Chapter 12
Statement of Cash Flows
ANSWERS TO QUESTIONS
1. The income statement reports revenues earned and expenses incurred during a
period of time. It is prepared on an accrual basis. The balance sheet reports the
2. The statement of cash flows reports cash receipts and cash payments from three
broad categories of business activities: operating, investing, and financing. While
the income statement reports operating activities, it reports them on the accrual
basis: revenues when earned, and expenses when incurred, regardless of the
3. Cash equivalents are short-term, highly liquid investments that are purchased
within three months of the maturity date. The statement of cash flows does not
4. The major categories of business activities reported on the statement of cash flows
are operating, investing, and financing activities. Operating activities of a business
5. Cash inflows from operating activities include cash sales, collections on accounts
and notes receivable arising from sales, dividends on investments, and interest on
6. Depreciation expense is added to net income to adjust for the effects of a noncash
7. Cash expenditures for purchases and salaries are not reported on the statement of
8. The $50,000 increase in inventory must be used in the statement of cash flows’
calculations because it increases the outflow of cash all other things equal. It is
9. The two methods of reporting cash flows from operating activities are the direct
method and the indirect method. The direct method reports the gross amounts of
cash receipts and cash payments arising from the revenues and expenses reported
10. Cash inflows from investing activities include cash received from the sale of
property, plant, and equipment, intangibles, and investments, the maturity value of
11. Cash inflows from financing activities include cash received from issuing stock, the
Financial Accounting, 10/e 12-3
12. Noncash investing and financing activities are activities that would normally be
classified as investing or financing activities, except no cash was received or paid.
13. When equipment is sold, any cash received is reported as a cash inflow from
investing activities. When using the indirect method, a gain on sale of equipment
ANSWERS TO MULTIPLE CHOICE
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
1
5
1
35
1
35
1
2
5
2
35
2
35
2
3
5
3
35
3
35
3
4
5
4
40
4
5
5
5
40
5
6
5
6
45
6
7
5
7
7
8
9
10
1
40
11
12
13
14
15
16
17
18
19
20
21
22
23
24
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open-ended project,
it is possible for students to devote a large amount of time to these assignments. While
MINI–EXERCISES
M12–1.
F
1.
Purchase of stock. (This involves repurchase of its own stock.)
F
2.
Principal payment on long-term debt.
3.
Proceeds from sale of properties.
O
4.
Inventories (decrease).
O
5.
Accounts payable (decrease).
O
6.
Depreciation and amortization.
M12–2.
+
1.
Accrued expenses (increase).
2.
Inventories (increase).
+
3.
Accounts receivable (decrease).
4.
Accounts payable (decrease).
+
5.
Depreciation, depletion, and amortization.
M12–3.
O
1.
Receipts from customers.
F
2.
Dividends paid.
F
3.
Payment for share buy-back (repurchase of company stock).
4.
Proceeds from sale of property, plant, and equipment.
F
5.
Repayments of borrowings (bank debt).
O
6.
Income taxes paid.
M12–4.
Quality of income ratio
=
Cash flow from operations
=
$86,500
=
0.85 (85%)
Net income
$102,000
M12–5.
Investing Activities
M12–6.
Financing Activities
M12–7.
Yes
Purchase of building with mortgage payable.
Dividends paid in cash.
Financial Accounting, 10/e 12-7
EXERCISES
E12–1.
F
1. Dividends paid.
F
2. Repayments of short-term borrowings.
O
3. Depreciation and amortization.
F
4. Proceeds from reissuance of treasury shares to employees.
O
5. [Change in] Accounts payable and other liabilities.
6. Cash collections from customers.
7. Purchase of investments.
O
8. Net income.
9. Purchase of property, plant, and equipment.
O
10. Increase in receivables and other assets.
E12–2.
O
1. [Change in] Accounts payable.
O
2. Depreciation and amortization.
O
3. [Change in] Inventories.
4. Maturities and sales of investments.
F
5. Proceeds from debt.
6. Payments to suppliers and employees.
7. Proceeds from sale of facilities, land, and other assets.
O
8. [Change in] Deferred revenue.
