Chapter 12
The Statement of Cash Flows
Ethics Check
(5-10 min.) EC 12-1
a. Integrity
b. Due care
c. Objectivity and independence
d. Integrity
Short Exercises
(10 min.) S 12-1
The statement of cash flows helps investors and creditors:
a. Predict future cash flows by reporting past cash receipts and
payments, which are reasonably good predictors of future cash
receipts and payments.
(10-15 min.) S 12-2
DATE: _______________
TO: Managers of Sowell Enterprises, Inc.
FROM: Student Name
SUBJECT: Purposes of the statement of cash flows
The statement of cash flows is designed to help predict the future cash
flows of a business. The statement of cash flows measures past cash
flows, which are a reasonably good predictor of future cash flows. Net
In evaluating the ability to repay a loan, a creditor examines the
statement of cash flows to learn how the borrower has gained and spent
cash. As Sowell’s situation indicates, income may increase while cash
decreases. Therefore, the statement of cash flows should be used in
(5-10 min) S 12-3
Three things that could cause operating cash flows to be positive (under
the indirect method) are:
1. Increase in net income
2. Decreases rather than increases in current assets other than cash
(15-30 min.) S 12-4
DATE: _______________
TO: Managers of Jolson Hotels, Inc.
FROM: Student Name
SUBJECT: Assessment of 2016 and Outlook for the Future
2016 was not a good year. Most of the increase in net income resulted
from the gain on the insurance proceeds from fire damage to a building,
which means that normal operations were not very profitable. This is
confirmed by the increase in receivables, which hints that collections
are lagging.
(continued) S 12-4
Financing activities provided a net cash inflow, which is normal.
However, if the cash provided by financing activities is from debt, the
additional debt could be difficult to repay since operating activities did
not generate cash.
(5-10 min.) S 12-5
Cash flows from operating activities:
Net income ………………………………………………………………….
$21,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ………………………………………………
5,000
Gain on sale of land …………………………………………………
(3,000)
Increase in accounts receivable, inventory,
Net cash provided by operating activities ……………………..
$17,000
(10 min.) S 12-6
O+
a.
Increase in accounts
O−
h.
payable
O+
b.
Decrease in accounts
O+
i.
receivable
j.
O−
c.
Gain on sale of
building
N
k.
Collection of cash
O+
d.
Loss on sale of land
O+
e.
Depreciation expense
I
l.
Purchase of
F
g.
Issuance of common
stock
F
n.
Payment of dividends
(10 min.) S 12-7
Williams Corporation
Statement of Cash Flows (partial)
Year ended June 30, 2016
Cash flows from operating activities:
Net income ………………………………………………….
$70,000*
Adjustments to reconcile net income to
Depreciation expense ………………………………
Increase in current assets other than
cash ……………………………………………………
Increase in current liabilities …………………….
Net cash provided by operating activities ……..
(15 min.) S 12-8
Williams Corporation
Statement of Cash Flows
Year ended June 30, 2016
Cash flows from operating activities:
Net income …………………………………………………..
$ 70,000*
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ……………………………….
Increase in current assets other than
cash …………………………………………………….
Increase in current liabilities …………………….
(14,000)
Net cash provided by operating activities ………
Cash flows from investing activities:
Purchase of equipment …………………………………
$(42,000)
Proceeds from sale of land …………………………...
27,000
Net cash used for investing activities…………….
(15,000)
Cash flows from financing activities:
Proceeds from issuance of common stock …….
$ 18,000
Payment of note payable ………………………………
(30,000)
Payment of dividends …………………………………..
Purchase of treasury stock …………………………..
Net cash used for financing activities ……………
Net increase in cash …………………………………………
(10 min) S 12-9
a. Acquisitions of plant assets = $86,000, as follows:
Plant Assets, net
Beg.
+
Acquisitions
−
Depreciation
−
Book value of
=
End.
bal.
assets sold
bal.
+
=
=
=
Plant Assets, net
Beg. bal.
180,000
b. Proceeds from the sale of long-term investments = $19,000, as
follows:
Long-term investments
Beg. bal.
+
Purchases
−
Book value of
=
End. bal.
investments sold
With no gain or loss, proceeds from the sale must be the same as the
book value of the investments sold, $19,000.
Long-Term Investments
Beg. bal.
71,000
Book value of
End. bal.
52,000
(15 min.) S 12–10
a. New borrowing on long-term notes payable = $11,000 ($64,000 −
$53,000)
b. Issuance of common stock = $11,000 ($41,000 − $30,000)
c. Payment (and declaration) of dividends = $238,000, as follows:
Beginning
Net
income
Dividend
declarations
Ending
Retained
+
−
=
Retained
Earnings
Earnings
$239,000
+
$230,000
−
X
=
$231,000
=
=
Retained Earnings
Beg. bal.
239,000
End. bal.
