DQ1.
DQ2.
DQ3.
DQ4.
DQ5.
DQ6.
current liabilities, the results could overwhelm the earnings and create negative
cash flows from operating activities.
statement.
cash flows are the details of the changes. For instance, cash flows from oper-
ating activities is a very important figure that cannot be seen on any other
The change in cash from year to year, while important, can easily be obtained
from the comparative balance sheets. What is important from the statement of
CHAPTER 15—Solutions
THE STATEMENT OF CASH FLOWS
Discussion Questions
to the goal of profitability, whereas the statement of cash flows is more closely
tied to the goal of liquidity.
Cash flows to sales and cash flows to assets would be less than profit margin
and return on assets, respectively, because a cash flow yield of 1.0 means that
cash flows from operations are less than net income. Both are numerators in
ratios that have the same denominators.
Gains and losses from operating activities are directly related to the cash flows
from the sale of assets reported in the investing activities section.
Both purchases of treasury stock and dividend payments represent payments
to stockholders. Each diverts cash from productive use in the business (as
assets), and thus each reduces free cash flow.
If a company has large gains, large increases in current assets, or decreases in
The statements are equally useful. The income statement relates most directly
15-1
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1. 4.
2. 5.
3. 6.
b
Schedule of Cash Flows from Operating Activities
c
Short Exercises
SE1. Classification of Cash Flow Transactions
c
a
SE2. Computing Cash Flows from Operating Activities: Indirect Method
Stewart Construction Corporation
d
c
For the Year Ended December 31, 2014
Cash flows from operating activities:
15-2
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1. 5.
2. 6.
3. 7.
4. 8.
SE6. Identifying Components of the Statement of Cash Flows
ba
ca
ed
Cash flows from investing activities:
a
c
SE4. Cash Flows from Investing Activities and Noncash Transactions
15-3
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( + ) / 2
‒‒+
place its depreciable assets, as indicated by a decline in the gross amount of equip-
ment, it did reduce liabilities by 25 percent. Overall the company improved its liquidity
and its ability to borrow for possible future expansion.
SE8. Cash-Generating Efficiency Ratios and Free Cash Flow
The cash flow yield is 0.7 times, which indicates that cash flows from operations are
that the company was able to finance its net expenditures for land and equipment from
its cash flows from operations after paying dividends. Although the company did not re-
to sales because the asset turnover is slightly more than 1. Because cash flow yield is
$240,000
*
$360,000 $40,000
22.8%
$80,000
Purchases of Plant Assets + Sales of Plant Assets
=
Net Cash Flows from Operating Activities ‒ Dividends ‒ Free Cash Flow =
Average Total Assets
$1,100,000 $1,000,000 =
$360,000
=$360,000 =
$1,580,000
Cash Flows to Sales = Net Cash Flows from Operating Activities
Sales
Cash Flow Yield = Net Cash Flows from Operating Activities
Net Income
SE7. Cash-Generating Efficiency Ratios and Free Cash Flow
*Rounded
Cash Flows to Assets = Net Cash Flows from Operating Activities
15-4
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1. 6. 11.
2. 7. 12.
3. 8. 13.
4. 9.
5. 10.
Exercises: Set A
a
c
b
a
b
d
c
Cash flows from operating activities:
Conti Chemical Company
d
a
a b and a e
c
Schedule of Cash Flows from Operating Activities
For the Year Ended December 31, 2014
E1A. Classification of Cash Flow Transactions
E2A. Cash Flows from Operating Activities: Indirect Method
15-5
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a.
b.
T account shows purchases of investments to be $116,000, which is an outflow
Flake Corporation
E4A. Preparing a Schedule of Cash Flows from Operating Activities: Indirect Method
Schedule of Cash Flows from Operating Activities
For the Year Ended June 30, 2014
T account shows $78,000 of investments sold. There was a $13,000 loss on the
of cash.
Cash flows from operating activities:
sale. The net cash flow from the sale is computed as follows:
15-6
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a.
E6A. Computing Cash Flows from Investing Activities: Plant Assets
T account shows total purchases of plant assets of $67,200, which is an out-
Cash flows from investing activities:
flow of cash.
15-7
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Keeper Corporation
E8A. Preparing the Statement of Cash Flows: Indirect Method
Statement of Cash Flows
For the Year Ended June 30, 2014
Cash flows from operating activities:
*$27,000 – $15,300 = $11,700
15-8
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