312
Chapter 10
Statement of Cash Flows
QUESTIONS
10– 1. The basic justification for a statement of cash flows is that the balance sheet
and the income statement do not adequately indicate changes in cash.
obtained this way.
The income statement shows the income or loss for a period of time, but it does
summarize the cash flows in another statement.
10– 2. 1. Cash flows from operating activities
10– 3. The cash inflows (outflows) will be determined by analyzing all balance sheet
accounts other than the cash and cash equivalent accounts. The cash inflows
will be generated from the following accounts:
1. Decreases in assets
2. Increases in liabilities
3. Increases in stockholders’ equity
1. Increases in assets
10– 4. This statement is not correct. The land account may contain an explanation of a
source and use of cash.
10– 5. 1. Visual method
313
10– 6. For the direct approach, the revenue and expense accounts on the income
income on an accrual basis to income on a cash basis after eliminating gains or
10– 7. Items have been included in income that did not provide cash and items have
10– 8. Cash and short-term highly liquid investments. This would include cash on
10– 9. The purpose of the statement of cash flows is to provide information on why the
10–10. These transactions represent significant investing and/or financing activities,
financing activities.
10–11. No. The write-off of uncollectible accounts against allowance for doubtful
receivables amount would not change.
10–12. Discarding a fully depreciated asset with no salvage value will not result in cash
flow.
10–13. This may be the result of noncash charges for depreciation, amortization, and
payable may have increased.
from operations (source of funds).
10-15. Investments in receivables, inventories, fixed assets, and the paying off of debt
10–16. Depreciation is not a source of funds. Depreciation has been deducted on the
from operations.
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10–18. This is an example of noncash investing and financing. As such, it should be
10–19. Cash flow per share is not as good an indicator of profitability as earnings per
ability to pay dividends.
10–20. Since cash flow from operating activities is substantially greater than the cash
financing goals.
10–21. Credit Sales in 2010
$
450,000
Decrease Cash Flow from receivable increase
(10,000)
(A) Cash from credit sales
440,000
(B) Cash sales
100,000
(A) ÷ (B)
$
540,000
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PROBLEMS
PROBLEM 10-1
Effect on Cash
Data
Operating
Activity
Investing
Activity
Financing
Activity
Increase
Decrease
Noncash
Transaction
a. Net loss
X
X
b. Increase in inventory
X
X
c. Decrease in receivables
X
X
d. Increase in prepaid
insurance
X
X
e. Issuance of common
stock
X
X
f. Acquisition of land using
notes payable
X
g. Purchase of land, using
cash
X
X
h. Paid cash dividend
X
X
i. Payment of income
taxes
X
X
j. Retirement of bonds,
using cash
X
X
k. Sale of equipment for
cash
X
X
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PROBLEM 10-2
Effect on Cash
Data
Operating
Activity
Investing
Activity
Financing
Activity
Increase
Decrease
Noncash
Transaction
a. Net income
X
X
b. Paid cash dividend
X
X
c. Increase in receivables
X
X
d. Retirement of debt,
paying cash
X
X
e. Purchase of treasury
stock
X
X
f. Purchase of equipment
X
X
g. Sale of equipment
X
X
h. Decrease in inventory
X
X
i. Acquisition of land,
using common stock
X
j. Retired bonds, using
common stock
X
k. Decrease in accounts
payable
X
X
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PROBLEM 10-3
a.
BBB COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flow from operating activities:
Net income
$
500
Non cash expenses, revenues, losses, and gains
included in income:
Depreciation
$
2,800
Gain on sale of land
(800)
Decrease in accounts receivable
400
Decrease in inventory
500
Increase in accounts payable
800
Increase in wages payable
50
Decrease in taxes payable
(1,000)
$
2,750
Net cash flow from operating activities
$
3,250
Cash flows from investing activities:
Land was sold for
1,800
Equipment was purchased for
(3,500)
Net cash used for investing activities
$
(1,700)
Cash flows from financing activities:
Dividends declared and paid
(4,350)
Common stock was sold for
3,800
Net cash used for financing activities
$
(550)
Net increase in cash and marketable securities
$
1,000
The cash from issuing the common stock was sufficient to cover the net cash used
situation.
