Problem 21–21 (continued)
INCOME STATEMENT ACCOUNTS
Sales Investment Revenue
________________________ ________________________________
Gain on Sale of Treasury Bills Cost of Goods Sold
________________________ ________________________________
Salaries Expense Depreciation Expense
________________________ ________________________________
Problem 21–21 (continued)
Patent Amortization Expense
________________________
2__________
(7) 2
Insurance Expense Bond Interest Expense
________________________ ________________________________
Income Tax Expense Loss on Machine Damage
________________________ ________________________________
Net Income (Income Summary)
________________________
67
(12) 67
Problem 21–21 (concluded)
ARDUOUS COMPANY
Statement of Cash Flows
For year ended December 31, 2018 ($ in millions)
Cash flows from operating activities:
Cash inflows:
From customers $414
From investment revenue 3
Cash flows from investing activities:
Sale of machine components 17
Cash flows from financing activities:
Payment on lease liability (7)
Net increase in cash 28
Noncash investing and financing activities:
Acquired $82 million building by 15-year lease.
Communication Case 21–1
Memorandum
To: Mr. Robert James
From: Your Name
Date: Current Date
RE: Discrepancy between profitability and cash flows
Our operating results for the first half of the year demonstrate that it is possible
for operating activities to simultaneously produce a positive net income and
negative net cash flows. Net income was $5 million. Cash flow from operating
activities for the period was negative $16 million.
Generally accepted accounting principles permit us to report cash flows by either
of two methods—the direct or the indirect approach as follows:
($ in millions)
[Direct Method]
Cash flows from operating activities:
Cash inflows:
From customers ($75 – 20) $55
Cases
Case 21–1 (concluded)
[Indirect Method]
Cash flows from operating activities:
Net income $ 5
Adjustments for noncash effects:
Depreciation expense 5
The reason for the apparent discrepancy between cash flows and net income is
due to the way the two items are measured. Net income (or loss) is the result of
combining the revenues earned during the reporting period, regardless of when
Let me know if I can provide you additional details.
Judgment Case 21–2
DARING COMPANY
Statement of Cash Flows
For year ended December 31, 2018 ($ in 000s)
Cash flows from operating activities:
Cash inflows:
From customers ($100 – 25) $75
Cash outflows:
Cash flows from investing activities:
Cash flows from financing activities:
Your concerns are justified in the sense that cash flows are insufficient to
cover existing interest charges, not to mention additional charges from new debt.
In fact, the principal on the debt of $45,000 will come due shortly in addition to
Case 21–2 (concluded)
On the other hand, the negative cash flow from operations is not reason, in
and of itself, for rejecting the application. Profit is positive. The reason net
income is measured on an accrual basis rather than a cash basis is that very often,
net income is a better indication of performance, particularly long-term
The bottom line is that additional information is needed. One cause of the
negative operating cash flows is the acquisition of a large amount of inventory that
is unsold. If product demand is strong, this is favorable. Why are those
inventories unsold? What is the projected growth rate in revenues? Another
Research Case 21–3
Requirement 1
FedEx is expanding its business as evidenced by the investing activities.
External financing need not be sufficient to fund those investments because of
Requirement 2
The six activities listed under financing activities are:
($ in millions):
Financing Activities 2015 2014 2013
Principal payments on debt (5) (254) (417)
Proceeds from debt issuances 2,491 1,997 1,739
The statement tells us that FedEx borrowed much more cash in all three years
Case 21–3 (concluded)
Requirement 3
Companies are required to separately disclose cash payments for both interest
and income taxes. When the direct method is used to report operating activities,
Note 15: Supplemental Cash Flow Information
Cash paid for interest expense and income taxes for the years ended May 31 was
as follows:
In thousands 2015 2014 2013
Requirement 4
The specific citation that specifies the way FedEx reports interest and income
Trueblood Accounting Case 19–4
A solution and extensive discussion materials accompany each case in the Deloitte
& Touche Trueblood Case Study Series. These are available to instructors at:
www.deloitte.com/us/truebloodcases.