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P17-9. Preparing a statement of cash flows—indirect method
(AICPA adapted)
Omega Corporation
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flow from Operating Activities:
Net income $360,000
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation1150,000
Changes in assets and liabilities:
Decrease in accounts receivable 40,000
Cash Flows from Investing Activities:
Proceeds from sale of equipment 40,000
1Depreciation
Net increase in accumulated depreciation
Proceeds $40,000
Carrying value 35 ,000
Gain $ 5 ,000
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P17-10. Operating cash flow impact of securitization
Requirement 1:
Use the data presented in the problem to first determine gross accounts
receivable:
Next, determine the amount of accounts receivable written off during Year
3:
Allowance for Doubtful Accounts
The preceding information, in conjunction with information given in the
problem, can then be used to reconstruct summary entries in the accounts
receivable account, thus solving for cash collected from customers.
Accounts Receivable
Beginning balance $ 387,285 $ 20,000 Securitizations in YR3
Credit sales for YR3 17,507,719 28,693 Accounts written off
during YR3
17,441,572 Collections from
customers during YR3
Ending balance 404,739
Requirement 2:
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$ 32,336 Beginning balance
Accounts written off
during YR3 (plug)
28,693 26,603 Bad debts expense for YR3
(given)
30,246 Ending balance
While the impact of securitization on operating cash flows for fiscal Year 3 might not be
considered material, the increases in the two prior years certainly were.
Requirement 3:
Note: Pretax operating income as defined in this analysis excludes the effects of
(nonrecurring) events not related to core business operations and the impact of the large,
and inconsistent, income tax benefit.
Dividing operating cash flows (both with and without securitization as
determined in requirement 2) by pretax operating income results in the
following:
A healthy business should produce positive operating cash flows and these cash flows
should usually exceed operating income because of the presence of non-cash charges
(e.g., depreciation). In Rite Aid’s case, this expected relationship is in evidence without the
effects of securitization, but is significantly enhanced by securitization.
Financial Reporting & Analysis (7th Ed.)
Chapter 17 Solutions
Statement of Cash Flows
Cases
Cases
C17-1. Statement of cash flow differences under IFRS and U.S. GAAP
Telstra Seven Group Holdings First Solar
Operating
section
1. Interest and other
items of a similar nature
1. Interest received
3. Interest paid
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received
2a. Dividends received
from equity accounted
investees
2b. Other dividends
received
3. Interest and other
costs of finance paid
Investing section 1. Interest received
2a. Distributions
received from Foxtel.
2b. Dividends received
Financing section 3. Finance costs paid
(i.e., interest)
As illustrated, key areas of difference between IFRS and U.S. GAAP under current
standards are where interest and dividends received and interest paid are reported.
All of these items are reported in the operating section under U.S. GAAP. IFRS
permits firms to report these items in other sections of the statement of cash flows. A
number of top 100 Australian firms follow the approach taken by Seven Group
Holdings; a few others report interest or dividends received as investing activities.
C17-2. Lucky Lady, Inc.: Preparing comprehensive statement of cash flows
Note: All amounts shown in this solution are “$ in thousands”
Lucky Lady, Inc.
Statement of Cash Flows
For the Year Ended 12/31/17
Cash Flows from Operating Activities:
Net loss ($117,586)
+ Depreciation expense 8,018
+ Aircraft carrying value adjustment 68,948
+ Loss on sale of property, plant & equip.
(book value $2,501–cash received $684) 1,817
- Increase in net accounts receivable (29,869)
- Increase in prepaid expenses (10,536)
- Increase in inventories (12,508)
+ Decrease in pre-opening costs 10,677
- Increase in other operating assets (5,485)
+ Increase in accounts payable 9,859
+ Increase in accrued salaries & wages 7,249
+ Increase in accrued interest on LT debt 43
+ Increase in other accrued liabilities 23,758
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+ Increase in deferred revenue 10 ,784
Cash flow from operations ( 34 ,831)
Cash Flows from Investing Activities:
Sale of property, plant & equipment 684
Purchase of PP&E and cost of building (480,054)
+ Increase in construction payables1 64 ,548
(415,506)
Cash flow from investment activities (414 ,822)
Cash Flow from Financing Activities:
Repayment of principal in capital lease (1,564)
Additional borrowing (laundry loan) 10,000
Issuance of additional common stock 72 ,559
Cash flow from financing activities 80 ,995
Total change in cash (368,658)
Cash at 12/31/16 579 ,963
Cash at 12/31/17 $211 ,305
1Alternatively, this could be shown as a financing activity cash inflow.
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Note on significant non-cash transaction: The Company entered
into a capital lease agreement and recorded an asset and a
corresponding liability for $16,987.
Property, Plant and Equipment
Beginning balance $471,506
New capital lease 16,987 $14,751 Cost of asset sold (net book value
$2,501 + Acc. dep. $12,250)
Other new additions X
Ending balance $953,796
Solve for X:
$953,796 = $471,506 + $16,987 + X - $14,751
X = $480,054
Accumulated Depreciation
$21,796 Beginning balance
Acc. depr. on asset sold X 8,018 Depreciation expense
68,948 Carrying value adjustment
$86,512 Ending balance
Solve for X:
$86,512 = $21,796 + $8,018 + $68,948 - X
X = $12,250
Capital Lease Obligation (including current maturities)
$451 Beginning balance
Repayment of principal X 16,987 New capital lease
$15,874 Ending balance
Solve for X:
$15,874 = $451 + $16,987 - X
X = $1,564
Note: Alternatively, the cash flow statement could show in cash flow
from operations a $3,855 addback for bad debt expense and a
($33,724) reduction for the increase in receivables instead of the
($29,869) increase in net receivables. The following analysis shows
how these amounts are determined.
Allowance for Doubtful Accounts
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$1,531 Beginning balance
Bad debts written off X 3,855 Bad debt expense
$4,733 Ending balance
$4,733 = $1,531 + $3,855 – X; X = $653
Gross Accounts Receivable
Beginning balance $2,178 $653 Bad debts written off
Revenue 57,800 X Cash collected
Ending balance $35,249
$35,249 = $2,178 + $57,800 - $653 – X; X = $24,076
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