SMChap012 PDF

Chapter 12
Reporting and Analyzing Cash Flows
QUESTIONS
1. The purpose of the cash flow statement is to report all major cash receipts (inflows) and
cash payments (outflows) during a period. It helps users to answer questions such as:
How does a company obtain its cash?
Where does a company spend its cash?
What explains the change in the cash balance?
2. On a statement of cash flows, investing activities include cash outflows from purchases
of long-term investments such as stocks and bonds, from purchases of plant assets
such as land, buildings, and machinery, and from purchases of other noncurrent assets
such as natural resources and intangible assets. When these types of assets are sold,
the cash inflows from the sales are also reported as investing activities.
3. On a statement of cash flows, financing activities include cash inflows such as those
that result from issuing preferred or common stock, and from borrowing by issuing
bonds or signing long-term or short-term notes payable. Financing activities also
include cash outflows such as dividend payments to stockholders, purchases of
treasury stock, and repayments of debt.
4. The direct method of reporting cash flows from operating activities itemizes the major
classes of cash receipts such as sales to customers, and also itemizes the major
classes of cash payments such as for merchandise, interest, taxes, and other operating
expenses.
5. On a statement of cash flows prepared according to the direct method, operating
activities generally include cash receipts from the sale of goods and services, cash
dividends received from stock investments in other entities, and interest on loans to
others. Operating activities also include cash outflows such as payments for
merchandise, salaries, rent, income taxes, utilities, and other operating expense items.
6. The indirect method of reporting cash flows from operating activities begins with net
income and then adjusts it for items that are necessary to reconcile net income to the
net cash provided or used by operating activities.
7. Payments of cash dividends should be reported on the statement of cash flows as
financing activities.
8. The amount of the land purchase that was paid for in cash ($400,000) should be reported
on the statement of cash flows as an investing activity. Also, a schedule of noncash
investing and financing activities or the notes to the statement should show the
$1,000,000 land investment, the $600,000 financing in the form of a long-term note
payable, and the net $400,000 cash outflow.
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Solutions Manual, Chapter 12 667
9. Since this cash inflow results from borrowing money, it is reported on the statement of
cash flows as a financing activity.
10. Yes; even though a company reports positive net income for the year, it may still show a
net cash outflow from operating activities. When net income is reconciled to the net
cash flow from operating activities, the net effect of all the adjustment items may be a
subtraction from net income (examples of such adjustments are accrued revenues,
prepaid expenses, and other gains). If the amount of this net subtraction is larger than
the net income, the result is net cash used by operating activities.
11. Depreciation is not a source or a use of cash, even though it must be added to net
income when the net cash flow from operating activities is calculated by the indirect
method. (Note: When depreciation is deducted on the tax return of a corporation, the
effect is to reduce taxable income and reduce the cash outflow for income taxes.)
12. (a) Indirect method. (b) The increase in accounts (trade) receivable represents an
amount by which the company had cash tied up in accounts (trade) receivable versus
being held in cash. More cash was tied up in accounts (trade) receivable since the prior
year. If accounts (trade) receivable had decreased, less cash would have been tied up in
accounts (trade) receivable and cash would have increased.
13. Arctic Cats statement of cash flows shows several major financing activities for the
year ended March 31, 2011 ($ thousands):
Proceeds from short-term borrowings........................................................................ $1,012,000
Payments on short-term borrowings .......................................................................... (1,012,000)
Proceeds from issuance of common stock ................................................................ 728,000
Tax benefit from stock option exercise....................................................................... 745,000
Repurchase of common stock ..................................................................................... (2,419,000)
Net cash provided by (used in) financing activities .................................................. $ (946,000)
14. KTMs net cash (all is Euro thousands) from operating activities is 70,348; its net cash
used in investing activities is (37,271), and its net cash used in financing activities is
(27,060).
15. Piaggios investing activities yielding cash outflows and inflows for the year ended
December 31, 2011, follow. Its cash outflows are listed in parentheses ( in thousands):
Investment in property, plant and equipment ............................................................ (61,790)
Sale price, or repayment value, of property, plant and equipment .......................... 6,542
Investment in intangible assets ................................................................................... (64,300)
Sale price, or repayment value, of intangible assets................................................. 122
Sale price of financial assets ....................................................................................... 23,051
Collected interests......................................................................................................... 11,666
668 Financial & Managerial Accounting, 5th Edition
QUICK STUDIES
Quick Study 12-1 (20 minutes)
1. The statement of cash flows reports the cash (and cash equivalent)
activities of a business for a specific accounting period. The cash flows
are classified into operating, investing, and financing activities. The net
change in cash as well as the beginning and ending cash balances are also
reported on the statement.
2. Examples of transactions classified as investing activities
Plant asset purchases
Plant asset sales
Investment in debt and equity securities (except trading securities)
Intangible asset acquisitions and disposals
Purchases and sales of natural resources
3. Examples of transactions classified as financing activities

