Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 12
Chapter 12
Reporting Cash Flows
QUESTIONS
1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and
cash payments (outflows) during a period. It helps users to answer questions such as:
• How does a company obtain its cash?
• Where does a company spend its cash?
• What explains the change in the cash balance?
2. On a statement of cash flows, investing activities include cash outflows from purchases
of long-term investments such as stocks and bonds, from purchases of plant assets
such as land, buildings, and machinery, and from purchases of other noncurrent assets
such as natural resources and intangible assets. When these types of assets are sold,
the cash inflows from the sales are also reported as investing activities.
3. On a statement of cash flows, financing activities include cash inflows such as those
that result from issuing preferred or common stock, and from borrowing by issuing
bonds or signing long-term or short-term notes payable. Financing activities also
include cash outflows such as dividend payments to stockholders, purchases of
treasury stock, and repayments of debt.
4. The direct method of reporting cash flows from operating activities itemizes the major
classes of cash receipts such as sales to customers, and also itemizes the major
classes of cash payments such as for inventory, interest, taxes, and other operating
expenses.
9. Since this cash inflow results from borrowing money, it is reported on the statement of
cash flows as a financing activity.
10. Yes; even though a company reports positive net income for the year, it may still show a
net cash outflow from operating activities. When net income is reconciled to the net
cash flow from operating activities, the net effect of all the adjustment items may be a
subtraction from net income (examples of such adjustments are accrued revenues,
prepaid expenses, and other gains). If the amount of this net subtraction is larger than
the net income, the result is net cash used by operating activities.
11. Depreciation is not a source or a use of cash, even though it must be added to net
income when the net cash flow from operating activities is calculated by the indirect
method. (Note: When depreciation is deducted on the tax return of a corporation, the
effect is to reduce taxable income and reduce the cash outflow for income taxes.)
15. Samsung’s investing activities yielding cash outflows and inflows follow. Its cash
outflows are listed in parentheses (₩ millions):
Net decrease (increase) in short-term financial instruments …………………………... ₩ 387,627
Disposal of short-term available-for-sale financial assets ………………………………. 499,856
Acquisition of short-term available-for-sale financial assets ………………………….. –
Disposal of long-term financial instruments…………………………………………………… 1,750,221
Acquisition of long-term financial instruments ………………………………………………. (1,079,355)
Disposal of long-term available-for-sale financial assets ……………………………….. 191,826
Acquisition of long-term available-for-sale financial assets ……………………………. (358,497)
Acquisition of held-to-maturity financial assets …………………………………………….. (106,751)
QUICK STUDIES
Quick Study 12-1 (10 minutes)
1. (I) Investing 6. (F) Financing
2. (O) Operating 7. (O) Operating
Quick Study 12-2 (20 minutes)
Statement of cash flow items in sequential order 1 through 13 on left OR
textbook order on right:
1.
d
8.
k
a.
h.
2.
f
9.
j
b.
3.
b
10.
g
c.
4.
c
11.
i
d.
k.
5.
h
12.
m
13
e.
6.
a
13.
e
7.
l
10
g.
Quick Study 12-3 (10 minutes)
Cash Flows from Operating Activities (Indirect)
Net Income ……………………………………………………………….
$20,000
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Quick Study 12-4 (10 minutes)
Cash Flows from Operating Activities (Indirect)
Net Income ……………………………………………………………….
$15,000
Adjustments to reconcile net income to net cash
provided by operating activities
Changes in current assets and liabilities
Change in accounts receivable ………………………………..
(6,000)
Change in inventory ………………………………………………..
8,000
Change in prepaid insurance …………………………………..
1,000
Change in accounts payable ……………………………………
3,000
Change in taxes payable …………………………………………
Quick Study 12-5 (20 minutes)
Cash Flows from Operating Activities (Indirect)
Twix
Dots
Skor
Net Income ……………………………………………………..
