CHAPTER 12
The Statement of Cash Flows
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Explain the concept of cash flows and accrual accounting 25* 60 Diff
and the purpose of a statement of cash flows.
4. Describe the difference between the direct and indirect
methods of computing cash flow from operating activities.
Module 2
5. Use T accounts to prepare a statement of cash flows using the 6 5 Mod
direct method to determine cash flow from operating activities. 7 5 Mod
8 10 Mod
Module 3
6. Use T accounts to prepare a statement of cash flows using 16 10 Mod
the indirect method to determine cash flow from operating 17 10 Easy
activities. 18 15 Mod
12-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 4
7. Use cash flow information to help analyze a company. 19 15 Mod
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-3
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Explain the concept of cash flows and accrual accounting
and the purpose of a statement of cash flows.
Module 2
5. Use T accounts to prepare a statement of cash flows using the 3 45 Mod
direct method to determine cash flow from operating activities. 6 30 Mod
11* 30 Mod
13* 30 Diff
Module 3
6. Use T accounts to prepare a statement of cash flows using 1 30 Mod
the indirect method to determine cash flow from operating 4 45 Mod
activities. 7 30 Mod
9 45 Diff
12* 30 Mod
12-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Explain the concept of cash flows and accrual accounting 4* 60 Diff
and the purpose of a statement of cash flows. 5* 25 Mod
6* 25 Mod
Module 2
5. Use T accounts to prepare a statement of cash flows using the 4* 60 Diff
direct method to determine cash flow from operating activities.
Module 3
Module 4
7. Use cash flow information to help analyze a company. 2 20 Mod
Module 5
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-5
EXERCISES
LO 2 EXERCISE 12-1 CASH EQUIVALENTS
Investments made during December 2016 that qualify as cash equivalents at
December 31, 2016:
LO 3 EXERCISE 12-2 CLASSIFICATION OF ACTIVITIES
1. F 6. O 10. I
LO 3 EXERCISE 12-3 RETIREMENT OF BONDS PAYABLE ON THE STATEMENT OF
CASH FLOWS—INDIRECT METHOD
1. Journal entry:
Journal 2016
Entry Dec. 31 Bonds Payable ……………………………………… 500,000
Analysis Loss on Retirement of Bonds …………………. 50,000
2. The $510,000 in cash paid to retire the bonds would be reported as a cash outflow in
the Financing Activities section. Assuming the company uses the indirect method,
the loss of $50,000 would be added back in the Operating Activities section.
12-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 3 EXERCISE 12-4 CLASSIFICATION OF ACTIVITIES FOR CARNIVAL CORPORATION
1. F 3. O 5. F
2. F 4. I 6. O
LO 5 EXERCISE 12-6 CASH COLLECTIONS—DIRECT METHOD
Cash collections to be reported in the Operating Activities section of Spencer’s 2016
statement of cash flows (direct method):
Accounts receivable, December 31, 2015 …………………………….. $28,000
LO 5 EXERCISE 12-7 CASH COLLECTIONS—DIRECT METHOD
Cash collections to be reported in the Operating Activities section of Stanley’s 2016
statement of cash flows (direct method):
Accounts receivable, December 31, 2015 …………………………….. $ 80,800
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-7
LO5 EXERCISE 12-8 WORKING BACKWARD: CASH COLLECTIONS—DIRECT METHOD
Sales revenue can be determined by analyzing the change in the Accounts Receivable
account:
Accounts Receivable
Beg. Bal. 15,300
LO 5 EXERCISE 12-9 CASH PAYMENTS—DIRECT METHOD
Cash payments for inventory to be reported in the Operating Activities section of Wolf’s
2016 statement of cash flows (direct method):
Inventory, December 31, 2015 …………………………………………….. $ 45,000
Purchases during 2016 ………………………………………………………. X
Cost of goods sold during 2016 …………………………………………… (120,000)
12-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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LO 5 EXERCISE 12-10 CASH PAYMENTS—DIRECT METHOD
Cash payments for inventory to be reported in the Operating Activities section of Lester
Enterprises’ 2016 statement of cash flows (direct method):
LO5 EXERCISE 12-11 WORKING BACKWARD: CASH PAYMENTS—DIRECT METHOD
Cost of goods sold expense can be determined by analyzing first the change in the Ac-
counts Payable account and then in the Inventories account:
Accounts Payable
Cash paid to
acquire Inventories 44,000
24,000 Beg. Bal.
