SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 23-1
(a) The main purpose of the statement of cash flows is to show the change in cash from one period to
the next. Another objective of a statement of the type shown is to summarize the financing and
(b) The following are weaknesses in form and format of Maloney Corporation’s Statement of Sources
and Application of Cash:
1. The title of the statement should be Statement of Cash Flows.
2. The statement should add back to (or deduct from) net income certain items that did not use
(or provide) cash during the period. The resulting total should be described as net cash provided
(c) 1. (i) The $25,000 option plan salaries and wages expense should be included in the statement
as an amount added back to net income, an expense not requiring the outlay of cash
during the period.
(ii) Since the statement balances and no reference is made to the $25,000 salaries and wages
expense, it appears the expense was not recorded or that there is an offsetting error
elsewhere in the statement.
3. Stock dividends or stock splits need not be disclosed in the statement because these trans-
actions do not significantly affect financial position.
4. The issuance of the 16,000 shares of common stock in exchange for the preferred stock
CA 23-1 (Continued)
6. The details of changes in long-term debt should be shown separately. Payments should not be
CA 23-2
(a) From the information given, it appears that from an operating standpoint Pacific Clothing Store did
not have a superb first year, having suffered an $11,000 net loss. Lenny is correct; the statement of
cash flows is not prepared in correct form. The sources and uses format is not an acceptable form.
in cash.
(b) PACIFIC CLOTHING STORE
Statement of Cash Flows
For the Year Ended January 31, 2014
Cash flows from operating activities
Net loss ……………………………………………………….
$ (11,000)*
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………...
Gain from sale of investment …………………
Net cash provided by operating activities ……..
Cash flows from investing activities
Sale of investment ……………………………………….
120,000
Purchase of fixtures and equipment ……………..
Purchase of investment ……………………………….
Net cash used by investing activities …………….
Cash flows from financing activities
Sale of capital stock …………………………………….
380,000
Purchase of treasury stock …………………………..
(10,000)
Net cash provided by financing activities ………
370,000
Supplemental disclosure of cash flow information:
CA 23-2 (Continued)
Noncash investing and financing activities
Issuance of note for truck ………………………………..
*Computation of net income (loss)
Sales of merchandise ………………………………………
Interest revenue ………………………………………………
Total revenues………………………………………….
Merchandise purchases …………………………………..
Depreciation ……………………………………………………
Total expenses …………………………………………
Net loss ………………………………………………………….
CA 23-3
1. The earnings are treated as an inflow of cash and should be reported as part of the net cash
2. The $315,000 depreciation expense is neither an inflow nor an outflow of cash. Because
depreciation is an expense, it was deducted in the computation of net income. Accordingly, the
$315,000 must be added back to income before extraordinary items in the operating activities
section because it was deducted in determining earnings, but it was not a use of cash.
3. The write-off of uncollectible accounts receivable against the allowance account has no effect on
cash because the net accounts receivable remain unchanged. An adjustment to income is only
necessary if the net receivable amount increases or decreases. Because the net receivable amount
4. The $6,000 gain realized on the sale of the machine is an ordinary gain, not an extraordinary gain,
5. Generally, extraordinary items are investing or financing activities and the cash inflow or outflow
resulting from such events should be reported in the investing or financing activities section of the
CA 23-3 (Continued)
6. The $75,000 use of cash should be reported as a cash outflow from investing activities. The
CA 23-4
Where to Present
How to Present
1.
Investing and operating
Cash provided by sale of fixed assets, $4,750 as an investing
activity. In addition, the loss of $2,250 ([($20,000 x 31/2) ÷ 10] –
$4,750) on the sale would be added back to net income.
3.
Financing
Cash provided by the issuance of capital stock of $16,000.
depreciation of $2,000 and amortization of $400 are added
back to the loss from operations. Net cash provided by operating
activities is $300.
5.
Not reported in statement.
6.
Investing and operating
Cash provided by the sale of the investment, $10,600 as an
investing activity. The loss of $1,400 is added back to net
income.
of $24,240. Additionally, the gain (of $1,760 = $26,000 –
$24,240) is deducted from net income in the operating activities
section.
CA 23-5
(a) The primary purpose of the statement of cash flows is to provide information concerning the cash
receipts and cash payments of a company during a period. The information contained in the
statement of cash flows, together with related disclosures in other financial statements, may help
(b) The statement of cash flows classifies cash inflows and outflows as those resulting from operating
activities, investing activities, and financing activities.
