1
CHAPTER 14
THE STATEMENT OF CASH FLOWS
BRIEF EXERCISES
BE14–1
a. Depreciation expense is shown as an adjustment to net income to calculate cash flow. Depreciation
expense is added back to net income because it is a non-cash expense. This means that it is deducted
in the calculation of net income but there is no cash expenditure related to depreciation.
b. Net income plus depreciation does not equal net cash provided by operating activities because all of
c. The estimated net change in current assets and current liabilities is $0.2 billion. This is calculated by
BE14–2
During 2012 Pier One collected $1,694 million from its customers. This can be calculated as follows:
BE14–3
a. Cost of inventories purchased during 2012 equals:
Inventory, ending balance $356 million
b. Cash payments made to suppliers during 2012 equals:
Accounts payable, beginning balance $ 64 million
Cash payments to suppliers made in 2012 $ 1,001 million
BE14–4
a. Agilent AMD
Cash from operations $1,228 $ (338)
b. AMD is generating cash from financing activities—that is, the company is raising cash from equity
and/or debt issuances. Agilent, on the other hand, is using cash to return to shareholders and/or repay
c. Cash from operations exceeds the net income(loss) figure due to depreciation, other non-cash
expenses and the change to operating accounts (such as receivables, payables). The difference in Cash
BE14–5
a. In 2011 profit was below operating cash flows because the change in operating accounts (such as
receivables and payables) acted as a source of cash balances. Receivables decreased and/or payables
b. In 2011 the company used its cash flow from operations and combined it with the proceeds from long
term asset assets to fund a rather large return of cash to debt and equity providers. In 2012, the
EXERCISES
E14–1
1. Investing activity
10. Operating activity
E14–2
1. Not included on the statement of cash flows because it does not affect cash. As proof, the entry for
this event would be:
2. Investing activity
5. Not included on the statement of cash flows because it does not affect cash. As proof, the entry for
this event would be:
Dividend (–SE)……………………………………………………………… XX
E14–2 Concluded
7. Investing activity
10. Operating activity
11. Not included on the statement of cash flows because it does not affect cash. As proof, the entry for
this event would be:
Inventory (+A) ……………………………………………………………… XX
Exchanged a building for land.
E14–3
Cash Provided (Used) by Net Increase
Company Operations Investments Financing (Decrease)
AAA 320 (178) $(180) $ (38)
BBB 219 (450) 190 (41)
stock.
BBB
Similar to AAA, this company appears to be following a policy of maintaining a relatively constant cash
balance. This company also appears to be using cash from operating activities and from borrowings to
purchase nonoperating assets.
CCC
CCC appears to be using large amounts of cash generated in both the current and prior periods to acquire
E14–4
Kraft Foods – Cash from Investments ($422): the company was able to generate cash from operations and
used much of this increase in cash to repay debt, pay dividends, and/or repurchase equity. The company
E14–5
Assets = Liabilities + Owners’ Equity
1. Depreciation expense –170,000 = –170,000
– 40,000 (cash) = +160,000 (mortgage)
1. Under the direct method, depreciation expense is not included on the statement of cash flows because
it does not affect cash. However, under the indirect method, depreciation expense is included under
operating activities as an adjustment to net income to arrive at net cash flows from operating activities.
2. Issuance of common stock, $180,000, increases cash. The $180,000 would be included in the financing
E14–6
a. 1. Merchandise Inventory and Accounts Payable
2. Prepaid Insurance
E14–6 Concluded
b. Sales Revenue
1. Unearned Sales Revenue would increase when a company collects cash from a customer in
2. Accounts Receivable would increase when a company makes credit sales. The amount of the
3. An increase in Allowance for Doubtful Accounts by itself has no effect on accrual-basis sales.
However, one must analyze the account to determine whether the company had any write-offs or
recoveries of previously written off accounts during the year. Write-offs would be deducted from
reflect cash outflows.
Interest Expense
1. An increase in Interest Payable would be deducted from accrual-basis interest expense because the
2. An increase in Prepaid Interest implies that the company disbursed cash during the year to cover
3. An increase in Discount on Bonds Payable does not affect interest expense per se; it indicates that
the company issued additional bonds at less than face value. However, the net increase in the
discount is comprised of two components. First, the discount balance increases for the discount
E14–7
a. Hamilton Watson
Direct method
Cash collections from customers $ 900,000 $ 900,000
b. Cash flows from operating activities measures all the cash inflows and cash outflows associated with a
company’s operating assets and liabilities. Alternatively, net income measures the inflows and outflows
of operating assets and liabilities, not just the cash associated with operating assets and liabilities. Thus,
c. Disagree. Many people think that depreciation expense represents a fund established to finance future
acquisitions of fixed assets. If this were true, it would follow that companies using accelerated
depreciation methods would have more cash available than companies that use straight-line
fixed assets are acquired or sold, not when the cost of the fixed asset is allocated to expenses.
E14–8
a. 1. Cash (+A) ……………………………………………………………………………. 20,000
Contributed Capital (+SE)……………………………………………….. 20,000
Owner contributed capital.
E14–8 Continued
5. Cash (+A) ……………………………………………………………………………. 20,000
Accounts Receivable (+A) …………………………………………………….. 60,000
6. Operating Expenses (E, –SE) …………………………………………………. 18,000
Payable to Bank (–L) ……………………………………………………………. 5,000
7. Operating Expenses (E, –SE) …………………………………………………. 15,000
b.
