Chapter 11 – Statement of Cash Flows
Chapter 11
Statement of Cash Flows
REVIEW QUESTIONS
Question 11-1 (LO 11-1)
The three categories of cash flows are operating activities, investing activities, and financing
Question 11-2 (LO 11-1)
Question 11-3 (LO 11-1)
Noncash activities are investing and financing activities that do not result in the transfer of cash.
Examples of significant noncash investing and financing activities include:
Question 11-4 (LO 11-1)
The income statement provides important information in determining cash flows from operating
activities. The balance sheet provides changes in asset, liability, and stockholders’ equity accounting
Question 11-5 (LO 11-1)
The heading includes the company name, the title statement of cash flows, and the period
Question 11-6 (LO 11-1)
The four steps are to calculate net cash flows from operating activities using information from
the income statement and changes in current assets and current liabilities, determine the net cash
Chapter 11 – Statement of Cash Flows
Question 11-7 (LO 11-1)
Using the indirect method, we begin with net income and then list adjustments to net income in
order to arrive at operating cash flows. Using the direct method we adjust the items on the income
Question 11-8 (LO 11-2)
The most common adjustments to convert net income to net cash flows are adjustments for
Question 11-9 (LO 11-2)
It is possible to report a loss and still have positive operating cash flows. For example, if
Question 11–10 (LO 11-2)
Depreciation expense is an addition to net income in arriving at net operating cash flows.
Question 11-11 (LO 11-2)
We subtract a gain on sale of assets and add a loss on sale of assets to net income in arriving at
Question 11–12 (LO 11-2)
Question 11–13 (LO 11-2)
Question 11-14 (LO 11-3)
The purchase of land by issuing its own common stock is a noncash activity. Transactions like
Question 11-15 (LO 11-2, 11-3)
Question 11–16 (LO 11-3)
Question 11–17 (LO 11-4)
Return on assets has net income in the numerator while cash return on assets has cash flows from
Question 11-18 (LO 11-4)
Companies have two primary strategies for increasing their cash return on assets. One strategy,
Question 11-19 (LO 11-5)
Question 11–20 (LO 11-5)
Depreciation expense has no effect on cash flows. It is merely an allocation in the current period
Chapter 11 – Statement of Cash Flows
BRIEF EXERCISES
Brief Exercise 11-1 (LO 11-1)
1. Financing activity.
Brief Exercise 11-2 (LO 11-1)
Brief Exercise 11-3 (LO 11-2)
Investing activities
Net increase (decrease) in cash
Beginning cash balance
Ending cash balance
Brief Exercise 11-4 (LO 11-2)
Cash Flows from Operating Activities
Chapter 11 – Statement of Cash Flows
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation expense
Increase in accounts receivable
Brief Exercise 11-5 (LO 11-2)
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense
Increase in accounts payable
Increase in income tax payable
Brief Exercise 11-6 (LO 11-2)
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense
6
Loss (on sale of equipment)
2
Increase in accounts receivable
Increase in accounts payable
4
Brief Exercise 11-7 (LO 11-2)
Chapter 11 – Statement of Cash Flows
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation expense
6
Gain (on sale of land)
(2)
Decrease in accounts receivable
3
Decrease in inventory
5
Decrease in accounts payable
Brief Exercise 11-8 (LO 11-3)
Cash Flows from Investing Activities
Sale of investments
Sale of land
16
Purchase equipment
Chapter 11 – Statement of Cash Flows
Brief Exercise 11-9 (LO 11-3)
Brief Exercise 11-10 (LO 11-4)
Operating
Cash Flow
÷
Average
Total Assets
=
Cash Return
on Assets
60,000
÷
(500,000 + 800,000)/2
=
9.2%
÷
Average
Total Assets
=
÷
(500,000 + 800,000)/2
=
Brief Exercise 11-11 (LO 11-4)
Operating Cash Flow
=
0.25
(620,000 + 820,000)/2
Operating Cash Flow
*Brief Exercise 11-12 (LO 11-5)
Chapter 11 – Statement of Cash Flows
Net sales
$73
Cash received from customers
*Brief Exercise 11-13 (LO 11-5)
Cost of goods sold
$45
+ Increase in inventory
= Purchases
= Cash paid to suppliers
$43
*Brief Exercise 11-14 (LO 11-5)
Operating expenses
$985,000
+ Increase in prepaid rent
30,000
= Cash paid to suppliers
*Brief Exercise 11-15 (LO 11-5)
Income tax expense
$340,000
Cash paid for income taxes
Chapter 11 – Statement of Cash Flows
EXERCISES
Exercise 11-1 (LO 11-1, 11-2, 11-3, 11-4, 11-5)
Items
__e__ 1. Operating activities
__f__ 2. Investing activities
__d__ 3. Financing activities
__g__ 4. Noncash activities
__a__ 5. Indirect method
__h__ 6. Direct method
__b__ 7. Depreciation expense
__c__ 8. Cash return on assets
Descriptions
a. Begins with net income and then lists adjustments to net income in order to
arrive at operating cash flows.
b. Item included in net income, but excluded from net operating cash flows.