X = Purchases
33,000 End. Bal.
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-9
LO 5 EXERCISE 12-12 OPERATING ACTIVITIES SECTION—DIRECT METHOD
1. Operating Activities section of the statement of cash flows:
LABRADOR COMPANY
PARTIAL STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Cash Flows from Operating Activities
Cash collected from customers ……………………………………………. $102,0001
Cash payments for:
Footnotes:
1Cash collections from customers:
Sales revenue ………………………………………………………………. $100,000
Decrease in accounts receivable …………………………………….. 2,000
Cash collections …………………………………………………………… $ 102,000
4For interest:
Interest expense …………………………………………………………… $ 3,000
Decrease in interest payable ………………………………………….. 500
Cash payments …………………………………………………………….. $ 3,500
12-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 12-12 (Concluded)
2. The use of the direct method reveals the amounts collected from customers and the
amounts paid for inventory, interest, taxes, and other operating purposes. The indi-
rect method simply reconciles the net income of the period to the net cash flow from
operations. The direct method shows the reader of the statement the specific
amounts collected and paid for operating purposes.
LO 5 EXERCISE 12-13 DETERMINATION OF MISSING AMOUNTS—CASH FLOW FROM
OPERATING ACTIVITIES
Case 1:
Accounts Receivable
Case 2:
Inventory
Beg. Bal. 80,000
X = Purchases
175,000 Cost of goods
sold exp.
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-11
EXERCISE 12-13 (Concluded)
Case 3:
Prepaid Insurance
Beg. Bal. 17,000
15,000 Insurance
Case 4:
Income Taxes Payable
95,000 Beg. Bal.
LO 5 EXERCISE 12-14 DIVIDENDS ON THE STATEMENT OF CASH FLOWS
1. First, determine the amount of dividends declared:
Retained Earnings
250,000 Beg. Bal.
Stock dividend 50,000
X = Dividends declared
285,000 Net income
375,000 End. Bal.
12-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 12-14 (Concluded)
2. Because a stock dividend does not involve cash, it is not reported on the statement
of cash flows. It is questionable whether or not a stock dividend is a significant non-
cash activity that should be reported on a supplemental schedule.
LO5 EXERCISE 12-15 WORKING BACKWARD: DIVIDENDS ON THE STATEMENT OF
CASH FLOWS
Since the company paid dividends during its first year of $160,000 and has a balance of
LO 6 EXERCISE 12-16 CASH PAYMENTS FOR INCOME TAXES—INDIRECT METHOD
Income Taxes Payable
Income tax paid
in cash 12,000
10,000 Beg. Bal.
X = Income taxes
accrued
15,000 End. Bal.
LO 6 EXERCISE 12-17 ADJUSTMENTS TO NET INCOME WITH THE INDIRECT METHOD
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-13
LO 6 EXERCISE 12-18 OPERATING ACTIVITIES SECTION—INDIRECT METHOD
1. Operating Activities section of the statement of cash flows:
SUFFOLK COMPANY
PARTIAL STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
Cash Provided by Operating Activities
Net income ……………………………………………………………………………. $40,000
2. The primary reason that net cash inflow from operating activities of $66,000 is more
than net income of $40,000 is depreciation of $20,000. It is deducted on the income
statement, but it does not require the use of cash. Other reasons for the higher
LO 7 EXERCISE 12-19 CASH FLOW ADEQUACY
1. Cash flow adequacy ratio:
(Net cash provided by operations – Capital expenditures)/Average annual debt
maturing over next five years
2. The cash flow adequacy ratio gives the user an indication of whether or not the
company is generating sufficient cash from its operations to repay its debts, after
12-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
MULTI-CONCEPT EXERCISES
LO 2,3 EXERCISE 12-20 CLASSIFICATION OF ACTIVITIES
LO 3,5 EXERCISE 12-21 CLASSIFICATION OF ACTIVITIES
1. IO 3. NR 5. IO 7. OO 9. OF 11. OF
2. OO 4. IF 6. NR 8. OI 10. NR 12. II
LO 3,6 EXERCISE 12-22 LONG-TERM ASSETS ON THE STATEMENT OF CASH
FLOWS—INDIRECT METHOD
First, determine the accumulated depreciation on the assets sold so that the book value
of those sold can be found:
Thus, the entry to record the sale would be as follows:
Journal Cash ………………………………………………………………… 64,000
Entry Accumulated Depreciation …………………………………… 90,000
Analysis Plant and Equipment …………………………………….. 150,000
Gain on Sale of Plant and Equipment ……………… 4,000
To record sale of plant and equipment at a gain.
