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Problem 12-8A (20 minutes)
Transaction
Operating
Investing
Financing
Cash
Inflow
Cash
Outflow
a.
Paid suppliers for inventory purchases .....
X
X
b.
Bought equipment for cash ....................
X
X
c.
Paid cash to repurchase its own stock .....
X
X
d.
Collected cash from customers ...............
X
X
e.
Paid wages to employees .......................
X
X
f.
Equipment was sold for cash ..................
X
X
g.
Common stock was sold for cash ............
X
X
h.
Cash dividends were declared and paid ...
X
X
i.
A long-term loan was made to a supplier.
X
X
j.
Income taxes were paid to the
government ........................................
X
X
k.
Interest was paid to a lender ..................
X
X
l.
Bonds were retired by paying the
principal amount due ...........................
X
X
Problem 12-9A (60 minutes)
1. The statement of cash flows summarizes all of a company’s cash inflows
2. The statement is divided into three sections—operating activities,
investing activities, and financing activities. The operating activities
section summarizes the cash inflows and outflows related to revenue
3. The indirect method of preparing the operating activities section of the
statement of cash flows begins with net income and adjusts it to a cash
4. The second step is to analyze net changes in noncash balance sheet
accounts that impact the computation of net income. For Brock, this
includes Accounts Receivable, Inventory, Accounts Payable, Accrued
Problem 12-9A (continued)
The inventory balance decreased by $39. This means that Brock’s
inventory purchases were less than its cost of goods sold by $39.
Brock’s cost of goods sold was $2,980; therefore, its inventory
purchases were $2,941. The company’s accounts payable balance
5. The third step of the indirect method is to adjust for gains/losses
included in the income statement. This adjustment is necessary because
Problem 12-9A (continued)
6. The investing activities section of Brock’s statement of cash flows
records the gross cash flows related to its property, plant, and
7. The financing activities section of Brock’s statement of cash flows
records the gross cash flows related to its bonds payable, common
8. The net increase in cash and cash equivalents ($260) explains the
Problem 12-10A (45 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
$120,000 – $30,000 + Credits = $132,000
income.
Problem 12-10A (continued)
The net cash provided by operating activities is computed as follows:
Net income ...........................................................
$56,000
Adjustments to convert net income to cash basis:
Depreciation .......................................................
$ 42,000
Increase in accounts receivable ...........................
(80,000)
Increase in inventory ..........................................
(50,000)
Decrease in prepaid expenses ..............................
7,000
Increase in accounts payable ...............................
60,000
Decrease in accrued liabilities ..............................
(10,000)
Increase in income taxes payable ........................
3,000
Gain on sale of equipment ...................................
(8,000)
(36,000)
Net cash provided by operating activities ................
$20,000
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
noncash balance sheet accounts that impact investing and financing
Problem 12-10A (continued)
The loan to Hymans ($40,000) is recorded as a cash outflow in the
investing activities section of the statement. Because Joyner did not
retire any bonds during the year, the corresponding amount in the table
on the prior page (+120,000) represents a cash inflow pertaining to a
Problem 12-10A (continued)
Joyner Company
Statement of Cash Flows
For Year 2
Operating activities:
Net income .......................................................
$ 56,000
Adjustments to convert net income to cash basis:
Depreciation ...................................................
$ 42,000
Increase in accounts receivable .......................
(80,000)
Increase in inventory ......................................
(50,000)
Decrease in prepaid expenses .........................
7,000
Increase in accounts payable ...........................
60,000
Decrease in accrued liabilities ..........................
(10,000)
Increase in income taxes payable ....................
3,000
Gain on sale of equipment ..............................
(8,000)
(36,000)
Net cash provided by operating activities ............
20,000
Investing activities:
Proceeds from sale of equipment .......................
18,000
Loan to Hymans Company .................................
(40,000)
Additions to plant and equipment .......................
(150,000)
Net cash used in investing activities ...................
(172,000)
Financing activities:
Issuance of bonds payable .................................
120,000
Issuance of common stock.................................
30,000
Cash dividends ..................................................
(15,000)
Net cash provided by financing activities .............
135,000
Net decrease in cash .........................................
(17,000)
Beginning cash and cash equivalents ..................
21,000
Ending cash and cash equivalents ......................
$ 4,000
Problem 12-10A (continued)
3. Free cash flow computation:
Net cash provided by operating activities .................
$ 20,000
Capital expenditures ............................................
$150,000
Dividends ............................................................
15,000
165,000
Free cash flow ........................................................
$(145,000)
4. The relatively small amount of net cash provided by operating activities
during the year was largely the result of a large increase in accounts
receivable. (The large increase in inventory was offset by a large
Problem 12-11A (45 minutes)
To begin the problem, fill in the question mark pertaining to item “a”
using the following T-account:
Retained Earnings
Dividends
20,000
Net income
70,000
Change
50,000
Problem 12-11A (continued)
Step 3: The company had a $2,000 gain on the sale of equipment. The
book value of the equipment was $13,000 (= $50,000 – $37,000). The
company sold the equipment for $15,000, so its gain on the sale of
$2,000 (= $15,000 – $13,000) is subtracted from net income.
