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Chapter 14
The Statement of Cash Flows
Review Questions
1. What does the statement of cash flows report?
2. How does the statement of cash flows help users of financial statements?
The statement of cash flows helps users do the following:
3. Describe the three basic types of cash flow activities.
The three basic types of cash flow activities are: operating, investing, and financing. Operating
4. What types of transactions are reported in the non-cash investing and financing activities section of
the statement of cash flows?
5. Describe the two formats for reporting operating activities on the statement of cash flows.
The two formats for reporting the operating activities section are the indirect and direct methods.
14-2
6. Describe the five steps used to prepare the statement of cash flows by the indirect method.
The five steps used to prepare the statement of cash flows by the indirect method are:
• STEP 1: Complete the cash flows from operating activities section using net income and
adjusting for increases or decreases in current assets (other than cash) and current liabilities.
7. Explain why depreciation expense, depletion expense, and amortization expense are added to net
income in the operating activities section of the statement of cash flows when using the indirect
8. Explain why depreciation expense, depletion expense, and amortization expense are added to net
income in the operating activities section of the statement of cash flows when using the indirect
method.
Depreciation expense, depletion expense, and amortization expense all impact the income statement
9. If a company experienced a loss on disposal of long-term assets, how would this be reported in the
operating activities section of the statement of cash flows when using the indirect method? Why?
A loss on disposal of long-term assets would be removed from the net income on the statement of
10. If current assets other than cash increase, what is the effect on cash? What about a decrease in
current assets other than cash?
11. If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?
12. What accounts on the balance sheet must be evaluated when completing the investing activities
section of the statement of cash flows?
13. What accounts on the balance sheet must be evaluated when completing the financing activities
section of the statement of cash flows?
14. What should the net change in cash section of the statement of cash flows always reconcile with?
The net change in the cash section of the statement of cash flows reconciles the statement of cash
15. What is free cash flow, and how is it calculated?
Free cash flow is the amount of cash available from operating activities after paying for planned
15A. How does the direct method differ from the indirect method when preparing the operating
activities section of the statement of cash flows?
In the indirect method, start with net income and then adjust it to cash basis through a series of
16B. Why might a spreadsheet be helpful when completing the statement of cash flows?
Companies face complex situations, and a spreadsheet can help in preparing the cash flow statement.
14-4
Short Exercises
S14-1 Describing the purposes of the statement of cash flows
Learning Objective 1
Financial statements all have a goal. The statement of cash flows does as well. Describe how the
statement of cash flows helps investors and creditors perform each of the following functions:
a. Predict future cash flows.
b. Evaluate management decisions.
c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.
SOLUTION
a.
The statement of cash flows helps predict future cash flows by reporting past
S14-2 Classifying items on the statement of cash flows
Learning Objective 1
Cash flow items must be categorized into one of four categories. Identify each item as operating (O),
investing (I), financing (F), or non-cash (N).
a. Cash purchase of merchandise inventory
b. Cash payment of dividends
c. Cash receipt from the collection of long-term notes receivable
d. Cash payment for income taxes
e. Purchase of equipment in exchange for notes payable
f. Cash receipt from the sale of land
g. Cash received from borrowing money
h. Cash receipt for interest income
i. Cash receipt from the issuance of common stock
j. Cash payment of salaries
S14-2, cont.
SOLUTION
a.
Operating
f.
Investing
S14-3 Classifying items on the indirect statement of cash flows
Learning Objective 1, 2
Destiny Corporation is preparing its statement of cash flows by the indirect method. Destiny has the
following items for you to consider in preparing the statement:
a. Increase in accounts payable
b. Payment of dividends
c. Decrease in accrued liabilities
d. Issuance of common stock
e. Gain on sale of building
f. Loss on sale of land
g. Depreciation expense
h. Increase in merchandise inventory
i. Decrease in accounts receivable
j. Purchase of equipment
Identify each item as a(n):
• Operating activity—addition to net income
( )
O+
or subtraction from net income
( )
O−
• Investing activity—cash inflow
( )
I+
or cash outflow
( )
I−
• Financing activity—cash inflow
( )
F+
or cash outflow
( )
F−
• Activity that is not used to prepare the indirect statement of cash flows (N)
SOLUTION
a.
O+
f.
O+
14-6
S14-4 Computing cash flows from operating activities—indirect method
Learning Objective 2
DVR Equipment, Inc. reported the following data for 2018:
Income Statement:
Net Income
$ 43,000
Depreciation Expense
6,000
Balance Sheet:
Increase in Accounts
Receivable
6,000
Decrease in Accounts
Payable
2,000
Compute DVR’s net cash provided by operating activities—indirect method.
SOLUTION
DVR EQUIPMENT, INC.
Statement of Cash Flows—Partial
Year Ended December 31, 2018
S14-5 Computing cash flows from operating activities—indirect method
Learning Objective 2
Winding Road Cellular accountants have assembled the following data for the year ended April 30,
2018:
Cash receipt from sale of land
$
27,000
Net income
$ 55,000
Depreciation expense
2,000
Cash purchase of
equipment
44,000
Cash payment of dividends
5,800
Decrease in current
liabilities
20,000
Cash receipt from issuance of
common stock
17,000
Increase in current assets
other than cash
27,000
Prepare the operating activities section using the indirect method for Winding Road Cellular’s statement
of cash flows for the year ended April 30, 2018.
SOLUTION
WINDING ROAD CELLULAR
Statement of Cash Flows—Partial
Year Ended April 30, 2018
14-8
Note: Short Exercise S14-5 must be completed before attempting Short Exercise S14-6.
S14-6 Computing cash flows from investing and financing activities
Learning Objective 2
Use the data in Short Exercise S14-5 to complete this exercise. Prepare Winding Road Cellular’s
statement of cash flows using the indirect method for the year ended April 30, 2018. Assume beginning
and ending Cash are $48,000 and $52,200, respectively.
SOLUTION
WINDING ROAD CELLULAR
Statement of Cash Flows
Year Ended April 30, 2018
Cash Flows from Operating Activities:
S14-7 Computing investing and financing cash flows
Learning Objective 2
Preston Media Corporation had the following income statement and balance sheet for 2018:
S14-7, cont.
