CHAPTER 12
Statement of Cash Flows
Learning Objectives
1. Discuss the usefulness and format of the statement of cash flows.
2. Prepare a statement of cash flows using the indirect method.
3. Use the statement of cash flows to evaluate a company.
*4. Prepare a statement of cash flows using the direct method.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
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Questions
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Brief Exercises
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Do It! Exercises
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Exercises
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Problems: Set A
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Continuing Cookie Solutions for this chapter are available online.
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Distinguish among operating, investing, and financing
activities.
Simple
10–15
2A
Determine cash flow effects of changes in equity accounts.
Simple
10–15
3A
Prepare the operating activities section—indirect method.
Simple
20–30
*4A
Prepare the operating activities section—direct method.
Simple
20–30
5A
Prepare the operating activities section—indirect method.
Simple
20–30
*6A
Prepare the operating activities section—direct method.
Simple
20–30
7A
Prepare a statement of cash flows—indirect method, and
compute free cash flow.
Moderate
40–50
*8A
Prepare a statement of cash flows—direct method, and
compute free cash flow.
Moderate
40–50
9A
Prepare a statement of cash flows—indirect method.
Moderate
40–50
*10A
Prepare a statement of cash flows—direct method.
Moderate
40–50
11A
Prepare a statement of cash flows—indirect method.
Moderate
40–50
12A
Identify the impact of transactions on free cash flow.
Simple
10–15
ANSWERS TO QUESTIONS
1. (a) The statement of cash flows reports the cash receipts and cash payments from operating,
investing, and financing activities during a period in a format that reconciles the beginning
2. The statement of cash flows answers the following questions about cash: (a) Where did the cash
come from during the period? (b) What was the cash used for during the period? and (c) What
was the change in the cash balance during the period?
3. The three activities are:
Operating activities include the cash effects of transactions that create revenues and expenses
4. (a) The sources of cash (inflows) in the statement of cash flows come from:
(1) Operating activities
(2) Investing activities
(3) Financing activities
(b) The uses of cash (outflows) in the statement of cash flows come from:
(1) Operating activities
i. Payments to suppliers for inventory
(2) Investing activities
(3) Financing activities
i. Payment of cash dividends to stockholders
5. The statement of cash flows presents investing and financing activities so that even noncash
transactions of an investing and financing nature are disclosed in the financial statements. If they
6. Examples of significant noncash activities are: (1) issuance of stock for assets, (2) conversion of
7. Comparative balance sheets, a current income statement, and certain transaction data all provide
information necessary for preparation of the statement of cash flows. Comparative balance sheets
8. The advantage of the direct method is that it presents the major categories of cash receipts and
cash payments in a format that is similar to the income statement and familiar to statement users.
Its principal disadvantage is that the necessary data can be expensive and time-consuming to
9. When total cash inflows exceed total cash outflows, the excess is identified as a “net increase in
10. The indirect method involves converting accrual net income to net cash provided (used) by
operating activities. This is done by starting with accrual net income and adjusting for items that
11. It is necessary to convert accrual basis net income to cash basis income because the unadjusted
net income includes items that do not provide or use cash. An example would be an increase in
Questions Chapter 12 (Continued)
12. A number of factors could have caused an increase in cash despite the net loss. These are (1) high
cash revenues relative to low cash expenses; (2) sales of property, plant, and equipment; (3) sales
13. Student answers will vary, however the five items selected should come from the following list:
Depreciation/amortization/depletion expense.
14. Under the indirect method, depreciation is added back to net income to reconcile net income to net
15. The statement of cash flows is useful because it provides information to the investors, creditors,
and other users about: (1) the company’s ability to generate future cash flows, (2) the company’s
16. This transaction is reported in the note or schedule entitled “Noncash investing and financing
17. (a) The phases of the corporate life cycle are the introductory phase, growth phase, maturity
phase, and decline phase.
(b) During the introductory phase, net cash provided by operating and investing activities would
18. Apple has positive net cash provided by operating activities that exceeds its net income. Net
*19. Net cash provided (used) by operating activities under the direct approach is the difference
between cash revenues and cash expenses. The direct approach adjusts the revenues and
+ Decrease in accounts receivable
*20.
(a)
Cash receipts from customers = Revenues from sales
– Increase in accounts receivable
+ Increase in inventory
(b)
Purchases = Cost of goods sold
– Decrease in inventory
+ Decrease in accounts payable
Cash payments to suppliers = Purchases
– Increase in accounts payable
*21. Sales revenue ……………………………………………………………………………………………. $2,000,000
*22. Depreciation expense is not listed in the direct method operating activities section because it is
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 12-1
(a) Cash inflow from financing activity, $200,000.
