CHAPTER 23
Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Format, objectives
purpose, and source
of statement.
1, 2, 5, 7,
8, 12
1, 2, 5, 6
2.
Classifying investing,
financing, and operating
activities.
3, 4, 6,
16, 17, 19
1, 2, 3,
8, 12
1, 2, 10
1, 3, 4, 5
3.
Direct vs. indirect
methods of preparing
operating activities.
9, 20
4, 5, 9,
10, 11
3, 4, 5, 6,
13, 14
5
4.
Statement of cash flows—
direct method.
11, 13, 14
6, 7
3, 5, 7, 9,
12, 13
3, 4, 5
5.
Statement of cash flows—
indirect method.
10, 13,
15, 16
10, 11
4, 6, 8, 11,
14, 15, 16,
17, 18
1, 2, 4, 5,
6, 7, 8
2
6.
Preparing schedule
of non-cash investing
and financing activities.
6, 7, 8
5
Worksheet adjustments.
19, 20, 21
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe the usefulness and
format of the statement of cash
flows.
3
1, 2, 10, 16
5, 6
2. Prepare a statement of cash
flows.
1, 2, 4, 5, 8, 9,
10, 11
2, 3, 4, 5, 6, 7,
8, 9, 11, 12,
13, 14, 15, 16,
17, 18
1, 2, 3, 4,
5, 6, 7, 8
1, 2, 3, 4,
5, 6
preparing a statement of cash
flows.
10, 18
1, 2, 4, 5,
6, 7, 8
1, 2, 3, 4
preparing a statement of cash
19, 20, 21
flows.
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E23.1
Classification of transactions.
Simple
10–15
E23.2
Statement presentation of transactions—indirect method.
Moderate
20–30
periodic inventory.
E23.4
Preparation of operating activities section—direct method.
Simple
20–30
E23.5
Preparation of operating activities section—direct method.
Simple
20–30
E23.6
Preparation of operating activities section—indirect method.
Simple
15–20
E23.7
Computation of operating activities—direct method.
Simple
15–20
indirect method.
E23.9
SCF—direct method.
Moderate
20–30
E23.10
Classification of transactions.
Moderate
25–35
E23.11
SCF—indirect method.
Moderate
30–35
E23.12
SCF—direct method.
Moderate
20–30
E23.13
SCF—direct method.
Moderate
30–40
E23.14
SCF—indirect method.
Moderate
30–40
E23.15
SCF—indirect method.
Moderate
25–35
activities.
E23.17
SCF—indirect method and statement of financial position.
Moderate
30–40
E23.18
Partial SCF—indirect method.
Moderate
25–30
E23.19
Worksheet analysis of selected accounts.
Moderate
20–25
E23.20
Worksheet analysis of selected transactions.
Moderate
20–25
E23.21
Worksheet preparation.
Moderate
45–55
P23.1
SCF—indirect method.
Moderate
40–45
P23.2
SCF—indirect method.
Moderate
50–60
P23.3
SCF—direct method.
50–60
P23.4
SCF—direct method.
Moderate
45–60
activities, direct method.
financial statements.
P23.7
SCF—direct and indirect methods.
Moderate
30–40
P23.8
Indirect SCF.
Moderate
30–40
CA23.1
Analysis of improper SCF.
Moderate
30–35
CA23.2
SCF theory and analysis of improper SCF.
Moderate
30–35
CA23.3
SCF theory and analysis of transactions.
Moderate
30–35
CA23.4
Moderate
20–30
CA23.5
Purpose and elements of SCF.
30–40
CA23.6
Cash flow reporting, ethics.
Moderate
20–30
ANSWERS TO QUESTIONS
1. The main purpose of the statement of cash flows is to show the change in cash of a company from
one period to the next. The statement of cash flows provides information about a company’s
2. Some uses of this statement are:
Assessing future cash flows: Income data when augmented with current cash flow data provide a
better basis for assessing future cash flows.
Assessing quality of income: Some believe that cash flow information is more reliable than
income information because income involves a number of assumptions, estimates and valuations.
3. Investing activities generally involve non-current assets and include (1) lending money and
collecting on those loans and (2) acquiring and disposing of investments and productive long-lived
assets. Financing activities, on the other hand, involve liability and equity items and include (1)
4. Examples of sources of cash in a statement of cash flows include cash from operating activities,
issuance of debt, issuance of ordinary shares, sale of investments, and the sale of property, plant,
5. Preparing the statement of cash flows involves three major steps:
(1) Determine the change in cash. This is simply the difference between the beginning and ending
cash balances.
