY, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2014
Cash flows from operating activities
Net income ……………………………………………………….
$ 10,500
Adjustments to reconcile net income to net cash
provided by operating activities
Decrease in accounts receivable ……………………..……
2,100
Increase in inventory ……………………………………….………………
(19,950)
Decrease in accounts payable …………………………..
(1,500)
Decrease in salaries payable ………………………………………………
(100)
Depreciation expense ……………………………………………………….
7,200
Net cash used in operating activities ……………….………….
$ (1,750)
Cash flows from investing activities
Cash paid for equipment (Note 1) …………………….…….
(8,400)
Net cash used in investing activities ………………..…………
(8,400)
Cash flows from financing activities
Cash received from stock issuance ………………….……….
10,000
Net cash used in financing activities ………………..…………
10,000
Net decrease in cash ………………………………………….……………
$ (150)
Cash balance at beginning of year ……………………..……
30,550
Cash balance at end of year ……………………………….…………………
$ 30,400
Note 1
Equipment
Bal., 12/31/2013
41,500
Purchase
“plug”
Sale 0
→ plug = $8,400
Bal., 12/31/2014
49,900
Quick Study 12-17 (Concluded)
Part 2
The company’s operating cash flows are negative, $(1,750). This is not a good
the form of cash (more than 19%) as this is not a productive use of assets.
Quick Study 12-18 (15 minutes)
method of reporting operating cash flows are acceptable.
2. IFRS and US GAAP differ on the classification of the following cash flows
as operating, investing or financing:
Cash flow source U.S. GAAP IFRS _
a. Interest paid Operating Financing or Operating
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EXERCISES
Exercise 12-1 (25 minutes)
Statement of Cash Flows
Noncash
Operating
Activities
Investing
Activities
Financing
Activities
Investing &
Financing
Activities
Not Reported
on Statement
or in Notes
a. Declared and paid a
cash dividend
X
b. Recorded
depreciation expense
X
c. Paid cash to settle
long-term note payable
X
d. Prepaid expenses
increased in the year
X
e. Accounts receivable
decreased in the year
X
f. Purchased land by
issuing common stock
X
g. Paid cash to
purchase inventory
X
h. Sold equipment for
cash, yielding a loss
X
X
i. Accounts payable
decreased in the year
X
j. Income taxes payable
increased in the year
X
Exercise 12-2B (15 minutes)
Statement of Cash Flows
Noncash
Operating
Activities
Investing
Activities
Financing
Activities
Investing &
Financing
Activities
Not Reported
on Statement
or in Notes
a. Retired long-term notes
payable by issuing stock
X
b. Paid cash toward accounts
payable
X
c. Sold inventory for cash
X
d. Paid cash dividend that
was declared in a prior
period
X
e. Accepted six-month note
receivable in exchange for
plant assets
X
f. Recorded depreciation
expense
X
g. Paid cash to acquire
treasury stock
X
h. Collected cash from sales
X
i. Borrowed cash from bank
by signing a 9-month note
payable
X
j. Paid cash to purchase a
patent
X
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Exercise 12-3 (20 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………
$374,000
Adjustments to reconcile net income to net cash
provided by operating activities
Decrease in accounts receivable …………………………………
17,100
Decrease in merchandise inventory ……………………….….
42,000
Increase in prepaid expenses ………………………………..……
(4,700)
Decrease in accounts payable ……………………………….……
(8,200)
Increase in other payables …………………………………….……
1,200
Depreciation expense …………………………………………………
44,000
Amortization expense …………………………………………………
7,200
Gain on sale of plant assets …………………………………..……
(6,000)
Net cash provided by operating activities …………………..……
$466,600
Exercise 12-4 (10 minutes)
Cash flows from operating activities
Net income ………………………………………………………………..…..
$400,000
Adjustments to reconcile net income to operating cash flow
Depreciation ………………………………………………………………..
$80,000
Accounts receivable increase ………………………………….…..
(40,000)
Prepaid expense decrease ……………………………………….…..
12,000
Accounts payable increase …………………………………………..
6,000
Wages payable decrease…………………………..……………..…..
(2,000)
Gain on sale of machinery ……………………………………….…..
(20,000)
36,000
Net cash provided from operating activities ………………….…..
$436,000
Exercise 12-5B (15 minutes)
Case X:
Sales revenue …………………………………………………..
$515,000
Accounts receivable, Dec. 31, 2013 ………….………..
$ 27,200
Accounts receivable, Dec. 31, 2014 ………….………..
(33,600)
Less increase in accounts receivable ………………..
(6,400)
Cash received from customers ………………..………..
