Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 12 Lecture Note Part 2

March 26, 2020
VISUAL #12-2
STEPS TO DETERMINE INFORMATION
STATEMENT OF CASH FLOWS
1. Find change in CashThis is the target number.
2. Find cash flow from operations
(Using direct or indirect method)
3. Find Cash Flow from A. Financing and
B. Investing
Procedure:
In real life: Using data from comparative balance sheets, trace
changes through ledgers and journals probably using a worksheet
to organize, analyze, and prove data disclosed.
In the classroom: Determine the changes in noncurrent accounts
and notes from comparative balance sheets. Use the relevant data
the text provides that comes from the ledgers and the journals to
systematically analyze the data using chart and/or reconstructing
journal entries.
4. Combine cash flows from all three activities (from 2 and 3) to find
net cash flow and prove change in cash. (Target number
determined in Step 1).
Note: Once the above information has been gathered, the statement
can be prepared following the required format. If the direct method
was used, GAAP requires a reconciliation of net income to cash
provided from operations.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
VISUAL #12-3
Determining Cash Flows from Operating Activities
Direct Method
(Need income statement and balance sheet data)
1. Cash = Sales + Decrease in
Receipts Accounts
from Customers* Receivable
or
- Increase in
Accounts
Receivable
2. Cash = Cost of + Increase in + Decrease in
Payments Goods Sold Inventory Accounts
to Suppliers or Payable
- Decrease in - Increase in
Inventory Accounts
Payable
3. Cash = Operating + Increase in + Decrease in - Depreciation
Payments Expenses Prepaid Accrued and Other
for Expenses Liabilities Noncash
Operating** or or Expenses
Expenses - Decrease in - Increase in
Prepaid Accrued
Expenses Liabilities
4. Cash = Income + Decrease in
Payments Taxes Income
for Expense Taxes
Income Payable
Taxes or
- Increase in
Income
Taxes
Payable
5. Cash = Interest + Decreases in
Payments Expense Interest Payable
for - Increase in
Interest Interest Payable **Wage expense would be
taken out if CP for wages was
*use similar computations for to be reported separately.
CR from Interest &/or Dividends The related prepaids and
CR from Rent payables would be considered
in the computation.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
VISUAL #12-4
START WITH
NET INCOME OR (NET LOSS)
Add Subtract
1. Write-offs or noncash 1. Gains
expenses 2. Increases in current assets
2. Losses 3. Decreases in current
3. Decreases in current assets liabilities
4. Increases in current
liabilities.
RESULT
CASH FLOWS FROM
OPERATING ACTIVITIES
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
Alternate Demonstration Problem
Chapter 12
The Carpet Company’s 2014 and 2015 balance sheets included the
following items:
December 31
2015
Debits
Cash ..............................................................................
$10,500
Accounts receivable ....................................................
8,000
Merchandise inventory ................................................
21,000
Equipment .....................................................................
18,000
Totals ...................................................................
$57,500
Credits
Accumulated depreciation, equipment ......................
$ 4,000
Accounts payable .........................................................
7,000
Taxes payable ...............................................................
1,000
Dividends payable ........................................................
1,500
Common stock, $10 par value .....................................
27,000
Contributed capital in excess of par, common stock
6,000
Retained earnings ........................................................
11,000
Totals ...................................................................
$57,500
The Carpet Company’s income statement was as follows:
CARPET COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales ..............................................................................
$61,000
Cost of goods sold .......................................................
$40,000
Wages and other operating expenses........................
6,300
Income taxes expense .................................................
4,200
Depreciation expense ..................................................
1,500
52,000
Net income ....................................................................
$ 9,000
Required:
Prepare the statement of cash flows under both the direct method and the
indirect method for the year ended December 31, 2015. Additional
information includes the following:
a. Equipment costing $3,500 was purchased during the year.
b. Fully depreciated equipment that cost $500 was discarded and its
cost and accumulated depreciation were removed from the
accounts.
c. Two hundred shares of stock were sold and issued at $15 per
share.
d. The company declared $4,000 of cash dividends and paid $2,500.
Solution: Alternate Demonstration Problem
Chapter 12
Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Cash received from customers ...............................
$ 62,000
Cash paid for merchandise .....................................
(41,000
)
Cash paid for wages and other operating
expenses ...............................................................
(6,300
)
Cash paid for taxes ..................................................
(5,200
)
Net cash provided by operating activities .............
$ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant assets .................
(3,500
)
Net cash used by investing activities ....................
(3,500
)
Cash flows from financing activities:
Cash received from issuing stock ..........................
3,000
Cash paid for dividends ...........................................
( 2,500
)
Net cash provided by financing activities .............
500
Net increase in cash .......................................................
$ 6,500
Cash balance at end of 2014 .........................................
4,000
Cash balance at end of 2015 .........................................
$10,500
Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Net income ......................................................................
$ 9,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accounts receivable ............................
1,000
Increase in merchandise inventory ........................
(3,000
)
Increase in accounts payable .................................
2,000
Decrease in taxes payable .......................................
(1,000
)
Depreciation expense ..............................................
1,500
Net cash provided by operating activities .............
$ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant asset ...................
(3,500
)
Net cash used by investing activities ....................
(3,500
)
Cash flows from financing activities:
Cash received from issuing stock ..........................
3,000
Cash paid for dividends ...........................................
(2,500
)
Net cash provided by financing activities .............
500
Net increase in cash .......................................................
6,500
Cash balance at end of 2014 .........................................
4,000
Cash balance at end of 2015 .........................................
$10,500

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