PROBLEM 23.3
MORTONSON COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2020
($000 Omitted)
Cash flows from operating activities
Cash receipts from customers ………………….
$3,520 (a)
Cash payments for:
Payments for merchandise …………………..
$1,270
(b)
Heat, light, and power …………………………..
75
Property taxes ……………………………………..
Interest ………………………………………………..
30
Miscellaneous ……………………………………..
10
Income taxes ……………………………………….
808
(c)
Net cash provided by operating activities ….
Cash flows from investing activities
Sale of investments ………………………………….
40
Purchase of buildings and equipment ……….
(310)
Purchase of land ………………………………………
(80)
Net cash used by investing activities ………..
Increase in cash ………………………………………………
Cash, January 1, 2020 ………………………………………
(a) Sales ……………………………………………………….
$3,800
Deduct ending accounts receivable …………..
780
3,020
Add beginning accounts receivable …………..
500
Cash receipts (collections) from
PROBLEM 23.3 (Continued)
(b) Cost of goods sold …………………………..…….
$1,200
Add ending inventory …………………………....
720
Goods available for sale ………………….
1,920
Deduct beginning inventory ……………………
Purchases ………………………………………
Deduct ending accounts payable…………….
420
940
Add beginning accounts payable ……………
330
Cash purchases (payments for
(c) Income taxes …………………………………………
$818
Deduct ending income taxes payable ………
40
778
Add beginning income taxes payable ……..
30
PROBLEM 23.4
MICHAELS COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2020
(Direct Method)
Cash flows from operating activities
Cash receipts:
Cash received from customers …………………….
$1,152,450a
Dividends received ………………………………………
Cash payments:
To suppliers ………………………………………………..
For operating expenses ……………………………….
For taxes …………………………………………………….
For interest ………………………………………………….
Net cash provided by operating activities ……………..
Cash flows from investing activities
Sale of short-term investments
($8,000 + $4,000) ………………………………………
12,000
Sale of land ($175,000 – $125,000) + $8,000 ……
58,000
Purchase of equipment ………………………………..
Net cash used by investing activities ……………
Cash flows from financing activities
Proceeds from issuance of common stock ……
Principal payment on long-term debt …………….
(10,000)
Dividends paid …………………………………………….
Net cash used by financing activities ……………
Net increase in cash ……………………………………………
6,000
Cash, January 1, 2020 …………………………………………
4,000
Cash, December 31, 2020 ……………………………………
$ 10,000
Cash received from customers …………………………..
+ Increase in Inventory …………………………………………
+ Decrease in Accounts Payable …………………………..
PROBLEM 23.4 (Continued)
cOperating Expenses……………………………………….
$276,400
– Depreciation/Amortization expense ……………….
(40,500)
– Decrease in prepaid rent ……………………………….
+ Increase in prepaid insurance ……………………….
1,200
+ Increase in supplies ……………………………………..
– Increase in salaries and wages payable …………
dIncome tax expense ……………………………………….
$ 39,400
– Increase in income taxes payable ………………….
(1,000)
Taxes paid ……………………………………………….
$ 38,400
$ 51,750
+ Decrease in bond premium …………………………...
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income ……………………………………………………..
$58,850
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation/amortization expense ……………
$40,500
Decrease in prepaid rent …………………………..
9,000
Increase in income taxes payable ………………
Increase in salaries and wages payable ……..
2,000
Increase in accounts receivable ………………..
Increase in inventory ………………………………..
Increase in prepaid insurance ……………………
Increase in supplies ………………………………….
Decrease in accounts payable …………………..
Gain on sale of land ………………………………….
Gain on sale of short-term investments ……..
Amortization of bond premium ………………….
Total adjustments ………………………………
8,950
PROBLEM 23.5
ALEXANDER CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
(Indirect Method)
Cash flows from operating activities
Net income ……………………………………………….
$115,000*
Adjustments to reconcile net income
to net cash used by operating
activities:
Loss on sale of machinery ………………….
$ 2,200
(4)
Gain on redemption of bonds ……………..
(1,425)
(5)
Depreciation of machinery ………………….
(4)
Depreciation of building ……………………..
