Problem 12-8A (20 minutes)
Transaction
Operating
Investing
Financing
Cash
Inflow
Cash
Outflow
a.
Paid suppliers for inventory purchases …..
X
X
b.
Bought equipment for cash ………………..
X
X
c.
Paid cash to repurchase its own stock …..
X
X
Collected cash from customers ……………
X
Paid wages to employees …………………..
X
X
Equipment was sold for cash ………………
X
Common stock was sold for cash …………
X
Cash dividends were declared and paid …
X
X
A long-term loan was made to a supplier.
X
X
X
X
Interest was paid to a lender ………………
X
X
X
X
Problem 12-9A (60 minutes)
The forthcoming explanation is broken down into eight steps.
1. The statement of cash flows summarizes all of a company’s cash inflows
2. The statement is divided into three sections—operating activities,
investing activities, and financing activities. The operating activities
section summarizes the cash inflows and outflows related to revenue
3. The indirect method of preparing the operating activities section of the
statement of cash flows begins with net income and adjusts it to a cash
4. The second step is to analyze net changes in noncash balance sheet
accounts that impact the computation of net income. For Brock, this
includes Accounts Receivable, Inventory, Accounts Payable, Accrued
Problem 12-9A (continued)
The inventory balance decreased by $39. This means that Brock’s
inventory purchases were less than its cost of goods sold by $39.
Brock’s cost of goods sold was $2,980; therefore, its inventory
purchases were $2,941. The company’s accounts payable balance
5. The third step of the indirect method is to adjust for gains/losses
included in the income statement. This adjustment is necessary because
Problem 12-9A (continued)
6. The investing activities section of Brock’s statement of cash flows
records the gross cash flows related to its property, plant, and
7. The financing activities section of Brock’s statement of cash flows
records the gross cash flows related to its bonds payable, common
8. The net increase in cash and cash equivalents ($260) explains the
difference between the beginning and ending cash balances.
Problem 12-10A (45 minutes)
1. Net cash provided by operating activities:
Step 1: The following equation can be applied to the Accumulated
Credits = $42,000
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Decrease
in Account
Balance
Current Assets
Accounts receivable …………
Prepaid expenses …………….
Current Liabilities
Accounts payable …………….
Income taxes payable ………
Problem 12-10A (continued)
The net cash provided by operating activities is computed as follows:
Net income …………………………………………………..
$56,000
Adjustments to convert net income to cash basis:
Net cash provided by operating activities …………….
$20,000
2. Prepare a statement of cash flows.
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
Problem 12-10A (continued)
The loan to Hymans ($40,000) is recorded as a cash outflow in the
investing activities section of the statement. Because Joyner did not
retire any bonds during the year, the corresponding amount in the table
on the prior page (+120,000) represents a cash inflow pertaining to a
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$400,000 + Debits – $40,000 = $510,000
Debits = $510,000 – $400,000 + $40,000
Debits = $150,000
The additions to property, plant, and equipment ($150,000) are
in the financing activities section of the statement.
Problem 12-10A (continued)
Joyner Company
Statement of Cash Flows
For Year 2
Operating activities:
Net income ……………………………………………….
$ 56,000
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$ 42,000
Increase in accounts receivable …………………..
Increase in inventory ………………………………..
Decrease in prepaid expenses …………………….
Increase in accounts payable ………………………
Decrease in accrued liabilities ……………………..
Increase in income taxes payable ………………..
Gain on sale of equipment …………………………
Net cash provided by operating activities …………
20,000
Investing activities:
Proceeds from sale of equipment …………………..
18,000
Loan to Hymans Company …………………………...
(40,000)
Additions to plant and equipment …………………..
(150,000)
Net cash used in investing activities ……………….
(172,000)
Financing activities:
Issuance of bonds payable …………………………...
Issuance of common stock…………………………...
Cash dividends …………………………………………..
Net cash provided by financing activities ………….
135,000
Net decrease in cash …………………………………..
Beginning cash and cash equivalents ………………
Ending cash and cash equivalents ………………….
$ 4,000
Problem 12-10A (continued)
3. Free cash flow computation:
Net cash provided by operating activities ……………..
$ 20,000
4. The relatively small amount of net cash provided by operating activities
during the year was largely the result of a large increase in accounts
receivable. (The large increase in inventory was offset by a large
Problem 12-11A (45 minutes)
To begin the problem, fill in the question mark pertaining to item “a”
using the following T-account:
Retained Earnings
Dividends
20,000
Net income
70,000
Change
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase in
Account Balance
Decrease in
Account Balance
Current Assets
Accounts receivable ….
Prepaid expenses ……..
Current Liabilities
Accounts payable ……..
