Chapter 12
Reporting and Analyzing Cash Flows
QUESTIONS
1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and
cash payments (outflows) during a period. It helps users to answer questions such as:
• How does a company obtain its cash?
• Where does a company spend its cash?
• What explains the change in the cash balance?
2. On a statement of cash flows, investing activities include cash outflows from purchases
of long-term investments such as stocks and bonds, from purchases of plant assets
3. On a statement of cash flows, financing activities include cash inflows such as those
that result from issuing preferred or common stock, and from borrowing by issuing
4. The direct method of reporting cash flows from operating activities itemizes the major
5. On a statement of cash flows prepared according to the direct method, operating
activities generally include cash receipts from the sale of goods and services, cash
6. The indirect method of reporting cash flows from operating activities begins with net
8. The amount of the land purchase that was paid for in cash ($400,000) should be reported
on the statement of cash flows as an investing activity. Also, a schedule of noncash
10. Yes; even though a company reports positive net income for the year, it may still show a
net cash outflow from operating activities. When net income is reconciled to the net
11. Depreciation is not a source or a use of cash, even though it must be added to net
13. Google’s statement of cash flows shows several major financing activities for the year
ended December 31, 2014 ($ millions):
Net proceeds (payments) from stock-based award activities …………………………. $ (2,069)
activities is ₩(3,057,109).
15. Samsung’s investing activities yielding cash outflows and inflows for the year ended
QUICK STUDIES
Quick Study 12-1 (10 minutes)
1. Investing 6. Financing
Quick Study 12-2 (20 minutes)
Statement of cash flow items in sequential order 1 through 13 on left OR
textbook order on right:
1.
d
8.
k
2.
f
9.
j
3.
b
g
4.
c
i
5.
h
m
6.
a
e
7.
l
Quick Study 12-3 (20 minutes)
Cash Flows from Operations (Indirect)
Case X
Case Y
Case Z
Net Income ……………………………………………………
$ 4,000
$100,000
$72,000
Adjustments to reconcile net income to net
cash provided by operations
Income statement items not affecting cash
(40,000)
(44,000)
Quick Study 12-4 (10 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………….
$18,200
Adjustments to reconcile net income to operating cash flow
Quick Study 12-5 (10 minutes)
a. Reconstructed journal entry for equipment sale:
Cash ……………………………………………………………………. 37,000
b. We reconstruct the T-account for Accumulated Depreciation—Equipment
c. We reconstruct the T-account for Equipment to determine its purchases of
Quick Study 12-6 (10 minutes)
a. Reconstructed journal entry for building sale:
Cash ……………………………………………………………………. 130,000
b. We reconstruct the T-account for Accumulated Depreciation—Building to
c. We reconstruct the T-account for Building to determine its purchases of
Quick Study 12-7 (10 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given) ………………………………………………
$52,500
Accumulated depreciation at beginning of year (given) ……….
$110,700
Increase from depreciation expense (given) ………………………..
Actual accumulated depreciation at end of year (given) ………
Accumulated depreciation on sold furniture ……………………….
Cash received from sale of furniture at book value ……………..
$12,500
Quick Study 12-8 (15 minutes)
Investing Activities
Quick Study 12-9 (10 minutes)
Part 1
Computation of cash received from the sale of common stock
Increase in Common stock ($105,000 – $100,000) ………………………………….
$ 5,000
Increase in Paid-in capital in excess of par ($567,000-$342,000) ……………
Cash received from the sale of common stock …………………………………..
Part 2
Computation of cash paid for dividends
Cash paid for dividends …………………………………………………………………….
Quick Study 12-10 (15 minutes)
Financing Activities
Cash dividends paid …………………………………………………………………………
Quick Study 12–11 (10 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………….
$30,000
Adjustments to reconcile net income to operating cash flow
Income statement items not affecting cash
Depreciation expense …………………………………………………..
$37,600
Changes in current operating assets and liabilities
Accounts receivable decrease …………………………..………….
10,000
10,000
Accounts payable decrease ………………………………………….
Wages payable increase ……………………………………………….
Quick Study 12–12 (15 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given) …………………………………………..
$55,000
$25,400
Quick Study 12–13 (15 minutes)
1. Computation of cash paid for dividends
Beginning retained earnings ……………………………………..