Requirements
1. Compute the acquisition of plant assets for Preston Media Corporation during 2018. The business
sold no plant assets during the year. Assume the company paid cash for the acquisition of plant
assets.
2. Compute the payment of a long-term note payable. During the year, the business issued a $4,400 note
payable.
SOLUTION
Requirement 1
Requirement 2
14-11
Note: Short Exercise S14-7 must be completed before attempting Short Exercise S14-8.
S14-8 Preparing the statement of cash flows—indirect method
Learning Objective 2
Use the Preston Media Corporation data in Short Exercise S14-7 and the results you calculated from the
requirements. Prepare Preston Media’s statement of cash flows—indirect method—for the year ended
December 31, 2018.
SOLUTION
PRESTON MEDIA CORPORATION
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 19,000
S14-8, cont.
Common Stock
23,000
12/31/2017
Retirement
0
4,000
Issuance
27,000
12/31/2018
S14-9 Computing the change in cash; identifying non-cash transactions
Learning Objective 2
Jennifer’s Wedding Shops earned net income of $27,000, which included depreciation of $16,000.
Jennifer’s acquired a $119,000 building by borrowing $119,000 on a long-term note payable.
Requirements
1. How much did Jennifer’s cash balance increase or decrease during the year?
2. Were there any non-cash transactions for the company? If so, show how they would be reported in
the statement of cash flows.
14-13
S14-9, cont.
SOLUTION
Requirement 1
Requirement 2
Yes, there was a non-cash transaction for the company, the acquisition of building with a long-term note
S14-10 Computing free cash flow
Learning Objective 3
Julie Lopez Company expects the following for 2018:
• Net cash provided by operating activities of $148,000.
• Net cash provided by financing activities of $56,000.
• Net cash used for investing activities of $77,000 (no sales of long-term assets).
• Cash dividends paid to stockholders of $7,000.
How much free cash flow does Lopez expect for 2018?
SOLUTION
Net Cash provided by Operating Activities
$ 148,000
14-14
S14A-11 Preparing a statement of cash flows using the direct method
Learning Objective 4
Appendix 14A
Jelly Bean, Inc. began 2018 with cash of $58,000. During the year, Jelly Bean earned revenue of
$595,000 and collected $614,000 from customers. Expenses for the year totaled $427,000, of which
Jelly Bean paid $212,000 in cash to suppliers and $205,000 in cash to employees. Jelly Bean also paid
$148,000 to purchase equipment and a cash dividend of $57,000 to its stockholders during 2018. Prepare
the company’s statement of cash flows for the year ended December 31, 2018. Format operating
activities by the direct method.
SOLUTION
JELLY BEAN, INC
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Receipts:
14-15
S14A-12 Preparing operating activities using the direct method
Learning Objective 4
Appendix 14A
Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:
Payments to suppliers
$
115,000
Cash payment for purchase of
equipment
39,000
Payments to employees
66,000
Payment of notes payable
34,000
Payment of dividends
7,500
Cash receipt from issuance of stock
22,000
Collections from customers
188,000
Cash receipt from sale of land
58,000
Cash balance, June 30, 2017
41,000
Prepare the operating activities section of the business’s statement of cash flows for the year ended June
30, 2018, using the direct method.
SOLUTION
AMY’S LEARNING CENTER
Statement of Cash Flows—Partial
Year Ended June 30, 2018
Cash Flows from Operating Activities:
14-16
Note: Short Exercise S14A-12 must be completed before attempting Short Exercise S14A-13.
S14A-13 Preparing the direct method statement of cash flows
Learning Objective 4
Appendix 14A
Use the data in Short Exercise S14A-12 and your results. Prepare the business’s complete statement of
cash flows for the year ended June 30, 2018, using the direct method for operating activities.
SOLUTION
AMY’S LEARNING CENTER
Statement of Cash Flows
Year Ended June 30, 2018
14-17
S14A-14 Preparing the direct method statement of cash flows
Learning Objective 4
Appendix 14A
Red Toy Company reported the following comparative balance sheet:
Requirements
1. Compute the collections from customers during 2018 for Red Toy Company. Sales Revenue totaled
$134,000.
2. Compute the payments for inventory during 2018. Cost of Goods Sold was $79,000.
14-18
S14A-14, cont.
SOLUTION
Requirement 1
Requirement 2
Cost of Goods Sold
$ 79,000
S14B-15 Using a spreadsheet to complete the statement of cash flows—indirect method
Learning Objective 5
Appendix 14B
Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is
recorded in the transaction analysis columns of the spreadsheet.
a. Net income
b. Increases in current assets (other than Cash)
c. Decreases in current liabilities
d. Cash payment for acquisition of plant assets
e. Cash receipt from issuance of common stock
f. Depreciation expense
Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the
spreadsheet.
SOLUTION
a.
Debit
Exercises
E14-16 Classifying cash flow items
Learning Objective 1
Consider the following transactions:
a. Purchased equipment for $130,000 cash.
b. Issued $14 par preferred stock for cash.
c. Cash received from sales to customers of $35,000.
d. Cash paid to vendors, $17,000.
e. Sold building for $19,000 gain for cash.
f. Purchased treasury stock for $28,000.
g. Retired a notes payable with 1,250 shares of the company’s common stock.
Identify the category of the statement of cash flows in which each transaction would be reported.
SOLUTION
a.
Investing
e.
Investing & Operating (gain)
14-20
E14-17 Classifying transactions on the statement of cash flows—indirect method
Learning Objective 1
Consider the following transactions:
Identify the category of the statement of cash flows, indirect method, in which each transaction would be
reported.
SOLUTION
a.
Financing
g.
Non-cash investing and financing
E14-18 Classifying items on the indirect statement of cash flows
Learning Objectives 1, 2
The statement of cash flows categorizes like transactions for optimal reporting.
