12-76 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 12-11A (Concluded)
Statement of cash flows:
BANNACK CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2016
(IN THOUSANDS OF DOLLARS)
Cash Flows from Operating Activities
Cash collections from customers …………………………………………………… $ 389
Cash payments for:
Inventory ……………………………………………………………………………….. $(260)
General and administrative ………………………………………………………. (19)
Cash Flows from Financing Activities
Repayment of long-term loan …………………………………………………… $ (75)
Payment of cash dividends ………………………………………………………. (5)
Net cash used by financing activities ……………………………………………… $ (80)
Net decrease in cash …………………………………………………………………… $ (15)
Cash balance, June 30, 2015 ……………………………………………………….. 40
Cash balance, June 30, 2016 ……………………………………………………….. $ 25
2. It is true that the amount of cash flow from operating activities is the same regard-
less of which method (direct or indirect) is used. The two methods, however, differ in
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-77
LO 4,6 PROBLEM 12-12A STATEMENT OF CASH FLOWS—INDIRECT METHOD
1. Changes in account balances and explanations (in thousands of dollars):
Net Change
Dr. (Cr.) Explanation
Cash (15)
(10) Net income
Total 0
12-78 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 12-12A (Concluded)
Statement of cash flows:
BANNACK CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2016
(IN THOUSANDS OF DOLLARS)
Cash Flows from Operating Activities
Net income …………………………………………………………………………………. $ 10
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in other accrued liabilities ……………………………………………. 5
Decrease in income taxes payable ……………………………………………. (10)
Net cash provided by operating activities ………………………………………… $ 80
Cash Flows from Investing Activities
Sale of land……………………………………………………………………………. $ 90
Purchase of plant and equipment ……………………………………………… (125)
Sale of plant and equipment …………………………………………………….. 20
Net cash used by investing activities ……………………………………………… $ (15)
2. It is true that the amount of cash flow from operating activities is the same regard-
less of which method (direct or indirect) is used. The two methods, however, differ in
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-79
LO 2,5 PROBLEM 12-13A STATEMENT OF CASH FLOWS—DIRECT METHOD
1. No, the U.S. Treasury bills are not cash equivalents, because they have a maturity in
2. Changes in account balances and explanations (in thousands of dollars):
Net Change
Dr. (Cr.) Explanation
Cash (25)
U.S. Treasury bills 25
Accounts receivable (75)
Inventory 25
Land 20 Purchase
Buildings and equipment 60 Purchase
12-80 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 12-13A (Continued)
Conversion of income statement items to a cash basis (in thousands of dollars):
Income Statement Amount Adjustment Cash Flows
Sales $1,416 $1,416
+ Decrease in accounts receivable 75
Cash collected $1,491
Cost of goods sold 990 $ 990
+ Increase in inventory 25
– Increase in accounts payable (40)
Cash payments $ 975
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-81
PROBLEM 12-13A (Concluded)
Statement of cash flows:
SHEPARD COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN THOUSANDS OF DOLLARS)
Cash Flows from Operating Activities
Cash collections from customers …………………………………………………… $ 1,491
Cash payments for:
Inventory ……………………………………………………………………………….. $ (975)
Cash Flows from Investing Activities
Purchase of U.S. Treasury bills ………………………………………………… $ (25)
Acquisition of land ………………………………………………………………….. (20)
Acquisition of buildings and equipment ……………………………………… (60)
Net cash used by investing activities ……………………………………………… $ (105)
Cash Flows from Financing Activities
Retirement of notes payable …………………………………………………….. $ (100)
12-82 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 3,4 DECISION CASE 12-1 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:
CHIPOTLE AND PANERA BREAD
1. Both companies use the indirect method to prepare the Operating Activities section
of the statement of cash flows. This section of each company’s statement begins
with net income and adjustments are made to reconcile net income to cash provided
by operating activities.
LO 7 DECISION CASE 12-2 MAKING BUSINESS DECISIONS: ANALYZING KELLOGG’S
CASH FLOW ADEQUACY RATIO
Part A. Ratio Analysis Model
1. Formulate the Question:
Did Kellogg’s generate enough cash this year from its operations to pay for its capi-
tal expenditures and meet its maturing debt obligations?
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-83
DECISION CASE 12-2 (Continued)
3. Calculate the Ratio:
Cash Flow Adequacy = Net Cash Flow from Operating Activities – Capital Expenditures
Average Amount of Debt Maturing over Next Five Years
4. Compare the Ratio with Other Ratios:
Ratios are of no use in a vacuum. It is necessary to compare them with prior years
and with competitors.
Cash Flow Adequacy
Kellogg’s General Mills
Fiscal Years Fiscal Years
2014 2013 2014 2013
1.8 2.0 2.1 2.7
Calculations:
Kellogg’s for 2013: ($1,807 – $637)/[($289 + $610 + $1,253 + $403 + $403)/5] = 2.0
5. Interpret the Ratios:
Kellogg’s 2014 cash flow adequacy ratio of 1.8 was slightly lower than its competitor,
Part B. The Business Decision Model
1. Formulate the Question:
If you were a banker, would you loan money to Kellogg’s?
