23-1
CHAPTER 23
Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1.
Format, objectives
purpose, and source
of statement.
1, 2, 7,
8, 12
1, 2, 5, 6
4.
Statement of cash flows—
direct method.
11, 13, 14
8
4, 5, 7, 9,
12, 13
3, 4, 6,
7, 8
5.
Statement of cash flows—
indirect method.
10, 13,
15, 16
8
3, 6, 8, 11,
14, 15, 16,
17, 18
1, 2, 5, 6,
7, 8, 9
2
6.
Preparing schedule
of noncash investing
and financing activities.
5, 7, 8, 9
5
Worksheet adjustments.
19, 20, 21
3.
Direct vs. indirect
methods of preparing
operating activities.
9, 20
4, 5, 9,
10, 11
3, 4
5
23-2
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
1. Describe the purpose of the statement
of cash flows.
4. Contrast the direct and indirect methods
of calculating net cash flow from operating
activities.
4, 5, 6, 7, 9
3, 4, 5,
6, 7, 8
6, 7
5. Determine net cash flows from investing
and financing activities.
1, 2
6. Prepare a statement of cash flows.
8
9, 11, 12, 13,
14, 15, 17, 18
1, 2, 3, 4, 5,
6, 7, 8, 9
7. Identify sources of information
for a statement of cash flows.
1, 2, 4,
5, 8, 9
8. Discuss special problems in preparing
a statement of cash flows.
10, 18
1, 2, 4, 5,
6, 7, 8, 9
2. Identify the major classifications
of cash flows.
3
1, 2, 10, 16
3. Differentiate between net income and net
cash flows from operating activities.
4, 5, 9, 10, 11
2, 3, 4, 5, 6,
7, 8, 16
6, 7
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E23-1
Classification of transactions.
Simple
10–15
E23-2
Statement presentation of transactions—indirect method.
Moderate
20–30
E23-3
Preparation of operating activities section—indirect method,
periodic inventory.
Simple
15–25
E23-4
Preparation of operating activities section—direct method.
Simple
20–30
E23-5
Preparation of operating activities section—direct method.
20–30
E23-6
Preparation of operating activities section—indirect method.
Simple
15–20
E23-7
Computation of operating activities—direct method.
Simple
15–20
E23-8
Schedule of net cash flow from operating activities—
20–30
indirect method.
E23-9
SCF—direct method.
Moderate
20–30
E23-10
Classification of transactions.
Moderate
25–35
E23-11
SCF—indirect method.
Moderate
30–35
E23-12
SCF—direct method.
Moderate
20–30
E23-13
SCF—direct method.
Moderate
30–40
E23-14
SCF—indirect method.
Moderate
30–40
E23-15
SCF—indirect method.
Moderate
25–35
E23-16
Cash provided by operating, investing, and financing
activities.
30–40
E23-17
SCF—indirect method and balance sheet.
Moderate
30–40
E23-18
Partial SCF—indirect method.
Moderate
25–30
E23-19
Worksheet analysis of selected accounts.
Moderate
20–25
E23-20
Worksheet analysis of selected transactions.
Moderate
20–25
P23-1
SCF—indirect method.
Moderate
40–45
P23-2
SCF—indirect method.
Moderate
50–60
P23-3
SCF—direct method.
Complex
50–60
P23-4
SCF—direct method.
Moderate
45–60
P23-5
SCF—indirect method.
Complex
50–65
P23-6
activities, direct method.
40–50
P23-7
financial statements.
30–40
P23-8
SCF—direct and indirect methods.
Moderate
30–40
P23-9
Indirect SCF.
Moderate
30–40
CA23-1
Analysis of improper SCF.
Moderate
30–35
CA23-2
SCF theory and analysis of improper SCF.
Moderate
30–35
CA23-3
SCF theory and analysis of transactions.
Moderate
30–35
CA23-4
Moderate
20–30
CA23-5
Purpose and elements of SCF.
Complex
30–40
CA23-6
Cash flow reporting, ethics.
Moderate
20–30
CE23-1
Master Glossary
(a) Cash equivalents are short-term, highly liquid investments that have both of the following
characteristics:
1. Readily convertible to known amounts of cash
2. So near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.
(b) Financing activities include obtaining resources from owners and providing them with a return
on, and a return of, their investment; receiving restricted resources that by donor stipulation must
be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise
settling the obligation; and obtaining and paying for other resources obtained from creditors on
long-term credit.