Exercise 11-2 (LO 11-1)
The $25,000 increase in notes payable should be properly recorded as an increase in
cash from financing activities. While most changes in current assets and current
liabilities are included in operating activities, borrowing money from a bank is clearly
a financing activity.
Exercise 11-3 (LO 11-1)
1. Investing activities
2. Operating activities
3. Operating activities
4. Financing activities
5. Operating activities
7. Investing activities
9. Operating activities
Chapter 11 – Statement of Cash Flows
Exercise 11-4 (LO 11-1)
1. Financing activities
2. Investing activities
3. Operating activities
4. Operating activities
5. Noncash activities
6. Financing activities
7. Investing activities
8. Operating activities
Exercise 11-5 (LO 11-1)
1. Investing activities, Operating activities (Gain on sale of land)
2. Financing activities
3. Investing activities
4. Operating activities
Exercise 11-6 (LO 11-1)
1. Investing activities
2. Investing activities
3. Financing activities
4. Financing activities
Chapter 11 – Statement of Cash Flows
Exercise 11-7 (LO 11-2, 11-3)
Technology Solutions
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash
flows from operating activities:
List of items adjusting net income to operating
cash flows
Net cash flows from operating activities
$$$
Cash Flows from Investing Activities
List of cash inflows and outflows from investing
activities
Net cash flows from investing activities
$$$
Cash Flows from Financing Activities
List of cash inflows and outflows from
financing activities
Net cash flows from financing activities
$$$
Net increase (decrease) in cash
$$$
Cash at the beginning of the period
$$$
Cash at the end of the period
$$$
Note: Noncash Activities
List of noncash transactions
$$$
Exercise 11-8 (LO 11-2)
Cash Flows from Operating Activities
Net income
$165,000
Adjustments to reconcile net income to net cash
flows from operating activities:
Gain (on sale of land)
Increase in accounts receivable
Exercise 11-9 (LO 11-2)
Cash Flows from Operating Activities
Net income
$65,000
Adjustments to reconcile net income to net cash
flows from operating activities:
Loss (on sale of land)
Decrease in accounts receivable
Decrease in inventory
Increase in accounts payable
Exercise 11-10 (LO 11-2, 11-3)
Plasma Screens Corporation
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Net income
$ 79,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Payment of cash dividends
Net increase (decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
Chapter 11 – Statement of Cash Flows
Exercise 11-11 (LO 11-2)
Peach Computer
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Net income
$130,000
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation expense
60,000
Decrease in accounts receivable
Decrease in prepaid rent
Increase in accounts payable
Decrease in income tax payable
(9,000)
Exercise 11-12 (LO 11-4)
1.
÷
=
2.
($ in millions)
÷
Average
Total Assets
=
3.
($ in millions)
Operating
Cash Flows
÷
Net Sales
=
Cash Flow
to Sales
÷
=
($ in millions)
Net Sales
÷
Average
Total Assets
=
Asset
Turnover
÷
=
Chapter 11 – Statement of Cash Flows
*Exercise 11-13 (LO 11-5)
Peach Computer
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Cash received from customers
$2,058,000
Net sales
$2,050,000
+ Decrease in accounts receivable
8,000
= Cash received from customers
$2,058,000
+ Increase in inventory
= Purchases
= Cash paid to suppliers
Operating expenses
= Cash paid for operating expenses
Income tax expense
9,000
= Cash paid for income taxes
Chapter 11 – Statement of Cash Flows
*Exercise 11-14 (LO 11-5)
Net sales
$3,200,000
− Increase in accounts receivable
(55,000)
= Cash received from customers
$3,145,000
Cost of goods sold
$2,000,000
= Purchases
= Cash paid to suppliers
Income tax expense
= Cash paid for income taxes
*Exercise 11-15 (LO 11-5)
1.
($ in millions)
= Cash received from customers
2.
Cost of goods sold
$69,278
+ Increase in inventory
883
= Purchases
+ Decrease in accounts payable
= Cash paid to suppliers
$72,128