(b) Cash outflow from investing activity, $180,000.
BRIEF EXERCISE 12-2
(a) Investing activity. (d) Operating activity.
BRIEF EXERCISE 12-3
Cash flows from financing activities
Proceeds from issuance of bonds payable …………………… $300,000)
BRIEF EXERCISE 12-4
Net cash provided by operating activities is $2,730,000. Using the indirect
approach, the solution is:
Net income ……………………………………………. $2,500,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
LO 2 BT: AP Difficulty: Medium TOT: 5 min. AACSB: Analytic AICPA FC: Reporting
BRIEF EXERCISE 12-5
Cash flows from operating activities
Net income ……………………………………………. $280,000
Adjustments to reconcile net income
BRIEF EXERCISE 12-6
Net income …………………………………………………… $186,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in accounts receivable ……………. $80,000)
BRIEF EXERCISE 12-7
Original cost of equipment sold ………………………………………….. $22,000
Less: Accumulated depreciation ……………………………………….. 5,100
Book value of equipment sold ……………………………………………. 16,900
BRIEF EXERCISE 12-8
(a) Net cash provided by operating activities would be lower than net
income during the growth phase because inventory must be purchased
for future projected sales. Since sales during the growth phase are
(b) Cash from investing is often positive during the late maturity phase
BRIEF EXERCISE 12-9
BRIEF EXERCISE 12-10
BRIEF EXERCISE 12-11
BRIEF EXERCISE 12-12
Free cash flow is net cash provided by operating activities less capital
expenditures and cash dividends paid. For Uhuru Inc. this would be
$332,000 ($734,000 – $310,000 – $92,000). Since it has positive free cash
flow that far exceeds its dividend, an increase in the dividend might be
*BRIEF EXERCISE 12-13
*BRIEF EXERCISE 12-14
+ Decrease in income taxes payable
Cash payment
for income taxes
=
Income Tax
Expense
– Increase in income taxes payable
*BRIEF EXERCISE 12-15
+ Increase in prepaid expenses
Cash
payments for
Operating
expenses,
– Decrease in prepaid expenses
SOLUTIONS TO DO IT! EXERCISES
DO IT! 12-1
(2) Operating activity
(4) Investing activity
DO IT! 12-2a
Cash flows from operating activities
Net income …………………………………………………………. $100,000
Adjustments to reconcile net income to net cash
provided by operating activities:
DO IT! 12-2b
ALEX COMPANY
Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income ………………………………………………………… $156,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ……………………………………. 40,000
Cash flows from investing activities
Sale of land ……………………………………………………….. 15,000
Sale of equipment ……………………………………………… 34,000
Purchase of equipment ………………………………………. (166,000)
LO 2 BT: AP Difficulty: Hard TOT: 15 min. AACSB: Analytic AICPA FC: Reporting
DO IT! 12-3
(b) Net cash provided by operating activities fails to take into account that
a company must invest in new plant assets just to maintain the current
SOLUTIONS TO EXERCISES
EXERCISE 12-1
(a) Noncash investing and financing activities.
(b) Financing activities.
(c) Noncash investing and financing activities.
EXERCISE 12-2
(a)
(b)
Operating activity.
Noncash investing and
(h)
(i)
Financing activity.
Operating activity.
EXERCISE 12-3
SOSA COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income ………………………………………………… $190,000
Adjustments to reconcile net income to net
cash provided by operating activities:
EXERCISE 12-4
SUNN INC.
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income ………………………………………………… $153,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense …………………………. $27,000)
EXERCISE 12-5
STAMOS CORPORATION
Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income …………………………………………………………. $284,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense …………………………………… $162,000
Increase in accounts receivable ……………………. (8,200)
Cash flows from investing activities
Sale of land ………………………………………………….. 35,000
Purchase of building …………………………………….. (289,000)
Net cash used by investing activities ………. (254,000)
EXERCISE 12-6
BEIBER CORP
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income ………………………………………………… $ 72,000)
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cash flows from investing activities
Sale of equipment ……………………………………… 25,000*
Cash flows from financing activities
Payment of cash dividends ………………………… (14,000)
LO 2 BT: AN Difficulty: High TOT: 10 min. AACSB: Analytic AICPA FC: Reporting