1. Cash equivalents such as money market funds and CDs are highly liquid investments that can be
readily converted into cash. They are treated as cash.
2. Operating activities are the ongoing, day-to-day, revenue-generating activities of an organization.
Investing activities involve the sale or purchase of long-term assets. Financing activities stem
from long-term liabilities and equity sources.
5. The separation ensures that cash consequences of business transactions are emphasized since
the major purpose of the statement is disclosure of cash activities.
6. (1) Compute the change in cash for the period.
(2) Compute the cash flows from operating activities.
(3) Identify the cash flows from investing activities.
(4) Identify the cash flows from financing activities.
(5) Prepare the statement of cash flows.
The first step provides the net cash inflow or outflow that must appear on the statement of cash
flows. The next three steps provide the detail for explaining the change in cash flows. The final
step summarizes all the detail.
7. Accrual accounting allows a firm to recognize revenues before they are collected or to pay for
inputs before they are expensed. This practice creates the possibility of having a negative
operating cash flow while still reporting a positive net income.
14 STATEMENT OF CASH FLOWS
DISCUSSION QUESTIONS
CHAPTER 14 Statement of Cash Flows
10. A decrease in a current liability means that cash payments to creditors were greater than the
expenses recognized during the period. An increase in a noncash current asset means that
more cash was paid than the expenses recognized. (As assets expire, they become expenses.)
13. Worksheets are an efficient, logical way of organizing the data needed to prepare a statement of
cash flows.
14. The worksheet approach is based on a transaction analysis. Using the beginning and ending
balances on the balance sheet, transactions are analyzed that impact cash flows. Debit and
credit columns are set up for the upper and lower halves of the worksheet. The upper half
CHAPTER 14 Statement of Cash Flows
14-1. c
14-2. b
14-5. e
14-6. b
14-7. b
14-10. b
14-11. e
14-12. c
14-13. d
MULTIPLE-CHOICE QUESTIONS
CHAPTER 14 Statement of Cash Flows
BE 14-17
a. Operating—use of cash
b. Operating—source of cash
c. Financing—source of cash
d. Financing—use of cash
BE 14-18
1. Change in cash: $2,260,000 – $1,400,000 = $860,000
2. The sum of the operating, investing, and financing cash flows must equal the change
in cash from 20X1 to 20X2 ($860,000).
BE 14-19
Net income……………………………………………………………………………
…
$1,800,000
Add (deduct) adjusting items:
Decrease in accounts receivable……………………………………………
…
335,000
Decrease in wages payable……………………………………………………
…
(370,000)
BE 14-20
Sale of equipment…………………………………………………………………… $ 760,000
Purchase of equipment……………………………………………………………
…
(860,000)
Purchase of land……………………………………………………………………
…
(875,000)
Net cash from investing activities……………………………………………
…
$(975,000)
BRIEF EXERCISES: SET A
*
**
CHAPTER 14 Statement of Cash Flows
BE 14-21
Issuance of bonds payable………………………………………………………. $ 770,000
Payment of mortgage……………………………………..……………………… (200,000)
Payment of dividends……………………….……………………………………. (800,000)
Net cash from financing activities ……………………….………………… $(230,000)
BE 14-22
1.
Cash flows from operating activities:
Net income……………………………………..……
…
$1,800,000
Add (deduct) adjusting items:
Decrease in accounts receivable…………………
…
335,000
Decrease in wages payable………………………
…
(370,000)
Cash flows from investing activities:
Sale of equipment…………………………..………
…
$ 760,000
Purchase of equipment………………………….…
…
(860,000)
Purchase of land……………………………………
…
(875,000)
Net cash from investing activities……………
…
(975,000)
Cash flows from financing activities:
…
2. The sum of the operating, investing, and financing cash flows must equal the
change in cash flow.
Swasey Company
Statement of Cash Flows
For the Year Ended December 31, 20X2
*
CHAPTER 14 Statement of Cash Flows
BE 14-23
Income Cash
Statement Flows
Revenues…………………………………………
…
$ 2,400,000 $ 2,537,000
Gain on sale of equipment……………………… 100,000
Cost of goods sold………………………………
…
(1,300,000)
BE 14-24
20X1 Debit 20X2
Assets:
Cash……………………………
…
$108,000 (1) $114,000 $222,000
Accounts receivable………… 66,000 (2) 7,600 73,600
Inventory………………………
…
96,000 (3) $30,000 66,000
Plant and equipment………… 156,000 (4) 36,000 120,000
Accumulated depreciation .