$508,600
Case Y:
Rent expense ………………………………………….………..
$139,800
Rent payable, Dec. 31, 2013 …………………….…….
$ 7,800
Rent payable, Dec. 31, 2014 …………………….…….
(6,200)
Plus decrease in rent payable ………………….……….
1,600
Cash paid for rent ……………………………………………..
$141,400
Case Z:
Cost of goods sold ………………………………….………..
$525,000
Merchandise inventory, Dec. 31, 2014………………..
$130,400
Merchandise inventory, Dec. 31, 2013………………..
(158,600)
Less decrease in merch. inventory ………….………..
(28,200)
Cost of goods purchased ………………………..…
496,800
Accounts payable, Dec. 31, 2014 ……………..………..
82,000
Accounts payable, Dec. 31, 2013 ……………..………..
(66,700)
Less increase in accounts payable ………….………..
(15,300)
Cash paid for merchandise ……………………..……
$481,500
Exercise 12-6 (30 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………
$ 481,540
Adjustments to reconcile net income to net cash
provided by operating activities
Increase in accounts receivable …………………………….……
(30,500)
Increase in merchandise inventory ………………………..…
(25,000)
Decrease in accounts payable ……………………………….……
(12,500)
Decrease in salaries payable ………………………………………
(3,500)
Depreciation expense …………………………………………………
44,200
Amortization expense—Patents …………………………….……
4,200
Gain on sale of equipment …………………………………….……
(6,200)
Net cash provided by operating activities …………………..……
$ 452,240
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Exercise 12-7B (20 minutes)
Cash flows from operating activities
Receipts from customers (see note a) ……………………………………..
$1,797,500
Payments for merchandise (see note b) …………………………………..
(1,028,500)
Payments for salaries (see note c) …………………………………………..
(249,035)
Payments for rent ……………………………………………………………..…..
(49,600)
Payments for utilities ………………………………………………………..…..
(18,125)
Net cash provided by operating activities …………………………….…..
$ 452,240
Note a: Sales – Increase in receivables
$1,828,000 – $30,500 = $1,797,500
Note b: Cost of goods sold + Increase in inventory + Decrease in accounts payable
$991,000 + $25,000 + $12,500 = $1,028,500
Note c: Salaries expense + Decrease in salaries payable
$245,535 + $3,500 = $249,035
Exercise 12-8 (10 minutes)
Cash flows from investing activities
Cash received from the sale of equipment* …………………………….
$ 51,300
Cash paid for new truck …………………………..……………………………..
(89,000)
Cash received from the sale of land ………………………………………..
198,000
Cash received from the sale of long-term investments ……………
60,800
Net cash provided by investing activities ………………………………..
$221,100
* Cash received from sale of equipment = Book value – loss = $65,300 – $14,000 = $51,300
Exercise 12-9 (10 minutes)
Cash flows from financing activities
Sale of common stock …………………………………………………………….………..
$ 64,000
Paid cash dividend ………………………………………………………………….………..
(14,600)
Repaid note payable ……………………………………………………………….………..
(50,000)
Purchased treasury stock ……………………………………………………….
(12,000)
Net cash used by financing activities ………………………………………………..
$(12,600)
Exercise 12-10 (40 minutes)
Part 1
IKIBAN, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended June 30, 2013
Cash flows from operating activities
Net income …………………………………………………..…..
$ 99,510
Adjustments to reconcile net income to net cash
provided by operating activities
Increase in accounts receivable …………………………..
(14,000)
Decrease in merchandise inventory ……………..……….
22,700
Decrease in prepaid expenses ……………………..……
1,000
Decrease in accounts payable ……………………..……
(5,000)
Decrease in wages payable …………………………..
(9,000)
Decrease in income taxes payables ……………..……….
(400)
Depreciation expense …………………………………..……….
58,600
Gain on sale of plant assets …………………………..
(2,000)
Net cash provided by operating activities ……..……….
$151,410
Cash flows from investing activities
Cash received from sale of equip. (Note 1) ……
10,000
Cash paid for equipment (Note 1—given) ……..
(57,600)
Net cash used in investing activities …………….
(47,600)
Cash flows from financing activities
Cash received from stock issuance ………………
60,000
Cash paid to retire notes (Note 2—given) ……..
(30,000)
Cash paid for dividends (Note 3) …………………..
(90,310)
Net cash used in financing activities …………….
(60,310)
Net increase in cash ……………………………………….
$ 43,500
Cash balance at prior year-end ……………………….
44,000
Cash balance at current year-end ……………………
$ 87,500
(Notes 1, 2, and 3 on next page.)