CHAPTER 13
STATEMENT OF CASH FLOWS
Brief Learning
Exercises Objectives Skills
B. Ex. 13.1 Cash flows from operations (direct) 13-3 Analysis
B. Ex. 13.2 Cash flows from operations (indirect) 13-7 Analysis
B. Ex. 13.3 Cash flows from operations (direct) 13-3 Analysis
B. Ex. 13.4 Cash flows from operations (indirect) 13-7 Analysis
B. Ex. 13.5 Cash flows from investing activities 13-4 Analysis
B. Ex. 13.6 Cash flows from financing activities 13-4 Analysis
B. Ex. 13.7 Cash payment for merchandise 13-3 Analysis
B. Ex. 13.8 Determining beginning cash balance 13-2 Analysis
B. Ex. 13.9
Analysis
13-6
B. Ex. 13.10 Prepare statement of cash flows 13-2
Analysis
Skills
13.1 Using a cash flow statement 13-1, 13-2 Analysis, communication
13.2 Using a cash flow statement
13-1, 13-2,
13-6
Analysis, communication
13.3 13-4 Analysis
13.4 13-3, 13-6 Analysis, communication
13.5 Accrual versus cash flows 13-3 Analysis
13.6 13-3, 13-6 Communication
13.7 Format of a cash flow statement 13-2 Analysis
13.8 13-8
13.9 Indirect method 13-6, 13-7 Analysis, communication
13.10 Indirect method 13-7 Analysis
13.11 Classification of cash flows 13-2 Analysis
13.12 Classification of cash flows 13-2 Analysis
13.13 Cash flows from operating activities 13-4
13.14 Cash flows from financing activities 13-4
13.15 Real World: Home Depot, Inc.
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Investing activities and interest revenue
Relationship between accrual and cash
flows
Learning
Objectives
Using noncash accounts to compute cash
flows
Topic
Cash effects of business strategies
13-1, 13-2,
13-4
Topic
Reconciling net income to cash from
operations
Analysis, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment, research
Analysis, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment
13-2–13-4,
13-6, 13-8
Analysis, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment
Analysis, communication,
judgment
Cash flow from operating
activities—direct method
Analytical, communication,
judgment
Analytical, communication,
judgment
Analytical, communication,
judgment, research
Analytical, communication,
judgment
Window dressing; effects on net
income and net cash flow
13-1, 13-4,
13-8
Improving the Statement of Cash
Flows (Ethics, fraud & corporate
Real World: Coca-Cola,
Amazon.com Cash Flow Analysis
Analytical, communication,
judgment
Analytical, communication,
judgment
Critical Thinking Cases
Preparing a statement of cash
flows—direct method (short)
Investing activities
Investing activities
Preparing a worksheet and statement
of cash flows; evaluate the company’s
financial position—indirect method.
Preparing a worksheet and statement
of cash flows; evaluate the
company’s liquidity-indirect method.
Cash flow from operating
activities—indirect method
Preparing a statement of cash
flows—direct method; comprehensive
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
Problems (Sets A and B)
45 Strong
13.6 A,B
21st Century Technologies/Foxboro Technologies
Prepare the operating activities section of a statement of cash
flows from accounting records maintained using the accrual basis
of accounting. Students also are to explain how more efficient
asset management could increase cash flow provided by operating
activities. Uses the direct method. (Problem 13–5 uses the same
data but requires use of the indirect method. )
A comprehensive problem covering conversion from the accrual
basis to the cash basis and preparation of a statement of cash
flows. Uses the direct method.
Using the data provided in Problem 13.4 A,B, prepare the
operating activities section of a statement of cash flows using the
indirect method.
13.5 A,B
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume
use of the partially filled-in working papers.
Treece, Inc./Royce Interiors, Inc.
13.2 A,B
25 Easy
Prepare a statement of cash flows. Emphasis is on format of the
statement, with computations held to a minimum. However,
sufficient computations are required to assure that students are
able to distinguish between cash flows and accrual basis
measurements. Uses the direct method.
25 Easy
Holmes Export Co./RPZ Imports
30 Medium
Lambert Company/Welch Company
13.1 A,B
13.4 A,B
Prepare the investing activities section of a statement of cash flows
by analyzing changes in balance sheet accounts and gains and
losses reported in the income statement.