$ 8,400
Net income ……………………………………………………………….
Actual ending retained earnings ………………………………..
(35,600)
$ 2,800
2. Computation of cash payments for notes
Beginning notes payable …………………………………………..
$69,000
Actual ending notes payable ……………………………………..
(29,000)
$40,000
Quick Study 12–14B (10 minutes)
1. Cash received from customers = Sales + Accounts receivable decrease
Quick Study 12-15B (10 minutes)
1. Cash paid for inventory
2. Cash paid for other expenses
= Other expenses (which exclude depreciation)
Quick Study 12-16B (10 minutes)
Cash flows from operating activities
Receipts from sales to customersa ………………………………..
$ 498,000
Payments for inventoryb ………………………………………………
Payments for other expensesc ………………………………………
Quick Study 12-17 (10 minutes)
1. Moore is probably in the strongest position of the three competing companies
on the basis of the statement of cash flows. Moore’s cash flows from
Quick Study 12-18A (10 minutes)
The balance sheet equation can be arranged so that the algebraic total of all
Quick Study 12-19 (25 minutes)
Part 1
MONTGOMERY, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2016
Cash flows from operating activities
Net income …………………………………………………………………………
$ 10,500
Adjustments to reconcile net income to net cash
provided by operating activities
Income statement items not affecting cash
Depreciation expense ……………………………………………………….
$ 7,200
Changes in current operating assets and liabilities
Decrease in accounts receivable …………………………..
Increase in inventory ……………………………………………………….
Decrease in accounts payable ………………………………………….
Decrease in salaries payable …………………………..………………..
Cash flows from investing activities
Cash paid for equipment (Note 1) ……………………………………….
Cash flows from financing activities
Cash received from stock issuance …………………………..
$ 30,400
Quick Study 12-19 (Concluded)
Part 2
The company’s operating cash flows are negative, $(1,750). This is not a good
omen. However, much of this is attributed to a huge increase in inventory.
Quick Study 12–20 (15 minutes)
2. IFRS and US GAAP differ on the classification of the following cash flows
as operating, investing or financing:
Cash flow source U.S. GAAP IFRS _
a. Interest paid Operating Financing or Operating
EXERCISES
Exercise 12-1 (25 minutes)
Statement of Cash Flows
Noncash
Operating
Activities
Investing
Activities
Financing
Activities
Investing &
Financing
Activities
Not Reported
on Statement
or in Notes
a. Declared and paid a
cash dividend
X
X
c. Paid cash to settle
long-term note payable
X
d. Prepaid expenses
increased in the year
X
e. Accounts receivable
decreased in the year
X
in the year
X
cash, yielding a loss
X
i. Accounts payable
decreased in the year
X
j. Income taxes payable
increased in the year
X
Exercise 12-2 (20 minutes)
Cash flows from operating activities—indirect method
Net income ……………………………………………………………………………………
$ 24,000
)
Net cash provided by operating activities ………………………………………….
Adjustments to reconcile net income to net cash provided by
operating activities
Exercise 12-3 (30 minutes)
1.
Cash flows from operating activities—indirect method
Net income (loss) ……………………………………………………………………………..
$ (16,000
)
)
Net cash provided by operating activities ………………………………………….
Adjustments to reconcile net income to net cash provided by
2. One reason for the net loss was depreciation expense. Depreciation
expense is added to net income to adjust for the effects of a noncash
3. Differences between cash flow from operations and net income can be
Exercise 12-4 (30 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………
$ 481,540
Adjustments to reconcile net income to net cash
provided by operating activities
Exercise 12-5 (20 minutes)
Cash flows from operating activities
Net income ……………………………………………………………………
$374,000
Adjustments to reconcile net income to net cash
provided by operating activities
Exercise 12-6 (10 minutes)
Cash flows from operating activities
Net income ……………………………………………………….……………
$400,000
Adjustments to reconcile net income to operating cash flow
Income statement items not affecting cash
$436,000
Exercise 12-7 (10 minutes)
Cash flows from investing activities
Cash received from the sale of equipment* …………………………….
$ 51,300
Cash paid for new truck ………………………………………………………….
