17-1
Financial Reporting & Analysis (6th Ed.)
Chapter 17 Solutions
E17-1. Deriving direct method presentation of cash flow from operations
ABC Mining Company
Cash Flow from Operations
For the Year Ended December 31, 2014
(dollars in millions)
Cash received from customers1
$ 82,158.4
Cash received from affiliates2
667.6
Cash payments for goods sold3
(40,513.2)
Cash payments for general and administrative expenses4
(20,229.2)
Cash payments for interest5
(11,549.2)
Cash payments for taxes6
(3,318.4)
Cash flow from operations
7,216.0
1Collections from customers:
Sales $81,860.0
Plus: Decrease in accounts receivable 298.4
3Cash paid for goods sold:
Cost of goods sold $39,853.2
Plus: Increase in inventory 795.6
Less: Increase in accounts payable (135.6)
Cash paid for goods sold $40,513.2
17-2
Cash paid for general and administrative expenses $20,229.2
5Cash paid for interest:
E17–2. Determining cash flows from operations
(AICPA adapted)
Lino’s net cash from operating activities is calculated below:
Net income
$150,000
Increase in accounts receivable1
(5,800)
Decrease in prepaid rent
4,200
Increase in accounts payable
3,000
Cash flow from operations
$151,400
1The increase in accounts receivable is net of the allowance for doubtful accounts.
E17–3. Calculating cash flows from operating activities, direct method
Cash flow from operating activities for Hamilton Corporation is presented
below:
$396,000
207,000
32,400
10,800
36,000
286,200
$109,800
Supporting calculations:
1Collections from customers:
Sales $360,000
Plus: Decrease in accounts receivable 36,000
17-3
Cash collected from customers $396,000
2Cash paid to suppliers:
Purchases $228,000
Less: Increase in Accounts payable (21,000)
E17–4. Determining cash collections from customers
The following analysis is to determine the amount of cash collected on
accounts receivable during 2014:
Accounts Receivable
Beginning balance
$170,000
$25,000
Write-offs
Credit sales
$710,000
6,000
Swap note for account
X
Cash receipts for year
Ending balance
$140,000
Solving for X yields cash receipts of $709,000
Cash collected on accounts receivable
$709,000
Cash collected on notes receivable
2,300
Total cash collected from customers
$711,300
E17–5. Determining cash flows from investing and operating activities
17-4
+ Depreciation 52,000
– Gain on sale of equipment (5,000)
Cash flows from operating activities $347,000
Requirement 2:
E17–6. Determining cash flows from investing and financing activities
Requirement 1:
Sale of equipment $ 5,000
E17–7. Determining cash flows from investing activities
(AICPA adapted)
E17–8. Relationship between balance sheet and statement of cash flows
17-5
Solution approach: The following journal entries can be derived from the
information given. Posting the entries then yields the balance sheet found
below.
Amount of the sale of equipment can be determined as follows:
DR
Cash
$ 5,250
DR
Accumulated depreciation – equipment
4,500
CR Gain on sale
$3,000
CR Equipment (plug)
6,750
The amount of the sold equipment can then be recorded along with net income
and cash flows from operating activities and the equipment sale:
DR
Cash ($22,500 + $5,250)
$ 27,750
DR
Accumulated depreciation
4,500
CR Owner’s capital (net income)
$14,250
CR Equipment
6,750
CR Accumulated depr-equipment
8,250
CR Accumulated depr-leased property
3,000
Other entries:
Principal portion of lease payment (the interest portion of the payment was
included in both operating cash flows and net income):
DR
Leased liabilities
$ 3,000
CR Cash
$3,000
Land purchase
DR
Land
$ 13,500
CR Cash
$13,500
Purchased investments
DR
Investments
$ 22,500
CR Cash
$22,500
DR
Cash
$ 15,000
CR Long-term notes payable
$15,000
17-6
Owner withdrawals
DR
Owner’s capital
$ 12,000
CR Cash
$12,000
Balance Sheet
December 31, 2014
Assets:
Cash
$21,750
Investments
22,500
Land
13,500
Equipment
29,250
Less: Accumulated depreciation
(15,000)
Leased property
18,000
Less: Accumulated depreciation
(3,000)
Total
$87,000
Liabilities and owner’s equity:
Leased liabilities
$15,000
Long-term notes payable
15,000
Ralston, capital
57,000
Total
$87,000
E17–9. Determining operating cash flows
(AICPA adapted)
E17–10. Statement of cash flows preparation
(AICPA adapted)
a) The dividend will not appear in Hoffman’s 2014 statement of cash flows
17-7
However, firms that prepare statements of cash flows using the direct
method are required to reconcile net income to operating cash flow and
depreciation expense will be listed among the reconciling items.