(8)
Amortization of patents ………………………
(3)
Amortization of copyrights …………………
Amortization of bond discount ……………
(6)
Amortization of bond premium ……………
(5)
Equity in earnings of subsidiary ………….
(10,500)
(7)
Increase in accounts receivable
(net) ………………………………………………..
(121,124)
Increase in inventory ………………………….
(131,700)
Increase in prepaid expenses ……………..
(4,000)
Increase in income taxes payable ……….
Increase in accounts payable ……………..
Net cash used by operating activities …………
Cash flows from investing activities
Sale of machinery ……………………………………..
9,000
(4)
Investment in subsidiary …………………………...
(100,000)
(7)
Addition to buildings …………………………………
(127,300)
Major repairs to building …………………………...
(7,200)
(8)
Purchase of machinery ……………………………..
(4)
Purchase of patent ……………………………………
(15,000)
(3)
Net cash used by investing activities …………
PROBLEM 23.5 (Continued)
Cash flows from financing activities
Redemption of bonds ………………………………..
(100,900)
(5)
Sale of bonds less expense of sale …………….
120,411
(6)
Sale of stock ……………………………………………..
Net cash provided by financing activities ……
Decrease in cash ……………………………………………..
Cash, January 1, 2020 ………………………………………
($25,000 + $90,000) ……………………………………….
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ……………………………………………………..
$10,500
Income taxes …………………………………………….
$34,000
Noncash investing and financing activities
Reduction in stated value of stock to
eliminate deficit ………………………………………
$425,000
Comments on Numbered Items
(1) Write-off of deficit has no effect on cash. Analysis of the Common
Stock account shows the following:
Balance 12/31/19 ……………………………………….
Restatement of stated value of stock ………….
(2) Sale of 29,600 shares 11/1/20 for $257,000
with stated value of $5 per share ………………..
PROBLEM 23.5 (Continued)
(3) A patent was purchased for $15,000 cash. The account activity is
analyzed as follows:
Balance 12/31/19 …………………………………………….
$64,000
Purchase ………………………………………………………..
Total ………………………………………………………………
Balance 12/31/20 …………………………………………….
(4) Analysis of the Machinery account shows the following:
Balance 12/31/19 …………………………………………….
$190,000
Disposition of machinery …………………………..……
(16,400)
Total ………………………………………………………
173,600
Balance 12/31/20 …………………………………………….
Loss on sale:
Analysis of accumulated depreciation—
machinery:
Balance 12/31/19 of Accumulated
Depreciation …………………………………
Amount on asset sold ………………………
Balance …………………………………………..
Balance 12/31/20 ……………………………..
Depreciation charged against income
PROBLEM 23.5 (Continued)
(5) Funds to redeem bonds ($100,000 X 1.009) ………
$100,900
Face value of bonds ………………………………………..
$100,000
Unamortized premium 12/31/19 ………………………..
$2,400
Amortization to 3/31/20 not requiring cash
($6,000 ÷ 20) X 1/4…………………………………………
Balance at date of redemption ………………….
2,325
Gain on redemption
(6) Face amount of bonds issued ………………………….
$125,000
Discount on $125,000 of bonds sold
($125,000 X .03) …………………………………………..
$3,750
Expense of issuance ……………………………………….
839
Total ………………………………………………………
(4,589)
Beginning Discount ………………………………..
Amortization for nine months, which
did not require cash ……………………………..
(87)*
*($4,589/477 months (a)) X 9 months = $87
(a) (40 years X 12 months) – 3
(7) Purchase of stock requiring cash …………………….
$100,000
70% of subsidiary’s income for year
($15,000), which did not provide
cash but was credited to income …………………..
10,500
(8) Analysis of accumulated depreciation—
Building
Balance of accumulated depreciation 12/31/19 …
$400,000
Charge for major repairs which used cash ……….
Balance 12/31/20 …………………………………………….
(424,000)
Depreciation charged against income which
PROBLEM 23-5 (Continued)
Comments on Other Items
(not required)
Increase in cash surrender value of insurance required cash ……
$ 504
Increase in Buildings required cash ………………………………………..
127,300
Decrease in Copyrights was a noncash charge against income ..