Balance Sheet Income Statement
STOCKHOLDERS’
NET
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-15
EXERCISE 12-22 (Concluded)
Plant and Equipment
Beg. Bal. 500,000
X = Acquisitions
150,000 Sale of plant
and equipment
Similarly, acquisitions of new patents can be determined:
Patents
Beg. Bal. 80,000
These items would appear on the statement of cash flows as follows:
Cash Flows from Operating Activities
Net income ………………………………………………………………………………… $ 200,000
Adjustments to reconcile net income to net cash
12-16 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO3,6 EXERCISE 12-23 WORKING BACKWARD: INVESTING ACTIVITIES ON THE
STATEMENT OF CASH FLOWS
1. Both depreciation expense and the loss on sale of equipment are added in the
2. The cash received from the sale of the equipment will be added in the Investing
Activities section of the statement of cash flows. The book value of the equipment at
LO3,6 EXERCISE 12-24 WORKING BACKWARD: FINANCING ACTIVITIES ON THE
STATEMENT OF CASH FLOWS
1. The gain on the retirement of the bonds is deducted in the Operating Activities sec-
2. Since the company used cash of $95,000 to retire the bonds and reported a gain of
$5,000, the book value of the bonds was $95,000 + $5,000 = $100,000.
LO 1,5 EXERCISE 12-25 INCOME STATEMENT, STATEMENT OF CASH FLOWS
(DIRECT METHOD), AND BALANCE SHEET
1. Income statement:
HANDSOME HOUNDS GROOMING COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED XX/XX/XX
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-17
EXERCISE 12-25 (Continued)
2. Statement of cash flows:
HANDSOME HOUNDS GROOMING COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED XX/XX/XX
Cash Flows from Operating Activities
Cash receipts from:
Cash sales ……………………………………………………………………….. $110,0001
Cash Flows from Investing Activities
Down payment on patent ……………………………………………………. $ (20,000)4
Cash Flows from Financing Activities
Issuance of common stock …………………………………………………. $ 50,000
Supplemental Schedule of Noncash Activities
Acquisition of patent in exchange for four-year note ……………….. $ 80,000
3. The company generated slightly less cash flow from operations, $68,000, than it
earned in net income, $70,000. The differences between the two can be reconciled
as follows:
Net income ……………………………………………………………………………. $ 70,000
12-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 12-25 (Concluded)
4. Balance sheet:
HANDSOME HOUNDS GROOMING COMPANY
BALANCE SHEET
AS OF XX/XX/XX
Assets
Current assets:
Cash [from part (2)] …………………………………………….. $78,000
Liabilities and Stockholders’ Equity
Long-term liabilities:
Notes payable …………………………………………………….. $ 80,000
Stockholders’ equity:
CHAPTER 12 • THE STATEMENT OF CASH FLOWS 12-19
PROBLEMS
LO 6 PROBLEM 12-1 STATEMENT OF CASH FLOWS—INDIRECT METHOD
1. Changes in account balances and explanations (in thousands of dollars):
Net Change
Dr. (Cr.) Explanation
Cash (2)
Accounts receivable 5
Inventory (10)
Prepaid rent 3
12-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 12-1 (Concluded)
Statement of cash flows:
CHRISMAN COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN THOUSANDS OF DOLLARS)
Cash Flows from Operating Activities
Net income ……………………………………………………………………………. $ 26
Adjustments to reconcile net income to net cash provided
by operating activities:
Cash Flows from Investing Activities
Acquisition of plant and equipment ………………………………………. $(100)
Cash Flows from Financing Activities
Retirement of bonds payable ………………………………………………. $ (25)
2. No, Chrisman did not generate enough cash from its operations to pay for its invest-
ing activities. Cash flow from operating activities amounted to only $63,000, while