F
9. Repurchases of Dell Common Stock.
O
10. Net income
E12–3.
I
1. Proceeds from the sale of property, plant and equipment.
O
2. Net interest paid.
I
3. Payments for intangible assets.
O
4. Payments to suppliers and employees.
5. Proceeds from borrowings.
6. Dividends paid.
O
7. Income tax paid.
O
8. Receipts from customers.
I
9. Payments for the purchase of investments.
10. Proceeds from the issue of equity securities.
E12–4.
1. NE Salaries expense
Accrued salaries payable
2. – NCFI Plant and equipment
Cash
6. + NCFI Cash
Accumulated depreciation
Plant and equipment
Financial Accounting, 10/e 12-9
E12–5.
1. NE Inventory
Accounts payable
2. – NCFO Prepaid expenses (rent)
Cash
6. – NCFI Investment securities
Cash
7. + NCFF Cash
Common stock
Additional paid-in capital
E12–6.
Comparison of Statement of Cash Flows—direct and indirect reporting
Cash Flows
Statement of Cash Flows
Method
(and related changes)
Direct
Indirect
1.
Accounts payable increase or decrease
X
2.
Payments to employees
X
3.
Cash collections from customers
X
4.
Accounts receivable increase or decrease
X
Payments to suppliers
X
Inventory increase or decrease
X
7.
Wages payable, increase or decrease
X
8.
Depreciation expense
X
9.
Net income
X
Cash flows from operating activities
X
X
Cash flows from investing activities
X
X
Cash flows from financing activities
X
X
Net increase or decrease in cash during the period
X
X
The direct method reports cash flows from operating activities individually for each
Financial Accounting, 10/e 12–11
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E12–7.
Cash flows from operating activities—indirect method
Net income …………………………………………………………………………………..
$23,125
E12–8.
Req. 1
Cash flows from operating activities—indirect method
Net loss ……………………………………………………………………………………….
($6,400
)
Depreciation expense ……………………………………………………………………
Amortization of copyrights ………………………………………………………………
Accounts receivable decrease ($8,000 – $13,000) …………………………...
Salaries payable increase ($12,000 – $1,000) ………………………………….
Other accrued liabilities decrease ($1,000 – $2,800) ………………………….
)
Note: The purchase of the machine does not affect cash flows from operating activities.
Req. 2
The first reason for the net loss was the depreciation expense. This is a non-cash
Depreciation expense ……………………………………………………………………
Accounts receivable decrease ($10,500 – $12,000) ………………………….
Inventory increase ($13,000 – $8,000) ……………………………………………
Salaries payable increase ($2,250 – $800) ………………………………………
E12–9.
Req. 1
Cash flows from operating activities—indirect method
Net loss ………………………………………………………………………………………
($13,402
)
Depreciation, amortization, and impairments ……………………………………
34,790
1,245
Increase in inventories ………………………………………………………………….
)
)
Req. 2
The primary reason for the net loss was the depreciation, amortization, and impairments
expense. These represent non-cash expenses. Large depreciation, amortization, and
E12–10.
Cash flows from operating activities—indirect method
Net income …………………………………………………………………………………..
$14,000
Depreciation expense ……………………………………………………………………
8,500
Accounts receivable decrease ……………………………………………………….
10,000
Salaries payable increase ………………………………………………………………
11,000
Other accrued liabilities decrease ……………………………………………………
)
Financial Accounting, 10/e 12–13
E12–11.
Account
Change
Receivables
Increased
Inventories
Increased
Other current assets
Decreased
Payables
Increased
E12–12.
Account
Change
Accounts receivable
Decreased
Inventories
Decreased
Other current assets
Increased
Accounts payable
Increased
Deferred revenue
Increased
Other current liabilities
Increased
E12–13.
Req. 1
Cash flows from investing activities
Year 1
Year 2
Proceeds from sale of equipment ……..
$17,864
$12,163
Req. 2
Any gain on the sale of the equipment is subtracted from net income to avoid double
Cash flows from operating activities
Year 1
Year 2
Loss (Gain) on sale of equipment ……..
