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, 7,
8, 12
1, 2, 5, 6
2.
Classifying investing,
financing, and operating
activities.
3, 4, 5, 6,
16, 17, 19
1, 2, 3,
8, 12
1, 2, 10, 16
1, 3, 4, 5
3.
Direct vs. indirect
methods of preparing
operating activities.
9, 20
4, 5, 6, 7,
9, 10, 11
3, 4
5
Statement of cash flows—
direct method.
11, 13, 14
9
4, 5, 7, 9,
12, 13
3, 4, 6,
7, 8
5.
Statement of cash flows—
indirect method.
10, 13,
15, 16
9, 10, 11
2, 3, 6, 8,
11, 14, 15,
16, 17, 18
1, 2, 5, 6,
7, 8, 9
2
6.
Preparing schedule
of noncash investing
and financing activities.
5, 7, 8, 9
5
Worksheet adjustments.
19, 20, 21
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts for
Analysis
1. Describe the usefulness
and format of the
statement of cash flows.
1, 2 3 4
1
1, 2, 10, 16
5, 6
12, 13, 14,
in preparing
a statement of cash flows.
17, 18, 19
10, 18
1, 2, 4, 5,
worksheet in preparing a
statement of cash flows.
19, 20, 21
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E23.1
Classification of transactions.
Moderate
10–15
E23.2
Statement presentation of transactions—indirect method.
Moderate
20–30
E23.3
Preparation of operating activities section—indirect method,
periodic inventory.
Moderate
15–25
E23.4
Preparation of operating activities section—direct method.
Moderate
20–30
E23.5
Preparation of operating activities section—direct method.
Moderate
20–30
E23.6
Preparation of operating activities section—indirect method.
Moderate
15–20
E23.7
Computation of operating activities—direct method.
Moderate
15–20
E23.8
Schedule of net cash flow from operating activities—
indirect method.
20–30
E23.9
SCF—direct method.
Complex
20–30
E23.10
Classification of transactions.
Complex
25–35
E23.11
SCF—indirect method.
Complex
30–35
E23.12
SCF—direct method.
Complex
20–30
E23.13
SCF—direct method.
Complex
30–40
E23.14
SCF—indirect method.
Complex
30–40
E23.15
SCF—indirect method.
Complex
25–35
E23.16
Cash provided by operating, investing, and financing
activities.
30–40
E23.17
SCF—indirect method and balance sheet.
Moderate
30–40
E23.18
Partial SCF—indirect method.
Complex
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.
Complex
40–45
P23.2
SCF—indirect method.
Complex
50–60
P23.3
SCF—direct method.
Complex
50–60
P23.4
SCF—direct method.
Complex
45–60
P23.5
SCF—indirect method.
Complex
50–65
P23.6
activities, direct method.
40–50
P23.7
financial statements.
Moderate
30–40
P23.8
SCF—direct and indirect methods.
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
Moderate
20–30
CA23.5
Purpose and elements of SCF.
Complex
30–40
CA23.6
Cash flow reporting.
Moderate
20–30
ANSWERS TO QUESTIONS
1. The main purpose of the statement of cash flows is to provide information about a company’s cash
receipts and cash payments in a period. The statement of cash flows provides information about a
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 reasons for differences between income and net cash flow from operations:
3. Investing activities generally involve long-term assets and include (1) lending money and collecting
on those loans and (2) acquiring and disposing of investments and productive long-lived assets.
4. Examples of sources of cash in a statement of cash flows include cash from operating activities,
issuance of debt, issuance of equity securities, the sale of investments, and the sale of property,
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 balance sheets, a current income statement, and certain transaction data all provide
information necessary for preparation of the statement of cash flows. Comparative balance sheets
8. It is necessary to convert accrual-basis 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
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 (increased when
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
(d) Cash flows from operating activities
Net loss ……………………………………………………………………….. $(50,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Questions Chapter 23 (Continued)
17. (a) Operating activity. (g) Operating activity.
(b) Financing activity. (h) Financing activity.
18. Examples of noncash transactions are (1) issuance of stock for noncash assets, (2) issuance of stock
19. Cash flows from operating activities
Net income …………………………………………………………………………. XXXX
20. Arguments for the indirect or reconciliation method are:
(a) By providing a reconciliation between net income and net cash provided by operating
activities, the differences are highlighted.
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
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 23.1
(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 23.2
Cash flows from investing activities
Sale of land ……………………………………………………………
$ 180,000
Purchase of equipment …………………………………………..
Purchase of available-for-sale securities …………………
(59,000)
BRIEF EXERCISE 23.3
Cash flows from financing activities
Issuance of common stock …………………………………….
$ 250,000
Issuance of bonds payable ……………………………………..
Payment of dividends …………………………………………….
Purchase of treasury stock …………………………………….
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 accounts receivable ……………..
Increase in inventory …………………………….
BRIEF EXERCISE 23.6
Sales revenue ………………………………………………………
$420,000
Cash receipts from customers ………………………………
$438,000
BRIEF EXERCISE 23.7
Cost of goods sold ……………………………………………….
$500,000
Add: Increase in inventory ($113,000 – $95,000) …….
18,000
Purchases ……………………………………………………………
518,000
Cash payments to suppliers ………………………………….
$510,000
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, 1/1/20………………………………………………………………
BRIEF EXERCISE 23.9
(a)
Cash flows from operating activities
Cash received from customers …………………………..