Identify each item as a(n):
• Operating activity—addition to net income
( )
O+
or subtraction from net income
( )
O−
• Investing activity—cash inflow
( )
I+
or cash outflow
( )
I−
• Financing activity—cash inflow
( )
F+
or cash outflow
( )
F−
• Non-cash investing and financing activity (NIF)
• Activity that is not used to prepare the indirect statement of cash flows (N)
The indirect method is used to report cash flows from operating activities.
a. Loss on sale of land.
b. Acquisition of equipment by issuance of note payable.
c. Payment of long-term debt.
d. Acquisition of building by issuance of common stock.
e. Increase in Salaries Payable.
f. Decrease in Merchandise Inventory.
g. Increase in Prepaid Expenses.
h. Decrease in Accrued Liabilities.
i. Cash sale of land (no gain or loss).
j. Issuance of long-term note payable to borrow cash.
k. Depreciation Expense.
l. Purchase of treasury stock.
m. Issuance of common stock.
n. Increase in Accounts Payable.
o. Net income.
p. Payment of cash dividend.
14-22
E14-18 , cont.
SOLUTION
a.
O+
i.
I+
E14-19 Computing operating activities cash flow—indirect method
Learning Objective 2
Net Cash Prov. by Op. Act. $16,000
The records of Vintage Color Engraving reveal the following:
Net income
$ 36,000
Depreciation expense
$ 5,000
Sales revenue
53,000
Decrease in current liabilities
19,000
Loss on sale of
land
4,000
Increase in current assets other than cash
10,000
Acquisition of land
35,000
Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.
SOLUTION
VINTAGE COLOR ENGRAVING
Statement of Cash Flows—Partial
Year Ended December 31, 2018
Cash Flows from Operating Activities:
E14-20 Computing operating activities cash flow—indirect method
Learning Objective 2
Net Cash Prov. by Op. Act. $49,500
The accounting records of CD Sales, Inc. include the following accounts:
Account
Beginning Balance
Ending Balance
Cash
$ 7,500
$ 6,500
Accounts Receivable
21,000
17,500
Merchandise Inventory
20,000
30,000
Accounts Payable
15,000
19,000
Compute CD’s net cash provided by (used for) operating activities during July 2018. Use the indirect
method.
SOLUTION
CD SALES, INC.
Statement of Cash Flows—Partial
For Month Ended July 31, 2018
E14-21 Preparing the statement of cash flows—indirect method
Learning Objective 2
Net Cash Prov. by Op. Act. $98,000
The income statement of Boost Plus, Inc. follows:
14-24
E14-21, cont.
Additional data follow:
a. Acquisition of plant assets is $124,000. Of this amount, $108,000 is paid in cash and $16,000 by
signing a note payable.
b. Cash receipt from sale of land totals $20,000. There was no gain or loss.
c. Cash receipts from issuance of common stock total $36,000.
d. Payment of notes payable is $15,000.
e. Payment of dividends is $5,000.
f. From the balance sheet:
September 30
2018
2017
Cash
$ 39,000
$ 13,000
Accounts Receivable
46,000
61,000
Merchandise Inventory
94,000
88,000
Land
82,000
102,000
Plant Assets
214,000
90,000
Accumulated Depreciation
(61,000)
(34,000)
Accounts Payable
32,000
15,000
Accrued Liabilities
12,000
20,000
Notes Payable (long-term)
16,000
15,000
Common Stock, no par
40,000
4,000
Retained Earnings
314,000
266,000
Prepare Boost Plus’s statement of cash flows for the year ended September 30, 2018, using the indirect
method. Include a separate section for non-cash investing and financing activities.
E14-21, cont.
SOLUTION
BOOST PLUS, INC
Statement of Cash Flows
Year Ended September 30, 2018
Cash Flows from Operating Activities:
Net Income
$ 53,000
Adjustments to Reconcile Net Income to Net Cash
E14-22 Computing cash flows for investing and financing activities
Learning Objective 2
2. Book Value on Plant Assets Sold $7,000
Consider the following facts for Java Jolt:
a. Beginning and ending Retained Earnings are $45,000 and $70,000, respectively. Net income for the
period is $60,000.
b. Beginning and ending Plant Assets are $124,500 and $134,500, respectively.
c. Beginning and ending Accumulated Depreciation—Plant Assets are $21,500 and $26,500,
respectively.
d. Depreciation Expense for the period is $17,000, and acquisitions of new plant assets total $29,000.
Plant assets were sold at a $5,000 gain.
Requirements
1. How much are cash dividends?
2. What was the amount of the cash receipt from the sale of plant assets?
SOLUTION
Requirement 1
Retained Earnings (let Dividends = X)
14-27
E14-22, cont.
Requirement 2
Plant Assets (let X = Cost of Assets Sold)
Beginning
+
Acquisitions
−
Sold
=
Ending
$124,500
+
$29,000
−
X
=
$134,500
X
=
$19,000
14-28
E14-23 Computing the cash effect
Learning Objective 2
2. Payment: $8,000
4. Dividends $47,000
Rouse Exercise Equipment, Inc. reported the following financial statements for 2018:
14-29
E14-23, cont.
14-30
E14-23, cont.
Requirements
1. Compute the amount of Rouse Exercise’s acquisition of plant assets. Assume the acquisition was for
cash. Rouse Exercise disposed of plant assets at book value. The cost and accumulated depreciation
of the disposed asset was $47,900. No cash was received upon disposal.
2. Compute new borrowing or payment of long-term notes payable, with Rouse Exercise having only
one long-term notes payable transaction during the year.
3. Compute the issuance of common stock with Rouse Exercise having only one common stock
transaction during the year.
4. Compute the payment of cash dividends.
Note: Exercise E14-23 must be completed before attempting Exercise E14-24.
SOLUTION
Requirement 1
Requirement 2
E14-23, cont.
Requirement 3
Requirement 4
Retained Earnings
230,000
12/31/2017
107,000
Net Income
Dividend
47,000
290,000
12/31/2018
14-32
E14-24 Preparing the statement of cash flows—indirect method
Learning Objective 2
Net Cash Prov. by Op. Act. $160,000
Use the Rouse Exercise Equipment data in Exercise E14-23. Prepare the company’s statement of cash
flows—indirect method—for the year ended December 31, 2018. Assume investments are purchased
with cash.
