Problem 12-7BA (50 minutes)
SATU COMPANY
Spreadsheet for Statement of Cash Flows
For Year Ended December 31, 2015
December
31, 2014
Analysis of Changes
December
31, 2015
Debit
Credit
Balance sheet—debits
Cash ………………………………………………….
$ 58,750
Accounts receivable ………………………...
(b)
$ 5,638
20,222
Inventory …………………………………………..
(c)
$ 25,347
165,667
Equipment ………………………………………..
(g)
30,250
107,750
$352,389
Balance sheet—credits
Accum. depreciation—Equip. …………..
(f)
15,700
$ 46,700
Accounts payable ……………………………..
(d)
137,158
20,372
Income taxes payable ……………………….
(e)
4,000
2,100
Common stock, $5 par value …………….
(h)
15,000
40,000
Paid-in capital in excess of
par value, common stock ……………….
(h)
48,000
68,000
Retained earnings …………………………….
(i)
60,000
(a)
202,767
175,217
$352,389
Statement of cash flows
Operating activities
Net income ………………………………………..
(a)
202,767
Decrease in accounts receivable ……..
(b)
5,638
Increase in merch. inventory …………….
(c)
25,347
Decrease in accounts payable ………….
(d)
137,158
Decrease in income taxes payable …...
(e)
4,000
Depreciation expense ……………………….
(f)
15,700
Investing activities
Payment for equipment …………………….
(g)
30,250
Financing activities
Issued common stock for cash ………..
(h)
63,000
Paid cash dividends ………………………….
________
(i)
60,000
$543,860
$543,860
Problem 12-7BA (concluded)
SATU COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities
Net income ……………………………………………………………………..
$202,767
Adjustments to reconcile net income to net
cash provided by operating activities
Income statement items not affecting cash
Depreciation expense ……………………………………………….
15,700
Changes in current assets and current liabilities
Decrease in accounts receivable ($25,860 – $20,222) …
5,638
Increase in inventory ($165,667 – $140,320) ………………..
(25,347)
Decrease in accounts payable ($157,530 – $20,372) …..
(137,158)
Decrease in taxes payable ($6,100 – $2,100) ………………
(4,000)
Net cash provided by operating activities …………………….
$ 57,600
Cash flows from investing activities
Cash paid for equipment ……………………………………………….
(30,250)
Cash flows from financing activities
Cash received from issuing stock (3,000 x $21) ……………..
63,000
Cash paid for dividends ………………………………………………..
(60,000)
Net cash provided by financing activities …………………….
3,000
Net increase in cash …………………………………………………………
$ 30,350
Cash balance at beginning of 2015 ………………………………….
28,400
Cash balance at end of 2015 ……………………………………………
$ 58,750
SERIAL PROBLEM — SP 12
Serial Problem — SP 12, Business Solutions (45 minutes)
BUSINESS SOLUTIONS
Statement of Cash Flows (Indirect)
For Quarter Ended March 31, 2016
Cash flows from operating activities
Net income ………………………………………………………………………………
$ 18,833
Adjustments to reconcile net income to net
cash provided by operating activities
Income statement items not affecting cash
Depreciation expense–Office Equipment …………………………..
400
Depreciation expense–Computer Equipment ……………….……
1,250
Changes in current assets and current liabilities
Increase in accounts receivable ($22,867 – $5,668) ………….……
(17,199)
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)
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, 2015 …………………………………….……
48,372
Cash balance at March 31, 2016 …………………………………………..……
$ 68,057
Reporting in Action — BTN 12-1
1. Apple uses the indirect method of reporting operating cash flows. We
2. In all three fiscal years, Apple’s cash flows from operating activities
markedly exceed its cash dividends paid, as shown in the table below:
($ millions)
Fiscal 2013
Fiscal 2012
Fiscal 2011
Cash provided by operating activities ……
$53,666
$50,856
$37,529
Cash dividends paid …………………………..
(10,564)
(2,488)
(0)
3. In fiscal 2013, the largest item in reconciling the difference between net
income and cash flow from operations was depreciation and amortization
of $6,757 million.
4. In fiscal 2013, the largest cash inflow from investing activities was $104,130
million from proceeds from sales of marketable securities. The largest cash
outflow from investing activities was for purchases of marketable
securities, in the amount of $148,489 million.
5. Answer depends on the financial statement information obtained.
Comparative Analysis — BTN 12-2
1. Apple’s cash flow on total assets ratio ($ millions)
Current Year = Operating cash flows/Average total assets
Google’s cash flow on total assets ratio ($ millions)
Current Year = Operating cash flows/Average total assets
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, Apple has a higher cash flow on total assets ratio than
Google.
Ethics Challenge — BTN 12-3
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
Communicating in Practice — BTN 12-4
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
Taking It to the Net — BTN 12-5
1. Mendocino Brewing Company uses the indirect method to construct the
consolidated statement of cash flows.
2. The largest reconciling item is for increase in accounts receivable totaling
$1,395,400.
Teamwork in Action — BTN 12–6
Part 1
a. The reporting objective of the statement of cash flows is to provide
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.
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
Teamwork in Action (Concluded)
Part 3
a. Cash receipts from customers = Sales – Increase in Accounts Receivable,
or, + Decrease in Accounts Receivable.
b. Cash paid for inventory requires a two-step computation.
(1) Purchases = Cost of goods sold + Increase in inventory, or, – Decrease
c. Cash paid for wages and operating expenses = Wages and other operating
expenses [+ Increase in prepaid expenses, or, – Decrease in prepaid
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, – Increase in related payable.
Entrepreneurial Decision — BTN 12-7
1. It is common that small businesses must pay cash in advance for items such
as rent, advertising, supplies, and facilities expansion. Consequently, those
2. As a privately owned company, it can potentially raise cash financing for
expansion by selling shares in the company or by borrowing money. The
Entrepreneurial Decision — BTN 12-8
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.
Hitting the Road — BTN 12-9
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 12–10
1. Samsung’s cash flow on total assets ratio follows (in KRW millions):
Current Year = Operating cash flows / Average total assets
2. For the current and prior years, Samsung’s ratios (23.6% and 22.5%,
respectively) are lower than Apple’s ratios (28.0% and 34.8%, respectively).