$ 4,000
$100,000
$72,000
Adjustments to reconcile net income to net
cash provided by operating activities
Income statement items not affecting cash
Depreciation expense ……………………………………
30,000
8,000
24,000
Changes in current assets and liabilities
Change in accounts receivable ………………………
Change in inventories ……………………………………
20,000
(10,000)
Change in accounts payable ………………………….
14,000
Change in accrued liabilities ………………………….
Quick Study 12-6 (15 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………….
$18,200
Adjustments to reconcile net income to operating cash flow
Income statement items not affecting cash
Depreciation expense ……………………………………………………
$36,000
Changes in current operating assets and liabilities
Accounts receivable decrease ………………………………………
Inventory increase ……………………………………………………….
Accounts payable increase …………………………………………..
Quick Study 12-7 (15 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………….
$30,000
Adjustments to reconcile net income to operating cash flow
Income statement items not affecting cash
Depreciation expense …………………………………………………..
$37,600
Changes in current operating assets and liabilities
Accounts receivable decrease ………………………………………
10,000
Inventory decrease ……………………………………………………….
10,000
Prepaid expense increase …………………………..………………..
(1,200)
Accounts payable decrease ………………………………………….
(6,000)
Wages payable increase …………………………..…………………..
Quick Study 12-8 (10 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given) …………………………………………………
$52,500
Accumulated depreciation at end of prior year (given) ……………
$110,700
Increase from depreciation expense (given) …………………………..
18,000
Actual accumulated depreciation at end of current yr (given) …
(88,700)
Accumulated depreciation on sold furniture ……………………….
Cash received from sale of furniture at book value ……………..
$12,500
Quick Study 12-9 (10 minutes)
a. Increase of $8,000. The cost, accumulated depreciation, and resulting loss
do not affect investing cash flows. Only cash received of $8,000 affects
investing cash flows.
Quick Study 12–10 (10 minutes)
1. Reconstructed journal entry for equipment sale:
Cash ………………………………………………………………………. 37,000
Loss on Sale of Equipment……………………………………… 3,000
Accumulated Depreciation—Equipment ………………….. 170,000
Equipment ………………………………………………………. 210,000
Record sale of equipment.
Company received $37,000 cash from sale.
2. We reconstruct the T-account for Accumulated Depreciation—Equipment
to determine its Depreciation Expense of $60,000.
Accumulated Depreciation—Equipment
Bal., 2018
Depr. Expense
Bal., 2019
3. We reconstruct the T-account for Equipment to determine its purchases of
equipment of $120,000.
Equipment
Bal., 2018
270,000
Purchases
120,000
Sale 210,000
Bal., 2019
180,000
Quick Study 12–11 (10 minutes)
1. Reconstructed journal entry for building sale:
Cash ……………………………………………………………………. 130,000
Accumulated Depreciation— Building …………………… 230,000
Gain on Sale of Building ………………………………… 60,000
Building ………………………………………………………… 300,000
Record sale of building.
Company received $130,000 cash from sale.
2. We reconstruct the T-account for Accumulated Depreciation—Building to
determine its Depreciation Expense of $45,000.
3. We reconstruct the T-account for Building to determine its purchases of
buildings of $280,000.
Quick Study 12–12 (15 minutes)
Investing Activities
Cash purchase of used equipment ……………………………………………………
$(5,000)
Sale of short-term stock investments ………………………………………………..
6,000
Cash provided by investing activities ……………………………………………….
$ 1,000
Quick Study 12–13 (15 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given) …………………………..………………
$55,000
Accumulated depreciation at beginning of year (given) ……….
$ 9,000
Increase from depreciation expense (given) ………………………..
37,600
Actual accumulated depreciation at end of year (given) ………
(17,000)
Accumulated depreciation on sold furniture ……………………….
Cash received from sale of furniture at book value ……………..
$25,400
Quick Study 12–14 (10 minutes)
a. Decrease of $16,000. The carrying value and gain do not affect financing
cash flows. Only cash paid of $16,000 affects financing cash flows.
b. Decrease of $11,000. Cash dividends paid reduce financing cash flows.
c. No effect. No cash is received or paid. This transaction is reported at the
bottom of the statement of cash flows or in a note to the statement.