SOLUTION
ROUSE EXERCISE EQUIPMENT, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 107,000
E14-25 Identifying and reporting non-cash transactions
Learning Objective 2
Total Non-cash Inv. and Fin. Act. $153,000
Dirtbikes, Inc. identified the following selected transactions that occurred during the year ended
December 31, 2018:
a. Issued 750 shares of $3 par common stock for cash of $17,000.
b. Issued 5,100 shares of $3 par common stock for a building with a fair market value of $96,000.
c. Purchased new truck with a fair market value of $29,000. Financed it 100% with a long-term note.
d. Retired short-term notes of $28,000 by issuing 1,900 shares of $3 par common stock.
e. Paid long-term note of $10,500 to Bank of Tallahassee. Issued new long-term note of $23,000 to
Bank of Trust.
Identify any non-cash transactions that occurred during the year, and show how they would be reported
in the non-cash investing and financing activities section of the statement of cash flows.
SOLUTION
DIRTBIKES, INC.
Statement of Cash Flows - Partial
Year Ended December 31, 2018
Non-cash Investing and Financing Activities:
14-34
E14-26 Analyzing free cash flow
Learning Objective 3
Use the Rouse Exercise Equipment data in Exercises E14-23 and E14-24. Rouse plans to purchase a
truck for $23,000 and a forklift for $125,000 next year. In addition, it plans to pay cash dividends of
$3,500. Assuming Rouse plans similar activity for 2019, what would be the amount of free cash flow?
SOLUTION
Net Cash provided by Operating Activities
$ 160,000
E14A-27 Preparing operating activities cash flow—direct method
Learning Objective 4
Appendix 14A
Net Cash Prov. by Op. Act. $3,000
The accounting records of Four Seasons Parts reveal the following:
Payment of salaries and wages
$ 34,000
Net income
$ 21,000
Depreciation expense
10,000
Payment of income tax
16,000
Payment of interest
17,000
Collection of dividend revenue
5,000
Payment of dividends
5,000
Payment to suppliers
51,000
Collections from customers
116,000
Compute cash flows from operating activities using the direct method for the year ended December 31,
2018.
14-35
E14A-27, cont.
SOLUTION
FOUR SEASONS PARTS
Statement of Cash Flows—Partial
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Receipts:
14-36
E14A-28 Preparing the statement of cash flows—direct method
Learning Objective 4
Appendix 14A
Net Cash Prov. by Op. Act. $76,000
The income statement and additional data of Value Corporation follow:
a. Collections from customers are $13,000 more than sales.
b. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
c. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
d. Payments to employees are $3,000 more than salaries expense.
e. Cash payment for the acquisition of plant assets is $102,000.
f. Cash receipts from sale of land total $29,000.
g. Cash receipts from issuance of common stock total $38,000.
h. Payment of long-term notes payable is $10,000.
i. Payment of dividends is $9,000.
j. Cash balance at June 30, 2017, was $21,000; at June 30, 2018, it was $43,000.
Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct
method.
14-37
E14A-28, cont.
SOLUTION
VALUE CORPORATION
Statement of Cash Flows
Year Ended June 30, 2018
Cash Flows from Operating Activities:
Receipts:
14-38
E14A-29 Computing cash flow items—direct method
Learning Objective 4
Appendix 14A
1. Cash Receipts from Cust. $72,000
Consider the following facts:
a. Beginning and ending Accounts Receivable are $24,000 and $20,000, respectively. Credit sales for
the period total $68,000.
b. Cost of goods sold is $77,000.
c. Beginning Merchandise Inventory balance is $29,000, and ending Merchandise Inventory balance is
$26,000.
d. Beginning and ending Accounts Payable are $12,000 and $16,000, respectively.
Requirements
1. Compute cash collections from customers.
2. Compute cash payments for merchandise inventory.
SOLUTION
Requirement 1
Net Sales Revenue
$ 68,000
14-39
E14A-30 Computing cash flow items—direct method
Learning Objective 4
Appendix 14A
2. Cash Paid for Merchandise Inventory $18,542
7. Dividends $374
A-One Mobile Homes reported the following in its financial statements for the year ended December 31,
2018:
2018
2017
Income Statement
Net Sales Revenue
$ 25,118
$ 21,893
Cost of Goods Sold
18,074
15,501
Depreciation Expense
271
234
Other Operating Expenses
4,632
4,277
Income Tax Expense
530
482
Net Income
$ 1,611
$ 1,399
Balance Sheet
Cash
$ 21
$ 19
Accounts Receivable
798
615
Merchandise Inventory
3,483
2,832
Property, Plant, and
Equipment, net
4,351
3,437
Accounts Payable
1,547
1,364
Accrued Liabilities
938
851
Long-term Liabilities
477
461
Common Stock, no par
670
443
Retained Earnings
5,021
3,784
Requirements
1. Compute the collections from customers.
2. Compute payments for merchandise inventory.
3. Compute payments of other operating expenses.
4. Compute the acquisitions of property, plant, and equipment (no sales of property during 2018).
5. Compute the amount of borrowing, with A-One paying no long-term liabilities.
6. Compute the cash receipt from issuance of common stock.
7. Compute the payment of cash dividends.
14-40
E14A-30, cont.
SOLUTION
Requirement 1
Net Sales Revenue
$ 25,118
Requirement 2
Cost of Goods Sold
$ 18,074
Requirement 3
Other Operating Expenses
$ 4,632
Requirement 4
Property and Equipment, net
14-41
E14A-30, cont.
Requirement 5
Requirement 6
Common Stock
Requirement 7
Retained Earnings
14-42
E14B-31 Using a spreadsheet to prepare the statement of cash flows—indirect method
Learning Objective 5
Appendix 14B
Use the Boost Plus, Inc. data in Exercise E14-21 to prepare the spreadsheet for the 2018 statement of
cash flows. Format cash flows from operating activities by the indirect method.
SOLUTION
BOOST PLUS, INC.
Statement of Cash Flows
Year Ended September 30, 2018
Transaction Analysis
Panel A – Balance Sheet:
9/30/2017
DEBIT
CREDIT
9/30/2018
Cash
$ 13,000
(l)
26,000
$ 39,000
14-43
E14B-31, cont.