Cash received from the sale of land ………………………………………..
Cash received from the sale of long-term investments ……………
Net cash provided by investing activities ………………………………..
$221,100
Exercise 12-8 (10 minutes)
Cash flows from financing activities
Proceeds from issuance of common stock ………………………………………..
$ 64,000
Paid cash dividend ……………………………………………………………………………
Repaid note payable …………………………………………………………………………
Purchased treasury stock ……………………………………………………….
Net cash used by financing activities ………………………………………………..
Exercise 12-9 (20 minutes)
PEUGEOT S.A.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2014
Cash flows from operating activities
Net income (loss) …………………………………………………….
€ (822)
Adjustments to reconcile net income to net cash
provided by operating activities
Net cash from operating activities …………………………..
€ 4,064
Cash flows from investing activities
Cash from disposal of plant assets & intangibles……..
206
Cash paid for plant assets, intangibles & other ………..
(2,542)
Net cash used in investing activities ………………………..
(2,336)
Cash flows from financing activities
Cash from issuances of shares ………………………………..
Cash paid for dividends …………………………………………..
Cash paid for other financing activities ……………………
Net cash from financing activities …………………………..
Net increase in cash …………………………………………………..
Cash and cash equivalents, Dec 31, 2013 ……………………
Exercise 12-10 (15 minutes)
2015: $102,920 / $1,240,000 = 8.3%
Exercise 12-11 (40 minutes)
Part 1
IKIBAN, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended June 30, 2016
Cash flows from operating activities
Net income ……………………………………………………………….
$ 99,510
Adjustments to reconcile net income to net cash
provided by operating activities
Gain on sale of plant assets ……………………………………
Increase in accounts receivable ……………………………..
Decrease in inventory ……………………………………………
22,700
Decrease in prepaid expenses ………………………………..
Decrease in accounts payable ………………………………..
Decrease in wages payable …………………………………….
Decrease in income taxes payables ………………………..
Cash flows from investing activities
Cash received from sale of equip. (Note 1) ………………..
10,000
Cash flows from financing activities
Cash received from stock issuance …………………………..
60,000
Net increase in cash ……………………………………………………
$ 43,500
Cash balance at prior year-end ……………………………………
Exercise 12-11 (Part 1 continued)
(1)
Cost of equipment sold (Given) …………………………………………………………..
$ 48,600
Accumulated depreciation of equipment sold* ……………………………………..
(40,600)
Book value of equipment sold …………………………………………………………….
Gain on sale of equipment (Given) ………………………………………………………
2,000
Cash receipt from sale of equipment ……………………………………………………
$ 10,000
Cost of equipment sold ………………………………………………………………………
$ 48,600
Plus net increase in the equipment account balance …………………………..
9,000
Cash paid for new equipment (given) …………………………………………………..
$ 57,600
Bal., 6/30/2015
115,000
Bal., 6/30/2015
Purchase
Sale 48,600
Sale (plug) *40,600
Depr. Expense
Bal., 6/30/2016
124,000
Bal., 6/30/2016
(2)
Carrying value of notes retired ……………………………………………………………
$ 30,000
Cash payment to retire notes ………………………………………………………………
$ 30,000
(3)
Retained Earnings
Bal., 6/30/2015
24,100
Dividends (plug)
Net income
99,510
Bal., 6/30/2016
33,300
Part 2
Cash flow on total assets ratio = Operating cash flows / Average total assets
= $151,410 / [($317,700 + $292,900)/2]
Exercise 12-12B (40 minutes)
Part 1
IKIBAN, INC.
Statement of Cash Flows (Direct Method)
For Year Ended June 30, 2016
Cash flows from operating activities
Cash received from customers (Note 1) ………..
$664,000
Cash paid for inventory (Note 2) …………………..
Cash paid for operating expenses (Note 3) ……
Cash paid for income taxes (Note 4) ……………..
Cash flows from investing activities
Cash received from sale of equip. (Note 5) ……
10,000
Cash flows from financing activities
Cash received from stock issuance ………………
60,000
Cash paid to retire notes (Note 6) …………………
Cash paid for dividends (Note 7) …………………..
Net increase in cash ……………………………………….
$ 43,500
Cash balance at prior year-end ……………………….