Chapter 13 – Statement of Cash Flows
AP13–1. (continued)
Ingersol Construction Supply Company
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities:
Net income
$27,200 1
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense
$ 5,000
2
Increase in accounts receivable
Decrease in merchandise inventory
4
Increase in accounts payable
5
Increase in wages payable
800
6
3,800
Net cash provided by operating activities
31,000
Cash flows from investing activities:
Cash payments to purchase fixed assets
(21,000) 7
Cash flows from financing activities:
Cash payments for dividends
(15,000)
1
Cash payments on long-term note
8
Cash receipts from issuing stock
9
Net cash provided by financing activities
Net increase in cash during the year
Cash balance, December 31, 2012
$34,000
Req. 2
There was an increase in cash for Ingersol Construction Supply Company this year of
$5,000. Operating activities provided a positive cash flow of $31,000. This inflow of
Chapter 13 – Statement of Cash Flows
13–35
AP13–2.
Req.1
Related Cash
Flow Section
2013
2012
Change
Δ in Cash
Cash
$64,000
$65,000
-1,000
10
Net decrease in cash
O
Accounts receivable
15,000
20,000
–5,000
3
Add to net income the decrease in A/R
depreciation
$251,000
$210,000
Subtract from net income the decrease in Accounts
payable
Add to net income the increase in Taxes payable
Note payable, long-term
86,000
75,000
8
Borrow additional note principal
Contributed capital
75,000
70,000
+5,000
9
Issuance of stock for cash
O,F
Retained earnings
80,000
45,000
+35,000
1
Increased for net income ($40,000) / decreased for
dividends ($5,000)
$251,000
$210,000
Sales
$190,000
Cost of goods sold
Other expenses
Net Income
Property and equipment
150,000
+60,000
7
Payment in cash for equipment
Chapter 13 – Statement of Cash Flows
13 36
AP13–2. (continued)
Audio House Inc.
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash flows from operating activities:
Net income
$40,000
1
Adjustments to reconcile net income to net
cash provided by operating activities:
Net cash provided by operating activities
48,000
Cash flows from investing activities:
Cash payments to purchase fixed assets
(60,000)
7
Cash flows from financing activities:
Cash dividends paid
( 5,000)
Cash receipts from borrowing on long-term
11,000
8
Net cash provided by financing activities
11,000
Net decrease in cash during the year
( 1,000)
10
Cash balance, December 31, 2013
(11,000)
Chapter 13 – Statement of Cash Flows
Req. 2
Chapter 13 – Statement of Cash Flows
13 38
AP13–3.
Req. 1
Related
Cash
Balance sheet at December 31
Flow
Section
2012
2011
Change
Δ in Cash
Cash
$34,000
$29,000
+5,000
10
Net increase in cash
O
Accounts receivable
45,000
28,000
+17,000
3
Subtract from sales to compute collections from
customers
O
Merchandise inventory
32,000
38,000
-6,000
4
Subtract from CGS to compute payments to suppliers
$202,000
$170,000
O
Accounts payable
$36,000
$27,000
+9,000
5
Subtract from CGS to compute payments to suppliers
O
Wages payable
2,200
1,400
+800
6
Subtract from Wage expense to compute payments for
wages
F
Note payable, long-term
38,000
44,000
-6,000
8
Cash used for repayment of note principal
F
Contributed capital
88,600
72,600
9
Issuance of stock for cash
Retained earnings
1
Increased for net income of $27,200 and decreased
for dividends declared and paid of $15,000
$202,000
$170,000
Sales
$135,000
Cost of goods sold
70,000
Other expenses
37,800
Net Income
Property and equipment
121,000
100,000
7
Payment in cash for equipment
depreciation
Chapter 13 – Statement of Cash Flows
13–39
AP13–3. (continued)
Ingersol Construction Supply Company
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities:
Collections from customers ($135,000 –
$118,000
3
Net cash provided by operating activities
31,000
Cash flows from investing activities:
Cash payments to purchase fixed assets
(21,000) 7
Cash flows from financing activities:
Cash payments for dividends
(15,000)
1
Cash payments on long-term note
Cash receipts from issuing stock
Req. 2
There was an increase in cash for Ingersol Construction Supply Company this year of
$5,000. Operating activities provided a positive cash flow of $31,000. This inflow of
Payments to suppliers ($70,000 – $6,000 –
4,5
Chapter 13 – Statement of Cash Flows
13–40
CASES AND PROJECTS
ANNUAL REPORT CASES
CP13–1.