Panel B – Statement of Cash Flows:
Cash Flows from Operating Activities:
Net Income
(a)
53,000
Problems (Group A)
P14-32A Identifying the purpose and preparing the statement of cash flows—indirect method
Learning Objectives 1, 2
2. Net Income $266,400
4. Net Cash Used by Op. Act. $(48,000)
American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, ARC issued no par common stock for $450,000.
b. Early in January, ARC made the following cash payments:
1. For store fixtures, $53,000
2. For merchandise inventory, $340,000
3. For rent expense on a store building, $20,000
c. Later in the year, ARC purchased merchandise inventory on account for $239,000. Before year-end,
ARC paid $139,000 of this accounts payable.
d. During 2018, ARC sold 2,400 units of merchandise inventory for $275 each. Before year-end, the
company collected 85% of this amount. Cost of goods sold for the year was $250,000, and ending
merchandise inventory totaled $329,000.
e. The store employs three people. The combined annual payroll is $96,000, of which ARC still owes
$3,000 at year-end.
f. At the end of the year, ARC paid income tax of $17,000. There are no income taxes payable.
g. Late in 2018, ARC paid cash dividends of $44,000.
h. For store fixtures, ARC uses the straight-line depreciation method, over five years, with zero residual
value.
Requirements
1. What is the purpose of the statement of cash flows?
2. Prepare ARC’s income statement for the year ended December 31, 2018. Use the single-step format,
with all revenues listed together and all expenses listed together.
3. Prepare ARC’s balance sheet at December 31, 2018.
4. Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31,
2018.
14-45
P14-32A, cont.
SOLUTION
Requirement 1
The purpose of the statement of cash flow is to report on the cash receipts and cash payments for a
Requirement 2
AMERICAN RARE COINS
Income Statement
Year Ended December 31, 2018
Revenue:
P14-32A, cont.
Requirement 3
AMERICAN RARE COINS
Balance Sheet
December 31, 2018
Assets
Current Assets:
14-47
P14-32A, cont.
Requirement 4
AMERICAN RARE COINS
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 266,400
P14-33A Preparing the statement of cash flows—indirect method
Learning Objective 2
Net Cash Used for Inv. Act. $(15,500)
Accountants for Morganson, Inc. have assembled the following data for the year ended December 31,
2018:
2018
2017
Current Assets:
Cash
$ 99,400
$ 25,000
Accounts Receivable
64,100
69,700
Merchandise
Inventory
83,000
75,000
Current Liabilities:
Accounts Payable
57,600
55,200
Income Tax Payable
14,800
16,800
Transaction Data for 2018:
Issuance of common stock for
cash
$ 38,000
Payment of notes
payable
$ 46,100
Depreciation expense
24,000
Payment of cash
dividends
50,000
Purchase of equipment with cash
74,000
Issuance of notes
payable to borrow cash
62,000
Acquisition of land by issuing
long-term notes payable
119,000
Gain on sale of
building
4,500
Book value of building sold
54,000
Net income
68,500
Prepare Morganson’s statement of cash flows using the indirect method. Include an accompanying
schedule of non-cash investing and financing activities.
14-49
P14-33A, cont.
SOLUTION
MORGANSON, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 68,500
P14-34A Preparing the statement of cash flows—indirect method with non-cash transactions
Learning Objective 2
Net Cash Prov. by Op. Act. $125,100
The 2018 income statement and comparative balance sheet of Rolling Hills, Inc. follow:
P14-34A, cont.
Additionally, Rolling Hills purchased land of $21,100 by financing it 100% with long-term notes
payable during 2018. During the year, there were no sales of land, no retirements of stock, and no
treasury stock transactions. A plant asset was disposed of for $0. The cost and the accumulated
depreciation of the disposed asset was $13,410. The plant acquisition was for cash.
Requirements
1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.
2. How will what you learned in this problem help you evaluate an investment?
14-52
P14-34A, cont.
SOLUTION
Requirement 1
ROLLING HILLS, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 96,400
P14-34A
Requirement 1, cont.
Plant Assets
12/31/2017
114,650
Acquisitions
23,600
13,410
Disposed of
Requirement 2
I will be able to evaluate an investment with this information because I can see the cash receipts and
P14-35A Preparing the statement of cash flows—indirect method, evaluating cash flows, and
measuring free cash flows
Learning Objectives 2, 3
1. Net Cash Used for Inv. Act. $(152,700)
The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the
following:
2018
2017
Current Assets:
Cash
$ 87,700
$ 23,500
Accounts Receivable
15,300
22,000
Merchandise Inventory
62,600
60,400
Current Liabilities:
Accounts Payable
28,100
26,100
Accrued Liabilities
10,600
11,300
Jackson’s transactions during 2018 included the following:
Payment of cash dividends
$ 16,200
Depreciation expense
$ 16,700
Purchase of equipment with cash
54,700
Purchase of building with cash
98,000
Issuance of long-term notes payable to borrow cash
48,000
Net income
57,600
Issuance of common stock for cash
105,000
Requirements
1. Prepare the statement of cash flows of Jackson Educational Supply for the year ended December 31,
2018. Use the indirect method to report cash flows from operating activities.
2. Evaluate Jackson’s cash flows for the year. Mention all three categories of cash flows, and give the
reason for your evaluation.
3. If Jackson plans similar activity for 2019, what is its expected free cash flow?
14-55
P14-35A, cont.
SOLUTION
Requirement 1
JACKSON EDUCATIONAL SUPPLY
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 57,600
Requirement 2
The company shows a strong cash flow. They are generating cash from their operations due primarily to
Requirement 3
Net Cash provided by Operating Activities
$ 80,100
14-56
P14A-36A Preparing the statement of cash flows—direct method
Learning Objective 4
Appendix 14A
2. Total Assets $1,051,400
3. Net Cash Prov. by Op. Act. $308,500
Boundary Rare Coins (BRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, BRC issued no par common stock for $475,000.
b. Early in January, BRC made the following cash payments:
1. For store fixtures, $53,000
2. For merchandise inventory, $260,000
3. For rent expense on the store building, $13,000
c. Later in the year, BRC purchased merchandise inventory on account for $240,000. Before year-end,
BRC paid $160,000 of this accounts payable.
d. During 2018, BRC sold 2,200 units of merchandise inventory for $450 each. Before year-end, the
company collected 85% of this amount. Cost of goods sold for the year was $330,000, and ending
merchandise inventory totaled $170,000.
e. The store employs three people. The combined annual payroll is $80,000, of which BRC still owes
$4,000 at year-end.
f. At the end of the year, BRC paid income tax of $24,000. There are no income taxes payable.
g. Late in 2018, BRC paid cash dividends of $40,000.
h. For store fixtures, BRC uses the straight-line depreciation method, over five years, with zero residual
value.
