Chapter 13
Statement of Cash Flows
QUESTIONS
1. The income statement is prepared using accrual accounting which reflects both cash
2. Investors use the statement to assess whether the company they are investing in
can earn a reasonable return on their investment and possibly pay a dividend.
3. a. Operating cash flows relate to the production and delivery of goods and services.
That is, they are related to the day-to-day profit-oriented activities of a business.
An example of an operating cash inflow would be cash receipts from customers.
4. Cash received from interest is shown in the section for operating cash flows. This is
6. The indirect method is used much more frequently compared to the direct method. If
7. Under the indirect method, the starting point for determining operating cash flows is
13-2 Jiambalvo Managerial Accounting
8. Depreciation expense is deducted in arriving at net income. However, it does not
9. Comparing relationships from year to year allows users to identify trends. For
example, a startup company would normally be expected to have negative operating
10. Such a company most likely has products that are successful and well established.
Thus, they can be “milked” for cash without substantial additional investments that
Chapter 13 Statement of Cash Flows 13-3
EXERCISES
E1. [LO 3]
The equation for determining cost of goods sold is:
Beginning inventory + Purchases – Ending inventory = Cost of goods sold.
E2. [LO 3]
The answer depends on the stage of the company. A startup company might be
opening new stores and have relatively few customers. This, hopefully, will
E3. [LO 3]
E4. [LO 1]
All listed events affect only the statement of cash flows. The intent of this
E5. [LO 1]
1. Financing – outflow
13-4 Jiambalvo Managerial Accounting
4. Investing – outflow
6. Investing – inflow (sales price); Operating – positive adjustment (loss)
8. Financing – outflow
E6. [LO 2, 3]
Investing Activities
E7. [LO 2, 3]
Financing Activities
E8. [LO 2]
Note that 2017 sales are irrelevant to this question.
Accounts Receivable – beginning of year $ 600,000
E9. [LO 2]
Note that 2017 cost of goods sold is irrelevant to this question.
Beginning inventory $ 650,000
Plus purchases ?
E10. [LO 3]
1. Added
3. Added
5. Deducted
7. Added
9. Added
E11. [LO 3]
Net Income $169,325
Add back non-cash expenses:
E12. [LO 3]
Current Asset and Liability Accounts
E13. [LO 3]
a. NR
b. D
E14. [LO 3]
Operating Activities
Net Income
$15,000
Adjustments of net income to the cash basis:
Net cash provided by operating activities
$17,400
E15. [LO 2, 3]
a. The cost of the equipment sold was $25,000 and book value (cost less
accumulated depreciation) was $9,000. Therefore accumulated depreciation
removed when the items was sold must have been $16,000.
Beginning accumulated depreciation $30,000
b. Now solve for purchases of equipment:
Beginning equipment $105,000
Plus purchases of equipment ?
c.
Operating Activities
Net Income $380,000
Adjustments of net income to cash basis:
E16. [LO 1, 3]
a. Net income includes many large non-cash deductions such as depreciation and bad
debt expense. Thus, net income is typically, but certainly not always, less than cash
E17. [LO 1, 2, 3]
E18. [LO 3]
Beginning retained earnings $5,100,000
13-8 Jiambalvo Managerial Accounting
PROBLEMS
P1. [LO 1]
As anyone who has studied accounting knows, there is a major difference
between income and cash flow. Indeed, income can be decomposed into two
P2. [LO 1]
While cash may have increased by $2.5 million, that, by itself, does not mean
things are going well for the company. For example, the firm could have
P3. [LO 1]
a. 2
b. 4
P4. [LO 1]
1. c
P5. [LO 1]
1. f
2. a
13–10 Jiambalvo Managerial Accounting
P6. [LO 2]
Octel Corporation
Statement of Cash Flows – Direct Method
For the Year Ended June 30, 2017
Operating Cash Flows
Cash received from customers ($8,600 + $267,000 – $8,300) $267,300
Prepaid expenses (1,200)
-7. [LO 2] a. Cash spent on new equipment = $0
b. Net amount of investing cash flow = $3,200
Chapter 13 Statement of Cash Flows 13-11
f. Cash received from sale of land = $3,200
P8. [LO 3]
1. f
7. d
8. e
13–12 Jiambalvo Managerial Accounting
P9. [LO 3]
Goodly’s Clothing Company
Partial Statement of Cash flows – Indirect method
For the Year Ended December 31, 2017
Operating activities
Net Income $35,815
Adjustments of net income to the cash basis:
P10. [LO 3]
Goodly’s Clothing Company
Partial Statement of Cash flows – Indirect method
For the Year Ended December 31, 2017
Operating activities
Net Income $17,000
Adjustment of net income to cash basis:
P11. [LO 1, 3]
1. a. Operating activities – Added
8. a. Operating activities – Subtracted
P12. [LO 2, 3]
(a) Patton Company
Statement of Cash Flows – Indirect method
For the Year Ended December 31, 2017
Operating activities
Net income $12,210
Depreciation expense 3,560
Increase in accounts receivables (600)
Investing Activities
13–14 Jiambalvo Managerial Accounting
(b) Patton Company
Partial Statement of Cash Flows – Direct method
For the Year Ended December 31, 2014
Operating activities
Increase in prepaid expenses ($1,160)
P13. [LO 2, 3]
(a) Claims Corporation
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Operating activities-indirect method
Net income $17,400
Adjustments of net income to cash basis:
(b) Claims Corporation
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Operating activities-direct method
Cash received from customers ($4,700 + $80,700 – $10,200) $ 75,200
P14. [LO 2, 3]
(a) Sellmer’s Pasta, Inc.
Statement of Cash Flows—Direct Method
For the Year Ended December 31, 2017
Operating activities
Cash received from customers($118,000+$449,000 – $120,500)$446,500
Investing activities
Financing activities
Payments on long-term notes $(18,995)
(b) Sellmer’s Pasta, Inc.
Partial Statement of Cash Flows—Indirect Method
For the Year Ended December 31, 2017
Operating activities
Net Income $68,800
Adjustments of net income to cash basis
13–16 Jiambalvo Managerial Accounting
P15. [LO 3]
a. In general, when receivables are increasing, less revenue is being converted
Case 13-1. [LO 3]
WELLCOMP COMPUTERS
Summary
A marketing VP at a computer company proposes grabbing market share by dropping
prices but the COO is worried that this will hurt cash flow.
Questions to ask students
1. What is the situation at Wellcomp?
Discussion
The company typically collects payments from customers within 5 days but doesn’t pay
suppliers for 30 days. Thus, as sales accelerate due to lowering prices, cash inflows
from collections from customers are likely to outpace payments to suppliers even at
lower prices.