(d) Operating activities include all transactions and other events that are not defined as investing or
financing activities (see paragraphs 230–10–45-12 through 45-15). Operating activities generally
CE23-2
According to FASB ASC 230-10–45-14 (Statement of Cash Flow—Other Presentation Matters—Cash
Flows from Financing Activities):
All of the following are cash inflows from financing activities:
23-5
CE23-2 (Continued)
(c) Receipts from contributions and investment income that by donor stipulation are restricted for the
purposes of acquiring, constructing, or improving property, plant, equipment, or other long-lived
assets or establishing or increasing a permanent endowment or term endowment.
CE23-3
According to FASB ASC 230-10–45-11 (Statement of Cash Flows—Other Presentation Matters—Cash
Flows from Investing Activities):
CE23-4
According to FASB ASC 230-10–50-3 (Statement of Cash Flows—Disclosure—Noncash Investing and
Financing Activities):
23-6
ANSWERS TO QUESTIONS
1. The main purpose of the statement of cash flows is to show the change in cash of a company from
2. Some uses of this statement are:
Assessing future cash flows: Income data when augmented with current cash flow data provide a
better basis for assessing future cash flows.
Assessing quality of income: Some believe that cash flow information is more reliable than
3. Investing activities generally involve noncurrent assets and include (1) lending money and
collecting on those loans and (2) acquiring and disposing of investments and productive long-lived
4. Examples of sources of cash in a statement of cash flows include cash from operating activities,
issuance of debt, issuance of capital stock, sale of investments, and the sale of property, plant,
5. Preparing the statement of cash flows involves three major steps:
(1) Determine the change in cash. This is simply the difference between the beginning and ending
cash balances.
6. Purchase of land—investing;
Payment of dividends—financing;
Cash sales—operating;
Purchase of treasury stock—financing.
7. Comparative balance sheets, a current income statement, and certain transaction data all provide
information necessary for preparation of the statement of cash flows. Comparative balance sheets
Questions Chapter 23 (Continued)
8. It is necessary to convert accrual-based net income to a cash basis because net income includes
items that do not provide or use cash. An example would be an increase in accounts receivable.
9. Net cash flow from operating activities under the direct method is the difference between cash
revenues and cash expenses. The direct method adjusts the revenues and expenses directly to
10. Net cash flow from operating activities is $3,820,000. Using the indirect method, the solution is:
Net income …………………………………………………………………….. $3,500,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense …………………………………………………. $ 520,000
Accounts receivable increase ………………………………………. (500,000)
Accounts payable increase ………………………………………….. 300,000 320,000
Net cash provided by operating activities …………………………….. $3,820,000
11. Accrual basis sales ……………………………………………………. $100,000
13. Declared dividends ……………………………………………………. $260,000
Add: Dividends payable (beginning of year) ………………….. 85,000
345,000
Deduct: Dividends payable (end of year) ……………………… 90,000
Cash paid in dividends during the year …………………………. $255,000
14. To determine cash payments to suppliers, it is first necessary to find purchases for the year. To
find purchases, cost of goods sold is adjusted for the change in inventory (increased when
15. Cash flows from operating activities
Net income ……………………………………………………………… $320,000
23-8
Questions Chapter 23 (Continued)
16. (a) Cash flows from operating activities
Net income …………………………………………………………………… XXXX
Adjustments to reconcile net income to net
cash provided by operating activities:
(c) No effect on cash; not shown in the statement of cash flows or in any related schedules
or notes.
Note to instructor: The change in net accounts receivable is an adjustment to net income
under the indirect method.
17. (a) Operating activity. (g) Operating activity.
(b) Financing activity. (h) Financing activity.
(c) Investing activity. (i) Significant noncash investing
(d) Operating activity. and financing activities.
(e) Significant noncash investing (j) Financing activity.
and financing activities. (k) Investing activity.
(f) Financing activity. (l) Operating activity.
property, plant, and equipment.
19. Cash flows from operating activities
Net income………………………………………………………………………….. XXXX
20. Arguments for the indirect or reconciliation method are:
(a) By providing a reconciliation between net income and cash provided by operations, the
differences are highlighted.
23-9
Questions Chapter 23 (Continued)
(c) There is some question as to whether the direct method is cost/benefit-justified as this
method would probably lead to additional preparation cost because the financial records are
not maintained on a cash basis.
23–10
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 23-1
Cash flow from investing activities
Sale of land ……………………………………………………………
$ 180,000
Purchase of equipment …………………………………………..
