1. The primary advantage of the direct method is that it directly reports cash receipts and cash
p
ayments in the statement of cash flows. Its primary disadvantage is that these data may not be
readily available in the accounting records. Thus, the direct method is normally more costly to
p
repare and, as a result, is used infrequently in practice.
4. The $30,000 increase must be added to net income because the amount of cash paid to
merchandise creditors was $30,000 less than the amount of purchases included in the cost of
merchandise sold.
6. a. Cash flows from investing activities—Cash received from the disposal of fixed assets, $15,000
The $15,000 gain on asset disposal should be deducted from net income in determining ne
t
cash flows from (used for) operating activities under the indirect method.
b. No effect
7. a. $100,000 gain
b. Cash inflow of $600,000
c. The gain of $100,000 would be deducted from net income in determining net cash flows fro
m
(used for) operating activities; $600,000 would be reported as a cash inflow under investing
activities.
b
CHAPTER 16
STATEMENT OF CASH FLOWS
DISCUSSION QUESTIONS
CHAPTER 16 Statement of Cash Flows
PE 16-1A
a. Financing d. Financing
PE 16-1B
a. Financing d. Operating
b. Investing e. Operating
PE 16-2A
Net income…………………………………………………………………………
…
$343,700
Adjustments to reconcile net income to net cash flows from (used for)
operating activities:
Depreciation…………………………………………………………………
…
17,720
PE 16-2B
Net income…………………………………………………………………………
…
$126,300
Adjustments to reconcile net income to net cash flows from (used for)
operating activities:
Depreciation……………………………………………………..…………… 6,320
PRACTICE EXERCISES
CHAPTER 16 Statement of Cash Flows
PE 16-3A
Net income…………………………….…………………………………………………
…
$185,000
Adjustments to reconcile net income to net cash flows from (used for)
operating activities:
Changes in current operating assets and liabilities:
Decrease in accounts receivable……………………………………………
…
2,700
Increase in inventory…………………………………..……………………… (2,300)
PE 16-3B
Net income…………………………………..……………………………………………
…
$351,000
Adjustments to reconcile net income to net cash flows from (used for)
operating activities:
Changes in current operating assets and liabilities:
Increase in accounts receivable……………………………………………
…
(7,900)
Increase in inventory…………………………….……………………………
…
(11,190)
PE 16-4A
Cash flows from (used for) operating activities:
Net income……………………………………….…………………
…
$296,000
Adjustments to reconcile net income to net cash flows
from (used for) operating activities:
Depreciation……………………………………………………
…
113,100
PE 16-4B
Cash flows from (used for) operating activities:
Net income…………………………………….………………………
…
$170,000
Adjustments to reconcile net income to net cash flows
from (used for) operating activities:
Depreciation……………………………………………………… 29,000
Loss on disposal of equipment……………………………..
…
11,850
PE 16-5A
The loss on the sale of land is added to net income in the Operating Activities section.
Loss on sale of land……………………………………….………………………… $ 33,000
The purchase and sale of land are reported as part of cash flows from (used for)
investing activities as shown below.
PE 16-5B
The gain on the sale of land is subtracted from net income in the Operating Activities
section.
Gain on sale of land………………………….……………………………………… $ (29,000)
The purchase and sale of land are reported as part of cash flows from (used for)
investing activities as shown below.
CHAPTER 16 Statement of Cash Flows
PE 16-6A
Cash flows from (used for) financing activities:
Cash received from issuing common stock*……………………
…
$12,000
Cash dividends**……………………………………………………… (2,000)
PE 16-6B
Cash flows from (used for) financing activities:
Cash received from issuing common stock*…………………..
…
$ 156,000
Cash paid to retire bonds payable………………………..………
…
(160,000)
Cash dividends**……………………………………………………… (11,000)
…
CHAPTER 16 Statement of Cash Flows
PE 16-7A
Year 2 Year 1
a. Net cash flows from operating activities…………
…
$385,000 $367,000
Less investments in fixed assets to replace
b. The increase in free cash flow from $136,000 to $179,900 represents an improvement.