Requirements
1. Prepare BRC’s income statement for the year ended December 31, 2018. Use the single-step format,
with all revenues listed together and all expenses listed together.
2. Prepare BRC’s balance sheet at December 31, 2018.
3. Prepare BRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows
from operating activities by the direct method.
14-57
P14A-36A, cont.
SOLUTION
Requirement 1
BOUNDARY RARE COINS
Income Statement
Year Ended December 31, 2018
Revenue:
14-58
P14A-36A, cont.
Requirement 2
BOUNDARY RARE COINS
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash
$ 690,500
14-59
P14A-36A, cont.
Requirement 3
BOUNDARY RARE COINS
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Receipts:
Collections from Customers (2,200 × $450 × 0.85)
$ 841,500
P14A-37A Preparing the statement of cash flows—direct method
Learning Objective 4
Appendix 14A
1. Net Cash Prov. by Op. Act. $125,100
Collections from Cust. $438,900
Use the Rolling Hills, Inc. data from Problem P14-34A.
Requirements
1. Prepare the 2018 statement of cash flows by the direct method.
2. How will what you learned in this problem help you evaluate an investment?
SOLUTION
Requirement 1
ROLLING HILLS, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Receipts:
Collections from Customers
$ 438,900
Interest Received
8,700
$ 447,600
14-61
P14A-37A, cont.
Requirement 1, cont.
Net Sales Revenue
$ 440,000
+ Beginning Accounts Receivable
+ 25,400
Other Operating Expenses
$ 10,200
+ Beginning Accrued Liabilities
+ 30,300
− Ending Accrued Liabilities
− 28,700
= Cash paid for other operating expenses
$ 11,800
14-62
P14A-37A, cont.
Requirement 1, cont.
Plant Assets
12/31/2017
114,650
Acquisitions
23,600
13,410
Disposed of
12/31/2018
124,840
Requirement 2
I will be able to evaluate an investment with this information because I can see the cash receipts and
14-63
P14B-38A Using a spreadsheet to prepare the statement of cash flows—indirect method
Learning Objective 5
Appendix 14B
Cash Pmt. of Div. $28,300
Cash Pmt. for Acq. of Land $25,200
The 2018 comparative balance sheet and income statement of Appleton Group, Inc. follow. Appleton
disposed of a plant asset at book value during 2018.
14-64
P14B-38A, cont.
Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating
activities by the indirect method. A plant asset was disposed of for $0. The cost and accumulated
depreciation of the disposed asset was $11,600. There were no sales of land, no retirement of common
stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.
14-65
P14B-38A, cont.
SOLUTION
APPLETON GROUP, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Balance
Transaction Analysis
Balance
Panel A – Balance Sheet:
12/31/2017
DEBIT
CREDIT
12/31/2018
Cash
$ 15,900
1,200
(m)
$ 14,700
Accounts Receivable
43,900
1,700
(c)
42,200
P14B-38A, cont.
Panel B – Statement of Cash Flows:
Cash Flows from Operating Activities:
14-67
Problems (Group B)
P14-39B Identifying the purpose and preparing the statement of cash flows—indirect method
Learning Objectives 1, 2
2. Net Income $492,800
4. Net Cash Prov. by Op. Act. $359,500
Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, CRC issued no par common stock for $525,000.
b. Early in January, CRC made the following cash payments:
1. For store fixtures, $51,000
2. For merchandise inventory, $240,000
3. For rent expense on a store building, $18,000
c. Later in the year, CRC purchased merchandise inventory on account for $243,000. Before year-end,
CRC paid $153,000 of this accounts payable.
d. During 2018, CRC sold 2,800 units of merchandise inventory for $325 each. Before year-end, the
company collected 95% of this amount. Cost of goods sold for the year was $290,000, and ending
merchandise inventory totaled $193,000.
e. The store employs three people. The combined annual payroll is $82,000, of which CRC still owes
$5,000 at year-end.
f. At the end of the year, CRC paid income tax of $17,000. There was no income taxes payable.
g. Late in 2018, CRC paid cash dividends of $38,000.
h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual
value.
Requirements
1. What is the purpose of the statement of cash flows?
2. Prepare CRC’s income statement for the year ended December 31, 2018. Use the single-step format,
with all revenues listed together and all expenses listed together.
3. Prepare CRC’s balance sheet at December 31, 2018.
4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31,
2018.
P14-39B, cont.
SOLUTION
Requirement 1
The purpose of the statement of cash flow is to report on the cash receipts and cash payments for
Requirement 2
CLASSIC RARE COINS
Income Statement
Year Ended December 31, 2018
Revenue:
Sales (2,800 × $325)
$ 910,000
14-69
P14-39B, cont.
Requirement 3
CLASSIC RARE COINS
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash
$ 795,500
P14-39B, cont.
Requirement 4
CLASSIC RARE COINS
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 492,800
14-71
P14-40B Preparing the statement of cash flows—indirect method
Learning Objective 2
Net Cash Prov. by Op. Act. $85,700
Accountants for Benson, Inc. have assembled the following data for the year ended December 31, 2018:
2018
2017
Current Assets:
Transaction Data for 2018:
Issuance of common stock for cash
$ 37,000
Payment of notes payable
$ 47,100
Depreciation expense
24,000
Payment of cash dividends
53,000
P14-40B, cont.
SOLUTION
BENSON, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 66,000
14-73
P14-41B Preparing the statement of cash flows—indirect method with non-cash transactions
Learning Objective 2
1. Net Cash Prov. by Op. Act. $136,300
The 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:
14-74
P14-41B, cont.