Dividends declared
Net income
230,000
(15 min.) S 12-11
a. Collections from customers = $759,000, as follows:
Collections
=
Service
−
Increase in Accounts Receivable
from customers
Revenue
=
−
=
Accounts Receivable
Beg. Bal.
45,000
Revenue
End. Bal.
56,000
b. Payments for inventory = $283,000, as follows:
Payments for
inventory
Decrease in
Inventory
Increase in
Accounts Payable
=
COGS
−
−
=
$310,000
−
$16,000
−
$11,000
=
Inventory
Beg. Bal.
87,000
End. Bal.
71,000
Accounts Payable
Payments for
Beg. bal.
42,000
Inventory
Purchases
(10-15 min.) S 12-12
a. Payments to employees = $46,000, as follows:
Payments to
=
Salary
−
Increase in
employees
Expense
Salary Payable
Salary Payable
Payments to
Beg. bal.
26,000
Employees
Salary expense
50,000
End. bal.
b. Payments for other expenses = $144,000, as follows:
Payments
of other
expenses
Other
Expenses
Increase in
Decrease in
=
+
Prepaid
+
Accrued
Expenses
Liabilities
=
(15 min.) S 12–13
Laughlin Horse Farms, Inc.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Collections from customers ……………………….
$ 570,000
Payments to suppliers and employees ……….
Net cash provided by operating activities …..
Cash flows from investing activities:
Purchase of equipment ……………………………..
Net cash used for investing activities …………
Cash flows from financing activities:
Issued note payable to borrow money ………..
$ 24,000
Payment of dividends ………………………………..
Net cash used for financing activities …………
Net increase in cash ………………………………………
Cash balance, beginning ……………………………….
Cash balance, ending …………………………………….
(5 min.) S 12-14
Mulberry Golf Club, Inc.
Statement of Cash Flows (partial)
Year ended September 30, 2016
Cash flows from operating activities:
Collections from customers …………………………...
$ 202,000
Payments to suppliers ……………………………………
(111,000)
Payments to employees …………………………………
Payment of income tax …………………………………..
Net cash provided by operating activities ………..
(15 min.) S 12-15
Mulberry Golf Club, Inc.
Statement of Cash Flows
Year ended September 30, 2016
Cash flows from operating activities:
Collections from customers …………………………...
$ 202,000
Payments to suppliers ……………………………………
(111,000)
Payments to employees …………………………………
Payment of income tax …………………………………..
Net cash provided by operating activities ……….
$ 2,000
Cash flows from investing activities:
Purchase of equipment ………………………………….
Proceeds from sale of land …………………………....
Net cash provided by investing activities ………..
19,000
Cash flows from financing activities:
Proceeds from issuance of common stock ……..
$ 17,000
Payment of note payable ………………………………..
(23,000)
Payment of dividends …………………………………….
(7,500)
Purchase of treasury stock …………………………….
Net cash used for financing activities ……………..
(19,000)
Net increase in cash …………………………………………..
Exercises
(10-15 min.) E 12-16A
F–
a.
Payment of long-term
F+
k.
Issuance of long-term
debt
note payable to borrow
cash
O+
Increase in salary payable
Increase in prepaid
c.
Cash sale of land
expenses
d.
Sale of long-term
Decrease in accrued
investment
liabilities
e.
Acquisition of building by
Loss on sale of equipment
cash payment
Decrease in accounts
Net income
receivable
F+
g.
Issuance of common stock
Depreciation on equipment
for cash
Increase in accounts
h.
Payment of cash dividend
payable
NIF
Acquisition of equipment
Amortization of intangible
by issuance of note
assets
payable
s.
Purchase of treasury stock
j.
Purchase of long-term
investment with cash
(5-10 min.) E 12-17A
a.
Investing
h.
Financing
b.
Financing
i.
Financing
Financing
j.
Investing
d.
Operating
k.
Operating
Operating
l.
Operating
financing
g.
Investing
(10-15 min.) E 12-18A
Cash flows from operating activities:
Net income ……………………………………………….
$40,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense …………………………
Decrease in current assets other
than cash …………………………………………
Decrease in current liabilities ………………
Net cash provided by operating activities …..
Operating cash flow is strong, as shown by the positive net cash flows
from operating activities. Normally, net cash provided by operations is
greater than net income because of the depreciation add-back.
(15-20 min.) E 12-19A
Cash flows from operating activities:
Net income …………………………………………………..
$ 10,000
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation expense ……………………………..
$ 2,000
Increase in inventory …………………………..….
(100,000)
Increase in accounts payable ………………….
103,000
Decrease in accrued liabilities …………………
Net cash used by operating
activities ………………………………………………………..
Wisconsin Trading Post Company apparently has trouble collecting
receivables and selling inventory because these two accounts increased
significantly during the year. Another troublesome sign for the company