PE 16-7B
Year 2 Year 1
a. Net cash flows from operating activities…………
…
$623,000 $596,000
Less investments in fixed assets to replace
existing capacity……………………………………
…
447,200 396,000
***
***
…
CHAPTER 16 Statement of Cash Flows
Ex. 16-1
There were net additions of $3,161 ($1,063 + $2,098) to the net loss $1,063 reported
on the income statement to convert the net loss to the net cash flows from
operating activities. For example, depreciation and amortization are expenses
in determining net income, but they do not result in cash ‘outflows. Thus, depreciation
The following cash flows from operating activities for Tesla, Inc. (in millions) is
provided for class discussion:
Cash flows from (used for) operating activities:
Amortization of debt discounts and issuance costs 159
Inventory write-downs 85
Loss on disposals of fixed assets 161
Foreign currency transaction (gains) losses (1)
Interest expense, noncash, and other operating activities 49
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable (497)
Decrease (increase) in inventory (1,023)
Decrease (increase) in operating lease vehicles (215)
Decrease (increase) in other assets (289)
EXERCISES
CHAPTER 16 Statement of Cash Flows
Ex. 16-2
a. Cash payment, $303,000 e. Cash payment, $40,000
b. Cash receipt, $720,000 f. Cash receipt, $588,000
Ex. 16-3
a. financing g. investing
b. financing h. investing
c. financing i. investing
Ex. 16-4
a. deducted g. added
b. deducted h. deducted
c. added i. added
CHAPTER 16 Statement of Cash Flows
Ex. 16-5
a. Cash flows from (used for) operating activities:
Net income………………………………………………………
…
$73,600
Adjustments to reconcile net income to net cash
flows from (used for) operating activities:
Depreciation………………………………………………… 27,400
Changes in current operating assets and liabilities:
Increase in accounts receivable……………………
…
(8,000)
b. Cash flows from operating activities show the cash inflow or outflow from a
company’s day-to-day operations. Net income reports the excess of revenues over
expenses for a company using the accrual basis of accounting. Revenues are
recorded when they are earned, not necessarily when cash is received. Expenses
Ex. 16-6
a. Cash flows from (used for) operating activities:
Net income………………………………………………………
…
$290,000
Adjustments to reconcile net income to net cash
flows from (used for) operating activities:
Depreciation………………………………………………… 150,500
Changes in current operating assets and liabilities:
Decrease in accounts receivable……………………
…
8,600
Increase in inventories………………………………
…
(17,600)
…
CHAPTER 16 Statement of Cash Flows
Ex. 16-7
a. Cash flows from (used for) operating activities:
Net income…………………………………………………………
…
$542,000
Adjustments to reconcile net income to net cash
flows from (used for) operating activities:
Depreciation…………………………………………………
…
57,000
Gain on disposal of equipment……………………………
…
(24,000)
Changes in current operating assets and liabilities:
Increase in accounts receivable………………………
…
(9,800)
Decrease in inventory……………………………………
…
5,550
Decrease in prepaid insurance………………………… 1,000
b. Cash flows from operating activities reports the cash inflow or outflow from a
company’s day-to-day operations. Net income reports the excess of revenues over
expenses for a company using the accrual basis of accounting. Revenues are
Ex. 16-8
a. Net cash flows from operating activities…………………………
…
$357,500
Add: Increase in accounts receivable…………………………
…
$ 14,300
Increase in prepaid expenses……………………………… 2,970
Decrease in income taxes payable………………………
…
7,700
Gain on sale of investments………………………………
…
13,200 38,170
Deduct: Depreciation………………………………………………
…
$(29,480)
Decrease in inventories…………………………………
…
(19,140)
CHAPTER 16 Statement of Cash Flows
Ex. 16-8 (Concluded)
b. Curwen’s net income differed from net cash flows from operating activities because
of the following:
●$29,480 of depreciation expense, which has no effect on cash flows from
operating activities.
●A $13,200 gain on the sale of investments. The proceeds from this sale, which
include the gain, are reported in the Investing Activities section of the
statement of cash flows.
Ex. 16-9
a. Cash flows from (used for) operating activities:
Net income $149,774
Adjustments to reconcile net income to net
cash flows from (used for) operating activities:
Increase in accounts payable
and other current liabilities 17,464
Net cash flows from operating activities $150,296
b. National Beverage is doing well financially. The company has positive earnings
and positive net cash flow from operating activities. The increases in accounts
receivable and inventory are reasonable variations and not concerning. The
CHAPTER 16 Statement of Cash Flows
Ex. 16-10
Cash flows from (used for) investing activities:
Cash received from sale of equipment………………………………………… $101,250
Ex. 16-11
Cash flows from (used for) investing activities:
Cash received from sale of equipment………………………………………… $132,500
The loss on the sale, $7,500 ($132,500 proceeds from sale less $140,000*
book value), would be added to net income in determining the net cash flows
from operating activities if the indirect method of reporting cash flows from
operations was used.
*
$200,000 – $60,000
…
Ex. 16-13
Cash flows from (used for) investing activities:
Cash paid for purchase of land…………………………………………………
…
$(246,000)
A separate schedule of noncash investing and financing activities would report
the purchase of $324,000 land with a long-term mortgage note, as follows:
Purchase of land by issuing long-term mortgage note………………………… $324,000
Ex. 16-14
Dividends declared……………………………………………………………………
…
$585,000
CHAPTER 16 Statement of Cash Flows
Ex. 16-15
Cash flows from (used for) financing activities:
Cash received from issuing common stock…………………………………
…
$1,920,000
Cash dividends……………………………………………………………………
…
(463,200)
*
$1,200,000 + $720,000
A stock dividend does not involve the receipt or payment of cash.
Note: It could be disclosed in a note since it involves the issuance of additional stock.
*
CHAPTER 16 Statement of Cash Flows
Ex. 16-17
a.
Cash flows from (used for) operating activities:
Net income $ 79
Adjustments to reconcile net income to net
Net cash flows from operating activities $ 49
Cash flows from (used for) investing activities:
Cash received from sale of land $153
Cash paid for purchase of equipment (38)
Net cash flows from investing activities 115
*$31 – $6 = $25
b. Hirayama Industries Inc.’s net income was more than the net cash flows from
operating activities because of the following:
●$33 of depreciation expense, which has no effect on cash.