Income taxes payable .
Problem 12-11A (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income …………………………………………..
$ 70,000
Adjustments to convert net income to cash basis:
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
cash flows as follows:
Increase in
Account
Balance
Decrease in
Account
Balance
Noncurrent Assets
Plant and equipment ……………………….
Bonds payable ……………………………….
Common stock ……………………………….
Problem 12-11A (continued)
As stated in item “f” in the problem, it is reasonable to assume that the
$80,000 increase in long-term investments corresponds with a cash
outflow that needs to be recorded in the investing section of the
Property, plant, and equipment:
The addition to property, plant, and equipment ($270,000) is recorded
as a cash outflow and the proceeds from the sale of equipment
($15,000) is recorded as a cash inflow.
Problem 12-11A (continued)
Given the amounts above, the statement of cash flows would be as follows:
Yoric Company
Statement of Cash Flows
Operating activities:
Net income ………………………………………………….
$ 70,000
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………..
$ 42,000
Increase in accounts payable ………………………..
Decrease in accrued liabilities ……………………….
Net cash provided by operating activities ……………
Investing activities:
Decrease in long-term loan to subsidiary ……………
30,000
Proceeds from sale of equipment ……………………..
15,000
Additions to long-term investments …………………..
Financing activities:
Issuance of bonds payable ……………………………..
400,000
Repurchase of common stock ………………………….
(170,000)
Cash dividends …………………………..………………..
(20,000)
Net cash provided by financing activities ……………
210,000
Net increase in cash ………………………………………
Problem 12-12A (45 minutes)
1 Prepare a statement of cash flows (all numbers in millions).
Operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase in
Account Balance
Decrease in
Account Balance
Current Assets
Current Liabilities
Problem 12-12A (continued)
As an intermediate step, the net cash provided by operating activities
can now be calculated as follows:
Net income ……………………………………………….
$115
Adjustments to convert net income to cash basis:
Depreciation ……………………………………………
$132
Increase in accounts receivable …………………..
Increase in inventory ………………………………..
Increase in accounts payable ………………………
Gain on sale of equipment …………………………
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
cash flows as follows:
Increase
in Account
Decrease
in Account
Problem 12-12A (continued)
Burgess did not issue any bonds during the year; therefore, the amount
in the table on the prior page (–170) represents a cash outflow
pertaining to a bond retirement. Property, plant, and equipment and
retained earnings require further analysis as follows:
Property, plant, and equipment:
Retained earnings:
Problem 12-12A (continued)
Burgess Company
Statement of Cash Flows
Operating activities:
Net income ……………………………………………….
$ 115
Adjustments to convert net income to cash basis:
Increase in accounts receivable …………………..
(65)
Increase in inventory ………………………………..
Increase in accounts payable ………………………
Gain on sale of equipment …………………………
Net cash provided by operating activities …………
Investing activities:
Proceeds from sale of equipment …………………..
8
Additions to plant and equipment …………………..
(62)
Net cash used in investing activities ……………….
(54)
Retirement of bonds payable ………………………..
Cash dividends …………………………………………..
Net cash used in financing activities ……………….
Net decrease in cash …………………………………..
(30)
Beginning cash and cash equivalents ………………
Ending cash and cash equivalents ………………….
2. Burgess’s net income decreased by $20 million; however, its net cash
provided by operating activities increased by $110 million over the prior
Problem 12-12A (continued)
This suggests that Burgess may be inflating its net income by failing to
record a growing amount of uncollectible accounts. The company’s
inventory has increased (+45 million) even though sales have declined.
Problem 12-13A (45 minutes)
1. Net cash provided by operating activities:
Step 1: The following equation can be applied to the Accumulated
Depreciation account to compute the depreciation to add back to net
income:
Step 2: The guidelines from Exhibit 12-2 can be used to analyze the
changes in noncash balance sheet accounts that impact net income as
follows:
Increase in
Account Balance
Decrease in
Account Balance
Current Assets
Current Liabilities
Problem 12-13A (continued)
The net cash provided by operating activities can now be calculated as
follows:
Net income ……………………………………….
$30,000
Adjustments to convert net income to cash basis:
Depreciation ……………………………………
$20,000
Increase in inventory ………………………..
Decrease in prepaid expenses …………….
Increase in income taxes payable ………..
Loss on sale of equipment ………………….
Gain on sale of investments ………………..
Net cash provided by operating activities …
2. Prepare a statement of cash flows.
Investing and Financing activities:
The guidelines from Exhibit 12-3 can be used to analyze the changes in
noncash balance sheet accounts that impact investing and financing
cash flows as follows:
Increase in
Account
Balance
Decrease in
Account
Balance
Noncurrent Assets