Questions Chapter 23 (Continued)
6. Purchase of land—investing;
Payment of dividends—financing;
7. Comparative statements of financial position, a current income statement, and certain transaction
data all provide information necessary for preparation of the statement of cash flows. Comparative
8. It is necessary to convert accrual-based net income to a cash basis because net income includes
items that do not provide or use cash. An example would be an increase in accounts receivable.
9. Net cash flow from operating activities under the direct method is the difference between cash
revenues and cash expenses. The direct method adjusts the revenues and expenses directly to
reflect the cash basis. This results in cash net income, which is equal to “net cash flow from
10. Net cash flow from operating activities is $3,820,000. Using the indirect method, the solution is:
Net income …………………………………………………………………….. $3,500,000
Adjustments to reconcile net income to net cash
provided by operating activities:
11. Accrual basis sales ……………………………………………………. £100,000
Less: Increase in accounts receivable …………………………. 30,000
12. A number of factors could have caused an increase in cash despite the net loss. These are: (1) high
cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3) sales
Questions Chapter 23 (Continued)
13. Declared dividends…………………………………………………….. £260,000
Add: Dividends payable (beginning of year) ………………….. 85,000
14. To determine cash payments to suppliers, it is first necessary to find purchases for the year. To
find purchases, cost of goods sold is adjusted for the change in inventory (added when inventory
15. Cash flows from operating activities
Net income………………………………………………………………. €320,000
Adjustments to reconcile net income to net cash
16. (a) Cash flows from operating activities
Net income …………………………………………………………………… XXXX
Adjustments to reconcile net income to net
cash provided by operating activities:
Note to instructor: The change in net accounts receivable is an adjustment to net income
under the indirect method.
(d) Cash flows from operating activities
Net loss ……………………………………………………………………….. $(50,000)
Questions Chapter 23 (Continued)
17. (a) Operating activity. (g) Operating activity.
(b) Financing activity. (h) Financing activity.
18. Examples of non–cash transactions are: (1) issuance of shares for non-cash assets, (2) issuance of
19. Cash flows from operating activities
Net income …………………………………………………………………………. XXXX
Adjustments to reconcile net income to net cash
20. Arguments for the indirect or reconciliation method are:
(a) The principal advantage of the indirect method is that it focuses on the differences
between net income and net cash flow from operating activities. That is, it provides a
useful link between the statement of cash flows and the income statement and statement
of financial position. Many companies contend that it is less costly to adjust net income to
net cash flow from operating activities (indirect) than it is to report gross operating cash
21. A worksheet is desirable because it allows the orderly accumulation and classification of data that
will appear on the statement of cash flows. It is an optional but efficient device that aids in the
preparation of the statement of cash flows, especially when numerous adjustments are necessary
or other complicating factors are present.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 23.1
Cash flows from investing activities
Sale of land ……………………………………………………………
$ 180,000
Purchase of equipment …………………………………………..
Purchase of equity investments ………………………………
BRIEF EXERCISE 23.2
Cash flows from financing activities
Issuance of ordinary shares ……………………………………
€ 250,000
Issuance of bonds payable ……………………………………..
Payment of dividends …………………………………………….
Purchase of treasury shares …………………………..………
BRIEF EXERCISE 23.3
(a)
P-I
(g)
P-F
(m)
N
(b)
A
(h)
D
(n)
D
(c)
R-F
(i)
P-I
(o)
R-F
(d)
A
(j)
A
(p)
P-F
(e)
R-I
(k)
D
(q)
R-I, A
(f)
R-I, D
(l)
R-F
(r)
P-F
BRIEF EXERCISE 23.4
Cash flows from operating activities
Cash received from customers
(€200,000 – €12,000) …………………………………..
€188,000
Cash payments
To suppliers
(€120,000 + €11,000 – €13,000) …………….
For operating expenses
(€50,000 – €21,000) ……………………………..
BRIEF EXERCISE 23.5
Cash flows from operating activities
Net income …………………………………………………..
€30,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………...
Increase in inventory …………………………….
BRIEF EXERCISE 23.6
Sales ……………………………………………………………………
$420,000
Add: Decrease in accounts receivable
BRIEF EXERCISE 23.7
Cost of goods sold ……………………………………………….