30 Medium
Treece, Inc. (Indirect)/Royce Interiors, Inc. (Indirect)
25 Medium
13.3 A,B
Prepare the investing activities section of a statement of cash
flows. Problem demonstrates how this section of the financial
statement can be prepared by analyzing income statement amounts
and changes in balance sheet accounts.
Hampton Inc./Mary’s Fashions
Problems (cont’d)
60 Strong (P13.7A)
40 Strong (P13.7B)
13.7 A,B
Satellite World/LGIN
A comprehensive problem covering all learning objectives.
Includes a worksheet, the indirect method, and analysis of the
company’s financial position. We assign this to groups and let
them deal with the worksheet mechanics on their own.
60 Strong
A comprehensive problem covering all learning objectives. P13.7A
includes a worksheet, the indirect method, and analysis of the
company’s financial position. P13.7B does not include a
worksheet and uses the indirect method. We assign this to groups
and let them deal with the worksheet mechanics on their own.
Miracle Tool, Inc./Purcells, Inc.
13.8 A,B
Critical Thinking Cases
Another Look at Allison Corporation
Cash Budgeting for You as a Student
Lookin’ Good?
Peak Pricing
Improving the Statement of Cash Flows
Ethics, Fraud & Corporate Governance
Comparing Cash Flow Information from Two Companies
Internet
25 Strong
Students are to discuss various aspects of peak pricing and discuss
how it might be applied in specific situations. Also, they are to
describe situations in which peak pricing might be considered
unethical.
15 Easy
13.2
A simple case that illustrates the usefulness of cash budgeting in the
environment of a college student.
An automobile manufacturer is in serious financial difficulty, and
management is considering several proposals to increase reported net
income and net cash flow. Students are asked to evaluate the probable
effects of each proposal. This case can lead into an open-ended
discussion of “window dressing” in annual statements.
13.1
45 Medium
Students are asked to review the cash flow statement of Allison
Corporation (the company used as an example throughout the
chapter) and to evaluate the company’s ability to maintain its present
level of dividends.
13.4
13.3
20 Medium
Students explore the website of the Securities & Exchange
Commission and locate a speech by an S.E.C. official in which
suggestions for improving the statement of cash flows are discussed.
13.5
13.6
Visit a website that actually provides assistance in preparing cash
budgets and statements of cash flows.
30 Medium
15 Easy
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
3.
a.
b. c.
(1) Sales of investments. (1)
(2) Collecting loans. (2)
(3) Sales of plant assets. (3)
(1) Purchases of investments. (1)
(2) Lending cash.
(3) Purchases of plant assets.
Payments:
Payments:
Repayment of debt.
Purchase of treasury stock or retirement of
outstanding shares.
Payment of dividends.
Issuance of capital stock.
Sales of treasury stock.
4.
5.
The primary purpose of a statement of cash flows is to provide information about the cash
The income statement provides the better measurement of profitability, especially when the
business is financially sound and short-run survival is not the critical issue. The statement of cash
Receipts:
Receipts:
Investing activities:
Financing activities:
In the long run, it is most important for a business to have positive cash flows from operating
activities. To a large extent, the ability of a business to generate positive cash flows from
financing activities is dependent upon its ability to generate cash from operations. Investors are
Net cash flow from operating activities generally reflects the cash effects of transactions entering
2.
Receipts:
Examples of cash receipts and of cash payments in the three major classifications of a cash flow
statement are shown below (two receipts and two payments required):
Operating activities:
Short-term or long-term borrowing.
Payments:
Cash paid to suppliers and employees.
Income taxes paid.
Dividends and interest received.
Cash received from customers.
Interest paid.
6.
7.
8.
9.
10.
Among the classifications shown in the cash flow statement, a successful and growing company is
The credit to the Land account indicates a sale of land and, therefore, a cash receipt. However, the
Net income may differ from the net cash flows from operating activities as a result of such factors
as:
The direct method identifies the major operating sources and uses of cash, using such captions as
One purpose of a statement of cash flows is to provide information about all the investing and
financing activities of a business. Although the acquisition of land by issuing capital stock does
Nonoperating gains and losses that, although included in the measurement of net income,
Depreciation and other noncash expenses that enter into the determination of net
11.
12.
Add: Decrease during the year in the liability for dividends payable
13.
14.
15.
From a short-term creditor’s point of view, free cash flow is a “buffer,” indicating that the business
Credits to paid-in capital accounts usually indicate the issuance of additional shares of capital stock.
Free cash flow is that portion of the net cash flow from operating activities that is available for
discretionary purposes after the basic obligations of the business have been met.