…
(78,000) (4) 18,000 (5) 12,000 (72,000)
Land……………………………
…
30,000 (6) 50,000 80,000
Total assets………………
…
$378,000 $489,600
Liabilities and stockholders’ equity:
Accounts payable……………
…
$ 48,000 (7) 24,000 $ 72,000
Wages payable………………
…
6,000 (8) 2,400 3,600
…
…
…
Credit
Worksheet: Norton Company
At December 31, 20X2
Adjustments
Transactions
$137,000
(100,000)
(125,000)
*
**
…
CHAPTER 14 Statement of Cash Flows
BE 14-24 (Concluded)
Cash flows from operating activities:
Net income…………………………………………
…
(12) $60,000
Depreciation expense……………………………
…
(5) 12,000
Loss on sale of equipment……………………
…
(4) 8,400
Decrease in inventory……………………………
…
(3) 30,000
Cash flows from investing activities:
Sale of equipment………………………………
…
(4) 9,600
Cash flows from financing activities:
Reduction in bonds payable……………………
…
(9) 14,000
Payment of dividends……………………………
…
(13) 20,000
Issuance of preferred stock……………………
…
(10) 14,000
Debit Credit
Transactions
…
CHAPTER 14 Statement of Cash Flows
BE 14-25
a. Investing—use of cash
b. Financing—source of cash
c. Operating—use of cash
d. Investing—use of cash
BE 14-26
1. Change in cash: $565,000 – $350,000 = $215,000
2. The sum of the operating, investing, and financing cash flows must equal the
change in cash from 20X1 to 20X2 ($215,000).
BE 14-27
Net income…………………………………………………………………
…
$450,000
Add (deduct) adjusting items:
Decrease in accounts receivable……………………………………
…
83,750
Decrease in wages payable…………………………………………
…
(92,500)
BE 14-28
Sale of equipment…………………………………………………………
…
$ 190,000
Purchase of equipment…………………………………………………
…
(215,000)
…
BRIEF EXERCISES: SET B
*
CHAPTER 14 Statement of Cash Flows
BE 14-29
Issuance of bonds payable………………………………………………………
.
$ 192,500
Payment of mortgage……………………………………..……………………… (50,000)
BE 14-30
1.
Cash flows from operating activities:
Net income……………………………………..……… $ 450,000
Add (deduct) adjusting items:
Decrease in accounts receivable…………………
…
83,750
Decrease in wages payable………………………… (92,500)
.
Cash flows from investing activities:
Sale of equipment…………………………..………
…
$ 190,000
Purchase of equipment………………………….…
…
(215,000)
Purchase of land………………………………………
…
(218,750)
Net cash from investing activities……………
…
(243,750)
Cash flows from financing activities:
Issuance of bonds payable…………………………
…
$ 192,500
Payment of mortgage………………………..………
…
(50,000)
…
2. The sum of the operating, investing, and financing cash flows must equal the
change in cash flow.
Roberts Company
Statement of Cash Flows
For the Year Ended December 31, 20X2
.
CHAPTER 14 Statement of Cash Flows
BE 14-31
Income Cash
Statement Flows
Revenues…………………………………………
…
$ 480,000 $ 507,400
Gain on sale of equipment……………………
…
20,000
Cost of goods sold……………………………… (260,000)
(311,000)
Depreciation expense…………………………
…
(50,000)
BE 14-32
20X1 Debit 20X2
Assets:
Cash……………………………… $ 32,400 (1) $34,200 $ 66,600
Accounts receivable…………
…
19,800 (2) 2,280 22,080
Inventory………………………
…
28,800 (3) $ 9,000 19,800
…
Liabilities and stockholders’ equity:
Accounts payable……………
…
$ 14,400 (7) 7,200 $ 21,600
Wages payable…………………
…
1,800 (8) 720 1,080
Bonds payable…………………
…
10,800 (9) 4,200 6,600
Preferred stock (no par)……… 1,800 (10
)
4,200 6,000
Common stock…………………
…
18,000 (11
)
3,600 21,600
Paid-in capital in
)
)
)
Adjustments
Transactions
Worksheet: Evans Company
At December 31, 20X2
Credit
$27,400
(20,000)
(25,000)
(26,000)
50,000
*
**
***
CHAPTER 14 Statement of Cash Flows
BE 14-32 (Concluded)
Cash flows from operating activities:
Net income………………………………………
…
(12) $18,000
Depreciation expense…………………………
…
(5) 3,600
Loss on sale of equipment……………………
…
(4) 2,520
Decrease in inventory…………………………
…
(3) 9,000
Cash flows from investing activities:
Sale of equipment………………………………
…
(4) 2,880
Cash flows from financing activities:
Reduction in bonds payable…………………
…
(9) 4,200
Payment of dividends…………………………
…
(13) 6,000
Transactions
Debit Credit
CHAPTER 14 Statement of Cash Flows
E 14-33
a. Investing—source of cash f. Investing—use of cash
b. Operating—source of cash g. Financing—source of cash
c. Financing—use of cash h. Investing—use of cash
E 14-34
a. Deducted from f. Added to
b. Deducted from g. Deducted from
E 14-35
1. Note: Balances refer to prepaid rent account.
Cash Paid for Rent = Rent Expense + Ending Balance – Beginning Balance
=
=
2. In determining operating cash flow under the indirect method, any increase in a
E 14-36
1. Cash flows from operating activities:
Net income……………………………………………………………………
…
$ 61,725
Add (deduct) adjusting items:
Increase in accounts receivable……………………………………………
…
(32,250)
Increase in inventory……………………………….………………………
…
(16,500)
Increase in prepaid expenses…………………………………..…………
…
(3,000)
Increase in accounts payable……………………………………..………
…
10,125
…
…
$472,500 + $226,800 – $189,000
$510,300
EXERCISES
CHAPTER 14 Statement of Cash Flows
E 14-36 (Concluded)
2. From Requirement 1, the net operating cash without the change in accounts
payable is $8,475 ($18,600 – $10,125). Thus, the change in accounts payable
must be $20,475 – $8,475 = $12,000, which means accounts payable must have
increased by this amount. The ending balance is, therefore, $57,000: Beginning
Accounts Payable + Increase = $45,000 + $12,000.