Quick Study 12–15 (10 minutes)
Part 1
Computation of cash received from the sale of common stock
Increase in Common stock ($105,000 – $100,000) …………………………….
$ 5,000
Increase in Paid-in capital in excess of par ($567,000-$342,000) ………
225,000
Cash received from the sale of common stock ……………………………..
$230,000
$287,500
48,000
Total “expected” retained earnings……………………………………………………
(313,500)
Cash paid for dividends …………………………………………………………………….
$ 22,000
Quick Study 12-16 (15 minutes)
Financing Activities
Cash received from short-term note payable ……………………………………..
$20,000
Cash dividends paid …………………………………………………………………………
(16,000)
Cash provided by financing activities ……………………………………………….
$ 4,000
Quick Study 12-17 (15 minutes)
1. Computation of cash paid for dividends
Beginning retained earnings ……………………………………..
$ 8,400
Net income ……………………………………………………………….
30,000
Total “expected” retained earnings…………………………...
38,400
Actual ending retained earnings ………………………………..
(35,600)
Decrease from (cash paid for) dividends ……………………
$ 2,800
2. Computation of cash payments for notes
Beginning notes payable …………………………………………..
$69,000
Increases to notes (given) …………………………………………
0
Total “expected” notes payable …………………………………
69,000
Actual ending notes payable ……………………………………..
(29,000)
Decrease from (cash) payments toward notes …………..
$40,000
Quick Study 12–18 (20 minutes)
VPI CO.
Statement of Cash Flows (Indirect Method)
For Current Year Ended December 31
Cash flows from operating activities
Net income …………………………………………………………………………
$23,000
Adjustments to reconcile net income to net cash provided
by operating activities
Income statement items not affecting cash
Depreciation expense ……………………………………………………….
$ 4,000
Gain on sale of machinery ………………………………………………..
(2,000)
Changes in current operating assets and liabilities
Decrease in accounts receivable ………………………………………
3,000
Increase in inventory ……………………………………………………….
(5,000)
Increase in accounts payable ……………………………………………
1,500
Net cash provided by operating activities …………………………..
$24,500
Cash flows from investing activities
Cash received from sale of machinery …………………………..
Cash flows from financing activities
Cash received from issuing stock ………………………………………
Cash paid for dividends ……………………………………………………..
Net cash provided by financing activities …………………………..
Net increase in cash ……………………………………………………….
Cash balance at prior year-end ……………………………………………..
Quick Study 12-19 (10 minutes)
1. High to Low: Mancala, $70,000; Yahtzee, $60,000; and Cluedo, $(24,000).
2. Yahtzee has the largest cash outflow for investing activities of $(34,000).
3. Cluedo has the largest cash inflow from financing activities of $23,000.
4. Yahtzee’s cash flow on total assets ratio is slightly stronger than that for
Quick Study 12–21B (10 minutes)
Cash Receipts from Operations (Direct)
Sales revenue ………………………………………………
$30,000
Interest revenue ……………………………………………
5,000
Decrease in accounts receivable …………………..
4,000
Increase in interest receivable ………………………
(1,000)
Cash provided by operating activities ……………….
$38,000
Quick Study 12–22B (10 minutes)
Cash Payments to Suppliers (Direct)
Cost of goods sold …………………………..…………..
$42,000
Decrease in inventory …………………………………..
Increase in accounts payable ……………………….
(5,000)
Cash paid for inventory ……………………………………
$30,000
Quick Study 12–23B (10 minutes)
Cash Payments for Operations (Direct)
Operating expenses ……………………………………..
$27,000
Decrease in accrued liabilities ………………………
6,000
Increase in prepaid expenses ……………………….
2,000
Cash used in operating activities ……………………..
$35,000
Quick Study 12–24B (15 minutes)
Case A:
Interest revenue ………………………………………………..
$5,000
Interest receivable, beginning of year ………………..
$ 600
Interest receivable, end of year………………………….
