2. Q A _ O r i : One can criticize a single income statement using a cash basis of
3. Q A _ O r i : Accrual accounting provides a measure of operating performance that
4. Q A _ O r i : The statement of cash flows reports changes in the investing and financing
5. Q A _ O r i : The indirect method reconciles net income, the primary measure of a firm’s
profitability, with cash flow from operations. Some argue that the relation between
net income and cash flow from operations is less evident when a firm reports using
6. Q A _ O r i : The classification in the statement of cash flows under U.S.
GAAP parallels that in the income statement, where interest on debt is an expense
7. Q A _ O r i : The classification in the statement of cash flows parallels that in the
income statement, where interest on debt is an expense but dividends are a
8. Q A _ O r i : Firms generally use accounts payable directly in financing purchases of
9. Q A _ O r i : This is an investing and financing transaction whose disclosure helps the
10. Both are correct, but the writer’s point is not expressed clearly.
Depreciation expense is a charge to operations that does not require cash. If revenues
precisely equal total expenses, there will be a retention of net funds in the business
equal to the amount of the depreciation. As long as replacement of the depreciating
assets is not necessary, it is possible to finance expansion without resorting to
borrowing or the issuance of additional stock.
6.11 The firm must have increased substantially its investment in accounts receivable
or inventories or decreased substantially its current liabilities.
6.12 The firm might be capital intensive and, therefore, subtracted substantial amounts of
depreciation expense in computing net income. This depreciation expense is added
6.13 Direct Method: The accountant classifies the entire cash proceeds from the
equipment sale as an investing activity. Indirect Method: As above, the entire cash
6.14 (Microchem Corporation; derive sales revenue from data in the statement of cash
flows and balance sheet.) (amounts in millions of euros)
6.15 (Electropin Company; derive cost of goods sold from data in the statement of cash
flows.) (amounts in millions of US$)
6.16 (Taylor Stores; derive cost of goods sold from data in the statement of cash flows.)
(amounts in millions of US$)
6.17 (Yoshi Group; derive wages and salaries expense from data in the
statement of cash flows.) (amounts in millions of yen)
6.18 (JAJ Incorporated; derive cash disbursements for dividends.) (amounts in millions
of US$)
6.19 (Gillette Limited; effect of borrowing and interest on statement of cash flows.)
(amounts in millions of pounds sterling)
Change
in
+
Change
in
October 1 bond issue. Refer to Exhibit 6.12. Line
(11)
increases by £250. Line (8) increases by
£250.
Change
in
Cash
=
Change
in
Liabilities
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
+3.75 –3.75
Refer to Exhibit 6.12. Line (3) decreases by £3.75.
Line
(4) increases by
£3.75.
6.20 (Radion Corporation; effect of income taxes on statement of cash flows.) (amounts
in millions of US$)
=
+
Change
in
Shareholders’ Equit
–
Change
in
Non-cash
Assets
–179.5
6.21 (Jennings Company; effect of rent transactions on statement of cash flows.)
(amounts in US$)
Change
in
Cash
=
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
Change
in
Cash
=
Change
in
Liabilities
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
–18,000
Change
in
Cash
=
Change
in
Liabilities
+
Change
in
Shareholders’ Equity
–
Change
in
Non-cash
Assets
–16,500 –16,500
Change
in
Cash
=
Change
in
Liabilities
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
–18,000
Opns –17,700 +300
6.22 (Infotech Corporation; calculating components of cash inflow from
operations.) (amounts in thousands of US$)
6.23 (Infotech Corporation; calculating components of cash outflow from
operations.) (amounts in thousands of US$)
a. Cost of Goods Sold for the Year …………………………………….. $ 11,596
b. Other Expenses,
T
ota
l
……………………………………………………… $ 2,276
6.24 (Spreadsheet for understanding the relation between changes in income statement
items and changes in items in the statement of cash flows.) (amounts in US$)
a. S1 changes from $10 to $12.
b. Lines [1], [2], and [4] of the statement of cash flows do not change.
c. Lines [1], [3], and [5] do not change.
6.25 (Dearing Incorporated; working backward from changes in Buildings and
Equipment account.) (amounts in millions of US$)
Buildings and
Eq
ui
pm
en
t
( O
r i g i n a l C o s t ) A c
c
u
mu la t e
d D
e
p r e
c i
a
t
i
o
n
Balance, 1
/
1 …………………… $16,825 Balance, 1
/
1 ………………….. $ 4,914
6.26 (Incloud Airlines; preparing a statement of cash flows from changes in balance
sheet accounts.) (amounts in thousands of US$)
a.INCLOUD AIRLINES Statement of Cash Flows
For the Ye
a
r
(amounts in thousands of U
S
$)
Operations:
Additions:
aNet Income of $474,378 less Increase in Retained Earnings of
b. Cash flow from operations exceeds net income primarily because of the
6.27 (Bamberger Enterprises; calculating and interpreting cash flow from
operations.) (amounts in thousands of US$)
a. Net Income………………………………………………………………….. $ 290
Additions:
Cash Flow from
O
pe
r
at
ions
………………………………………….. $ 1
, 31
0
b. Bamberger Enterprises decreased its non-cash current assets, particularly
6.28 (Finanka; calculating and interpreting cash flow from operations.)
(amounts in millions of euros)
a. 2013 2012 2011 2010
b. The addback for depreciation, a non-cash expense, causes cash flow from
operations to exceed net income each year, except 2013. Inventories increased in
line with increases in net income. The company increases its accounts payable
6.29(Market Star; calculating and interpreting cash flows.)(amounts in millions of US$)
a.MARKET STAR Comparative Statement of Cash Flows
(amounts in millions of US$)
Operations
201
3 201
2 201
1
b. Interpreting cash flow from operations for a marketing services firm requires
a comparison of the change in accounts receivable from clients and
accounts payable to various media. Marketing services firms act as agents
between these two constituents. In Year 2011 and Year 2012, the increase in
Year 2012 and Year 2013. Thus, the capital structure of the firm became
more risky during the three years.
