3. Spreadsheet Activity
Have students create a functional spreadsheet in Excel or some other spreadsheet program
capable of being used to help prepare a statement of cash flows. Suggest that the spreadsheet:
1. Accommodate debit and credit “explanations” for changes in all noncash account
balances.
2. Automatically and continually verify that total debits equal total credits.
Ask students to use their spreadsheet when solving assigned homework problems.
4. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Case 21–1, Judgment Case 21–2 can be
adapted to ask students to prepare a report outlining the findings of the research for
presentation at the meeting. Judgment Case 21–2 and Analysis Cases 21–5 and 21–8 work
well as group assignments. Questions 21–8, 21–11, and 21–19, Problem 21–12, and Ethics
Case 21–7 create good class discussions. Problem 21–13 is suitable for student
presentation(s).
Research Skills. In their professional lives, our graduates will be required to locate and extract
relevant information from available resource material to determine the correct accounting
practice, perhaps identifying the appropriate authoritative literature to support a decision.
Research Cases 21–3 and 21–9 provide opportunities to develop research skills.
As a research activity, have students search the Internet for examples of companies using
the direct method of accounting for cash flows from operating activities. You might let
them use their own creativity in deciding where to look for examples or you might suggest
a search engine such as Google.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for
making business and investment decisions. In addition to Analysis Cases 21–5 and 21–8,
Communication Case 21–1 and Trueblood Case 21–4 also provide opportunities to develop
analysis skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that
require students to critically analyze issues to apply concepts learned to business situations
in order to evaluate options for decision-making and provide an appropriate conclusion.
Judgment Case 21–2 and Analysis Case 21–5 require students to exercise judgment.
5. Ethical Dilemma
The chapter includes the following ethical dilemma.
ETHICAL DILEMMA
“We must get it,” Courtney Lowell, president of Industrial Fasteners, roared. “Without it,
we’re in big trouble.” The “it” Mr. Lowell referred to is the renewal of a $14 million loan with
Community First Bank. The big trouble he fears is the lack of funds necessary to repay the
existing debt and few, if any, prospects for raising the funds elsewhere.
Mr. Lowell had just hung up the phone after a conversation with a bank vice-president in
which it was made clear that this year’s statement of cash flows must look better than last
year’s. Mr. Lowell knows that improvements are not on course to happen. In fact, cash flow
projections were dismal.
Later that day, Tim Cratchet, assistant controller, was summoned to Mr. Lowell’s office.
“Cratchet,” Lowell barked, “I’ve looked at our accounts receivable. I think we can generate
quite a bit of cash by selling or factoring most of those receivables. I know it will cost us more
than if we collect them ourselves, but it sure will make our cash flow picture look better.”
Is there an ethical question facing Cratchet?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Industrial Fasteners needs the renewal of a $14 million loan with Community First Bank.
Prospects for currently repaying the debt are poor. The bank has required an improved statement
of cash flows in order to obtain the loan renewal. Mr. Lowell, president of the company, suggests
that Tim Cratchet, assistant controller, factor the accounts receivable to improve the cash flow
position. Factoring accounts receivable will result in finance charges, but will increase cash
inflow. Mr. Lowell has not stated that he would use the increased cash flow to repay the loan. He
only wants to improve the statement of cash flows required by the bank for renewal.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the assistant controller’s obligation to the president
and the company is greater than an obligation to appropriately advise the president in making a
sound financial decision and an obligation to the bank to fairly present the operating cash
position of the company.
Stakeholders include Cratchet, the assistant controller, the president, other top management,
employees, the bank and other creditors, the factor, and current and future investors.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, and
responsibility to financial statements users’ right to know.
Step 4—Alternatives:
1. Follow the suggestion of the president to factor the accounts receivable.
2. Refuse to factor the accounts receivable.
3. Report the president’s request to the board of directors, the audit committee, or the
auditors.
4. Resign from the company and seek employment elsewhere.
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to the president and the company.
2. Alternative 2 exhibits the values of competence, honesty, integrity, objectivity, and
responsibility to users of the financial statements.
3. Alternative 3 also illustrates loyalty to the employer at a level higher than that of the
president, but includes the values of honesty, integrity, and objectivity on the part of the
assistant controller.
