Accounting Chapter 23 Pepsi co Use The Indirect Method Computing And

CA 23.1 (Continued)

6. The details of changes in long-term debt should be shown separately. Payments should not be

netted against increases in long-term borrowings. The long-term borrowing of $620,000 should

CA 23.2

(a) From the information given, it appears that from an operating standpoint Pacific Clothing Store did

not have a superb first year, having suffered an $11,000 net loss. Lenny is correct; the statement of

(b) PACIFIC CLOTHING STORE

Statement of Cash Flows

For the Year Ended January 31, 2020

Cash flows from operating activities

Net loss ………………………………………………………

$ (11,000)*

Adjustments to reconcile net income

to net cash provided by operating

activities:

Depreciation expense …………………………...

Gain from sale of investment …………………

(25,000)

Net cash provided by operating activities ……..

Cash flows from investing activities

Sale of investment ……………………………………….

120,000

Purchase of fixtures and equipment ……………..

(330,000)

Purchase of investment ……………………………….

(95,000)

Net cash used by investing activities ……………

(305,000)

Sale of common stock ………………………………….

380,000

Purchase of treasury stock …………………………..

(10,000)

Net cash provided by financing activities ………

Supplemental disclosure of cash flow information:

CA 23.2 (Continued)

Note to Instructor: The data provided do not allow reconciliation of other

working capital accounts.

Noncash investing and financing activities

Issuance of note for truck ………………………………..

$ 30,000

Interest revenue ………………………………………………

Merchandise purchases …………………………………..

Interest expense ……………………………………………..

Net loss…………………………………………………………..

CA 23.3

1. The earnings are treated as an inflow of cash and should be reported as part of the net cash

provided by operating activities in the statement of cash flows.

2. The $315,000 depreciation expense is neither an inflow nor an outflow of cash. Because

3. The write-off of uncollectible accounts receivable against the allowance account has no effect on

cash because the net accounts receivable remain unchanged. An adjustment to income is only

necessary if the net receivable amount increases or decreases. Because the net receivable amount

4. The $6,000 gain realized on the sale of the machine must be deducted from net income to arrive

5. In this case, no cash flow resulted from the lightning damage. The net loss (a noncash event) must

CA 23.3 (Continued)

6. The $75,000 use of cash should be reported as a cash outflow from investing activities. The

CA 23.4

Where to Present

How to Present

1.

Investing and operating

Cash provided by the sale of fixed assets, $4,750 as an

investing activity. In addition, the loss of $2,250 ([($20,000 x

31/2) ÷ 10] – $4,750) on the sale would be added back to net

income.

use cash. The amount of $15,000 is added back to net income.

3.

Financing

Cash provided by the issuance of capital stock of $16,000.

activities is $300.

5.

Not reported in statement.

6.

Investing and operating

is deducted from net income in the operating activities section.

Cash provided by the sale of the investment, $10,600 as an

CA 23.5

(a) The primary purpose of the statement of cash flows is to provide information concerning the cash

receipts and cash payments of a company during a period. The information contained in the

statement of cash flows, together with related disclosures in other financial statements, may help

CA 23.5 (Continued)

Cash inflows from operating activities include receipts from the sale of goods and services,

receipts from returns on loans and equity securities (interest and dividends), and all other receipts

that do not arise from transactions defined as financing and investing activities. Cash outflows for

operating activities include payments to buy goods for manufacture and resale, payments to

employees for services, tax payments, payments to creditors for interest, and all other payments

that do not arise from transactions defined as financing and investing activities.

(c) Cash flows from operating activities may be presented using the direct method or the indirect

method. Under the direct method, the major classes of operating cash receipts and cash payments

are shown separately. The indirect method involves adjusting net income to net cash flow from

operating activities by removing the effects of deferrals of past cash receipts and payments,

accruals of future cash receipts and payments, and noncash items from net income.

CA 23.6

(a) It is true that selling current assets, such as receivables and notes to factors, will generate cash

flows for the company, but this practice does not cure the systemic cash problems for the

organization. In short, it may be a bad business practice to liquidate assets, incurring expenses

and losses, in order to “window dress” the cash flow statement.

