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Chapter 12
Reporting 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
of long-term investments such as stocks and bonds, from purchases of plant assets
3. On a statement of cash flows, financing activities include cash inflows such as those
that result from issuing preferred or common stock, and from borrowing by issuing
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
activities generally include cash receipts from the sale of goods and services, cash
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
financing activities.
8. The amount of the land purchase that was paid for in cash ($400,000) should be reported
on the statement of cash flows as an investing activity. Also, a schedule of noncash
QUICK STUDIES
Quick Study 12-1 (10 minutes)
1. Investing 6. Financing
2. Operating 7. Operating
Quick Study 12-2 (20 minutes)
Statement of cash flow items in sequential order 1 through 13 on left OR
textbook order on right:
1.
d
8.
k
6
a.
5
h.
2.
f
9.
j
3
b.
11
i.
3.
b
10.
g
4
c.
9
j.
4.
c
11.
i
1
d.
8
k.
5.
h
12.
m
13
e.
7
l.
6.
a
13.
e
2
f.
12
m.
7.
l
10
g.
Quick Study 12-3 (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
Income statement items not affecting cash
Depreciation expense ........................................
30,000
8,000
24,000
Changes in current assets and liabilities
Change in accounts receivable ........................
(40,000)
(20,000)
4,000
Change in inventories ........................................
20,000
10,000
(10,000)
Change in accounts payable.............................
24,000
(22,000)
14,000
Change in accrued liabilities.............................
(44,000)
12,000
(8,000)
Cash provided by (used for) operations ............
$ (6,000)
$ 88,000
$96,000
Quick Study 12-6 (10 minutes)
a. Reconstructed journal entry for building sale:
Cash ............................................................................... 130,000
Accumulated Depreciation— Building ........................ 230,000
Gain on Sale of Building ....................................... 60,000
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. Inventory increased
in the year
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 12-3 (30 minutes)
1.
Cash flows from operating activities—indirect method
Net income (loss) .........................................................................................
$ (16,000
)
Adjustments to reconcile net income to net cash provided by
operating activities
Income statement items not affecting cash
Depreciation expense ..............................................................................
14,600
Changes in current operating assets and liabilities
Accounts receivable decrease ..............................................................
24,000
Salaries payable increase ................................................................
18,000
Accrued liabilities decrease ................................................................
(8,000
)
Net cash provided by operating activities .................................................
$ 32,600
2. One reason for the net loss was depreciation expense. Depreciation
expense is added to net income to adjust for the effects of a noncash
3. Differences between cash flow from operations and net income can be
Exercise 12-4 (30 minutes)
Cash flows from operating activities
Net income ..............................................................................
$ 481,540
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Depreciation expense .......................................................
44,200
Amortization expense—Patents ................................
4,200
Gain on sale of equipment ...............................................
(6,200)
Changes in current operating assets and liabilities
Increase in accounts receivable ................................
(30,500)
Increase in inventory .......................................................
(25,000)
Decrease in accounts payable ........................................
(12,500)
Decrease in salaries payable ...........................................
(3,500)
Net cash provided by operating activities .............................
$ 452,240
Exercise 12-5 (20 minutes)
Cash flows from operating activities
Net income ..............................................................................
$374,000
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Depreciation expense .......................................................
44,000
Amortization expense ......................................................
7,200
Gain on sale of plant assets ............................................
(6,000)
Changes in current operating assets and liabilities
Decrease in accounts receivable ....................................
17,100
Decrease in inventory .....................................................
42,000
Increase in prepaid expenses ..........................................
(4,700)
Decrease in accounts payable ........................................
(8,200)
Increase in salaries payable ............................................
1,200
Net cash provided by operating activities .............................
$466,600