(1,700)
Less increase in interest receivable …………………..
(1,100)
Cash interest received† ……………………………………..
$3,900
Case B:
Wages expense ………………………………………………..
Wages payable, beginning of year …………………….
Wages payable, end of year …………………………..
Plus decrease in wages payable ……………………….
Alternative Solution:
Interest Receivable†
Wages Payable¥
Beg. Bal.
600
2,200
Beg. Bal.
Interest Revenue
5,000
9,000
Wages Expense
?
Cash Received
Cash Paid
?
End. Bal.
1,700
1,000
End. Bal.
Quick Study 12–25B (10 minutes)
2. Net increase in cash = $94,800 – $24,000 = $70,800
Quick Study 12–26B (10 minutes)
1. Cash paid for inventory
= Cost of goods sold – Inventory decrease + Accounts payable decrease
= $314,000 – ($95,800 – $85,800) + ($21,000 – $15,000)
= $310,000
2. Cash paid for operating expenses
Quick Study 12–27B (10 minutes)
Cash flows from operating activities
Receipts from sales to customersa ………………………………..
$ 498,000
EXERCISES
Exercise 12-1 (25 minutes)
Statement of Cash Flows
Noncash
Operating
Activities
Investing
Activities
Financing
Activities
Investing &
Financing
Activities
Not Reported
on Statement
or in Notes
a. Declared and paid a
cash dividend
X
long-term note payable
d. Prepaid expenses
increased in the year
X
e. Accounts receivable
decreased in the year
X
f. Purchased land by
issuing common stock
X
in the year
X
cash, yielding a loss
X
decreased in the year
increased in the year
Exercise 12-2 (20 minutes)
Cash flows from operating activities—indirect method
Net income ……………………………………………………………………………………
$ 24,000
Adjustments to reconcile net income to net cash provided by
operating activities
Income statement items not affecting cash
Depreciation expense ……………………………………………………………………
12,000
Accounts receivable increase ………………………………………………………
)
Inventory decrease ……………………………………………………………………….
16,000
Salaries payable increase ……………………………………………………………..
Net cash provided by operating activities ………………………………………….
$ 43,000
Exercise 12-3 (30 minutes)
Cash flows from operating activities—indirect method
Net income (loss) ……………………………………………………………………………..
$ (16,000
)
Adjustments to reconcile net income to net cash provided by
operating activities
Income statement items not affecting cash
Depreciation expense …………………………………………………………………..
14,600
Accounts receivable decrease ……………………………………………………..
24,000
Salaries payable increase ……………………………………………………………..
18,000
Accrued liabilities decrease …………………………..…………………………..
)
Net cash provided by operating activities ………………………………………….
Exercise 12-4 (30 minutes)
Cash flows from operating activities
Net income …………………………………………………………………………….
$ 481,540
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Depreciation expense ………………………………………………………..
44,200
Amortization expense—Patents …………………………..…………….
4,200
Gain on sale of equipment …………………………………………………
(6,200)
Increase in inventory …………………………………………………………
Decrease in accounts payable …………………………………………..
Decrease in salaries payable ……………………………………………..
Exercise 12-5 (20 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………………..
$374,000
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Depreciation expense …………………………………………………………
44,000
Amortization expense ……………………………………………………….
7,200
Gain on sale of plant assets ……………………………………………….
(6,000)
Decrease in accounts receivable ………………………………………..
17,100
Decrease in inventory ……………………………………………………….
42,000
Decrease in accounts payable ……………………………………………
(8,200)
Increase in salaries payable ……………………………………………….
Exercise 12-6 (10 minutes)
Cash flows from operating activities
Net income …………………………………………………………………….
$400,000
Adjustments to reconcile net income to operating cash flow
Income statement items not affecting cash
Depreciation ………………………………………………………………
$80,000
Gain on sale of machinery ………………………………………….
(20,000)
Accounts receivable increase …………………………………….
Accounts payable increase ………………………………………..