Bond retirement and issuance
Issuance and settlement of notes payable
Common stock issuance
Cash paid for dividends
Treasury stock acquisitions
Owner contributions and withdrawals
4. Examples of significant noncash financing and investing activities

Exchange of stock or debt securities for noncash assets
Conversion of bonds into stock
Purchase of long-term assets by issuing notes payable to seller
Settle debt with noncash assets (such as giving equipment to pay off loan)

1. Investing 6. Financing
2. Operating 7. Operating
3. Operating 8. Operating
4. Operating 9. Investing*
5. Financing 10. Operating
* For the indirect method, the loss is reported as an adjustment (add-

back) to net income in the operating section.
Cash flows from operating activities

Net income .................................................................................. $18,200
Adjustments to reconcile net income to operating cash flow
Depreciation .............................................................................$36,000
Accounts receivable decrease ............................................... 7,000
Inventory increase ................................................................... (5,900)
Accounts payable increase .................................................... 4,700
Income taxes payable decrease ............................................. (150) 41,650
Net cash provided from operating activities ........................... $59,850

Computation of cash inflow from sale of furniture
Cost of furniture sold (given) ...................................................... $52,500
Accumulated depreciation at beginning of year (given) ..........$110,700
Increase from depreciation expense (given) ............................. 18,000
Total expected accumulated depreciation ............................. 128,700
Actual accumulated depreciation at end of year (given) ......... (88,700)
Accumulated depreciation on sold furniture ............................ 40,000
Cash received from sale of furniture at book value ................. $12,500

Part 1
Computation of cash received from the sale of common stock
Increase in Common stock ($105,000 - $100,000)........................................
$ 5,000
Increase in Paid-in capital in excess of par ($567,000-$342,000) ............... 225,000
Cash received from the sale of common stock .........................................
$230,000
Part 2
Computation of cash paid for dividends
Beginning retained earnings ....................................................................... $287,500
Net income ....................................................................................................48,000
Total expected retained earnings............................................................ 335,500
Actual ending retained earnings................................................................. (313,500)
Cash paid for dividends ............................................................................... $ 22,000
Net income .................................................................................. $30,000
Depreciation .............................................................................$37,600
Accounts receivable decrease ............................................... 10,000
Inventory decrease .................................................................. 10,000
Prepaid expense increase ....................................................... (1,200)
Accounts payable decrease ................................................... (6,000)
Wages payable increase ......................................................... 4,000
Income taxes payable decrease ............................................. (1,200) 53,200

Computation of cash inflow from sale of furniture
Cost of furniture sold (given) .................................................. $55,000
Accumulated depreciation at beginning of year (given) .......... $ 9,000
Increase from depreciation expense (given) ............................. 37,600
Total expected accumulated depreciation ............................. 46,600
Actual accumulated depreciation at end of year (given) ......... (17,000)
Accumulated depreciation on sold furniture ............................ 29,600
Cash received from sale of furniture at book value ................. $25,400

1. Computation of cash paid for dividends
Beginning retained earnings ............................................ $ 8,400
Net income ......................................................................... 30,000
Total expected retained earnings................................. 38,400
Actual ending retained earnings...................................... (35,600)
Decrease from (cash paid for) dividends ........................ $ 2,800
2. Computation of cash payments for notes