€500,000
Add: Increase in inventory (€113,000 – €95,000) …….
18,000
Purchases ……………………………………………………………
BRIEF EXERCISE 23.8
Net cash provided by operating activities …………………..
£531,000
Net cash used by investing activities …………………………
(963,000)
Net cash provided by financing activities …………………..
Net increase in cash ………………………………………………….
Cash, 1/1/19………………………………………………………………
BRIEF EXERCISE 23.9
(a)
Cash flows from operating activities
Cash received from customers …………………………..
Cash paid for expenses ($60,000 – $1,840) ………….
Net cash provided by operating activities ……
$31,840
(b)
Cash flows from operating activities
Net income ………………………………………………………..
$40,000
Net cash provided by operating activities ……
$31,840
BRIEF EXERCISE 23.10
Cash flows from operating activities
Net income ……………………………………………………….
$50,000
Adjustments to reconcile net income to net cash
Depreciation expense ……………………………………….
Increase in accounts payable …………………………….
Increase in accounts receivable ………………………..
Increase in inventory ………………………………………..
BRIEF EXERCISE 23.11
Cash flows from operating activities
Net loss …………………………………………………………
(€70,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation expense ……………………………..
Increase in accounts receivable ……………….
BRIEF EXERCISE 23.12
(a)
Land ……………………………………………………….……………..
40,000
Share Capital—Ordinary (1,000 X $10) ……………..
10,000
Share Premium—Ordinary …………………………..
30,000
(b)
No effect
(c)
Non-cash Investing and Financing Activities
Purchase of land through issuance of
ordinary shares ……………………………………………
BRIEF EXERCISE 23.13
(a)
Operating—Net Income ……………………………………………
317,000,000
Retained Earnings …………………………..
317,000,000
(b)
Retained Earnings …………………………………………………..
120,000,000
Financing—Cash Dividends …………………………..
(c)
Equipment ……………………………………………………….
114,000,000
Investing—Purchase of Equipment ………………….
(d)
Investing—Sale of Equipment …………………………..
10,000,000
Accumulated Depreciation—Equipment …………………..
32,000,000
SOLUTIONS TO EXERCISES
EXERCISE 23.1 (10–15 minutes)
(a) Operating—add to net income.
(b) Financing activity.
(c) Investing activity.
EXERCISE 23.2 (20–30 minutes)
(a)
Plant assets (cost) …………………………………………………..
€25,000)
Less: Accumulated depreciation ([€25,000 ÷ 10] X 6) ….
15,000)
Book value at date of sale ………………………………………..
10,000)
Sale proceeds ………………………………………………………….
(b)
Shown in the financing activities section of a statement of cash
flows as follows:
EXERCISE 23.2 (Continued)
(c) The writeoff of the uncollectible accounts receivable of €27,000 is not
(d) The net loss of €50,000 should be reported in the operating activities
section of the statement of cash flows as an adjustment added back
Cash flows from operating activities
Net loss …………………………………………………….
€(50,000)
Adjustments to reconcile net income
to net cash used in operating activities*:
Depreciation……………………………………….
Gain on sale of land …………………………...
Cash flows from investing activities
Sale of land …………………………………………………….
(e) The purchase of the certificate of deposit is not reported in the
statement of cash flows. This instrument is considered a cash
equivalent and therefore cash and cash equivalents have not changed
as a result of this transaction.
EXERCISE 23.2 (Continued)
(g) The exchange of ordinary shares for an investment in Plumlee is
reported as a “non–cash investing and financing activity.” It can be
shown in a note as follows:
(h) The purchase of treasury shares for €47,000 is reported as a cash
payment in the financing activities section of the statement of cash
flows.
EXERCISE 23.3 (15–25 minutes)
RODRIQUEZ SA
Partial Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income ……………………………………………………….
R$1,050,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense ………………………………….
Decrease in accounts receivable ………………….
Decrease in inventory ………………………………….
Increase in prepaid expenses ………………………
Decrease in accounts payable ……………………..
Decrease in accrued expenses payable ………..
EXERCISE 23.4 (20–30 minutes)
RODRIQUEZ SA
Partial Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Cash receipts from customers …………..
R$7,210,000
(a)
Cash payments …………………………………
To suppliers ……………………………….