2. Gather Information from the Financial Statements and Other Sources:
This information will come from a variety of sources, not limited to but including:
● The balance sheet provides information about liquidity, the income statement re-
12-84 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASE 12-2 (Concluded)
3. Analyze the Information Gathered:
● Compare Kellogg’s cash flow adequacy ratio in (A) above with General Mills as
4. Make the Decision:
5. Monitor Your Decision:
If you decide to make the loan, you will need to monitor it periodically. During the
time the loan is outstanding, you will want to assess the company’s continuing ability
to generate cash from operations as well as other factors you considered before
making the loan.
LO 2,3 DECISION CASE 12-3 READING AND INTERPRETING WALGREENS’ STATEMENT
OF CASH FLOWS
1. Walgreens’ uses the indirect method to prepare the Operating Activities section of
2. Net cash provided by operating activities exceeded net earnings by $3,893 – $2,031,
3. The largest source of cash in the Investing Activities section is the proceeds from
4. The largest source of cash in the Financing Activities section is the proceeds related
to employee stock plans of $612 million. The largest use of cash in the Financing
Activities section is for cash dividends paid of $1,199 million.
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-85
MAKING FINANCIAL DECISIONS
LO 1,5 DECISION CASE 12-4 DIVIDEND DECISION AND THE STATEMENT OF CASH
FLOWS—DIRECT METHOD
1. Changes in account balances and explanations (in thousands of dollars):
Net Change
Dr. (Cr.) Explanation
Cash 30
Accounts receivable 50
Inventory 150
Prepayments (15)
Land 1,055 Issued bonds to acquire 700 and
cash for 355
12-86 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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DECISION CASE 12-4 (Continued)
Conversion of income statement items to a cash basis (in thousands of dollars):
Income Statement Amount Adjustment Cash Flows
Sales revenue $8,000 $8,000
– Increase in accounts receivable (50)
Cash collected from customers $7,950
Cost of goods sold 4,500 $4,500
+ Increase in inventory 150
– Increase in accounts payable (70)
Cash paid to suppliers $4,580
2. Statement of cash flows:
BAILEY CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN THOUSANDS OF DOLLARS)
Cash Flows from Operating Activities
Cash collected from customers ………………………………………………… $ 7,950
Cash payments:
Cash Flows from Investing Activities
Sale of long-term investments …………………………………………….. $ 400
Acquisition of land …………………………………………………………….. (355)
Acquisition of plant and equipment ………………………………………. (1,700)
Net cash used by investing activities ………………………………………… $(1,655)
Cash Flows from Financing Activities
3. Bailey Corp. should be able to safely pay a cash dividend in 2017 of $250,000 (note
that there are now 250,000 shares of stock outstanding). The cash provided by op-
erating activities of $1,385,000 indicates that the company is generating a very sig-
12-88 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 1,6 DECISION CASE 12-5 EQUIPMENT REPLACEMENT DECISION AND CASH FLOWS
FROM OPERATIONS
1. Cash flow from operations Year 1 Year 2 Year 3 Year 4
Net income (loss) $(10) $ (2) $ 15 $ 20
Adjustments:
2. Memo to the president:
TO: President
FROM: Student’s name
DATE: XX/XX/XX
SUBJECT: Cash flow
help pay for capital expenditures.
The buildup of various current assets, such as accounts receivable, inventories,
and prepayments, is the main reason for our problems. First, we need to do a better
job of collecting our receivables in a timely fashion. Second, we must find ways to
limit our purchases of inventory and maintain products on hand at a minimum. Third,
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-89
ETHICAL DECISION MAKING
LO 1,6 DECISION CASE 12-6 LOAN DECISION AND THE STATEMENT OF CASH FLOWS—
INDIRECT METHOD
1. Recognize an ethical dilemma:
You must decide whether to challenge the way in which your boss has presented the
sale of the business on the statement of cash flows. The controller reported the sale
2. Analyze the key elements in the situation:
a. The company may benefit and the users of the statements, particularly the bank,
may be harmed.
3. List alternatives and evaluate the impact of each on those affected:
Your options are to go along with the controller and not question any further the
presentation of the sale on the statement of cash flows. If you do not insist on treat-
ing the sale in the correct way, the bank will not have reliable information to make a
loan decision, since the amount of cash generated from operations will be over-
stated.
4. Select the best alternative:
The best alternative is to insist that the gain on the sale of the business be deducted
from net income to arrive at the cash provided by operating activities. The controller
12-90 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 2,3 DECISION CASE 12-7 CASH EQUIVALENTS AND THE STATEMENT OF CASH
FLOWS
1. According to current accounting standards, only those investments in highly liquid
securities with an original maturity to the investor of three months or less should be
2. If the notes are classified as an operating rather than an investing activity, the infor-
mation is not free from bias. According to accounting standards, the proper classifi-
3. As controller, you need to explain to the treasurer that accounting standards do not
allow the company to classify the Treasury notes as cash equivalents. You are sym-