Additionally, Sweet Valley purchased land of $20,900 by financing it 100% with long-term notes
payable during 2018. During the year, there were no sales of land, no retirements of stock, and no
treasury stock transactions. A plant asset was disposed of for $0. The cost and the accumulated
depreciation of the disposed asset was $13,240. Plant asset was acquired for cash.
Requirements
1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.
2. How will what you learned in this problem help you evaluate an investment?
P14-41B, cont.
SOLUTION
Requirement 1
SWEET VALLEY, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 107,500
14-76
P14-41B, cont.
Requirement 1, cont.
Plant Assets
12/31/2017
108,330
Acquisitions
20,700
13,240
Disposed of
12/31/2018
115,790
Requirement 2
I will be able to evaluate an investment with this information because I can see the business’s cash
14-77
P14-42B Preparing the statement of cash flows—indirect method, evaluating cash flows, and
measuring free cash flows
Learning Objectives 2, 3
1. Net Cash Used for Inv. Act. $(157,400)
The comparative balance sheet of Robeson Educational Supply at December 31, 2018, reported the
following:
2018
2017
Current Assets:
Cash
$ 83,900
$ 20,500
Accounts Receivable
14,500
21,800
Merchandise Inventory
61,800
60,400
Current Liabilities:
Accounts Payable
29,600
28,100
Accrued Liabilities
10,500
11,900
Robeson’s transactions during 2018 included the following:
Payment of cash dividends
$ 21,200
Depreciation expense
$ 17,400
Purchase of equipment with cash
54,400
Purchase of building with cash
103,000
Issuance of long-term notes payable to
borrow cash
44,000
Net income
63,600
Issuance of common stock for cash
111,000
Requirements
1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31,
2018. Use the indirect method to report cash flows from operating activities.
2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the
reason for your evaluation.
3. If Robeson plans similar activity for 2018, what is its expected free cash flow?
P14-42B, cont.
SOLUTION
Requirement 1
ROBESON EDUCATIONAL SUPPLY
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Net Income
$ 63,600
Requirement 2
The company shows a strong cash flow. They are generating cash from their operations due primarily to
Requirement 3
Net Cash provided by Operating Activities
$ 87,000
14-79
P14A-43B Preparing the statement of cash flows—direct method
Learning Objective 4
Appendix 14A
2. Total Assets $1,118,800
3. Collections from Cust. $918,000
Diversion Rare Coins (DRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, DRC issued no par common stock for $450,000.
b. Early in January, DRC made the following cash payments:
1. For store fixtures, $46,000
2. For merchandise inventory, $310,000
3. For rent expense on a store building, $18,000
c. Later in the year, DRC purchased merchandise inventory on account for $238,000. Before year-end,
DRC paid $138,000 of this accounts payable.
d. During 2018, DRC sold 2,700 units of merchandise inventory for $400 each. Before year-end, the
company collected 85% of this amount. Cost of goods sold for the year was $340,000, and ending
merchandise inventory totaled $208,000.
e. The store employs three people. The combined annual payroll is $97,000, of which DRC still owes
$6,000 at year-end.
f. At the end of the year, DRC paid income tax of $18,000. There was no income taxes payable.
g. Late in 2018, DRC paid cash dividends of $35,000.
h. For store fixtures, DRC uses the straight-line depreciation method, over five years, with zero residual
value.
Requirements
1. Prepare DRC’s income statement for the year ended December 31, 2018. Use the single-step format,
with all revenues listed together and all expenses listed together.
2. Prepare DRC’s balance sheet at December 31, 2018.
3. Prepare DRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows
from operating activities by the direct method.
14-80
P14A-43B, cont.
SOLUTION
Requirement 1
DIVERSION RARE COINS
Income Statement
Year Ended December 31, 2018
Revenue:
14-81
P14A-43B, cont.
Requirement 2
DIVERSION RARE COINS
Balance Sheet
December 31, 2018
Assets
Current Assets:
Cash
$ 712,000
Accounts Receivable ($1,080,000 × 15%)
162,000
14-82
P14A-43B, cont.
Requirement 3
DIVERSION RARE COINS
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Receipts:
Collections from Customers (2,700 × $400 × 0.85)
$ 918,000
14-83
P14A-44B Preparing the statement of cash flows—direct method
Learning Objective 4
Appendix 14A
1. Net Cash Prov. by Op. Act. $136,300
Collections from Cust. $443,700
Use the Sweet Valley data from Problem P14-41B.
Requirements
1. Prepare the 2018 statement of cash flows by the direct method.
2. How will what you learned in this problem help you evaluate an investment?
SOLUTION
Requirement 1
SWEET VALLEY, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Cash Flows from Operating Activities:
Receipts:
Collections from Customers
$ 443,700
Interest Received
8,200
14-84
P14A-44B
Requirement 1, cont.
Net Sales Revenue
$ 445,000
+ Beginning Accounts Receivable
+ 25,100
− Ending Accounts Receivable
− 26,400
= Cash receipts from customers
$ 443,700
14-85
P14A-44B
Requirement 1, cont.
Plant Assets
12/31/2017
108,330
Acquisitions
20,700
13,240
Disposed of
12/31/2018
115,790
Requirement 2
I will be able to evaluate an investment with this information because I can see the cash receipts and
P14-45B Using a spreadsheet to prepare the statement of cash flows—indirect method
Learning Objective 5
Appendix 14B
Cash Pmt. of Div. $28,200
Cash Pmt. of N/P $13,000
The 2018 comparative balance sheet and income statement of Attleboro Group, Inc. follow. Attleboro
disposed of a plant asset at book value in 2018.
14-87
P14-45B. cont.
Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating
activities by the indirect method. A plant asset was disposed of for $0. The cost and accumulated
depreciation of the disposed asset was $13,600. There were no sales of land, no retirement of common
stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.
P14-45B, cont.
SOLUTION
ATTLEBORO GROUP, INC.
Statement of Cash Flows
Year Ended December 31, 2018
Balance
Transaction Analysis
Balance
Panel A – Balance Sheet:
12/31/2017
DEBIT
CREDIT
12/31/2018
Cash
$ 15,500
1,500
(m)
$ 14,000
Accounts Receivable
43,700
1,700
(c)
42,000
14-89
P14-45B, cont.
