Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 12
Company Analysis — AA 12-1 (15 minutes)
1. Indirect Method
Explanation: We readily know this because the operating activity section of
2. Apple’s cash flows from operating activities and cash dividends paid are
shown in the table below.
3. Yes, Apple has Sufficient Cash from Operations for Dividends
4. More Cash Spent toward Repurchase of Common Stock
Explanation: In 2017, Apple reported a $32,900 million cash outflow for
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 12
Comparative Analysis — AA 12-2 (25 minutes)
1. Apple’s cash flow on total assets ratio ($ millions)
Current Year = Operating cash flows/Average total assets
= $63,598 / [($375,319 + $321,686)/2]
= $63,598 / $348,503 = 18.2%
2. Google
3. a. Outperform
Explanation: In the current year, Apple has a higher cash flow on total
assets ratio than the industry average—see part 1 results.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 12
Global Analysis — AA 12–3 (35 minutes)
1. Samsung’s cash flow on total assets ratio follows (in KRW millions).
Current Year = Operating cash flows / Average total assets
2. Favorable
3. a. Better than Apple
Explanation: Samsung’s cash flow on total assets ratio is better than
Apple’s ratio of 18.2%. (Computations in AA 12-2)
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Ethics Challenge — BTN 12-1
1. The business actions available include
a. Encourage early collection of receivables to reduce the accounts
receivable balance.
2. As a business owner, Katie Murphy certainly can exercise discretion over
business actions. However, the underlying economic realities should
support any proposed actions. It is not ethical to pursue actions that
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 12
Communicating in Practice — BTN 12-2
Here is a sample of what the body of the memorandum might include:
TO: Diana Wood
FROM: (Your Name)
SUBJECT: Statement of Cash Flows
DATE: _________________
I am pleased to hear your business is more profitable this year than last.
However, I have been thinking about what you said regarding the statement of
cash flows and have some thoughts as to why you found it confusing.
The statement of cash flows (operating section) can be prepared using either
I recommend that you request your accountant to provide you with a
statement of cash flows that is prepared using the direct method. This will
identify exactly how much cash came in from operating activities like sales. It
will also identify exactly how much cash went out for operating expenses like
inventory, wages, interest, and taxes. It will determine your net operating
cash flow by directly subtracting the total of these operating outflows from the
inflows. You should find this format more understandable.
Note that good cash management is essential to business success and
growth. The statement of cash flows will provide you with a lot more
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Taking It to the Net — BTN 12-3
1. Mendocino Brewing Company uses the indirect method to construct the
consolidated statement of cash flows.
3. The following table shows the net income (or net loss) and the cash flows
from operations for Mendocino Brewing for 2014 and 2015. Over this two-
year period, Mendocino has generated consistently positive cash flows
4. For the recent period, the largest cash outflow for investing was $642,400
5. In the recent period, for supplementary cash flow information, the company
reports cash flows related to: Interest paid and Income taxes paid.
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Teamwork in Action — BTN 12-4
Part 1
a. The reporting objective of the statement of cash flows is to provide
information about important cash inflows and outflows for business
decision makers. It answers specific questions such as:
b. The statement can be prepared using the direct method or the indirect
method for reporting cash flows from operating activities.
Similarities
• Both methods report the same net cash flow from operating activities.
Differences
• Cash flow from operating activities is determined differently. The direct
method determines all operating cash inflows and outflows, and then
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Teamwork in Action (Continued)
c. Steps to prepare the statement of cash flows:
(i) Compute the net increase or decrease in cash using comparative
d. Common analyses made from information in the statement of cash flows
include assessing a company’s:
• Ability to generate future cash flows.
Part 2
Adjusting Net Income to Cash Flow from Operating Activities
Items to Add
Items to Subtract
a.
Noncash expenses
Noncash revenues
c.
Decreases in current assets
Increases in current assets
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Teamwork in Action (Concluded)
Part 3
a. Cash receipts from customers = Sales – Increase in Accounts Receivable,
b. Cash paid for inventory requires a two-step computation.
(1) Purchases = Cost of goods sold + Increase in inventory, or, – Decrease
Explanation for (1): If inventory increases, the entity bought more than was
c. Cash paid for wages and operating expenses = Wages and other operating
expenses [+ Increase in prepaid expenses, or, – Decrease in prepaid
expenses] and [+ Decrease in accrued liabilities, or, – Increase in accrued
liabilities].
Explanation: If prepaid expenses increase, the entity paid for more than
was incurred, so we add it. If prepaid expenses decrease, the entity paid
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, – Increase in related payable.
Explanation: If the related payable decreases, the entity paid for more than
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Entrepreneurial Decision — BTN 12-5
1. It is common for businesses to pay cash in advance for items such as rent,
advertising, supplies, and facilities expansion. Consequently, those costs are
2. It can potentially raise cash financing for expansion by selling shares in the
company or by borrowing money. Moreover, potential lenders will want to
evaluate the future profitability, cash flows, and solvency of the company
before lending money.
Entrepreneurial Decision — BTN 12-6
Memorandum
To: Jenna and Matt Wilder
From: Your name
Subject: Performance evaluation of Mountain High
Date: Current Date
I have completed my evaluation of your company, Mountain High. My conclusion
is that Mountain High is performing well. This is in spite of its reported net loss
and its negative net cash flow, which I explain in this memorandum.
First, with respect to the net loss, please note that it includes an $85,000 unusual
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 12
Hitting the Road — BTN 12-7
1. The Motley Fool’s Website defines cash flow as earnings before interest,
taxes, depreciation, and amortization (EBITDA). The justification for this
definition includes: “Interest income and expense, as well as taxes, are all tossed
aside because cash flow is designed to focus on the operating business and not
2. Some analysts tend to focus on this particular earnings definition
(earnings before interest and taxes or EBIT) as it purportedly allows a
3. Answer depends on the links visited and chosen for the report.
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