Beginning notes payable .................................................. $69,000
Increases to notes (given) ................................................ 0
Total expected notes payable....................................... 69,000
Actual ending notes payable............................................ (29,000)
Decrease from (cash) payments toward notes .............. $40,000
Quick Study 12-9B (10 minutes)
1. Cash received from customers = Sales + Accounts receivable decrease

= $488,000 + ($51,000 - $41,000)
= $498,000
2. Net increase in cash = $94,800 - $24,000 = $70,800
1. Cash paid for merchandise

= Cost of goods sold - Inventory decrease + Accounts payable decrease
= $314,000 - ($95,800 - $85,800) + ($21,000 - $15,000)
= $310,000
2. Cash paid for operating expenses

= Operating expenses (excluding depreciation)
+ Prepaid expenses increase - Wages payable increase
= $89,100 + ($5,400 - $4,200) - ($9,000 - $5,000)
= $86,300

Receipts from sales to customersa ...................................... $ 498,000
Payments for merchandise inventoryb ................................ (310,000)
Payments for other expensesc ............................................. (86,300)
Payments for taxesd .............................................................. (18,500)
Net cash provided by operating activities ............................. $ 83,200
a
From QS 12-9B
b
From QS 12-10B
c
From QS 12-10B
d
$17,300 (income tax expense) + $1,200 (decrease in income taxes payable)
1. Moore is probably in the strongest position of the three competing companies
on the basis of the statement of cash flows. Moores cash flows from
operations are able to finance reinvestment in operating assets as well as help
in paying down some debt. Sykes is in the second strongest position as it is
able to reinvest 57% of its operating cash flows into new productive assets.
Kritch is the weakest as it experienced negative cash flows from operations
and generates cash by selling productive assets and by taking on new debt.
2. Sykess cash flow on total assets ratio is slightly stronger than that for Moore.
Sykes has a 9.6% ratio ($60,000/$625,000) compared to Moores 8.9% ratio
($70,000/$790,000).
Quick Study 12-13A (10 minutes)

The balance sheet equation can be arranged so that the algebraic total of all
noncash items is equal to cash (see Exhibit 12.8 or similar). It follows that when
all changes in noncash balance sheet items are explained, the corresponding
change in cash is also explained. On the spreadsheet, when the changes in all
noncash balance sheet items have been accounted for, we can be confident that
the change in cash also has been fully accounted for.

Cash Flows from Operations (Indirect) Case X Case Y Case Z
Net Income ............................................................ $ 4,000 $100,000 $72,000
Adjustments to reconcile net income to net
cash provided by operations
Depreciation .........................................................
30,000 8,000 24,000
Changes in assets and liabilities
Accounts receivable ............................................ (40,000) (20,000) 4,000
Inventories ............................................................
20,000 10,000 (10,000)
Accounts payable ................................................ 24,000 (22,000) 14,000
Accrued liabilities ................................................(44,000) 12,000 (8,000)
Cash provided by (used for) operations ............ $ (6,000) $ 88,000 $96,000

Investing Activities
Purchase of used equipment ......................................................................
$(5,000)
Sale of short-term investments ..................................................................
6,000
Cash provided by investing activities .......................................................
$ 1,000
Financing Activities
Additional short-term borrowings .............................................................. $20,000
Cash dividends paid ....................................................................................
(16,000)
Cash provided by financing activities ....................................................... $ 4,000