d) Net income is not an inflow or outflow of cash—nor is the extraordinary loss.
such activities to be disclosed and such disclosure may be via a separate
section in the cash flow statement.
E17-11. Determining cash used in financing activities
(AICPA adapted)
Net cash used in financing activities:
17-8
P17-1. Preparing a statement of cash flows under the indirect method.
(AICPA adapted)
Requirement 1:
(a)
DR
Cash (Operations—Net income)
$ 234,000
CR Retained earnings
$234,000
(b)
DR
Retained earnings
$ 48,000
CR Dividends payable
$48,000
(c)
DR
Cash (Operations—Loss on sale of
machinery add back)
$ 15,600
DR
Cash (Investing—Sale of machinery)
57,600
DR
Machinery and equipment
463,000
DR
Accumulated depreciation
53,800
CR Machinery and equipment
$127,000
CR Cash (Investing—Purchase of
machinery and equipment)
463,000
(d)
DR
Preferred stock
$ 12,000
DR
Retained earnings
1,200
CR Cash (Financing—retirement of
preferred stock
$13,200
(e)
DR
Cash (Operations—Patent amortization
add back)
$ 5,040
CR Cash (Investing—Patent defense)
$2,400
CR Patent
2,640
(f)
DR
Allowance for uncollectible accounts
$ 3,600
CR Accounts receivable
$3,600
Implicit Transactions:
(g)
DR
Cash (Operations—Decrease in accounts
receivable)
$ 18,000
CR Accounts receivable
$18,000
(h)
DR
Cash (Operations—Bad debt expense add
back)
$ 2,400
CR Allowance for uncollectible accounts
$2,400
(i)
DR
Cash (Operations—Decrease in
inventories)
$ 66,000
CR Inventories
$66,000
(j)
DR
Cash (Operations—Depreciation expense
add back)
CR Accumulated depreciation
(k)
DR
Cash (Operations—Amortization expense
for leaseholds add back)
$ 10,800
CR Allowance for amortization
$10,800
(l)
DR
Cash (Operations—Increase in accounts
payable)
CR Accounts payable
DR
Securities held for plant expansion
securities)
DR
6% Serial bonds payable
$ 60,000
bonds)
$60,000
17–10
Requirement 2:
Banciu Corporation
Statement of Cash Flows
For the Year Ending December 31, 2014
Operating:
Net income
$234,000
Depreciation
106,600
Loss on sale of machinery
15,600
Amortization of patents
5,040
Amortization of leasehold improvements
10,800
Bad debt expense
2,400
Decrease in inventory
66,000
Decrease in accounts receivable
18,000
Increase in accounts payable
153,360
Cash Flow from operations
$611,800
Investing:
Payment for patent defense
$(2,400)
Sale of machinery
57,600
Purchase securities for plant expansion
(180,000)
Purchase machinery
(463,000)
Cash Flow from Investing
(587,800)
Financing:
Retirement of preferred stock
$(13,200)
Retirement of serial bonds
(60,000)
Cash Flow from Financing
(73,200)
Net Change in Cash during 2014
$(49,200)
Cash Balance, January 1, 2014
223,200
Cash Balance, December 31, 2014
$174,000
P17–2. Cash flow statement under indirect method
Net income $244,000
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Gain on sale of marketable securities (2,000)
Gain on retirement of bonds (44,000)
Loss on sale of equipment 8,000
Depreciation 40,000
Change in operating assets and liabilities providing (requiring) cash:
Accounts receivable (140,000)
Accrued wages 20,000
Accounts payable 160,000
Inventories (80,000)
Net cash provided by operating activities 206,000
Net cash used in investing activities (145,000)
Cash flows from financing activities:
Payment of dividends (40,000)
Payment to retire bonds (56,000)
Issuance of stock for cash 126,000
Barden Corporation
Cash Flow Statement
For the Year Ended December 31, 2014
17–12
Long- Common
A/R Mkt. Plant and Acc. Accrd. term Stock and Ret.