$436,000
Exercise 12-7 (20 minutes)
Cash flows from operating activities—indirect method
Net income ……………………………………………………………………………………
$ 8,500
Adjustments to reconcile net income to net cash provided by
operating activities
Income statement items not affecting cash
Amortization expense …………………………………………………………………..
1,500
Prepaid expenses increase ……………………………………………………….
)
Inventory increase ………………………………………………………………………..
)
Accounts payable decrease ……………………………………………………….
)
Net cash provided by operating activities ………………………………………….
$ 5,500
Exercise 12-8 (10 minutes)
Cash flows from investing activities
Cash received from the sale of equipment* …………………………….
$ 51,300
Cash paid for new truck ………………………………………………………….
(89,000)
Cash received from the sale of land ………………………………………..
Cash received from the sale of stock investments …………………..
Net cash provided by investing activities ………………………………..
$221,100
Exercise 12-9 (10 minutes)
Cash flows from financing activities
Sale of common stock ……………………………………………………………..
$ 64,000
Paid cash dividend …………………………………………………………………..
Purchased treasury stock …………………………..…………………………..
Net cash used by financing activities ……………………………………….
Exercise 12–10 (20 minutes)
1.
2.
a. Machinery ……………………………………………………………. 10,000
Notes Payable ……………………………………………….. 10,000
Record acquisition of machinery.
b. No effect on cash flows from investing or financing activities.
3.
4.
a. Notes Payable ………………………………………………………. 40,000
Loss on Retirement of Debt ………………………………….. 7,000
Cash ……………………………………………………….…….. 47,000
Paid cash to retire debt.
b. $47,000 decrease in cash flows from financing activities.
Exercise 12-11 (40 minutes)
Part 1
IKIBAN, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended June 30, 2019
Cash flows from operating activities
Net income ……………………………………………………………….
$ 99,510
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Gain on sale of plant assets ……………………………………
(2,000)
Increase in accounts receivable ……………………………..
(14,000)
Decrease in inventory ……………………………………………
22,700
Decrease in prepaid expenses ………………………………..
1,000
Decrease in accounts payable …………………………..……
(5,000)
Decrease in wages payable …………………………………….
(9,000)
Decrease in income taxes payables ………………………..
(400)
Net cash provided by operating activities ………………….
$151,410
Cash flows from investing activities
Cash received from sale of equip. (Note 1) ………………..
10,000
Cash paid for equipment (Note 1—given) ………………….
Net cash used in investing activities …………………………
Cash flows from financing activities
Cash received from stock issuance …………………………..
60,000
Cash paid to retire notes (Note 2—given) ………………….
(30,000)
Cash paid for dividends (Note 3) ……………………………….
(90,310)
Net cash used in financing activities …………………………
(60,310)
Net increase in cash ……………………………………………………
$ 43,500
Cash balance at prior year-end ……………………………………
Exercise 12-11 (Part 1 continued)
(1)
Cost of equipment sold (given) ……………………………………………………………
$ 48,600
Accumulated depreciation of equipment sold* ……………………………………..
(40,600)
Book value of equipment sold …………………………………………………………….
8,000
Gain on sale of equipment (given) ……………………………………………………….
2,000
Cash receipt from sale of equipment ……………………………………………………
$ 10,000
Cost of equipment sold ………………………………………………………………………
$ 48,600
Plus net increase in the equipment account balance …………………………..
9,000
Cash paid for new equipment (given) …………………………..………………………
$ 57,600
Bal., 6/30/2018
115,000
Bal., 6/30/2018
Purchase
Sale 48,600
Sale (plug) *40,600
Depr. Expense
Bal., 6/30/2019
124,000
Bal., 6/30/2019
(2)
Carrying value of notes retired ……………………………………………………………
$ 30,000
Cash payment to retire notes ………………………………………………………………
$ 30,000
(3)
Retained Earnings
Bal., 6/30/2018
24,100
Dividends (plug)
90,310
Net income
99,510
Bal., 6/30/2019
33,300
Part 2
Interpretation: A 49.6% result on the cash flow on total assets ratio is
indicative of very good performance.