Part 1
MONTGOMERY, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2014
Net income....................................................................................
$ 10,500
Adjustments to reconcile net income to net cash
provided by operating activities
Decrease in accounts receivable ...............................................
2,100
Increase in inventory ...................................................................
(19,950)
Decrease in accounts payable ...................................................
(1,500)
Decrease in salaries payable ......................................................
(100)
Depreciation expense ..................................................................
7,200
Net cash used in operating activities ........................................ $ (1,750)
Cash flows from investing activities
Cash paid for equipment (Note 1) ..............................................
(8,400)
Net cash used in investing activities ......................................... (8,400)
Cash flows from financing activities
Cash received from stock issuance ...........................................
10,000
Net cash used in financing activities ......................................... 10,000
Net decrease in cash ...................................................................... $ (150)
Cash balance at beginning of year ............................................... 30,550
Cash balance at end of year .......................................................... $ 30,400
Note 1
Equipment
Bal., 12/31/2013 41,500
Purchase plug Sale 0 plug = $8,400
Bal., 12/31/2014 49,900
Quick Study 12-17 (Concluded)
Part 2
The companys operating cash flows are negative, $(1,750). This is not a good
omen. However, much of this is attributed to a huge increase in inventory.
Thus, an assessment of the saleable nature of that inventory, and why it is
being built up, is crucially important. Also, the level of cash has only
marginally declined, from $30,550 to $30,400. Thus, there seems to be
sufficient cash. However, one should question why so much of its assets is in
the form of cash (more than 19%) as this is not a productive use of assets.
1. Under IFRS (as with U.S. GAAP), both the indirect method and direct
method of reporting operating cash flows are acceptable.
2. IFRS and US GAAP differ on the classification of the following cash flows
as operating, investing or financing:
Cash flow source U.S. GAAP IFRS _
a. Interest paid Operating Financing or Operating
b. Dividends paid Financing Financing or Operating
c. Interest received Operating Operating or Investing
d. Dividends received Operating Operating or Investing
EXERCISES
Exercise 12-1 (25 minutes)
Statement of Cash Flows Noncash
Investing & Not Reported
Operating Investing Financing Financing on Statement
Activities Activities Activities Activities or in Notes
a. Declared and paid a

X
cash dividend
b. Recorded
X
depreciation expense
c. Paid cash to settle

X
long-term note payable
d. Prepaid expenses
X
increased in the year
e. Accounts receivable
X
decreased in the year
f. Purchased land by
X
issuing common stock
g. Paid cash to
X
purchase inventory
h. Sold equipment for

X X
cash, yielding a loss
i. Accounts payable
X
decreased in the year
j. Income taxes payable

X
increased in the year
Exercise 12-2B (15 minutes)
Statement of Cash Flows Noncash

Investing & Not Reported
Operating Investing Financing Financing on Statement
Activities Activities Activities Activities or in Notes
a. Retired long-term notes X

payable by issuing stock
b. Paid cash toward accounts X

payable
c. Sold inventory for cash X
d. Paid cash dividend that

X
was declared in a prior
period
e. Accepted six-month note

receivable in exchange for X
plant assets
f. Recorded depreciation X
expense
g. Paid cash to acquire

X
treasury stock
h. Collected cash from sales X
i. Borrowed cash from bank

by signing a 9-month note X
payable
j. Paid cash to purchase a X

patent

Net income.............................................................................. $374,000
Decrease in accounts receivable ....................................... 17,100
Decrease in merchandise inventory .................................. 42,000
Increase in prepaid expenses ............................................ (4,700)
Decrease in accounts payable ........................................... (8,200)
Increase in other payables ................................................. 1,200
Depreciation expense ......................................................... 44,000
Amortization expense ......................................................... 7,200
Gain on sale of plant assets ............................................... (6,000)
Net cash provided by operating activities ............................. $466,600

Net income ............................................................................... $400,000
Depreciation ..........................................................................
$80,000
Accounts receivable increase ............................................. (40,000)
Prepaid expense decrease ................................................... 12,000
Accounts payable increase .................................................. 6,000
Wages payable decrease......................................................(2,000)
Gain on sale of machinery ................................................... (20,000) 36,000
Case X: Sales revenue ........................................................... $515,000

Accounts receivable, Dec. 31, 2013 ........................ $ 27,200
Accounts receivable, Dec. 31, 2014 ........................ (33,600)
Less increase in accounts receivable .................... (6,400)
Cash received from customers ............................... $508,600
Case Y: Rent expense ............................................................ $139,800

Rent payable, Dec. 31, 2013 ....................................$ 7,800
Rent payable, Dec. 31, 2014 .................................... (6,200)
Plus decrease in rent payable ................................. 1,600
Cash paid for rent ..................................................... $141,400
Case Z: Cost of goods sold ................................................... $525,000