Dividends declared did not require cash ………………………………….
PROBLEM 23.6
(a)
Net Cash Flow from Operating Activities
Cash received from customers ………………………..
$524,8501
Cash payments:
Cash payments to suppliers ………………………..
$375,7502
Cash payments for operating expenses ……….
**Increase in accrued payables
PROBLEM 23.6 (Continued)
(b) MARCUS INC.
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income ……………………………………………….
$42,500
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ………………………….
Gain on sale of investments ………………..
Loss on sale of machinery …………………..
Increase in accounts receivable (net) …..
Increase in inventory …………………………..
Increase in accounts payable ………………
Increase in accrued payables ………………
Net cash provided by operating activities …..
Cash flows from investing activities
Purchase of investments
$22,250 – ($38,500 – $25,000) ………………….
(8,750)
Addition to buildings …………………………………
(11,250)
Sale of investments …………………………………..
Sale of machinery ……………………………………..
Net cash used by investing activities …………
Cash flows from financing activities
Reduction in long-term note payable ………….
(10,000)
Cash dividends paid …………………………..……..
(21,125)
Net cash used by financing activities………….
(31,125)
Net increase in cash ………………………………………..
Cash, January 1, 2020 ……………………………………..
PROBLEM 23.7
(a) Both the direct method and the indirect method for reporting cash
flows from operating activities are acceptable in preparing a statement
of cash flows according to GAAP; however, the FASB encourages the use
(b) The Statement of Cash Flows for Chapman Company, for the year ended
May 31, 2020, using the direct method, is presented below.
CHAPMAN COMPANY
Statement of Cash Flows
For the Year Ended May 31, 2020
Cash flows from operating activities
Cash received from customers …………………..
$1,238,250
Cash payments:
To suppliers ……………………………………..
$684,000
To employees …………………………..……….
For other expenses …………………………...
For interest ……………………………………….
For income taxes …………………………..….
Net cash provided by operating activities …..
Cash flows from investing activities
Purchase of plant assets …………………………...
(28,000)
Cash flows from financing activities
Cash received from common stock issue ……
20,000
Cash paid:
For dividends ……………………………………
To retire bonds payable …………………….
Net cash used by financing activities …………
Net increase in cash ………………………………………….
Cash, June 1, 2019 ……………………………………………
Cash, May 31, 2020 ……………………………………………
PROBLEM 23.7 (Continued)
Note 1: Noncash investing and financing activities:
Issuance of common stock for plant assets $70,000.
Supporting Calculations:
Cash collected from customers
Sales revenue …………………………………………..
Less: Increase in accounts receivable ………
17,000
Cash collected from customers ……….
$1,238,250
Cash paid to suppliers
Less: Decrease in inventory ……………………..
Increase in accounts payable ………….
8,000
Cash paid to suppliers ……………………
$ 684,000
Cash paid to employees
Salaries and wages expense ……………………..
$ 252,100
Add: Decrease in salaries and
wages payable ………………………………..
24,750
Cash paid to employees …………………..
$ 276,850
Cash paid for other expenses
Other expenses …………………………..……………
$ 8,150
Add: Increase in prepaid expenses …………..
2,000
Cash paid for other expenses …………..
$ 10,150
Cash paid for interest
Interest expense ……………………………………….
$ 75,000
Less: Increase in interest payable …………….
2,000
Cash paid for interest ……………………..
$ 73,000
Cash paid for income taxes:
Income tax expense (given) ………………………
PROBLEM 23.7 (Continued)
(c) The calculation of the cash flow from operating activities for Chapman
Company, for the year ended May 31, 2020, using the indirect method,
is presented below.
CHAPMAN COMPANY
Statement of Cash Flows
For the Year Ended May 31, 2020
Cash flows from operating activities
Net income ……………………………………………….
$130,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ………………………..
Decrease in inventory ……………………….
Increase in accounts payable …………….
Increase in interest payable ……………….
Increase in accounts receivable …………
Increase in prepaid expenses …………….
