Reporting Cash Flows 151
P5–11 Office Decor Company
Statement of Cash Flows
For the Year Ended December 31, 2007
(in thousands)
Operating Activities
Net income $ 2,000
Increase in accounts receivable (2,400)
Office Decor reported net income of $2,000,000 for 2007. The compa-
ny’s cash flow from operating activities was a cash outflow of $3,600,000,
however. Thus, though the company appears to be profitable, it may be
P5–12 A. McDonald’s cash and cash equivalents increased $887 million during
2004.
B. The primary sources of cash were profitable operations. Other
sources of cash include sales of restaurant property, long-term and
short-term financing, and proceeds from the exercise of stock op-
tions.
152 Chapter 5
D. Depreciation and amortization are noncash expenses that reduce net
E. An increase in accounts receivable means that credit sales exceeded
F. Purchases of property and equipment are listed as investing activi-
ties because cash was used to purchase long-term (capital) assets.
H. The company is not facing a cash flow problem. The ending cash
balance has grown in each year presented. In addition, the company
produced enough cash from operations in 2004 and 2003 to provide
for its investing and financing activities.
P5–13 There are three primary factors that caused the rapid decrease in cash
provided by operating activities. First, the company’s profits have fallen
Reporting Cash Flows 153
P5–14 Items from the income statement (IS) and cash flow from operating activi-
ties (CF) can be used to answer each question (in millions):
A. Revenues (IS) $ 24,547
Increase in accounts receivable (27)
P5–15 The cash flow patterns of Dell and Apple Computer are remarkably simi-
lar. For example, both companies earned a positive net income during the
year. In addition, both companies increased the account balance of ac-
P5–16 A. False. Depreciation expense is added to net income because depre-
ciation reduces net income but not cash flow. Therefore, to deter-
154 Chapter 5
C. False. An increase in accounts payable indicates that some of the
E. True. Gamma’s operating activities are generating a negative cash
flow. (Note: The $80 is a net outflow—“Net cash for operating activi-
Reporting Cash Flows 155
P5–17 A. and B.
Event
Type
of Activity
Effect on
March’s
Net Income
Effect on
March’s
Cash Flow
1.
Sold $18,000 of goods on credit to custom-
ers. Received a 25% down payment with the
balance on account.
operating
+$4,500
2.
Paid $500 cash for office supplies that will be
7.
Purchased new Internet server equipment at
a cost of $50,000.
investing
–$50,000
8.
Purchased a 3-year fire insurance policy at a
total cost of $10,800. Its coverage began on
March 1.
operating
–$10,800
9.
Purchased merchandise from suppliers on
credit at a cost of $70,000.
operating
operating
11.
Collected four months rent in advance (at
$700 per month) from a tenant who will move
in on April 1.
operating
+$2,800
Paid $45,000 to suppliers in partial payment
operating
–$45,000
on credit.
operating
paid for it. A 3-year, 9% note receivable was
accepted in full payment.
investing
–$10,900
*March sales are indicated in event 1. Event 10 is indicating
collection of some of the receivables from those sales. (continued)
C. Student responses will vary. One possible response is as follows. It
is foolish to try to manage an organization with accrual-basis ac-
operating
0
3.
Received $3,000 from a customer in full
operating
0
+$3,000
starting in April.
5.
Paid rent on the office space ($1,200 per
operating
totaling $13,300. 30% was for work per-
performed in March.
operating
–$13,300
156 Chapter 5
counting information only. As illustrated by this problem, a company
P5–18 Sheik Company: Sheik’s cash flow information is characterized by
steady and reliable cash flow from operations over the
Speer Company: Speer’s cash flow information is not encouraging.
First, cash flow from operations has swung from quite
favorable 5 years ago to quite unfavorable today. If this
Love Company: Love’s cash flow from operations is growing rapidly.
While smaller than the other two firms, it is growing
the most rapidly. Further, the company appears to plan
on even more expansion as the investment in new
Reporting Cash Flows 157
P5–19 A. The primary source of cash inflow was $1,014 provided by an in-
crease in long-term debt. Operating activities provided $278 and the
sale of investments provided $206.