Cash inflows from operating activities include receipts from the sale of goods and services,
CA 23-5 (Continued)
Cash inflows from investing activities include receipts from collections or sales of debt instruments
of other companies, from the sale of the investments in those stocks, and from sales of various
productive fixed assets. Cash outflows for investing activities include payments for stocks of other
companies, purchase of productive fixed assets, and debt instruments of other companies.
Cash inflows from financing activities include proceeds from the company issuing its own stock or
CA 23-6
(a) It is true that selling current assets, such as receivables and notes to factors, will generate cash
flows for the company, but this practice does not cure the systemic cash problems for the
(b) Barbara Brockman should be told that if she executes her plan, the company may not survive.
While the factoring of receivables and the liquidation of inventory will indeed generate cash, the
actual amount of cash the company receives will be less than the carrying value of the receivables
and the raw materials. In addition, the company would still have the future expenditure of
replenishing its raw materials inventories, at a cost higher than the sales price.
FINANCIAL REPORTING PROBLEM
(a) P&G uses the indirect method to compute and report net cash provided
by operating activities. The amounts of net cash provided by operating
(b) The most significant item in the investing activities section is the
$3,306 million that P&G spent on “capital expenditures.” The most sig–
nificant item in the financing activities section is the $7,039 million
that P&G paid to purchase treasury stock.
COMPARATIVE ANALYSIS CASE
(a) Both Coca-Cola and PepsiCo use the indirect method of computing and
reporting net cash provided by operating activities in 2009–2011.
(b) The most significant investing activities items in 2011:
Coca-Cola
Proceeds from disposal of short term investments $5,647 million
(c) The Coca-Cola Company has increased net cash provided by operating
activities from 2009 to 2011 by $1,288 million or 15.7%. PepsiCo, Inc.
has increased net cash provided by operating activities by $2,148
(d) Both Coca-Cola and PepsiCo report depreciation and amortization in
the operating activities section:
COMPARATIVE ANALYSIS CASE (Continued)
(e)
Coca-Cola
PepsiCo
(f) The current cash debt coverage ratio uses cash generated from
operations during the period and provides a better representation of
liquidity on an average day. PepsiCo’s ratio of $0.53 of cash flow from
operations for every dollar of current debt was approximately 20%
FINANCIAL STATEMENT ANALYSIS CASE
VERMONT TEDDY BEAR CO.
(a) Even though prior year income exceeded the current year income by
$821,432 ($838,955 – $17,523), the current year cash flow from
operations exceeded prior year’s cash flow from operations by
$937,437 [$236,480 – ($700,957).]. This apparent paradox can be
explained by evaluating the components of net cash flow from
inventories did increase by $1,599,014.
(b) Liquidity: current cash debt coverage ratio (net cash provided by
operating activities ÷ average current liabilities)
$236,480 ÷ (($4,055,465 + $1,995,600) ÷ 2) = .078:1
Solvency: cash debt coverage (net cash provided by operating
activities ÷ average total liabilities)
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
LASKOWSKI COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income …………………………………………………… $ 430,000
Cash flows from investing activities
Sale of machinery …………………………………………. 270,000
Purchase of machinery………………………………….. (750,000)
Net cash used by investing activities ……………… (480,000)
Analysis
Laskowski’s free cash flow is:
Net cash provided by operating activities …… $1,222,000
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Laskowski’s free cash flow for the current year ($272,000) is less than the
amount needed for expansion next year ($500,000). Thus, assuming
Principles
According to Statement of Financial Accounting Concepts No. 1, paragraph
37, “Financial reporting should provide information to help present and
potential investors and creditors and other users in assessing the
amounts, timing, and uncertainty of prospective cash receipts from
PROFESSIONAL RESEARCH
(a) According to FASB ASC 230–10-10 (Statement of Cash Flows/Overall/
Objectives):
10-1 The primary objective of a statement of cash flows is to provide
relevant information about the cash receipts and cash payments
of an entity during a period.
As indicated in the glossary at this same section (230-10-20), cash
includes not only currency on hand but demand deposits with banks or
other financial institutions. Cash also includes other kinds of accounts
(b) See FASB ASC 230-10-10 (Statement of Cash Flows—Objectives)
10-2 The information provided in a statement of cash flows, if used
with related disclosures and information in the other financial
statements, should help investors, creditors, and others (including
donors) to do all of the following:
a. Assess the entity’s ability to generate positive future net cash
flows