4. Alternative 4 supports the values of honesty and integrity, but does not reflect
competence, objectivity, or responsibility to financial statement users.
Step 6—Consequences:
Alternative 1
Positive consequences: The assistant controller keeps the job and pleases the president.
The company will obtain the renewal and may avoid loan payment default and possible
bankruptcy.
Negative consequences: The bank would be misinformed regarding the liquidity of the
company and may call in the loan for immediate payment if the factoring is detected. The
assistant controller may lose integrity and self-respect. The assistant controller also may lose
his job if the bank calls in the loan.
Alternative 2
Positive consequences: The bank receives a cash flow statement that is more relevant and
reliable regarding the cash position of the company. The company may be able to collect
more of the accounts receivable. The assistant controller maintains integrity.
Negative consequences: The assistant controller may incur the disfavor of the president
and other top management resulting in loss of future promotions and his job. The bank may
refuse to give the loan renewal, which may cause the company to go bankrupt.
Alternative 3
Positive consequences: The assistant controller would maintain integrity. The bank
receives a more relevant and reliable reflection of the company’s operating cash position if
the board of directors or the audit committee prevent the president from factoring the
accounts receivable.
Negative consequences: The assistant controller may incur the disfavor of the president
and other top management resulting in loss of future promotions and his job. Whistle blowers
often are not rewarded.
Alternative 4
Positive consequences: The assistant controller maintains integrity and avoids conflict
with management, the board, and the audit committee.
Negative consequences: The assistant controller has no job and may have difficulty
getting references for a new job. The bank still does not receive relevant and reliable
information regarding the operating cash position of the company.
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
21–1 1, 2 Need for financial statement that reports cash
flows
5
21–2 3 Evolution of statement of cash flows 5
21–3 4 Cash equivalent 5
21–4 4 Cash equivalent 5
21–5 5 Cash flows from operating activities 5
21–6 5 Cash flows from operating activities 5
21–7 5 Cash flows from investing activities 5
21–8 5 Cash flows from financing activities 5
21–9 6 Noncash investing and financing activities 5
21–10 6 Transaction partly in cash 5
21–11 7 Most noteworthy item on a statement of cash
flows
5
21–12 7 Spreadsheet 5
21–13 7 Cash received from customers 5
21–14 7 When an asset is sold at a gain 5
21–15 7 Increase in the deferred income tax liability 5
21–16 8 Indirect method 5
21–17 8 Direct method 5
21–18 8 Indirect method 5
21–19 8 Indirect method 5
21–20 9 IFRS 5
21–21 9 IFRS 5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
21–1 3 Determine cash received from customers 5
21–2 3 Determine cash received from customers 5
21–3 3 Determine cash paid to suppliers 5
21–4 3 Determine cash paid to employees 5
21–5 3,6 Bond interest and discount 5
21–6 4,6 Bond interest and discount 5
21–7 3,6 Installment note 5
21–8 3,4,5 Sale of land 5
21–9 5 Investing activities 5
21–10 6 Financing activities 5
21–11 4 Indirect method 5
21–12 4 Indirect method 5
Learning Est.
time
Exercises Objective(s) Topic
(min.)