D. Receivables decreased; the cash inflow from customers was greater
P5–20 A. 1. Net income: The purpose of the operating activities
section under the indirect format is to
show why cash flow differed from net in-
2. Depreciation expense: Depreciation expense consumes zero
cash. Therefore, the entire amount of de-
B. 1. Accounts receivable: The increase in accounts receivable bal-
ance is deducted from net income be-
158 Chapter 5
2. Inventory: The decrease in inventory is added to net
income because some of the inventory
3. Prepaid advertising: The increase in prepaid advertising is
4. Rent payable: The decrease in rent payable is deducted
from net income because cash payments
5. Wages payable: The increase in wages payable is added
to net income because not all wages
D. 1. Buildings and equipment: The increase in account balance dur-
ing the year indicates that additional
2. Land: The increase in the account balance
3. Investments, long-term: The decrease in the account balance
indicates that a portion of investments
Reporting Cash Flows 159
F. 1. Notes payable, long-term: The increase in the account balance
2. Common stock: The increase in the account balance
3. Retained earnings: Although retained earnings itself does
not appear on the cash flow state-
P5–21 A. Beltway Distributors, Inc.
Statement of Cash Flows
For the Year Ended January 30, 2007
(In thousands)
Operating Activities
Net income $ 5,300
Add/Deduct:
Depreciation expense 2,900
B. It appears that the company is slowly decreasing the size of its oper-
ations. No new investment in long-term assets is occurring. Cash
P5–22 The Book Wermz
Statement of Cash Flows
For the Month Ended November 30, 2007
Direct Method Indirect Method
Operating Cash Flow: Operating Cash Flow:
From customers $ 45,003.48 Net income $ 2,447.45
Financing Cash Flow: Financing Cash Flow:
Payment of debt (1,122.77) Payment of debt (1,122.77)
P5–23
1
2
3
4
5
6
7
8
9
10
Reporting Cash Flows 161
CASES
C5-1 A. The three categories of cash flows are from operating activities, in-
C. In years 2004 and 2003, cash flows from operating activities were
sufficient to meet cash flow needs for investing activities. The ex-
cess cash flow generated by operating activities was used to reduce
C5-2 A. General Mills’ operating activities during 2004 included sales of
goods for $11,070 million that cost the company $6,594 million. Sell-
ing and administrative activities resulted in expenses of $2,443 mil-
B. 2004 2003
Return on total assets 5.7% 5.0%
($1,055 ÷ $18,448) ($917 ÷ $18,227)
Return on assets improved from 2003 to 2004.
162 Chapter 5
E. In 2004, the company used cash to reduce notes payable. Manage-
bly in connection with the acquisition of Pillsbury).
F. The company’s most important reported assets were goodwill and
C5-3 A. General Mills’ statement of cash flows reveals that its net earnings
B.
Increased
Decreased
Cash
Inventories
Accounts receivable
Deferred income taxes
Prepaid expenses
Accounts payable
Current portion of long-term debt
Notes payable
Other current liabilities
Beginning accounts receivable $ 980
(plus) Sales 11,070
Reporting Cash Flows 163
C. The overall trend in operating cash flow is positive; however, cash flow
from operating activities declined in 2004. Also, cash flow from operat-
C5-4 A. The statements are similar in that both report the results of operat-
ing, investing, and financing activities. The differences between the
which cash is paid during a period.
B. The reconciliation of net income to cash flow provided by operating ac-
tivities looks like the indirect format of the operating activities section.
C. Student responses may differ. Most will argue in favor of the direct
164 Chapter 5
COMPREHENSIVE REVIEW
A. Alice Springs Merchandise
Income Statement
For the Year Ended January 31
2007 2006
Sales revenue $ 589,351 $ 530,666
B. Alice Springs Merchandise
Balance Sheet
At January 31
2007 2006
Assets
Current assets:
Cash $ 63,168 $ 57,845
Accounts receivable 48,386 43,106
Liabilities and Equity
Current liabilities:
Accounts payable $ 25,953 $ 23,674
Wages payable 10,272 9,500
Reporting Cash Flows 165
C. Accrual Adjustments Cash Flow
Sales revenue $589,351
Accounts receivable $ (5,280)
Unearned revenue 1,291
Cash collected from customers $ 585,362
Depreciation expense (24,871)
Adjustment for noncash expense 24,871
Cash paid for depreciation 0
Supplies expense (13,555)
(continued)
166 Chapter 5
D. Alice Springs Merchandise
Statement of Cash Flows
For the Year Ended January 31, 2007
Operating Activities:
Net cash from operating activities 48,036
Investing Activities:
Paid for property and equipment (38,802)
Dividends paid (8,297)
Net cash for financing activities (5,878)
Reporting Cash Flows 167
E. Alice Springs Merchandise
Statement of Cash Flows
For the Year Ended January 31, 2007
Operating Activities:
Net income $ 37,541
Adjustments:
Supplies (177)
Net cash from operating activities 48,036
Investing Activities:
Paid for property and equipment (38,802)