($ in thousands) Cash (net) Sec. Invties. Land Equip. Depr. A/P Wages Bonds APIC Earn.
Balance 12/31/13 246 280 0440 400 1,266 (200) (500) (520) (360) (760) (292)
Net income 244 (244)
Change in A/R (140) 140
Gain on sale of MS (2) 2
Change in A/P 160 (160)
Change in inventories (80) 80
Depreciation 40 (40)
Loss on sale of equipment 8 (8)
Change in accrued wages 20 (20)
Gain on retirement of bonds (44) 44
Cash flow from operations 206
Purchase of MS (30) 30
Sale of MS 17 (17)
Purchase of land (170) 170
Sale of equipment 38 (98) 60
Cash flow from investing (145)
Issuance of common shares 126 (126)
Dividends (40) 40
Repayment of bonds (56) 56
Cash flow from financing 30
No effect 0 80 (80)
Unreconciled 0 0 0 0 0 0 0 0 0 0 0 0
Balance 12/31/14 337 420 15 520 650 1,160 (180) (660) (540) (260) (966) (496)
P17-3. Determining amounts reported on statement of cash flows
(AICPA adapted)
Requirement 1:
Cash collections from customers can be determined by examining the
17–13
Cash payments for purchase of property, plant, and equipment are calculated
as follows:
Property, Plant, & Equipment
Beginning balance
$247,000
$40,000
Sale of equipment
Acquired from
bond refinancing
20,000
Cash purchases
X
Ending balance
$277,000
Solving for X: $247,000 + $20,000 + X – $40,000 = $277,000;
X = $50,000.
Purchases of PP&E would be classified as cash flows from investing activities.
Requirement 3:
Proceeds from sale of equipment can be found by first looking at the
accumulated depreciation account:
Accumulated Depreciation
$167,000
Beginning balance
33,000
Depreciation expense
Accumulated depreciation on
equipment sold
X
$178,000
Ending balance
By solving for X, we can find the accumulated depreciation on the equipment
that was sold.
$167,000 + $33,000 – X = $178,000; X = $22,000.
Since we know the accumulated depreciation on the equipment sold, we can
determine the book value of the equipment sold as follows:
Proceeds from sale of equipment $31,000
This amount would be classified as cash flows from investing activities.
Requirement 4:
To find dividends paid, we need to first determine dividends declared by
analyzing retained earnings:
P17-4. Preparing statement of cash flows under indirect method using cash
flow spreadsheet
Net income $62,231
Depreciation 47,201
Amortization 6,207
Loss on equipment sale 60
Gain on marketable securities sale (208)
Deferred taxes 2,163
Change in accounts receivable (7,160)
Change in inventories (35,582)
Change in accounts payable 32,737
Change in taxes payable (254)
Change in accrued expenses 2,054
Change in accrued self–insurance (1,346)
Change in prepaid expenses (1,169)
Purchas of land and equipment (10,190)
Sale of marketable securities 2,197
Sale of equipment 991
Purchase of business (34,890)
Net cash used in investing activities (41,892)
Net increase in cash 31,649
Cash balance, January 1, 2014 59,351
Cash balance, December 31, 2014 $91,000
Neighborhood Supermarkets, Inc.
Cash Flow Statement
For the Year Ended December 31, 2014