The ethical implications are that Brockman creates a short-term cash flow at the longer-term

FINANCIAL REPORTING PROBLEM

(a) P&G uses the indirect method to compute and report net cash provided

by operating activities. The amounts of net cash provided by operating

activities for 2017, 2016, and 2015 are $12,753 million, $15,435 million,

and $14,608 million, respectively. The two items most responsible for

the decrease in cash provided by operating activities in 2017 are the

COMPARATIVE ANALYSIS CASE

(a) Both Coca-Cola and PepsiCo use the indirect method of computing and

reporting net cash provided by operating activities in 2015–2017.

(b) The most significant investing activities items in 2017:

Coca-Cola

Purchases of investments $16,520 million

(c) The Coca-Cola Company’s net cash provided by operating activities

has declined from 2015 to 2017 by $3,533 million or 0.34%. PepsiCo,

Inc. has decreased net cash provided by operating activities by $870

COMPARATIVE ANALYSIS CASE (Continued)

(e)

Coca-Cola

PepsiCo

1.

Current cash

$6,995

$9,994

(f) The current cash debt coverage ratio uses cash generated from

operations during the period and provides a better representation of

liquidity on an average day. PepsiCo’s ratio of $0.48 of cash flow from

operations for every dollar of current debt was approximately 85%

FINANCIAL STATEMENT ANALYSIS CASE

VERMONT TEDDY BEAR CO.

(a) Even though prior year income exceeded the current year income by

$821,432 ($838,955 – $17,523), the current year cash flow from

operations exceeded prior year’s cash flow from operations by

(b) Liquidity: current cash debt coverage ratio (net cash provided by

operating activities ÷ average current liabilities)

$236,480 ÷ (($4,055,465 + $1,995,600) ÷ 2) = .078:1

Solvency: cash debt coverage (net cash provided by operating

activities ÷ average total liabilities)

ACCOUNTING, ANALYSIS, AND PRINCIPLES

Accounting

LASKOWSKI COMPANY

Statement of Cash Flows

For the Year Ended December 31, 2020

Cash flows from operating activities

Net income ……………………………………………………. $ 430,000

Cash flows from investing activities

Sale of machinery ………………………………………….. 270,000

Purchase of machinery ………………………………….. (750,000)

Net cash used by investing activities ………………. (480,000)

Analysis

Laskowski’s free cash flow is:

Net cash provided by operating activities ……. $1,222,000

ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)

Laskowski’s free cash flow for the current year ($272,000) is less than the

amount needed for expansion next year ($500,000), mostly due to the

Principles

According to Statement of Financial Accounting Concepts No. 8 paragraph

37-OB2-3, “The objective of general purpose financial reporting is to

provide financial information about the reporting entity that is useful to

existing and potential investors, lenders, and other creditors in making

decisions about providing resources to the entity. Those decisions involve

By reporting the cash provided by operations, and the inflows and outflows

of cash from investing and financing decisions, the statement of cash

flows provides information relevant to assessing a company’s future cash

flows.

CODIFICATION EXERCISES

CE23.1

Master Glossary

(a) Cash equivalents are short-term, highly liquid investments that have both of the following

characteristics:

1. Readily convertible to known amounts of cash

(b) Financing activities include obtaining resources from owners and providing them with a return

on, and a return of, their investment; receiving restricted resources that by donor stipulation must

be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise

settling the obligation; and obtaining and paying for other resources obtained from creditors on

long-term credit.

(c) Investing activities include making and collecting loans and acquiring and disposing of debt or

equity instruments and property, plant, and equipment and other productive assets, that is,

CE23.2

According to FASB ASC 230-10–45-14 (Statement of Cash Flow—Other Presentation Matters—Cash

Flows from Financing Activities):

CE23.2 (Continued)

(c) Receipts from contributions and investment income that by donor stipulation are restricted for the

purposes of acquiring, constructing, or improving property, plant, equipment, or other long-lived

assets or establishing or increasing a permanent endowment or term endowment.

CE23.3

According to FASB ASC 230-10–45-11 (Statement of Cash Flows—Other Presentation Matters—Cash

Flows from Investing Activities):

CE23.4

According to FASB ASC 230-10–50-3 (Statement of Cash Flows—Disclosure—Noncash Investing and

Financing Activities):