Problem 12-11A (continued)
As stated in item “f” in the problem, it is reasonable to assume that the
$80,000 increase in long-term investments corresponds with a cash
outflow that needs to be recorded in the investing section of the
statement. The $30,000 repayment of loan received from a subsidiary
Problem 12-11A (continued)
Given the amounts above, the statement of cash flows would be as follows:
Yoric Company
Statement of Cash Flows
Operating activities:
Net income ..........................................................
$ 70,000
Adjustments to convert net income to cash basis:
Depreciation .....................................................
$ 42,000
Increase in accounts receivable ..........................
(110,000)
Decrease in inventory ........................................
65,000
Decrease in prepaid expenses ............................
8,000
Increase in accounts payable .............................
32,000
Decrease in accrued liabilities ............................
(9,000)
Increase in income taxes payable .......................
16,000
Gain on sale of equipment .................................
(2,000)
42,000
Net cash provided by operating activities ...............
112,000
Investing activities:
Decrease in long-term loan to subsidiary ...............
30,000
Proceeds from sale of equipment ..........................
15,000
Additions to long-term investments .......................
(80,000)
Additions to plant and equipment .........................
(270,000)
Net cash used in investing activities ......................
(305,000)
Financing activities:
Issuance of bonds payable ...................................
400,000
Repurchase of common stock ...............................
(170,000)
Cash dividends ....................................................
(20,000)
Net cash provided by financing activities ...............
210,000
Net increase in cash .............................................
17,000
Beginning cash and cash equivalents ....................
23,000
Ending cash and cash equivalents .........................
$ 40,000
Problem 12-12A (45 minutes)
1 Prepare a statement of cash flows (all numbers in millions).
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:
income.
Problem 12-12A (continued)
As an intermediate step, the net cash provided by operating activities
can now be calculated as follows:
Net income .......................................................
$115
Adjustments to convert net income to cash basis:
Depreciation ...................................................
$132
Increase in accounts receivable .......................
(65)
Increase in inventory ......................................
(45)
Increase in accounts payable ...........................
95
Increase in accrued liabilities ...........................
25
Increase in income taxes payable ....................
6
Gain on sale of equipment ..............................
(3)
145
Net cash provided by operating activities ............
$260
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
cash flows as follows:
Increase
in Account
Balance
Decrease
in Account
Balance
Noncurrent Assets
Property, plant, and equipment ..................
– 49
Liabilities and Stockholders’ Equity
Bonds payable ..........................................
– 170
Problem 12-12A (continued)
Burgess did not issue any bonds during the year; therefore, the amount
in the table on the prior page (–170) represents a cash outflow
pertaining to a bond retirement. Property, plant, and equipment and
retained earnings require further analysis as follows:
Problem 12-12A (continued)
Burgess Company
Statement of Cash Flows
Operating activities:
Net income .......................................................
$ 115
Adjustments to convert net income to cash basis:
Depreciation ...................................................
$132
Increase in accounts receivable .......................
(65)
Increase in inventory ......................................
(45)
Increase in accounts payable ...........................
95
Increase in accrued liabilities ...........................
25
Increase in income taxes payable ....................
6
Gain on sale of equipment ..............................
(3)
145
Net cash provided by operating activities ............
260
Investing activities:
Proceeds from sale of equipment .......................
8
Additions to plant and equipment .......................
(62)
Net cash used in investing activities ...................
(54)
Financing activities:
Retirement of bonds payable .............................
(170)
Cash dividends ..................................................
(66)
Net cash used in financing activities ...................
(236)
Net decrease in cash .........................................
(30)
Beginning cash and cash equivalents ..................
79
Ending cash and cash equivalents ......................
$ 49
2. Burgess’s net income decreased by $20 million; however, its net cash
provided by operating activities increased by $110 million over the prior
Problem 12-12A (continued)
This suggests that Burgess may be inflating its net income by failing to
record a growing amount of uncollectible accounts. The company’s
inventory has increased (+45 million) even though sales have declined.
Problem 12-13A (45 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
$50,000 – $10,000 + Credits = $60,000
income.
Problem 12-13A (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income ..............................................
$30,000
Adjustments to convert net income to cash basis:
Depreciation ..........................................
$20,000
Increase in accounts receivable ..............
(40,000)
Increase in inventory .............................
(50,000)
Decrease in prepaid expenses ................
4,000
Increase in accounts payable ..................
63,000
Decrease in accrued liabilities .................
(9,000)
Increase in income taxes payable ...........
8,000
Loss on sale of equipment ......................
2,000
Gain on sale of investments ....................
(10,000)
(12,000)
Net cash provided by operating activities ...
$18,000
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
noncash balance sheet accounts that impact investing and financing
