Chapter 12
Statement of Cash Flows
Solutions to Questions
12-1 The statement of cash flows highlights
12-2 Cash equivalents are short-term, highly
liquid investments such as Treasury bills,
commercial paper, and money market funds.
12-3 (1) Operating activities: Include cash
inflows and outflows related to revenue and
expense transactions that affect net income.
12-4 The company’s specific circumstances
should be considered when interpreting the
12-5 Since the entire cash proceeds from the
sale of a noncurrent asset appear as a cash
12-6 Transactions involving accounts payable
are not considered to be financing activities
12-7 The repayment of $300,000 and the
provided by financing activities and then show
$300,000 of cash used by financing activities.
activities.
12-9 Depreciation is not a cash inflow, even
increase in a noncash asset.
an investing activity.
The Foundational 15
1. The net decrease in cash and cash equivalents would equal the $9,000
2. The basic equation for stockholders’ equity accounts can be applied to
the Retained Earnings account to compute the net income of $2,000
3. The basic equation for contra-asset accounts can be applied to the
Accumulated Depreciation account to compute the depreciation of
$19,000 that needs to be added to net income as follows:
4. The completed T-account is as follows:
Accounts Receivable
Beg. Bal.
Sales on account
44,000
600,000
Cash collections
603,000
End. Bal.
41,000
The total amount of credits recorded in accounts receivable is
$603,000. This amount represents the cash collections from
customers.
The Foundational 15 (continued)
5. The accounts receivable balance decreased by $3,000; therefore, the
$3,000 decrease is added to net income. This adjustment reflects the
6. The completed T-accounts are as follows:
Inventory
Beg. Bal.
Purchases
50,000
405,000
Goods sold
400,000
End. Bal.
55,000
Accounts Payable
Supplier payments
430,000
Beg. Bal.
Purchases
57,000
405,000
End. Bal.
32,000
The total amount of inventory purchases debited to inventory and
credited to accounts payable is $405,000. Therefore, the total amount
of the debits to accounts payable is $430,000. The amount of the
debits to accounts payable represents to total cash paid to suppliers.
7. The inventory balance increased by $5,000; therefore, this amount is
subtracted from net income. The accounts payable balance decreased
8. The completed T-account is as follows;
Income Taxes Payable
Tax payments
3,700
Beg. Bal.
Taxes payable
28,000
700
End. Bal.
25,000
The total amount of debits recorded in income taxes payable is $3,700.
This amount represents the cash paid for income taxes.
The Foundational 15 (continued)
9. The income taxes payable balance decreased by $3,000; therefore, the
$3,000 decrease is subtracted from net income. This adjustment
10. The operating activities section of the statement of cash flows would
contain an adjustment related to a gain on the sale of a piece of
11. The net cash provided by operating activities would be computed as
follows:
$ 2,000
$19,000
3,000
(5,000)
(25,000)
(3,000)
(1,000)
(12,000)
$(10,000)
12. The gross cash outflows of $16,000 can be computed by applying the
basic equation for assets to the Property, Plant, and Equipment
The Foundational 15 (continued)
13. The net cash provided by (used in) investing activities is $(13,000).
12) and the $3,000 cash inflow from the sale of equipment.
14. The guidelines from Exhibit 12-3 can be used to analyze the changes
in noncash balance sheet accounts that impact financing cash flows as
follows:
Increase in
Account
Balance
Decrease
in Account
Balance
Liabilities and Stockholders’ Equity
Bonds payable ……………………………………
+ 10,000
Common stock ……………………………………
+ 10,000
Because Ravenna did not retire any bonds or repurchase any of its
own common stock during the year, the corresponding amounts in the
table above represent the gross cash inflows that are included in
financing section of the statement of cash flows.
15. The cash inflows of $20,000 from the issuance of bonds and common
Exercise 12-1 (15 minutes)
Activity
Transaction
Operating
Investing
Financing
a.
Collected cash from customers ……………………….
X
b.
Paid cash to repurchase its own stock ………………
X
c.
Borrowed money from a creditor …………………….
X
d.
Paid suppliers for inventory purchases ………………
X
e.
Repaid the principal amount of a debt ………………
X
f.
Paid interest to lenders …………………………………
X
g.
Paid a cash dividend to stockholders ………………..
X
h.
Sold common stock ………………………………………
X
i.
Loaned money to another entity ……………………..
X
j.
Paid taxes to the government …………………………
X
k.
Paid wages and salaries to employees ………………
X
l.
Purchased equipment with cash ………………………
X
m.
Paid bills to insurers and utility providers …………..
X
Exercise 12-2 (15 minutes)
The guidelines from Exhibit 12-2 can be used to analyze the changes in
noncash balance sheet accounts that impact net income as follows:
Increase
in Account
Balance
Decrease
in Account
Balance
Current Assets
Accounts receivable ………..
– 19,000
Inventory ……………………..
– 33,000
Prepaid expenses …………..
+ 1,000
Current Liabilities
Accounts payable …………..
+ 15,000
Accrued liabilities ……………
– 2,000
Income taxes payable ……..
+ 4,000
Exercise 12-3 (5 minutes)
Free cash flow computation:
Net cash provided by operating activities .
$ 34,000
Capital expenditures ………………………….
$110,000
Dividends ……………………………………….
30,000
140,000
Free cash flow ……………………………………
$(106,000)
Exercise 12-4 (30 minutes)
1. Net cash provided by operating activities:
Step 1: The company did not sell or retire any plant and equipment
during the year (land is not depreciated); therefore, the $60 increase in
Accumulated Depreciation equals the credit to the account that is added
Exercise 12-4 (continued)
The net cash provided by operating activities is computed as follows:
Net income …………………………..………………………
$ 84
Adjustments to convert net income to a cash basis:
Depreciation …………………………..…………………..