(415,000)
Purchase of available-for-sale securities …………………
(59,000)
Net cash used by investing activities ………………………
$(294,000)
BRIEF EXERCISE 23-3
(a)
P-I
(g)
P-F
(m)
N
(b)
A
(h)
D
(n)
D
(c)
R-F
(i)
P-I
(o)
R-F
(d)
A
(j)
A
(p)
P-F
(e)
R-I
(k)
D
(q)
R-I, A
(f)
R-I, D
(l)
R-F
(r)
P-F
Cash flows from operating activities
Cash received from customers
($200,000 – $12,000) …………………………………..
Cash payments:
To suppliers
($120,000 + $11,000 – $13,000) …………….
For operating expenses
Cash flow from financing activities
Issuance of common stock …………………………………….
Issuance of bonds payable ……………………………………..
Payment of dividends …………………………………………….
(350,000)
Purchase of treasury stock …………………………………….
Net cash provided by financing activities ………………..
23–11
BRIEF EXERCISE 23-5
Cash flows from operating activities
Net income …………………………………………………..
$30,000
BRIEF EXERCISE 23-6
Sales ……………………………………………………………………
$420,000
Add: Decrease in accounts receivable
($72,000 – $54,000) ………………………………………
18,000
Cash receipts from customers ………………………………
$438,000
BRIEF EXERCISE 23-7
Cost of goods sold ……………………………………………….
Add: Increase in inventory ($113,000 – $95,000) …….
18,000
Purchases ……………………………………………………………
518,000
Deduct: Increase in accounts payable
Cash payments to suppliers ………………………………….
$510,000
BRIEF EXERCISE 23-8
Net cash provided by operating activities ……………………
$531,000
Net cash used by investing activities ………………………….
(963,000)
Net cash provided by financing activities ……………………
Net increase in cash …………………………………………………..
Cash, 1/1/12 ………………………………………………………………
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………...
Increase in accounts receivable ……………..
Increase in inventory …………………………….
23–12
BRIEF EXERCISE 23-9
(a)
Cash flows from operating activities
Cash received from customers …………………………..
$90,000
Cash paid for expenses ($60,000 – $1,840) ………….
58,160
Net cash provided by operating
activities ………………………………………………..
$31,840
a($29,000 – $2,040) b($20,000 – $1,200)
BRIEF EXERCISE 23-10
Cash flows from operating activities
Net income ……………………………………………………….
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation expense ………………………………..
Increase in accounts payable ……………………..
Increase in accounts receivable ………………….
Increase in inventory ………………………………….
BRIEF EXERCISE 23-11
Cash flows from operating activities:
Net loss ……………………………………………………………
($70,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation expense ………………………………..
(b)
Cash flows from operating activities
Net income ……………………………………………………….
$40,000
23–13
BRIEF EXERCISE 23-12
(a)
Land ……………………………………………………….……………..
40,000
Common Stock ……………………………………………….
10,000
Paid-in Capital in Excess of Par—
Common Stock …………………………………………..
30,000
BRIEF EXERCISE 23-13
(a)
Operating—Net Income …………………………………………..
317,000
Retained Earnings …………………………………………..
317,000
(b)
Retained Earnings …………………………………………………..
120,000
Financing—Cash Dividends …………………………..
120,000
(c)
Equipment ……………………………………………………….
114,000
Investing—Purchase of Equipment ………………….
(d)
Investing—Sale of Equipment …………………………..
Accumulated Depreciation—Equipment …………………..
Equipment ……………………………………………………..
40,000
Operating—Gain on Sale of Equipment ……………
(b)
No effect
(c)
Noncash investing and financing activities:
Purchase of land through issuance of
common stock ……………………………………………..
SOLUTIONS TO EXERCISES
EXERCISE 23-1 (10–15 minutes)
(a) Operating—add to net income.
(b) Financing activity.
(c) Investing activity.
EXERCISE 23-2 (20–30 minutes)
(a)
Plant assets (cost) ……………………………………………………
$25,000)
Accumulated depreciation ([$25,000 ÷ 10] X 6) …………..
15,000)
Book value at date of sale ………………………………………..
10,000)
Sale proceeds ………………………………………………………….
(5,300)
23–15
EXERCISE 23-2 (Continued)
(c) The write-off of the uncollectible accounts receivable of $27,000 is not
reported on the statement of cash flows. The write-off reduces the
Allowance for Doubtful Accounts balance and the Accounts Receivable
balance. It does not affect cash flows.