The amount of cash dividends paid during the current year may be determined as follows:
Speeding up the collection of accounts receivable does not increase the total amount collected.
Peak pricing means charging higher prices in periods in which customer demand exceeds the
company’s capacity, and lower prices in “off-peak” periods. This serves the dual purposes of
B.Ex. 13.1
$470,000
$558,000
Net cash provided by operating activities
Adjustments to reconcile net income to net cash from operations:
B.Ex. 13.3
Cash received from customers
$750,000
$722,000
$654,000
$(50,000)
(55,000)
Net cash provided by operating activities
B.Ex. 13.5
Cash paid for investments
$(55,000)
SOLUTIONS TO BRIEF EXERCISES
Cash flows from operating activities:
Net income
B.Ex. 13.4
B.Ex. 13.2
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operations:
Cash used for investing activities:
$270,000
B.Ex. 13.6
Cash received from sale of common stock
$560,000
Cost of goods sold
$100,800
B.Ex. 13.8
$155,000
$67,000
B.Ex. 13.9
$68,000
$15,000
$86,000
Net cash provided by operating activities
Cash flows provided by operating activities
$136,000
$46,000
72,000
Cash flows used in financing activities
Cash, beginning of year
B.Ex. 13.10
Maines, Inc.
Statement of Cash Flows
For year ended _____________
Net income
B.Ex. 13.7
Adjustments to reconcile net income to net cash from
Cash balance at the beginning of the year:
Cash payments for purchases:
Ex. 13.1 a.
b.
Ex. 13.2
a. 280,000$
b.
SOLUTIONS TO EXERCISES
Cash from operations …………………………………………………………………
The gain on the sale of marketable securities represents a reclassification of this
The major sources and uses of cash from financing activities during 2018
were:
The operating activities section generally includes the cash provided by and used for
those transactions that are normal, ongoing operations and that included in the
Wallace Company’s cash increased significantly during the year, going from $75,000 to
$255,000. Operations were strong, providing $275,000 of positive cash flow. Based on the
d.
(1)
Expenditures for property and equipment …………………………………………..
Dividends paid …………………………………………………………………………
(2)
Ex. 13.4 a. (1)
$289,000
$472,000
$504,000
$761,000
$793,000
Cash received from customers ……………………………………….
Credit sales ………………………………………………………………
Credit sales ……………………………………………………………
Cash received from collecting accounts receivable:
Add: Decrease in accounts receivable ……………………………….
Collections of accounts receivable ……………………………………
Net sales (includes cash sales and credit sales) …………
Add: Decrease in accounts receivable …………………………………
Cash received from customers:
Ex. 13.5
Increase in inventory ($820,000 − $780,000) ……………..
Ex. 13.6
Cash payments to suppliers of merchandise ………………….
$ 2,992,000
Cash sales ………………………………………………………………
Cash payments to suppliers of merchandise:
The increase in accounts receivable represents credit sales which were not collected
Net sales:
$ 2,882,000
Cost of goods sold …………………………………………………………..
Ex. 13.3 a. $125,000
$115,000
value less $25,000 loss) ………………………………………………………………
Purchases of marketable securities ……………………………………………..
Proceeds from sales of marketable securities ($140,000 book
795,000$
(2)
a.
(1)
Cash received from customers ……………………………………
Ex. 13.7
WYOMING OUTFITTERS, INC.
Statement of Cash Flows
For the Year Ended December 31, Current Year
Cash flows from operating activities:
d.
b.
Selling to customers using bank credit cards taps a new market of potential
(1)
c.
(1)
(2)
Reducing inventory will lessen expenditures for inventory purchases
(2)
Deferring taxes can postpone taxes each year. For a growing business, this
Interest and dividends received ………………………………….
Cash provided by operating activities ………………………..
Cash and cash equivalents, December 31, 20__ ………………………………
Cash paid to suppliers and employees …………………………..
Interest paid ……………………………………………………….
Income taxes paid …………………………………………………..
Cash paid to acquire plant assets ………………………………..
Proceeds from sales of plant assets ………………………………
Collections on loans ……………………………………………….
Cash disbursed for operating activities ……………………….
Net cash flow from operating activities
Cash flows from investing activities:
Loans made to borrowers …………………………………………
Net cash used for investing activities …………………………………
Net cash used for financing activities ………………………………………………..
Net increase in cash and cash equivalents …………………………….