(b)
For operating expenses ………………
(c)
Net cash provided by operating
Computations:
(a)
Cash receipts from customers
Sales ………………………………………………..
R$6,900,000
Add: Decrease in accounts
receivable …………………………..
(b)
Cash payments to suppliers
Cost of goods sold …………………………..
R$4,700,000
Deduct: Decrease in inventories …………
300,000
*
Purchases ………………………………………..
Add: Decrease in accounts
payable ……………………………………
(c)
Cash payments for operating
expenses
Operating expenses, exclusive
of depreciation …………………………..
R$1,090,000
**
Add: Increase in prepaid
Cash payments for operating
EXERCISE 23.5 (20–30 minutes)
NORMAN NV
Partial Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Cash receipts from customers ……..
€862,000
(a)
Cash payments …………………………...
For operating expenses ………….
€609,000
(b)
For income taxes …………………..
(c)
Net cash provided by operating
activities …………………………………..
€208,500
(a)
Computation of cash receipts from customers:
Revenue from fees …………………………………….
€840,000
Add: Decrease in accounts receivable
Cash receipts from customers ……………………
€862,000
(b)
Computation of cash payments:
Operating expenses per income statement ….
€624,000
Deduct: Increase in accounts payable
Deduct (€46,000 – €31,000) ……………………….
15,000
Cash payments for operating expenses ………
€609,000
(c)
Computation for income tax:
Income tax expense per income statement ….
Add: Decrease in income taxes payable
Add (€8,500 – €4,000) ……………………………….
4,500
Cash payments for income taxes ………………..
EXERCISE 23.6 (15–20 minutes)
NORMAN NV
Partial Statement of Cash Flows
For the Year Ended December 31, 2019
Cash flows from operating activities
Net income …………………………………………………….
€90,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense ……………………………….
Loss on sale of equipment ………………………..
Decrease in accounts receivable ……………….
Increase in accounts payable …………………….
15,000 (b)
Decrease in income taxes payable ……………..
(4,500)( c)
Net cash provided by operating activities ………..
EXERCISE 23.7 (15–20 minutes)
Situation A:
Cash flows from operating activities
Net cash provided by operating activities ……….
€ 58,000
Cash receipts from customers
Situation B:
(a)
Computation of cash payments to suppliers
Cost of goods sold ……………………………….
€310,000
Add: Increase in inventory …………………..
21,000
Decrease in accounts payable ……..
17,000
Cash payments to suppliers …………………………..
€348,000
Operating expenses ……………………………..
€230,000
Deduct: Decrease in prepaid expenses ….
Increase in accrued expenses
payable ……………………………….
EXERCISE 23.8 (20–30 minutes)
Cash flows from operating activities
Net income
€145,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………..
Decrease in accounts receivable …………..
Other comments:
No. 1 is shown as a cash inflow from the issuance of treasury shares and
cash outflow for the purchase of treasury shares, both financing activities.
No. 2 is shown as a cash inflow from investing activities of €20,000 and the
gain of €3,500 is deducted from net income in the operating activities section.
No. 5 (depreciation) is added back in the operating section.
No. 6 is an increase in the investment account related to net income which
does not increase cash flow. The net income amount must be deducted
from net cash flow from operating activities.
LO: 2,3, Bloom: AP, Difficulty: Moderate, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
EXERCISE 23.9 (20–30 minutes)
a.
Sales Revenue ………………………………………………………
R$538,800
Deduct: Increase in accounts receivable,
net of write-offs
Cash collected from customers …………………………..
R$532,000
b.
Cost of goods sold ………………………………………………..
R$250,000
Purchases …………………………………………………………….
R$234,000
Cash payments to suppliers …………………………………..
R$226,000
Deduct: Decrease in inventory
c.
Interest expense ……………………………………………………
R$ 4,300
Deduct: Decrease in unamortized bond
discount ………………………………………………….
500
Cash paid for interest ……………………………………………
R$ 3,800
d.
R$ 20,400
(R$29,100 – R$21,000) …………………………..………
Deduct: Increase in deferred income taxes
Cash paid for income taxes ……………………………………
R$ 27,800
e.
Selling expenses …………………………………………………..
R$141,500
Deduct: Depreciation (R$3,000* X 1/3) ……………………
R$1,000
Bad debts expense …………………………………..
5,000
6,000
Cash paid for selling expenses …………………………..
R$135,500