21–1 3,4,5,6 Classification of cash flows 20
21–2 3,6 Determine cash paid to suppliers of merchandise 15
21–3 3 Determine cash received from customers 20
21–4 3 Summary entries for cash received from
customers
20
21–5 3 Determine cash paid to suppliers of merchandise 25
21–6 3 Summary entries for cash paid to suppliers of
merchandise
25
21–7 3 Determine cash paid for bond interest 20
21–8 3 Determine cash paid for bond interest 20
21–9 3 Determine cash paid for income taxes 25
21–10 3 Summary entries for cash paid for income taxes 25
21–11 3 Bonds; statement of cash flows effects 20
21–12 3,6 Installment note; statement of cash flows effects 20
21–13 5,6 Identifying cash flows from investing activities
and financing activities
20
21–14 5,6 Identifying cash flows from investing activities
and financing activities
20
21–15 3,5,6 Lease; lessee; statement of cash flows effects 20
21–16 3,5 Equity method investment; statement of cash
flows effects
20
21–17 4 Indirect method; reconciliation of net income to
net cash flows from operating activities
15
21–18 3,4,5,6,7,8 Spreadsheet entries from statement of retained
earnings
20
21–19 3,4 Relationship between the income statement and
cash flows from operating activities (direct
method and indirect method)
30
21–20 3,4 Reconciliation of net cash flows from operating
activities to net income
30
21–21 3,4 Cash flows from operating activities (direct
method) derived from an income statement; cash
flows from operating activities (indirect method)
30
21–22 4 Indirect method; reconciliation of net income to
net cash flows from operating activities
15
21–23 3 Cash flows from operating activities (direct
method)
30
21–24 4 Cash flows from operating activities (indirect
method
20
21–25 3 Cash flows from operating activities (direct
method)—includes loss on sale of cash
equivalent
30
21–26 4 Cash flows from operating activities (indirect
method)—includes loss on sale of cash
equivalent
20
21–27 3,5,6,8 Statement of cash flows; direct method 60
21–28 3 Pension plan funding 15
21–29 2 FASB codification research 15
21–30 1,4,7 FASB codification research 15
21–31 4,5,6,8,21A Statement of cash flows; indirect method [based
on Appendix A]
45
21–32 8, 21B Statement of cash flows; T-account method
[based on Appendix B]
50
Learning Est.
time
Problems Objective(s) Topic
(min.)
21–1 2,5,6,7 Classifications of cash flows from investing
and financing activities
25
21–2 3,8 Statement of cash flows; direct method 60
21–3 3,8 Statement of cash flows; direct method 75
21–4 3,8 Statement of cash flows; direct method 75
21–5 3,8 Statement of cash flows; direct method 60
21–6 3,4 Cash flows from operating activities (direct
method) derived from an income statement
and cash flows from operating activities
(indirect method)
35
21–7 3,4 Cash flows from operating activities (direct
method) derived from an income statement
and cash flows from operating activities
(indirect method)
40
21–8 3,4 Cash flows from operating activities (direct
method and indirect method)—deferred
income tax liability and amortization of
bond discount
45
21–9 3, 4 Cash flows from operating activities (direct
method and indirect method)—cash
equivalent
45
21–10 3, 4 Relationship between the income statement
and cash flows from operating activities
(direct method and indirect method)
25
21–11 3,8 Prepare a statement of cash flows; direct
method
75
21–12 5,6,8 Transactions affecting retained earnings 20
21–13 3,4,5,6,7,8 Various cash flows 25
21–14 4,8 Statement of cash flows; indirect method;
limited information
40
21–15 3,5,6 Integrating problem; bonds; lease
transactions; lessee and lessor; statement of
cash flow effects
40
21–16 4,8 Statement of cash flows; indirect method 60
21–17 4,8 Statement of cash flows; indirect method 45
21–18 4,8 Statement of cash flows; indirect method 60
21–19 3,8 Statement of cash flows; T-account method 60
21–20 3,8 Statement of cash flows; T-account method 45
21–21 3,8 Statement of cash flows; T-account method 60
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Communication Case 21–1 1,3,4 Distinguish income and cash flows 45
Judgment Case 21–2 3,8 Distinguish income and cash flows 30
Research Case 21–3 3,4,5,6,7,8 Information from cash flow activities; FedEx 25
Trueblood Accounting Case
21–4
5,6 Presentation issues 40
Analysis Case 21–5 3,4 Smudged ink; find missing amounts 20
Real World Case 21–6 1–8 Analyze cash flow activities; Staples, Inc. 40
Ethics Case 21–7 1,3 Where’s the cash? 25
Analysis Case 21–8 3,4,5,6,7,8 Information from cash flow activities; Kroger 25
Research Case 21–9 4,5,6 FASB codification; locate and extract relevant
information and cite authoritative support for a
financial reporting issue; cash flow classification
25
IFRS Case 21–10 3,4,5,6,9 Statement of cash flows presentation, British
Telecommunications
25
Target Case 2,3,4,5,6,7 Statement of cash flows; Target 30
Air France–KLM Case 9IFRS; statement of cash flows; Air
France–KLM
30