Cash and cash equivalents, January 1, 20__ …………………….
Cash flows from financing activities:
Proceeds from short-term borrowing …………………………….
Dividends paid ……………………………………………………..
e.
Ex. 13.9 a.
b.
c.
d.
e.
f.
h.
Dividends are a financing activity, not an operating activity. Therefore,
Added to net income. Depreciation is a noncash expense. Although it reduces the
Added to net income . In a statement of cash flows, the uninsured loss from fire is
Added to net income. An increase in accounts payable means that purchases of
merchandise, measured on the accrual basis, exceed the payments during the
Added to net income. A reduction in prepaid expenses indicates that the amounts
Omitted from the computation. The transfer of cash from a bank account to a
Deducted from net income. An increase over the year in the amount of accounts
Omitted from the computation. Cash received from customers is a cash inflow
$ 385,000
Ex. 13.11
a.
g.
o.
Operating activity
Operating activity
Operating activity
Investing activity
Operating activity
Investing activity
Not included in a statement of cash flows prepared by the direct method.
Operating activity
Financing activity
Financing activity
Operating activity
Financing activity
Operating activity
Ex. 13.10
FREEMAN MACHINERY, INC.
Net income ……………………………………………………………………………….
Partial Statement of Cash Flows
For the Year Ended December 31, 2018
Cash flows from operating activities:
$ 737,000
$ 607,000
Net cash flow from operating activities …………………………………………….
Subtotal ……………………………………………………………………………..
Ex. 13.12
1.
2.
Financing activity
Operating activity
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Operating activity
Financing activity
Operating activity
Operating activity
Investing activity
Investing activity
Operating activity
Financing activity
Operating activity
Operating activity
Ex. 13.13 a.
b.
Cost, less accumulated depreciation
Gain on sale
Cash received from sale
Loss on sale
Cash received from sale
c.
Cash provided by investing activities:
The amount of gain or loss is reflected in the cash receipts figure. For example,
The following items were excluded because they are financing activities, not
investing activities:
Sale of land
Ex. 13.14 a.
$420,000
b.
●Cash received from customers
Cash received from interest and dividends
●Cash paid to purchase inventory
Classified as investing activities:
c.
While an argument could be made that interest expense should be
Cash
Sale of bonds
Classified as operating activities:
The following items were excluded from the above calculations because
they are classified as indicated below in the statement of cash flows:
$392,000
Sale of treasury stock
Dividends on common stock
Purchase of treasury stock
(60,000)
(20,000)
Ex. 13.15
a.
b.
c.
d.
2015 2014 2013
9,373$ 8,242$ 7,628$
Net earnings for 2015 (year ending January 31, 2016) were $7,009 million, compared
Free cash flow for the three years is determined as follows (in millions):
Net cash from operations
The major uses of cash, other than operations, are as follows:
Negative cash flows from investing and financing activities do not necessarily lead to a
plant, and equipment
Cash paid for dividends
Cash invested in property,
30 Minutes, Medium
a.
Cash flows from operating activities:
Cash received from customers (1) 3,025,000$
Interest and dividends received 100,000
Cash provided by operating activities 3,125,000$
Cash flows from investing activities:
Loans made to borrowers (500,000)
Collections on loans 260,000
Cash paid to acquire plant assets (3,100,000)
Proceeds from sales of plant assets (3) 580,000
Net cash used in investing activities: (2,760,000)
Cash flows from financing activities:
Proceeds from issuing bonds payable 2,500,000$
Dividends paid (120,000)
Net cash provided by financing activities 2,380,000
Net increase (decrease) in cash and cash equivalents (80,000)
Supporting computations:
(1)
Cash sales 825,000$
Collections on accounts receivable 2,200,000
Cash received from customers 3,025,000$
(2) Cash paid to suppliers and employees:
Cash payments for operating expenses 1,050,000
Cash paid to suppliers and employees 2,550,000$
(3) Proceeds from sales of plant assets:
Book value of plant assets sold 660,000$
Less: Loss on sales of plant assets 80,000
Proceeds from sales of plant assets 580,000$
SOLUTIONS TO PROBLEM SET A
Cash received from customers:
PROBLEM 13.1A
LAMBERT COMPANY
For the Year Ended December 31, Current Year
Statement of Cash Flows
LAMBERT COMPANY
Cash paid to suppliers and employees (2) (2,550,000)$
Interest paid (180,000)
Income taxes paid (95,000)