$60
Increase in accounts receivable ………………………
(110)
Decrease in inventory …………………………………..
70
Increase in prepaid expenses …………………………
(9)
Increase in accounts payable ………………………….
35
Decrease in accrued liabilities …………………………
(4)
Increase in income taxes payable ……………………
8
Gain on sale of long-term investments ……………..
(10)
Loss on sale of land ……………………………………..
6
46
Net cash provided by operating activities …………….
$130
2. Prepare a statement of cash flows for the year
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
Exercise 12-4 (continued)
Because Pavolik did not retire any bonds or issue any of its own stock
during the year, the corresponding amounts in the table on the prior
page represent the gross cash flows that are included in the statement
Exercise 12-4 (continued)
Pavolik Company
Statement of Cash Flows
Operating activities:
Net cash provided by operating activities …………………..
$ 130
Investing activities:
Proceeds from sale of long-term investments ……………..
$ 16
Proceeds from sale of land ……………………………………..
9
Additions to property, plant, & equipment ………………….
(200)
Net cash used in investing activities ………………………….
(175)
Financing activities:
Issuance of bonds payable ……………………………………..
150
Purchase of common stock …………………………………….
(80)
Cash dividends …………………………………………………….
(30)
Net cash provided by financing activities ……………………
40
Net decrease in cash (net cash flow) ………………………..
(5)
Beginning cash and cash equivalents ………………………..
90
Ending cash and cash equivalents …………………………...
$ 85
Exercise 12-5 (10 minutes)
Item
Amount
Add
Subtract
Accounts receivable ……………….
$90,000
decrease
X
Inventory …………………………….
$120,000
increase
X
Prepaid expenses …………………..
$3,000
decrease
X
Accounts payable …………………..
$65,000
decrease
X
Accrued liabilities …………………..
$8,000
increase
X
Income taxes payable …………….
$12,000
increase
X
Sale of equipment ………………….
$7,000
gain
X
Sale of long-term investments ….
$10,000
loss
X
Exercise 12-6 (30 minutes)
1. Prepare a statement of cash flows:
Operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Exercise 12-6 (continued)
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
Exercise 12-6 (continued)
Carmono Company
Statement of Cash Flows
For This Year Ended December 31
Operating activities:
Net income ……………………………………………………..
$35
Adjustments to convert net income to a cash basis:
Depreciation …………………………………………………
$15
Decrease in accounts receivable ………………………..
2
Increase in inventory ………………………………………
(10)
Increase in accounts payable …………………………...
4
11
Net cash provided by operating activities ……………….
46
Investing activities:
Increase in plant and equipment ………………………….
(40)
Net cash used in investing activities ……………………..
(40)
Financing activities:
Increase in common stock ………………………………….
5
Cash dividends ………………………………………………..
(14)
Net cash used in financing activities ……………………..
(9)
Net decrease in cash …………………………………………
(3)
Beginning cash and cash equivalents ……………………
6
Ending cash and cash equivalents ………………………..
$ 3
2. Free cash flow computation:
Net cash provided by operating activities ….
$ 46
Capital expenditures ………………………….
$40
Dividends ……………………………………….
14
54
Free cash flow ……………………………………
$(8)
Problem 12-7A (30 minutes)
1. Net cash provided by operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Beginning balance – Debits + Credits = Ending balance
$85 – $16 + Credits = $93
income.
Problem 12-7A (continued)
The net cash provided by operating activities is computed as follows:
Net income …………………………………………………
$ 63
Adjustments to convert net income to cash basis:
Depreciation …………………………………………..
$24
Increase in accounts receivable …………………..
(100)
Decrease in inventory ……………………………….
50
Increase in prepaid expenses ……………………..
(4)
Increase in accounts payable ……………………..
80
Decrease in accrued liabilities …………………….
(12)
Increase in income taxes payable ………………..
6
Gain on sale of investments ……………………….
(7)
Loss on sale of equipment …………………………
4
41
Net cash provided by operating activities …………..
$104
2. Prepare a statement of cash flows.
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
Problem 12-7A (continued)
The decrease in the long-term investments account ($3) equals the cost
of the long-term investment sold; therefore, Weaver did not purchase
any long-term investments during the year. The proceeds from the sale
of a long-term investment ($10) should be recorded as a cash inflow in
Problem 12-7A (continued)
Weaver Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Operating activities:
Net income ………………………………………………….
$ 63
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$ 24
Increase in accounts receivable …………………..
(100)
Decrease in inventory ……………………………….
50
Increase in prepaid expenses ……………………..
(4)
Increase in accounts payable ………………………
80
Decrease in accrued liabilities ……………………..
(12)
Increase in income taxes payable ………………..
6
Gain on sale of investments ……………………….
(7)
Loss on sale of equipment ………………………….
4
41
Net cash provided by operating activities …………..
104
Investing activities:
Proceeds from sale of long-term investments ……..
10
Proceeds from sale of equipment ……………………..
20
Additions to plant and equipment …………………….
(180)
Net cash used in investing activities ………………….
(150)
Financing activities:
Issuance of bonds payable ……………………………..
110
Decrease in common stock ……………………………..
(40)
Cash dividends …………………………………………….
(30)
Net cash used in financing activities ………………….
40
Net decrease in cash ……………………………………..
(6)
Beginning cash and cash equivalents ………………..
15
Ending cash and cash equivalents …………………….
$ 9