Panel B – Statement of Cash Flows:
Cash Flows from Operating Activities:
Net Income
(a)
65,300
Adjustments to Reconcile Net Income to Net Cash
14-90
Excel Skill Problem
P14-46 Using Excel to prepare the statement of cash flows, indirect method
The James Island Clothing Company began operations on July 1, 2018. The adjusted trial balance as of
December 31, 2018, appears below, along with transaction data for 2018
Transaction data for 2018
Cash paid for purchase of office equipment
$ 6,000
Cash paid for purchase of truck
5,000
Acquisition of plant assets with a long-term notes payable
33,000
Cash payment of dividends
1,000
Cash receipt from issuance of common stock
100,000
P14-46B, cont.
Requirements
1. Complete the worksheet for the James Island Clothing Company, filling in the Transaction Analysis
columns. Note: Some of the input cells marked in blue may not require entries.
2. Prepare the James Island Clothing Company statement of cash flows for the year ended December
31, 2018. Use the indirect method.
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the Multimedia
14-92
Continuing Problem
P14-47 Preparing the statement of cash flows—indirect method
This problem continues the Canyon Canoe Company situation from Chapter 13. Canyon Canoe
Company’s comparative balance sheet is shown below. 2019 amounts are assumed, but include several
transactions from prior chapters.
Additional data follow:
P14-47, cont.
1. The income statement for 2019 included the following items:
a. Net income, $417,000.
b. Depreciation expense for the year, $34,330.
c. Amortization on the bonds payable, $254.
2. There were no disposals of property, plant and equipment during the year. All acquisitions of PP&E
were for cash except the land, which was acquired by issuing preferred stock.
3. The company issued bonds payable with a face value of $210,000, receiving cash of $208,476.
4. The company distributed 4,000 shares of common stock in a stock dividend when the market value
was $4.50 per share. All other dividends were paid in cash.
5. The common stock, except for the stock dividend, was issued for cash.
6. The cash receipt from the notes payable in 2019 is considered a financing activity because it does not
relate to operations.
Requirement
Prepare the statement of cash flows for the year ended December 31, 2019, using the indirect method.
14-94
P14-47, cont.
SOLUTION
CANYON CANOE COMPANY
Statement of Cash Flows
Year Ended December 31, 2019
Cash Flows from Operating Activities:
Net Income
$ 417,000
Critical Thinking
Tying It All Together Case 14-1
Amazon.com, Inc. serves its customers through its retail Web sites, selling millions of unique products.
In addition, the company manufactures and sells electronic devices including Kindle e-readers and Fire
tablets. Amazon.com also offers Amazon Prime, a membership program that includes unlimited free
shipping on items and access to unlimited streaming of movies and TV episodes.
Requirements
1. Review Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of
Operations) included in the 2015 Annual Report. What does Amazon.com, Inc. state is the
company’s financial focus? What are free cash flows and how does Amazon.com plan to
increase its free cash flows?
2. Review the statement of cash flows for Amazon.com, Inc. What type of noncash adjustments to
net income did Amazon.com report in 2015?
3. Review the 2015 statement of cash flows for Amazon.com, Inc. What was the net cash provided
(used) for investing activities? What were the cash inflows and outflows related to this section?
4. Review the 2015 statement of cash flows for Amazon.com, Inc. What was the net cash provided
(used) for financing activities? What were the cash inflows and outflows related to this section?
SOLUTION
Requirement 1
Amazon.com, Inc. states their financial focus is on long-term, sustainable growth in free cash flows per
Requirement 2
Amazon.com reported the following noncash adjustments to net income: depreciation, stock-based
Requirement 3
The net cash used for investing activities was $6,450 million. This included the following inflows and
outflows:
14-96
Requirement 4
The net cash used for financing activities was $3,763 million. This included the following inflows and
outflows:
Decision Case 14-1
Theater by Design and Show Cinemas are asking you to recommend their stock to your clients. Because
Theater by Design and Show Cinemas earn about the same net income and have similar financial
positions, your decision depends on their statement of cash flows, summarized as follows:
Theater by Design
Show Cinemas
Net Cash Provided by Operating Activities
$ 30,000
$ 70,000
Cash Provided by (Used for) Investing
Activities:
Purchase of Plant Assets
$ (20,000)
$ (100,000)
Sale of Plant Assets
40,000
20,000
10,000
(90,000)
Cash Provided by (Used for) Financing
Activities:
Issuance of Common Stock
0
30,000
Payment of Long-term Debt
(40,000)
0
Net Increase (Decrease) in Cash
$ 10,000
$ 10,000
Based on their cash flows, which company looks better? Give your reasons.
SOLUTION
Show Cinemas looks like a better investment because:
1. They have more cash provided from their operating activities. This is a key indicator when
14-97
Ethical Issue 14-1
Moss Exports is having a bad year. Net income is only $60,000. Also, two important overseas customers
are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The
company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the
best face on the company’s financial statements. Moss’s bank closely examines cash flow from
operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the
slow-paying clients as long-term. He explains to the board that removing the $80,000 increase in
accounts receivable from current assets will increase net cash provided by operations. This approach
may help Moss get the loan.
Requirements
1. Using only the amounts given, compute net cash provided by operations, both without and with the
reclassification of the receivables. Which reporting makes Moss look better?
2. Under what condition would the reclassification of the receivables be ethical? Unethical?
SOLUTION
Requirement 1
Without
With
Requirement 2
The reclassification would be unethical because it would be misleading on both the Statement of Cash
14-98
Financial Statement Case 14-1
Details about a company’s cash flows appear in a number of places in the annual report. Use Target
Requirements
1. Which method does Target use to report net cash flows from operating activities? How can you tell?
2. Target earned net income during 2015. Did operations provide cash or use cash during 2015? Give
the amount. How did net cash provided by (used for) operations during 2015 compare with net
income in 2015?
3. For the year ended January 30, 2016 (fiscal year 2015), did Target pay cash dividends? If so, how
much?
4. For the year ended January 30, 2016, did Target use cash to purchase property, plant, and equipment?
If so, how much?
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Requirement 4