3. The operating cash flows are only $18,600, about half of what would be needed.
However, Hepworth has a large cash balance ($126,600) including this year’s
E 14-37
1. Cash flows from investing activities:
Purchase of bonds……………………………………………………………
…
$(300,000)
Sale of equipment……………………………………………………………… 495,000
Purchase of new machinery…………………………………………..……
…
(180,000)
Purchase of common stock…………………………………………..……
…
(82,500)
…
2. The negative cash flow from investing can be covered using cash from operating
and financing activities. Sources of cash for investment include operating cash
flows and financing activities such as issuing bonds, issuing common stock, and
taking out mortgages. Thus, it is important to know operating cash flows so that
a decision can be made concerning the use of other forms of financing.
E 14-38
Cash flows from financing activities:
CHAPTER 14 Statement of Cash Flows
E 14-39
20X1 20X2
2.
Cash flows from operating activities:
Net income……………………………………………….………………
…
$40,000
Add (deduct) adjusting items:
Increase in accounts receivable…………………………………….… (3,800)
3. Change in Accounts Receivable = Operating Cash Flows without
Accounts Receivable
= $45,400 – $41,000
=$4,400
Indirect Method
Change
Oliver Company
Operating Cash Flows
CHAPTER 14 Statement of Cash Flows
E 14-40
Cash flows from operating activities:
Income Cash
Statement Flows
Revenues……………………………… $ 75,000 $(3,800) $ 71,200
Cost of goods sold…………………
…
(20,000) 2,000
E 14-41
a. Financing activities
b. Operating activities—added to net income
c. Operating activities—deducted from net income
d. Noncash financing/investing activities
e. Operating activities—added to net income
f. Financing activities
g. Investing activities
Adjustments
Oliver Company
Operating Cash Flows
Direct Method
*
**
CHAPTER 14 Statement of Cash Flows
E 14-42
Cash flows from operating activities:
Net income…………………………………….…………………………
…
$156,000
Add (deduct) adjusting items:
Decrease in accounts payable……………….………………………
…
(20,000)
Increase in accounts receivable……………………….……………
…
(20,000)
Increase in wages payable……………………….……………………
…
12,000
Increase in prepaid insurance…………………………..……………
…
(24,000)
E 14-43
Cash flows from operating activities:
Income Cash
Statement Flows
Revenues………………………… $ 1,500,000 $ (20,000) $1,480,000
Cost of goods sold……………
…
(1,000,000) 200,000
…
Wages expense…………………
…
(80,000) 12,000 (68,000)
Insurance expense……………
…
(40,000) (24,000) (64,000)
Income taxes……………………
…
(104,000) (104,000)
Net income………………………
…
$ 156,000
Net cash from operating
activities……………………
…
$ 424,000
Adjustments
Direct Method
Piura Merchandising Corporation
Cash Flows from Operating Activities
For the Year Ended December 31, 20X1
*
**
…
CHAPTER 14 Statement of Cash Flows
P 14-44
Cash flows from operating activities:
Net income………………………………………………
…
$ 63,000
Add (deduct) adjusting items:
Decrease in accounts receivable……………………
…
27,000
Net cash from operating activities………………
…
$32,400
Cash flows from financing activities:
…
P 14-45
Income Cash
Cash flows from operating activities:Statement Flows
Revenues…………………………………… $ 297,000 $ 27,000 $ 324,000
Cost of goods sold………………………
…
(175,500) (27,000)
(39,600) (242,100)
Operating expenses……………………… (58,500) 9,000 (49,500)
Net cash from operating activities…
…
$ 32,400
Cash flows from financing activities:
Sale of common stock………………
…
16,200
Adjustments
Solpoder Corporation
Statement of Cash Flows
For the Year Ended December 31, 20X2
Statement of Cash Flows
For the Year Ended December 31, 20X2
Direct Method
Solpoder Corporation
*
**
***
CHAPTER 14 Statement of Cash Flows
P 14-46
Cash flows from operating activities:
Net loss…………………………………………………
…
$ (800)
Add (deduct) adjusting items:
Depreciation expense………………………………… 6,000
Cash flows from investing activities:
Purchase of equipment………………………………
…
(20,000)
Net decrease in cash……………………………………
…
$(16,000)
P 14-47
Income Cash
Cash flows from operating activities: Statement Flows
Revenues……………………………………
…
$ 40,000 $(2,000) $ 38,000
Cost of goods sold………………………
…
(28,800) 2,800
—
—
For the Year Ended September 30, 20X2
Roberts Company
Statement of Cash Flows
Adjustments
Roberts Company
Operating Cash Flows
For the Year Ended September 30, 20X2
*
**