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PROBLEM 10-4
a.
FRISH COMPANY
Schedule of Change from Accrual to
Cash Basis Income Statement
For Year Ended December 31, 2011
Accrual Basis
Adjustments
Add (Subtract)
Cash Basis
Net sales
$
640,000
Increase in accounts
receivable
$
(27,000)
$
613,000
Less expenses:
Cost of goods sold
360,000
Increase in accounts
payable
(15,000)
Increase in inventories
35,000
Depreciation expense
(15,000)
365,000
Selling and
administrative
expenses
43,000
Decrease in prepaid
expenses
$
(1,000)
Increase in accrued
liabilities
(3,000)
Depreciation expense
(5,000)
34,000
Other expense
2,000
Amortization of patent
$
(3,000)
Amortization of bond
premium
1,000
0
Income before income
taxes
$
235,000
$
214,000
Income tax
92,000
Decrease in income
taxes payable
10,000
102,000
Net income
$
143,000
$
112,000
b.
1.
Direct Approach
Receipts from customers
$
613,000
Payments to suppliers
(365,000)
Selling and administrative expenses
( 34,000)
Income taxes paid
(102,000)
Cash flows from operating activities
$
112,000
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2.
Indirect Approach
Net income
$
143,000
Add (deduct) items not affecting cash
Depreciation
20,000
Amortization of patent
3,000
Amortization of bond premium
(1,000)
Increase in accounts receivable
(27,000)
Increase in accounts payable
15,000
Increase in inventories
(35,000)
Decrease in prepaid expenses
1,000
Increase in accrued liabilities
3,000
Decrease in income taxes payable
(10,000)
Cash flow from operating activities
$
112,000
PROBLEM 10-5
a.
BOYER COMPANY
Schedule of Change from Accrual to
Cash Basis Income Statement
For the Year Ended December 31, 2011
Accrual Basis
Adjustments
Add
(Subtract)
Cash
Basis
Sales
$
19,000
Increase in Receivables
$
(400)
$
18,600
Less operating expenses:
Depreciation
2,300
Depreciation expense
(2,300)
0
Other operating expenses
12,000
Increase in inventories
800
Increase in accounts payable
(500)
12,300
Operating Income
$
4,700
$
6,300
Loss on sale of land
1,500
Loss on sale of land
(1,500)
0
$
6,300
Income before tax expense
$
3,200
Tax expense
1,000
Decrease in income taxes payable
400
1,400
Net income
$
2,200
$
4,900
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b.
1.
Direct Approach
Receipts from customers
$
18,600
Payments to suppliers
(12,300)
Income taxes paid
(1,400)
Cash flows from operating activities
$
4,900
2.
Indirect Approach
Net income
$
2,200
Add (deduct) items not affecting cash:
Depreciation
$
2,300
Increase in receivables
(400)
Increase in inventories
(800)
Increase in accounts payable
500
Loss on sale of land
1,500
Decrease in income taxes payable
(400)
2,700
Cash flow from operating activities
$
4,900
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PROBLEM 10-6
a.
SAMPSON COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2011
Net cash flow from operating activities:
Net income
$
19,000
Noncash expenses, revenues, losses, and gains
included in income:
Depreciation expense
$
10,000
Increase in net receivables
(7,000)
Increase in inventory
(13,000)
Increase in accounts payable
5,000
Decrease in accrued liabilities
(17,000)
Net cash outflow from operating activities
(3,000)
Cash flows from investing activities:
Plant assets increase
(15,000)
Cash flows from financing activities:
Mortgage payable increase
$
11,000
Common stock increase
6,000
Dividends paid
(21,000)
Net cash flows from financing activities
(4,000)
Net decrease in cash
$
(22,000)