PROBLEM 23.8
(a) Net Cash Provided by Operating Activities
Cash receipts from customers
$925,000 (1)
Cash payments:
To suppliers
For operating expenses
For income taxes
Net cash provided by operating activities
$ 48,000
(1) (Sales Revenue) less (Increase in Accounts Receivable)
$950,000 – $25,000 = $925,000
(2) (Cost of Goods Sold) plus (Increase in Inventory) less
(Increase in Accounts Payable)
$600,000 + $14,000 – $6,000 = $608,000
(3) (Operating Expenses) less (Depreciation Expense) less
(Bad Debt Expense)
$45,000 – $2,000 = $43,000
PROBLEM 23.8 (Continued)
(b) SHARPE COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income …………………………………………………
$67,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………..
Gain on sale of investments………………….
Loss on sale of equipment ……………………
Increase in accounts receivable (net) …….
Increase in inventory …………………………...
Increase in accounts payable ……………….
Increase in income taxes payable …………
(19,000)
Net cash provided by operating activities …….
Cash flows from investing activities
Purchase of investments
[$55,000 – ($85,000 – $35,000)] ………………….
(5,000)
Sale of investments ($35,000 + $15,000) ……….
Net cash provided by investing activities ……..
Purchase of equipment
Cash flows from financing activities
Payment of long-term notes payable ……………
(8,000)
Cash dividends paid
[($95,000 + $67,000) – $92,000] ………………….
(70,000)
Issuance of common stock ………………………….
35,000*
Net cash used by financing activities …………..
(43,000)
Net increase in cash ……………………………………………
Cash, January 1, 2020 …………………………………………
Noncash investing and financing activities
PROBLEM 23.9
(a) DINGEL CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income…………………………………………………. $15,750(a)
Adjustments to reconcile net income to net
cash provided by operating activities:
Cash flows from investing activities
Sale of investments ……………………………………. 4,500
Sale of equipment ………………………………………. 2,500
Purchase of equipment (cash) …………………….. (15,000)
Proceeds from flood damage to building ……… 37,000
Net cash provided by investing activities …….. 29,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest …………………………………… $2,000
PROBLEM 23.9 (Continued)
Noncash investing and financing activities:
Retired note payable by issuing common stock …….. $ 5,000
Purchased equipment by issuing notes payable ……. 16,000
$21,000
Supporting Computations:
(a) Ending retained earnings ……………………………………… $20,750
Beginning retained earnings …………………………………. (5,000)
Net income ……………………………………………………. $15,750
(b) (1) For a severely financially troubled firm:
Operating: Probably a small cash inflow or a cash outflow
Investing: Probably a cash inflow as assets are sold to provide
(2) For a recently formed firm which is experiencing rapid growth:
Operating: Probably a cash inflow
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 23.1 (Time 30–35 minutes)
Purpose—to develop an understanding of the proper composition and presentation of the statement of
CA 23.2 (Time 30–35 minutes)
CA 23.3 (Time 30–35 minutes)
Purpose—to help a student identify whether a transaction creates a cash inflow or a cash outflow. The
CA 23.4 (Time 20–30 minutes)
Purpose—to help the student identify the sections of the statement of cash flows. The student is
CA 23.5 (Time 30–40 minutes)
Purpose—to identify and explain reasons and purposes for preparing a statement of cash flows, to
CA 23.6 (Time 20–30 minutes)
Purpose—provides the student with the opportunity to examine the effects of securitization on the
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 23.1
(a) The main purpose of the statement of cash flows is to show the change in cash from one period to
the next. Another objective of a statement of the type shown is to summarize the financing and
(b) The following are weaknesses in form and format of Maloney Corporation’s Statement of Sources
and Application of Cash:
1. The title of the statement should be Statement of Cash Flows.
2. The statement should add back to (or deduct from) net income certain items that did not use
4. Individual items should not be grouped together, as was the case for the $14,000 item.
(c) 1. (i) The $25,000 of salaries and wages expense attributable to the stock option plan should be
included in the statement as an amount added back to net income, an expense not
2. The expenditures for plant asset acquisitions should not be reported net of the proceeds from
plant asset retirements. Both the outlay for acquisitions and the proceeds from retirements
should be reported as investing activities. The details provide useful information about changes
in financial position during the period.