●A $51 gain on the sale of land. The proceeds from this sale of $153, which
include the gain, are reported in the Investing Activities section of the
statement of cash flows.
For the Year Ended December 31, 20Y2
Hirayama Industries Inc.
Statement of Cash Flows
CHAPTER 16 Statement of Cash Flows
Ex. 16-18
a. 1. The increase in accounts receivable should be deducted from net income in the
Cash Flows from (used for) Operating Activities section.
2. The gain on the sale of investments should be deducted from net income in the
Cash Flows from (used for) Operating Activities section.
3. The increase in accounts payable should be added to net income in the Cash
Flows from (used for) Operating Activities section.
CHAPTER 16 Statement of Cash Flows
Ex. 16-18 (Concluded)
b. A corrected statement of cash flows would be as follows:
Cash flows from (used for) operating activities:
Net income $ 360,000
Adjustments to reconcile net income to
net cash flows from (used for) operating activities:
Depreciation 100,800
Net cash flows from operating activities $ 381,360
Cash flows from (used for) investing activities:
Cash received from sale of investments $ 240,000
Cash paid for purchase of land (259,200)
Cash paid for purchase of equipment (432,000)
Net cash flows used for investing activities (451,200)
Cash flows from (used for) financing activities:
Cash received from issuing common stock $ 312,000
Cash dividends (132,000)
For the Year Ended December 31, 20Y9
Shasta Inc.
Statement of Cash Flows
CHAPTER 16 Statement of Cash Flows
Ex. 16-19
a. Cash flows used for investments in PPE………………………………
…
$210,000
Replacement percentage…………………………………………………
…
75
Cash paid for maintaining property, plant, and equipment…………
…
$157,500
Net cash flows from operating activities………………………………
…
$539,000
Less cash paid for maintaining property, plant, and equipment…
…
157,500
Free cash flow………………………………………………………………
…
$381,500
Ex. 16-20
a.
Cash flows used for investments in PPE…………………
…
$1,028
Replacement percentage………………………………………
…
90
Cash paid for maintaining PPE………………………………
…
$ 925
Net cash flows from operating activities…………………… $4,955
Less cash paid for maintaining PPE………………………… 925
Free cash flow…………………………………………………… $4,030
Ex. 16-21
Cash flows used for investments in PPE……………………………………
…
$440,000
Replacement percentage………………………………………………………
…
85
Cash paid for maintaining PPE………………………………………………
…
$374,000
Recent Fiscal Year-End
(all numbers in thousands)*
%
%
%
CHAPTER 16 Statement of Cash Flows
Appendix 2 Ex. 16-22
a. Sales………………………………………………………………………………
…
$753,500
Decrease in accounts receivable balance…………………………………
…
48,400
Cash received from customers………………………………………………
…
$801,900
Appendix 2 Ex. 16-23
Cost of merchandise sold*…………………………………………………………
…
$12,199
Decrease in merchandise inventories…………………………………………… (67)
* In millions
Appendix 2 Ex. 16-24
a. Cost of merchandise sold……………………………………………………
…
$1,031,550
Decrease in accounts payable………………………………………………
…
9,660
…
(15,410)
CHAPTER 16 Statement of Cash Flows
Appendix 2 Ex. 16-25
a. Cash flows from (used for) operating activities:
Cash received from customers…………………………
…
$ 522,760
Cash paid for merchandise………………………………
(302,400)
Computations:
1. Sales……………………………………………………………..……………
…
$511,000
Decrease in accounts receivable………………………………………… 11,760
Cash received from customers…………………………………………
…
$522,760
3. Operating expenses other than depreciation…………………………
…
$105,000
Decrease in prepaid expenses…………………………………………… (3,780)
Increase in accrued expenses payable…………………………………
…
(1,260)
b. The direct method directly reports cash receipts and payments. The cash received
less the cash paid is the net cash flows from operating activities. Individual cash
receipts and payments are reported in the Cash Flows from (used for) Operating
Activities section.
The indirect method adjusts accrual basis net income for revenues and expenses
that do not involve the receipt or payment of cash to arrive at net cash flows from
operating activities.
1
2
CHAPTER 16 Statement of Cash Flows
Appendix 2 Ex. 16-26
Cash flows from (used for) operating activities:
Cash received from customers……………………………
…
$ 370,250
Cash paid for merchandise…………………………………
…
(135,600)
Computations:
1. Sales………………………………………………………………………………
…
$374,500
Increase in accounts receivable………………………………………………
…
(4,250)
Cash received from customers………………………………………………
…
$370,250
2. Cost of merchandise sold………………………………………………………
…
$129,500
Increase in inventories…………………………………………………………
…
10,170
Increase in accounts payable…………………………………………………
…
(4,070)
Cash paid for merchandise……………………………………………………
…
$135,600
3. Operating expenses other than depreciation………………………………
…
$96,910
…
1
2