Req. 1:
Depreciation and amortization was the largest item. The $133,141 expense was
added to net income in the reconciliation because it is a noncurrent deferred
Req. 2:
American Eagle Outfitters’ three largest investing and financing uses of cash over
Req. 3: Free Cash Flow was negative $45,536 thousand, calculated as (in thousands):
Cash Flows from Operating Activities
$302,193
less Dividends
less Capital Expenditures (purchase of PPE)
Free Cash Flow
Chapter 13 – Statement of Cash Flows
CP13–2.
Req. 1 The company uses the indirect method.
Req. 4 The company has not paid cash dividends during the last three years, or in any
year since its initial public offering. (Any dividends paid would be a financing
cash outflow.) This information can be found under the “Dividend Policy”
heading in the section of the annual report entitled “Item 5. Market for
Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities”.
Req. 5 Free Cash Flow was $139,017 thousand, calculated as (in thousands):
Chapter 13 – Statement of Cash Flows
13–42
CP13–3.
Req. 1
American Eagle
Outfitters
Urban Outfitters
Quality of
=
Cash flow from operations
$302,193
=
1.69
$251,570
=
1.26
income ratio
Net income
$179,061
$199,364
American Eagle Outfitters has a higher, and therefore better, quality of income ratio
than does Urban Outfitters.
Req. 2
Industry
Average
American Eagle
Outfitters
Urban Outfitters
Req. 3
American Eagle
Outfitters
Urban Outfitters
Capital
=
Cash flow from operations
$302,193
=
1.14
$251,570
=
2.24
acquisitions
ratio
Cash paid for plant &
equipment
$265,335
$112,553
Req. 4
Capital Acquisitions =
1.93
1.14
2.24
Quality of Income =
0.72
Chapter 13 – Statement of Cash Flows
13–43
FINANCIAL REPORTING AND ANALYSIS CASES
CP13–4.
ROCKY MOUNTAIN CHOCOLATE FACTORY, INC.
Statement of Cash Flows
For the Quarter Ended May 31
Cash flows from operating activities:
Net income ……………………………………………………………..
$ 163,837
Add (deduct) to reconcile net income to net cash flow:
Depreciation expense …………………………………………………..
276,304
Amortization expense …………………………………………………..
5,901
Cash flows from investing activities:
Fixed assets purchased ………………………………………….
(1,081,121)
Other assets decrease …………………………………………………
50,055
Net cash outflow from investing activities
(1,031,066)
Cash flows from financing activities:
Repayment of short-term debt …………………………………
(1,000,000)
Repayment of long-term debt ……………………………………….
(2,355,029)
Issuance of long-term debt ………………………………………
4,659,466
Net cash inflow from financing activities …………………
1,304,437
Net increase in cash during the quarter …………………………..
392,718
Cash, February 29 ……………………………………………………….
528,787
Cash, May 31 ………………………………………………………………
Accounts receivable increase ………………………………………
Inventories increase ……………………………………………………..
Other current assets increase ………………………………………
Accounts payable increase …………………………………………..
280,935
Accrued liabilities increase …………………………………………..
164,087
Income taxes payable decrease …………………………………..
Long-term accounts receivable decrease …………………….
11,382
Net cash inflow from operating activities ………………..
Chapter 13 – Statement of Cash Flows
13–44
CP13–5.
Date: (today’s date)
To: Supervising Analyst
From: (your name)
Re: Evaluation of Carlyle Golf, Inc.’s Planned Expansion
While many companies experience losses and negative cash flows during the early
years of their operations, the cash situation for Carlyle Golf is a major concern. The
company has announced plans to increase inventory by $2.2 million but there is no
obvious source to finance the acquisition of this inventory. The statement of cash flows
shows that the company has to make cash deposits with its suppliers. It is unlikely that
these suppliers will be a major source of financing for Carlyle’s inventory. The company
obviously does not have enough cash on hand to finance its expansion of inventory.
Chapter 13 – Statement of Cash Flows
13–45
CRITICAL THINKING CASES
CP13–6.
Req. 1
The payment from Merrill Lynch to Enron does not automatically make the Nigerian
barge transaction a sale. When a loan is established between a lender and borrower, a
similar cash payment is made between the two parties. Two other features of the
The four revenue recognition criteria discussed in Chapter 3 are:
1) delivery has occurred or services have been rendered,
Without knowing about the secret side deal, it’s not obvious which of the four criteria
have not been fulfilled. Knowing about the side deal, however, makes it clear that the
Chapter 13 – Statement of Cash Flows
13–46
Req. 3
Most financial statement users view cash flows from operating activities as recurring
sources of cash into the future. If $100,000 of cash is generated from operations this
FINANCIAL REPORTING AND ANALYSIS PROJECTS
CP13–7.
The solutions to this case will depend on the company and/or accounting period
selected for analysis.