Tony’s Business
Income Statement
For the Year Ended December 31, 2015
Sales …………………………………………………………………………………………….. $ 80,000
Cost of goods sold …………………………………………………………………………. (25,000)
Tony’s Business
Statement of Retained Earnings
For the Year Ended December 31, 2015
Beginning retained earnings balance: January 1, 2015 ……………………….. $ 0
Plus: Net income ……………………………………………………………………………. 22,000
E14–8 Continued
Tony’s Business
Balance Sheet
December 31, 2015
Assets Liabilities & Stockholders’ Equity
Cash ………………………………………………. $ 25,000 Accounts payable …………………. $ 15,000
Accounts receivable ………………………… 60,000 Operating expenses payable .. 15,000
c. Cash
Beginning balance 0
Owner’s contribution 20,000 Purchase of fixed assets 25,000
Tony’s Business
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash from operating activities:
Cash collections from sales …………………………………………….. $ 20,000
Cash paid for inventory ………………………………………………….. (25,000)
Proceeds from bank loan………………………………………………… 60,000
Principal repayment on debt …………………………………………… (5,000)
E14–8 Concluded
d.
Tony’s Business
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash from operating activities:
Net income …………………………..………………………….. $ 22,000
Adjustments:
Increase in accounts receivable ……………………… $ (60,000)
Increase in inventory …………………………………….. (15,000)
Increase in accounts payable …………………………. 15,000
Increase in operating expense payable……………. 15,000
E14–9
a. 1. Cash (+A) ……………………………………………………………………………. 6,000
Common Stock (+SE) ……………………………………………………… 6,000
3. Equipment (+A) …………………………………………………………………… 5,000
E14–9 Continued
5. Accounts Payable (–L) ……………………………………………………….…. 5,000
Cash (–A) …………………………..…………………………………………. 5,000
8. Cash (+A) ……………………………………………………………………………. 65,000
Accounts Receivable (+A) …………………………………………………….. 35,000
b. Cash
(B.B.) 25,000
(1) 6,000 (3) 5,000
E14–9 Concluded
c.
Driftwood Shipbuilders
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities:
Cash collections from customers …………………………………. $ 75,000
Cash payments for rent ………………………………………………. (12,000)
E14–10
Insurance
2015 Ending prepaid insurance = 2015 Beginning prepaid insurance + Insurance purchases
E14–11
a. 2015 Ending machinery = 2015 Beginning machinery + Cost of machinery purchased
b. When the machinery was sold during 2015, Dylan’s Toys, would prepare the appropriate entry using
the following format.
Cash (+A) ……………………………………………………… XX
Gain on Sale of Machinery
It is given in the exercise that the gain on the sale was $2,000.
Accumulated Depreciation
2015 Ending accumulated depreciation = 2015 Beginning accumulated depreciation +
2015 Depreciation expense – Accumulated
depreciation on items sold
c. Cash (+A) ……………………………………………………………………………………… 8,000
Accumulated Depreciation (+A) ………………………………………………………. 2,000
E14–12
Cash Receipts Cash Payments
12/31/11 accounts receivable $ 499 Change in payables (‘12-‘11) $ 79
E14–13
1. Direct method
The first step in calculating the cash flows from operating activities is to calculate the cash inflows and
outflows associated with each income statement account. These calculations are given below.
Cash collections from customers:
Cash collections from customers = Sales – Ending accounts receivable + Beginning
Cash paid for inventory:
a. Inventory purchased
2015 Ending inventory = 2015 Beginning inventory + Net inventory purchased during
b. Disbursements for inventory
2015 Ending accounts payable = 2015 Beginning accounts payable + Net inventory
purchased during 2015 – Payments for inventory
E14–13 Concluded
2. Indirect method
Cash flows from operating activities:
Net income …………………………..…………………………………….. $ 11,000
Adjustments:
Depreciation …………………………………………………………… $ 2,000
E14–14
Grimes Pools
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash from operating activities:
Cash collections from sales …………………………………………….. $ 35,000
Cash paid on operating liabilities …………………………..………… (6,000)
Cash paid for expenses …………………………………………………… (34,000)
activities ……………………………………………………………….. (5,000)
Net increase (decrease) in cash…………………………..……………….. $ (2,000)
Beginning cash balance, January 1, 2015 ………………………………. 6,000
E14–15
Romora Supply House
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash from operating activities:
Cash collections from sales …………………………………………….. $ 64,000
Cash from decrease in noncash operating assets ………………. 5,000
Cash from increase in operating liabilities ………………………… 5,000
E14–16
Accrual-Basis Sales
2015 Sales = Cash inflows from sales made during 2015 + 2015 Ending accounts
Accrual-Basis COGS
2015 COGS = Cash disbursements during 2015 for inventory – 2015 Ending inventory +
E14–16 Concluded
Accrual-Basis Wage Expense
2015 Wage expense = Cash disbursements during 2015 for wages + 2015 Ending wages
Accrual-Basis Advertising Expense
2015 Advertising expense = Cash disbursement during 2015 for advertising – 2015 Ending
Depreciation Expense
2015 Depreciation expense = 2015 Ending accumulated depreciation – 2015 Beginning
accumulated depreciation
E14–17
L.L. Beeno
Operating Section – Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2015
Cash from operating activities:
Cash receipts from revenues …………………………………………… $ 45,900
Cash payments for inventory ………………………………………….. (26,400)