Exercise 21–23
Direct Method
Cash Flows from Operating Activities:
Cash received from customers $672
Cash paid to suppliers (234)
21–42 Intermediate Accounting, 8/e
Exercise 21–24
Indirect Method
Cash Flows from Operating Activities:
Net income $ 91
Adjustments for noncash effects:
Depreciation expense 90
Patent amortization expense 5
Exercise 21–25
Direct Method
Cash Flows from Operating Activities:
Cash received from customers $1,332 a
Exercise 21–25 (concluded)
Calculations using summary entries:
a. Summary Entry Cash (received from customers) 1,332
Accounts receivable 12
Sales revenue 1,320
d. Summary Entry Interest expense 40
Interest payable 5
Cash (paid for interest) 35
** If a cash equivalent investment is sold for either more or less than its acquisition
cost, we have a cash flow. Suppose the cost of this investment classified as a
cash equivalent had been, say, $15.000 and was sold for $9,000, $6,000 less
Depreciation expense and patent amortization are not cash flows.
Exercise 21–26
Indirect Method
Cash Flows from Operating Activities:
Net income $182
Adjustments for noncash effects:
Depreciation expense 180
Changes in operating assets and liabilities:
Decrease in accounts receivable 12
21–46 Intermediate Accounting, 8/e
Exercise 21–27
RED, INC.
Spreadsheet for the Statement of Cash Flows
Dec.31 Changes Dec. 31
2015 Debits Credits 2016
Balance Sheet
Assets:
Cash 110 (11) 86 24
Liabilities:
Accounts payable 100 (2) 13 87
Accrued expenses payable 11 (4) 5 6
Notes payable 0 (8) 50 50
Bonds payable 0 (10) 160 160
Shareholders’ Equity:
Common stock 400 400
Exercise 21–27 (continued)
Spreadsheet for the Statement of Cash Flows
(continued)
Dec.31 Changes Dec. 31
2015 Debits Credits 2016
Statement of Cash Flows
Operating activities:
Cash inflows:
Financing activities:
Issuance of note payable (8) 50
Exercise 21–27 (concluded)
RED, INC.
Statement of Cash Flows
For year ended December 31, 2016 ($ in millions)
Cash flows from operating activities:
Cash inflows:
From customers $1,954
Cash flows from investing activities:
Purchase of equipment (230)
Cash flows from financing activities:
Issuance of note payable 50
Issuance of bonds payable 160
Exercise 21–28
$ in millions
Pension expense (given) 82
Plan assets (expected return) 90
PBO ($112 service cost + $51 interest cost) 163
21–50 Intermediate Accounting, 8/e
Exercise 21–29
Requirement 1
The specific citation that specifies the guidelines for cash equivalents is FASB ASC
Requirement 2
Specifically, the guidelines are:
Cash Equivalents
Cash equivalents are short-term, highly liquid investments that have both of the
following characteristics:
Generally, only investments with original maturities of three months or less qualify
under that definition. Original maturity means original maturity to the entity holding
the investment. For example, both a three-month U.S. Treasury bill and a three-year
Exercise 21–30
The FASB Accounting Standards Codification represents the single source of
authoritative U.S. generally accepted accounting principles. The specific citation for
each of the following items is:
1. Disclosure of interest and income taxes paid if the indirect method is used:
3. Disclosure of noncash investing and financing activities:
21–52 Intermediate Accounting, 8/e
Exercise 21–31
RED, INC.
Spreadsheet for the Statement of Cash Flows
Dec.31 Changes Dec. 31
2015 Debits Credits 2016
Balance Sheet
Assets:
Cash 110 (13) 86 24
Liabilities:
Accounts payable 100 (6) 13 87
Shareholders’ Equity:
Common stock 400 400
Exercise 21–31 (continued)
Spreadsheet for the Statement of Cash Flows
(continued)
Dec.31 Changes Dec. 31
2015 Debits Credits 2016
Statement of Cash Flows
Net income (1) 103
Adjustments for noncash effects:
Depreciation expense (2) 50
Increase in accounts receivable (3) 46
Investing activities:
Purchase of equipment (8) 230
Sale of equipment (9) 9
Net cash flows (221)
Financing activities:
Issuance of note payable (10) 50
Exercise 21–31 (concluded)
RED, INC.
Statement of Cash Flows
For year ended December 31, 2016 ($ in millions)
Cash flows from operating activities:
Net income $ 103
Adjustments for noncash effects:
Depreciation expense 50
Cash flows from investing activities:
Purchase of equipment (230)
Cash flows from financing activities:
Issuance of note payable 50
Net decrease in cash (86)
Cash balance, January 1 110
Cash balance, December 31 $ 24
Exercise 21–32
BALANCE SHEET ACCOUNTS
Cash (Statement of Cash Flows)
______________________________________________________
86
Operating Activities:
From customers (1) 1,954 1,523 (2) To suppliers
456 (4) For expenses
Accounts Receivable Prepaid Insurance
______________________ ______________________
46 4
________ ________
(1) 46 (4) 4
Inventory Buildings and Equipment
21–56 Intermediate Accounting, 8/e
Exercise 21–32 (continued)
Accrued Expenses Payable Notes Payable
______________________ ______________________
5 50
________ ________
(4) 5 50 (8)
INCOME STATEMENT ACCOUNTS
Sales Cost of Goods Sold
______________________ ______________________
2,000 1,400
________ ________
2,000 (1) (2) 1,400
Net Income (Income Summary)
Exercise 21–32 (concluded)
RED, INC.
Statement of Cash Flows
For year ended December 31, 2016 ($ in millions)
Cash flows from operating activities:
Cash inflows:
Cash flows from investing activities:
Purchase of equipment (230)
Sale of equipment 9
Net cash flows from investing activities (221)
Cash flows from financing activities:
Issuance of note payable 50
Net decrease in cash (86)
Cash balance, January 1 110
21–58 Intermediate Accounting, 8/e
CPA / CMA REVIEW QUESTIONS
CPA Exam Questions
1. b. The two gains are not cash flows. Proceeds from the sale of equipment are
4. a. Dividends paid to stockholders are considered cash flows relating to
5. d. Dividends paid is not a component of cash flow from investing; it is a
6. a. Cash flows from operations using the indirect method are computed by
taking net income plus noncash expenses (e.g., depreciation) less gains from
7. c. IFRS allows companies to report cash outflows for interest and dividends as
either operating or financing cash flows.
8. b. U.S. GAAP requires that interest received and interest payments be reported
CMA Exam Questions
1. d. A statement of cash flows should report as operating activities all
transactions and other events not classified as investing or financing
2. a. Investing activities include the lending of money and the collecting of those
loans, and the acquisition, sale, or other disposal of securities that are not
cash equivalents and of productive assets that are expected to generate
3. c. Net operating cash flow may be determined by adjusting net income.
Depreciation is an expense not directly affecting cash flows that should be
added back to net income. The increase in accounts payable is added to net
21–60 Intermediate Accounting, 8/e
PROBLEMS
Problem 21–1
Classifications
+ I Investing activity (cash inflow)
Transactions
Example + I 1. Sale of land.
+ F 2. Issuance of common stock for cash.
– F 3. Purchase of treasury stock.
N 4. Conversion of bonds payable to common stock.
X 11. Issuance of stock dividend.
N 12. Payment of property dividend.
– F 13. Payment of cash dividends.
+ F 14. Issuance of short-term note payable for cash.
+ F 15. Issuance of long-term note payable for cash.
– I 16. Purchase of marketable securities (“available for sale”).