Cash flows from operating activities
Net loss …………………………………………………….
$(50,000)
Adjustments to reconcile net income
to net cash used in operating activities*:
Depreciation ………………………………………
22,000
Gain on sale of land …………………………...
(9,000)
*Either net cash used or provided depending upon other adjustments.
Given only the adjustments in (d), the “net cash used” should be
employed.
Cash flows from investing activities
Sale of land …………………………………………………….
EXERCISE 23-2 (Continued)
(g) The exchange of common stock for an investment in Plumlee is
reported as a “noncash investing and financing activity.” It is shown
as follows:
EXERCISE 23-3 (15–25 minutes)
RODRIQUEZ COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income ………………………………………………………
$1,050,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense ……………………………….
Decrease in accounts receivable ……………….
Decrease in inventory ……………………………….
Increase in prepaid expenses …………………….
Decrease in accounts payable……………………
Decrease in accrued expenses payable ……..
105,000
EXERCISE 23-4 (20–30 minutes)
RODRIQUEZ COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Cash receipts from customers …………..
$7,210,000
(a)
Cash payments:
To suppliers ……………………………….
For operating expenses ………………
Net cash provided by operating
activities ……………………………………….
$1,155,000
Computations:
(a)
Cash receipts from customers
Sales ………………………………………………..
$6,900,000
Add: Decrease in accounts
receivable …………………………..
310,000
Cash receipts from customers …………..
$7,210,000
(b)
Cash payments to suppliers
Cost of goods sold …………………………..
$4,700,000
Deduct: Decrease in inventories …………
300,000
Purchases ………………………………………..
Add: Decrease in accounts
payable ……………………………………
275,000
Cash payments to suppliers ………………
$4,675,000
(c)
Cash payments for operating
expenses
Operating expenses, exclusive
of depreciation …………………………..
$1,090,000*
Add: Increase in prepaid
expenses …………………………..
$170,000
290,000
Cash payments for operating
expenses ………………………………………
$1,380,000
EXERCISE 23-5 (20–30 minutes)
NORMAN COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Cash receipts from customers ………
$862,000
(a)
Cash payments:
For operating expenses ………….
$609,000
(b)
For income taxes ……………………
44,500
(c)
Net cash provided by operating
activities …………………………………..
$208,500
(a)
Computation of cash receipts from customers:
Service revenue ………………………………………..
$840,000
Add: Decrease in accounts receivable
Ad ($59,000 – $37,000) …………………………..
22,000
Cash receipts from customers …………………..
$862,000
(b)
Computation of cash payments:
Operating expenses per income statement …
$624,000
Deduct: Increase in accounts payable
Cash payments for operating expenses ……..
$609,000
(c)
Income tax expense per income statement …
$ 40,000
Add: Decrease in income taxes payable
4,500
Cash payments for income taxes ……………….
$ 44,500
23–19
EXERCISE 23-6 (15–20 minutes)
NORMAN COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Net income …………………………………………………….
$90,000
Adjustments to reconcile net income
EXERCISE 23-7 (15–20 minutes)
Situation A:
Cash flows from operating activities
($110,000 – $39,000) …………………………………..
71,000
Net cash provided by operating activities ……….
$ 58,000
Situation B:
(a)
Computation of cash payments to suppliers
Cost of goods sold ……………………………….
$310,000
Plus: Increase in inventory …………………..
21,000
Decrease in accounts payable ……..
17,000
Cash payments to suppliers ………………….
$348,000
Operating expenses ……………………………..
$230,000
Deduct: Decrease in prepaid expenses ….
Increase in accrued expenses
payable ……………………………….
11,000
to net cash provided by operating activities:
Depreciation expense ……………………………….
Loss on sale of equipment ………………………..
Decrease in accounts receivable ……………….
Increase in accounts payable …………………….
Decrease in income taxes payable …………….
Net cash provided by operating activities ………..
EXERCISE 23-8 (20–30 minutes)
Cash flows from operating activities
Net income
$145,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense …………………………..
Decrease in accounts receivable …………..
Other comments:
No. 1 is shown as a cash inflow from the issuance of treasury stock and
cash outflow for the purchase of treasury stock, both financing activities.
No. 4 is a significant noncash investing and financing activity.
No. 6 is an increase in the investment account related to net income which
does not increase cash flow. The net income amount must be deducted
from net cash flow from operating activities.