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
income is an important measure of management performance, but it
takes cash to pay the bills. Also, a manager’s performance should be
evaluated on how well he or she uses cash. This information is given in
the statement of cash flows.
Student responses may vary.
(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
3. Increases rather than decreases in current liabilities
(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.
The cash-flow data paint a similar picture. Operating activities used
cash, which is bad news. Over the long run, operations should provide
the bulk of the cash if the business expects to succeed.
(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 ………………………………………………
Gain on sale of land …………………………………………………
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
O+
j.
O−
c.
Gain on sale of
expense
building
N
k.
Collection of cash
O+
d.
Loss on sale of land
from customers
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
net cash provided by operating activities:
Depreciation expense ………………………………
$5,000
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 ……………………………….
$5,000
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.
$180,000
+
X
−
$40,000
−
$0
=
$226,000
X
=
$226,000 − $180,000 + $40,000
X
=
$86,000
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
$71,000
+
0
−
X
=
$52,000
=
=
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.
End. bal.
(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
+
−
=
=
=
(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
770,000
Collections
759,000
End. Bal.
56,000
b. Payments for inventory = $283,000, as follows:
Payments for
inventory
Decrease in
Inventory
Increase in
Accounts Payable
=
COGS
−
−
=
Inventory
Beg. Bal.
87,000
Purchases
294,000
COGS
310,000
End. Bal.
71,000
Accounts Payable
(10-15 min.) S 12-12
a. Payments to employees = $46,000, as follows:
Payments to
=
Salary
−
Increase in
employees
Expense
Salary Payable
=
$50,000
−
$4,000
($30,000 − $26,000)
=
$46,000
Salary Payable
Beg. bal.
Salary expense
End. bal.
b. Payments for other expenses = $144,000, as follows:
Payments
of other
=
Other
Expenses
Increase in
Decrease in
=
+
Prepaid
+
Accrued
(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 ……….
(410,000)
Net cash provided by operating activities …..
$160,000
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 …………………………………
(74,000)
Payment of income tax …………………………………..
(15,000)
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 ………..
Cash flows from financing activities:
Proceeds from issuance of common stock ……..
Payment of note payable ………………………………..
Payment of dividends …………………………………….
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+
b.
Increase in salary payable
O–
l.
Increase in prepaid
I+
c.
Cash sale of land
expenses
I+
d.
Sale of long-term
O–
m.
Decrease in accrued
investment
liabilities
e.
Acquisition of building by
n.
Loss on sale of equipment
cash payment
o.
Decrease in accounts
Net income
receivable
F+
g.
Issuance of common stock
p.
Depreciation on equipment
for cash
q.
Increase in accounts
h.
Payment of cash dividend
payable
NIF
i.
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
c.
Financing
j.
Investing
d.
Operating
k.
Operating
e.
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 …………………………
$ 17,000
Loss on sale of land …………………………...
27,000
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.
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 accounts receivable ………………
(104,000)
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
is that accounts payable have increased substantially, indicating that
Wisconsin Trading Post may have trouble paying off its creditors.