8. Q A _ O r i : Firms generally use accounts payable directly in financing purchases of
9. Q A _ O r i : This is an investing and financing transaction whose disclosure helps the
10. Both are correct, but the writer’s point is not expressed clearly.
Depreciation expense is a charge to operations that does not require cash. If revenues
precisely equal total expenses, there will be a retention of net funds in the business
equal to the amount of the depreciation. As long as replacement of the depreciating
assets is not necessary, it is possible to finance expansion without resorting to
borrowing or the issuance of additional stock.
6.11 The firm must have increased substantially its investment in accounts receivable
or inventories or decreased substantially its current liabilities.
6.12 The firm might be capital intensive and, therefore, subtracted substantial amounts of
depreciation expense in computing net income. This depreciation expense is added
6.13 Direct Method: The accountant classifies the entire cash proceeds from the
equipment sale as an investing activity. Indirect Method: As above, the entire cash
6.14 (Microchem Corporation; derive sales revenue from data in the statement of cash
flows and balance sheet.) (amounts in millions of euros)
6.15 (Electropin Company; derive cost of goods sold from data in the statement of cash
flows.) (amounts in millions of US$)
6.16 (Taylor Stores; derive cost of goods sold from data in the statement of cash flows.)
(amounts in millions of US$)
6.17 (Yoshi Group; derive wages and salaries expense from data in the
statement of cash flows.) (amounts in millions of yen)
6.18 (JAJ Incorporated; derive cash disbursements for dividends.) (amounts in millions
of US$)
6.19 (Gillette Limited; effect of borrowing and interest on statement of cash flows.)
(amounts in millions of pounds sterling)
Change
in
+
Change
in
October 1 bond issue. Refer to Exhibit 6.12. Line
(11)
increases by £250. Line (8) increases by
£250.
Change
in
Cash
=
Change
in
Liabilities
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
+3.75 –3.75
Refer to Exhibit 6.12. Line (3) decreases by £3.75.
Line
(4) increases by
£3.75.
6.20 (Radion Corporation; effect of income taxes on statement of cash flows.) (amounts
in millions of US$)
=
+
Change
in
Shareholders’ Equit
–
Change
in
Non-cash
Assets
–179.5
6.21 (Jennings Company; effect of rent transactions on statement of cash flows.)
(amounts in US$)
Change
in
Cash
=
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
Change
in
Cash
=
Change
in
Liabilities
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
–18,000
Change
in
Cash
=
Change
in
Liabilities
+
Change
in
Shareholders’ Equity
–
Change
in
Non-cash
Assets
–16,500 –16,500
Change
in
Cash
=
Change
in
Liabilities
+
Change
in Shareholders’ Equity
–
Change
in Non-cash Assets
–18,000
Opns –17,700 +300
6.22 (Infotech Corporation; calculating components of cash inflow from
operations.) (amounts in thousands of US$)
6.23 (Infotech Corporation; calculating components of cash outflow from
operations.) (amounts in thousands of US$)
a. Cost of Goods Sold for the Year …………………………………….. $ 11,596
b. Other Expenses,
T
ota
l
……………………………………………………… $ 2,276
6.24 (Spreadsheet for understanding the relation between changes in income statement
items and changes in items in the statement of cash flows.) (amounts in US$)
a. S1 changes from $10 to $12.
b. Lines [1], [2], and [4] of the statement of cash flows do not change.
c. Lines [1], [3], and [5] do not change.
6.25 (Dearing Incorporated; working backward from changes in Buildings and
Equipment account.) (amounts in millions of US$)
Buildings and
Eq
ui
pm
en
t
( O
r i g i n a l C o s t ) A c
c
u
mu la t e
d D
e
p r e
c i
a
t
i
o
n
Balance, 1
/
1 …………………… $16,825 Balance, 1
/
1 ………………….. $ 4,914
6.26 (Incloud Airlines; preparing a statement of cash flows from changes in balance
sheet accounts.) (amounts in thousands of US$)
a.INCLOUD AIRLINES Statement of Cash Flows
For the Ye
a
r
(amounts in thousands of U
S
$)
Operations:
Additions:
aNet Income of $474,378 less Increase in Retained Earnings of
b. Cash flow from operations exceeds net income primarily because of the
6.27 (Bamberger Enterprises; calculating and interpreting cash flow from
operations.) (amounts in thousands of US$)
a. Net Income………………………………………………………………….. $ 290
Additions:
Cash Flow from
O
pe
r
at
ions
………………………………………….. $ 1
, 31
0
b. Bamberger Enterprises decreased its non-cash current assets, particularly
6.28 (Finanka; calculating and interpreting cash flow from operations.)
(amounts in millions of euros)
a. 2013 2012 2011 2010
b. The addback for depreciation, a non-cash expense, causes cash flow from
operations to exceed net income each year, except 2013. Inventories increased in
line with increases in net income. The company increases its accounts payable
6.29(Market Star; calculating and interpreting cash flows.)(amounts in millions of US$)
a.MARKET STAR Comparative Statement of Cash Flows
(amounts in millions of US$)
Operations
201
3 201
2 201
1
b. Interpreting cash flow from operations for a marketing services firm requires
a comparison of the change in accounts receivable from clients and
accounts payable to various media. Marketing services firms act as agents
between these two constituents. In Year 2011 and Year 2012, the increase in
Year 2012 and Year 2013. Thus, the capital structure of the firm became
more risky during the three years.