$16,751
$(2,436)
Computations:
Year 1
Year 2
Plant and equipment (at cost)
Less: Accumulated depreciation
Net book value
Gain (Loss) on sale
E12–14.
Req. 1
Equipment
Accumulated Depreciation
Req. 2
Any gain on the sale of the equipment is subtracted from net income to avoid double
Req. 3
The amount of cash received is added in the computation of Net Cash Flows from
Financial Accounting, 10/e 12–15
E12–15.
Req. 1
Cash flows from operating activities—indirect method
Net income …………………………………………………………………………………..
$6,462
Depreciation and amortization ………………………………………………………..
2,737
Increase in accounts receivable ………………………………………………………
(666
)
Increase in inventory ……………………………………………………………………..
(331
)
Increase in prepaid expense …………………………………………………………..
)
Increase in accounts payable ………………………………………………………...
Decrease in taxes payable ……………………………………………………………..
)
$8,944
Cash flow from operations
Req. 3
The reason the quality of income ratio was greater than one was primarily because of
large non-cash depreciation charges.
E12–16.
The investing and financing sections of the statement of cash flows for Oering’s
Furniture:
Cash flows from investing activities:
Purchase of property, plant & equipment ……………………..
$(2,071)
Sale of marketable securities ………………………………………..
219
Proceeds from sale of property, plant & equipment ………
Cash flows from financing activities:
Borrowings under line of credit ……………………………………..
Proceeds from issuance of stock ………………………………….
11
Payments on long-term debt …………………………………………
Payment of dividends ……………………………………………………
Purchase of treasury stock ……………………………………………
(2,583)
E12–17.
SHALLOW WATERS COMPANY
Statement of Cash Flows
For the Year Ended December 31, Current Year
Cash flows from operating activities:
Net income …………………………………………………………….
$ 700
Adjustments to reconcile net income to net cash
flow from operating activities:
Increase in accounts receivable ……………………………….
Decrease in prepaid expenses ……………………………….
Decrease in wages payable …………………………………….
Cash flows from investing activities:
Cash flows from financing activities:
Financial Accounting, 10/e 12–17
E12–18.
COMPUTER SERVICE AND REPAIR
Statement of Cash Flows
For the Year Ended December 31, Current Year
Cash flows from operating activities:
Net income
$ 300
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation
Increase in accounts receivable
Increase in prepaid expenses
Decrease in wages payable
Cash flows from investing activities:
Cash flows from financing activities:
E12–19.
Req. 1
The investing and financing sections of the statement of cash flows for Gibraltar
Industries:
Cash flows from investing activities:
Acquisitions (investments in other companies)
(109,248)
Proceeds from sale of other equity investments
Purchases of property, plant, and equipment
Net proceeds from sale of property and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Long-term debt reduction
(76,658)
Proceeds from long-term debt
Net proceeds from issuance of common stock
Net cash provided by (used in) financing activities
(2,775)
Req. 2
Capital acquisitions ratio
=
Cash flow from operations
=
$46,695
=
4.04
Cash paid for plant &
equipment
$11,552
Req. 3
Gibraltar’s management is using the cash proceeds from the sale of other equity
Financial Accounting, 10/e 12–19
E12–20.
Req. 1
Both of these transactions are considered noncash investing and financing activities,
and are not reported on the statement of cash flows. The transactions must be
Req. 2
The capital acquisitions ratio measures the company’s ability to finance plant and
E12–21.
Cash flows from operating activities—direct method
Cash collected from customers1
$94,500
Cash payments to suppliers of inventory2
(56,875
)
Cash payments to employees 3
(10,550
)
E12–22.
Req. 1
Cash flows from operating activities—direct method
Cash collected from customers1
$59,000
Cash payments to employees2
(35,000
)
Cash paid for other expenses3
(11,500
)
1. Cash collected from customers = Sales revenue + Decrease in Accounts receivable
$54,000 + $5,000 = $59,000
Req. 2
The first reason for the net loss was the depreciation expense. This is a non-cash
expense. Depreciation expense, along with decreased working capital requirements