(b)
Cash flows from operating activities
Net income ……………………………………………………….
$40,000
BRIEF EXERCISE 23.10
Cash flows from operating activities
Net income ………………………………………………………..
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
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 ………………………………..
BRIEF EXERCISE 23.12
(a)
Land ……………………………………………………….……………..
40,000
Common Stock ……………………………………………….
10,000
(b)
No effect
(c)
Noncash investing and financing activities:
Purchase of land through issuance of
common stock …………………………..…………………
BRIEF EXERCISE 23.13
(a)
Operating—Net Income ……………………………………………
317,000
Retained Earnings …………………………………………..
317,000
(b)
Retained Earnings …………………………………………………..
120,000
Financing—Cash Dividends …………………………..
120,000
(c)
Equipment ……………………………………………………….
114,000
Investing—Purchase of Equipment ………………….
114,000
(d)
Investing—Sale of Equipment …………………………..
Accumulated Depreciation—Equipment …………………..
Equipment………………………………………………………
Operating—Gain on Sale of Equipment …………….
SOLUTIONS TO EXERCISES
EXERCISE 23.1 (10–15 minutes)
(a) Investing activity.
(b) Financing activity.
(c) Investing activity.
EXERCISE 23.2 (20–30 minutes)
(a)
Plant assets (cost)
$20,000)
Accumulated depreciation ([$20,000 10] X 6)
12,000)
Sale proceeds
(5,300)
(b)
Shown in the financing activities section of a statement of cash
flows as follows:
EXERCISE 23.2 (Continued)
(c) The write off of the uncollectible accounts receivable of $27,000 is not
reported on the statement of cash flows. The write off reduces the
(d) The net loss of $50,000 should be reported in the operating activities
section of the statement of cash flows. Depreciation of $22,000 is
reported in the operating activities section of the statement of cash
(e) The purchase of the U.S. Treasury bill 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 common stock for an investment in Tabasco is
reported as a “noncash investing and financing activity.” It is shown
as follows:
EXERCISE 23.3 (15–25 minutes)
VINCE GILL COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income
$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)
VINCE GILL COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Cash receipts from customers
$7,260,000
(a)
Cash payments:
To suppliers
$4,675,000
(b)
For operating expenses
(c)
Net cash provided by operating
Activities
$1,225,000
Computations:
(a)
Cash receipts from customers
Sales revenue
$6,900,000
Add: Decrease in accounts
Add: receivable
360,000
Cash receipts from customers
$7,260,000
(b)
Cash payments to suppliers
Cost of goods sold
$4,700,000
Deduct: Decrease in inventories
300,000
Purchases
Add: Decrease in accounts
Add: payable
275,000
Cash payments to suppliers
$4,675,000
(c)
Cash payments for operating
Expenses
Operating expenses, exclusive
of depreciation
$1,090,000*
Add: Increase in prepaid
Add: Decrease in accrued
Add: expenses payable
270,000
Cash payments for operating
Expenses
$1,360,000
EXERCISE 23.5 (20–30 minutes)
KRAUSS COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2020
Cash flows from operating activities
Cash receipts from customers
$857,000
(a)
Cash payments:
For operating expenses
$614,000
(b)
For income taxes
44,500
(c)
Net cash provided by operating
(a)
Computation of cash receipts from customers:
Service revenue
$840,000
Add: Decrease in accounts receivable
17,000
(b)
Computation of cash payments:
Operating expenses per income statement
$624,000
Deduct: Increase in accounts payable
10,000
(c)
Income tax expense per income statement
$ 40,000
Add: Decrease in income taxes payable
4,500
EXERCISE 23.6 (15–20 minutes)
KRAUSS COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2020
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
Decrease in income taxes payable
EXERCISE 23.7 (15–20 minutes)
Situation A:
Cash flows from operating activities
Situation B:
(a)
Computation of cash payments to suppliers
Cost of goods sold
$310,000
Plus: Increase in inventory
26,000
Decrease in accounts payable
Operating expenses
$230,000
Deduct: Decrease in prepaid expenses
Increase in accrued expenses
payable
11,000
EXERCISE 23.8 (20–30 minutes)
Cash flows from operating activities
$145,000
Net income
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 stock and
cash outflow for the purchase of treasury stock, both financing activities.
No. 4 is a significant noncash investing and financing activity.
No. 7 (dividends received) is added to net income. Another alternative is
to net the company’s pro-rata share of the dividend against the income
EXERCISE 23.9 (20–30 minutes)
(a)
Sales revenue
$538,800
Deduct: Increase in accounts receivable,
net of write-offs
[$33,000 – ($30,000 – $4,800)]
7,800
Cash collected from customers
$531,000
(b)
Cost of goods sold
Deduct: Decrease in inventory ($47,000 – $31,000)
16,000
Purchases
Cash payments to suppliers
$224,500
(c)
Interest expense
$4,300
Deduct: Decrease in unamortized bond discount
($5,000 – $4,500)
500
Cash paid for interest
$3,800
(d)
Income tax expense
Add: Decrease in income taxes payable
Deduct: Increase in deferred tax liability
Cash paid for income taxes
(e)
Selling expenses
$141,500
Deduct: Depreciation ($1,500* X 1/3)
Bad debt expense
Cash paid for selling expenses
$136,000