PB12–6
Req. 1 DIVE IN COMPANY
Statement of Cash Flows
For the Year Ended December 31
Cash flows from operating activities:
Cash collected from customers1 ………………………………..
$ 33,450
Cash paid for salaries and wages to employees2 …………
(30,750
)
Cash paid for rent and office expenses3 ……………………..
(3,700
)
Net cash provided by (used in) operating activities …
(1,000
)
Cash flows from financing activities:
Cash proceeds from issuing stock …………………………….
200
Net cash provided by financing activities ………………..
200
Net increase (decrease) in cash during the year ……………….
(800
)
Cash balance, January 1 ………………………………………………
4,000
Cash balance, December 31 ………………………………………….
$3,200
1 $33,950 + (500 – 1,000) = $33,450
2 $30,000 + (1,100 – 350) = $30,750
3 $3,650 + (100 – 50) = $3,700
Req. 2
Dive In Company appears to be in a satisfactory cash position, with an ending cash
balance of $3,200. However, this balance is down $800 from the prior year because the
company’s cash flows from operations were negative (-$1,000), which was offset
somewhat by issuing additional stock. The company needs to work at improving its
operating cash flows.
ANSWERS TO SKILLS DEVELOPMENT CASES
S12–1
1. B
2. B
3. D
S12–2
Req. 1
Lowe’s uses the indirect method to report the cash flows from operating activities on its
Statement of Cash Flows. This is the same method used by The Home Depot.
Req. 2
Lowe’s received $985 million from issuing long-term debt during the year ended
million.)
S12–3
The solutions to this project will depend on the company and/or accounting period
S12–4
Req. 1
The payment from Merrill Lynch to Enron does not automatically make the Nigerian
barge transaction a sale. When a loan is established between a lender and borrower, a
similar cash payment is made between the two parties. Two other features of the
Nigerian barge transaction resemble a loan. First, the requirement that Enron arrange
for Merrill Lynch to be paid only six months after the “sale” is similar to a possible
S12–5
Req. 1
The sale of accounts receivable to generate cash does not harm or mislead anyone
provided that this event is fully disclosed to users of the financial statements. If the
reason for the improvement in accounts receivable is not reported, financial statement
users might incorrectly assume that the company has permanently improved its
customer screening and collection processes, rather than temporarily improved them
future benefits did not exist.
It is not appropriate to make a decision about how to account for a transaction based on
the impact it could have on operating cash flows. Decisions should be drawn based on
the facts of the situation, not on whether it will make the club’s financial situation look
better or worse.
Req. 4
S12–6
While depreciation is indeed added to net income to compute cash flow from operating
activities, the new controller’s idea will not work. If depreciation expense is increased,
S12–7
S12–8
S12–9
Req. 1
If the company collected $10,000 of the accounts receivable, net cash flow from
operating activities would increase by $10,000.
Req. 2
If the company paid down its interest payable by an extra $2,000, net cash flow from
operating activities would decrease by $2,000.
Req. 3
CC12-1
Req. 1
NICOLE’S GETAWAY SPA
Statement of Cash Flows
For the year ended December 31
Cash Flows from Operating Activities
Net Income
Depreciation
Changes in current assets and current liabilities
Accounts Receivable
Inventory
Prepaid Expenses
Accounts Payable
$
2,300
3,000
859
(400)
(2,170)
(320)
Cash Provided by Operating Activities
3,269
Cash Flow from Investing Activities
Purchased new spa equipment
(7,582)
Cash Provided by (Used in) Investing Activities
(7,582)
Cash Flow from Financing Activities
Payments on note payably (long-term)
Issued new company stock
(4,600)
10,000
Cash Provided by Financing Activities
5,400
Net Change in Cash
Beginning Cash
1,087
7,000
Ending Cash
$
8,087
CC12-2