Merchandise inventory, Dec. 31, 2014.................... $130,400
Merchandise inventory, Dec. 31, 2013.................... (158,600)
Less decrease in merch. inventory ........................ (28,200)
Cost of goods purchased ........................................ 496,800
Accounts payable, Dec. 31, 2014 ............................ 82,000
Accounts payable, Dec. 31, 2013 ............................ (66,700)
Less increase in accounts payable ........................ (15,300)
Cash paid for merchandise ..................................... $481,500

Net income.............................................................................. $ 481,540
Increase in accounts receivable ........................................ (30,500)
Increase in merchandise inventory ................................... (25,000)
Decrease in accounts payable ........................................... (12,500)
Decrease in salaries payable ............................................. (3,500)
Depreciation expense ......................................................... 44,200
Amortization expensePatents ........................................ 4,200
Gain on sale of equipment ................................................. (6,200)
Net cash provided by operating activities ............................. $ 452,240

Receipts from customers (see note a) ............................................ $1,797,500
Payments for merchandise (see note b) ......................................... (1,028,500)
Payments for salaries (see note c) .................................................. (249,035)
Payments for rent ............................................................................ (49,600)
Payments for utilities ...................................................................... (18,125)
Net cash provided by operating activities ....................................... $ 452,240
Note a: Sales Increase in receivables

$1,828,000 - $30,500 = $1,797,500
Note b: Cost of goods sold + Increase in inventory + Decrease in accounts payable

$991,000 + $25,000 + $12,500 = $1,028,500
Note c: Salaries expense + Decrease in salaries payable

$245,535 + $3,500 = $249,035

Cash received from the sale of equipment* .................................. $ 51,300
Cash paid for new truck ................................................................... (89,000)
Cash received from the sale of land ............................................... 198,000
Cash received from the sale of long-term investments ............... 60,800
Net cash provided by investing activities ...................................... $221,100
* Cash received from sale of equipment = Book value - loss = $65,300 - $14,000 = $51,300

Sale of common stock .................................................................................
$ 64,000
Paid cash dividend .......................................................................................
(14,600)
Repaid note payable ....................................................................................
(50,000)
Purchased treasury stock ...........................................................................(12,000)
Net cash used by financing activities ........................................................ $(12,600)
Part 1
IKIBAN, INC.
For Year Ended June 30, 2013
Net income.....................................................................
$ 99,510
Increase in accounts receivable ..................................(14,000)
Decrease in merchandise inventory ...........................22,700
Decrease in prepaid expenses .................................... 1,000
Decrease in accounts payable .................................... (5,000)
Decrease in wages payable ......................................... (9,000)
Decrease in income taxes payables ........................... (400)
Depreciation expense ...................................................58,600
Gain on sale of plant assets ........................................ (2,000)
Net cash provided by operating activities .................. $151,410
Cash received from sale of equip. (Note 1) ...... 10,000
Cash paid for equipment (Note 1given) ........ (57,600)
Net cash used in investing activities ................ (47,600)
Cash received from stock issuance .................. 60,000
Cash paid to retire notes (Note 2given) ........ (30,000)
Cash paid for dividends (Note 3) ....................... (90,310)
Net cash used in financing activities ................ (60,310)
Net increase in cash .............................................. $ 43,500
Cash balance at prior year-end ............................ 44,000
Cash balance at current year-end ........................ $ 87,500
(Notes 1, 2, and 3 on next page.)
Exercise 12-10 (Part 1 continued)
(1) Cost of equipment sold (Given) .................................................................... $ 48,600

Accumulated depreciation of equipment sold* ............................................ (40,600)
Book value of equipment sold ...................................................................... 8,000
Gain on sale of equipment (Given) ............................................................... 2,000
Cash receipt from sale of equipment............................................................ $ 10,000
Cost of equipment sold ................................................................................. $ 48,600

Plus net increase in the equipment account balance .................................. 9,000
Cash paid for new equipment (given) ........................................................... $ 57,600
Equipment Accumulated Depreciation, Equipment

Bal., 6/30/2012 115,000 Bal., 6/30/2012 9,000
Purchase 57,600 Sale 48,600 Sale (plug) *40,600 Depr. Expense 58,600
Bal., 6/30/2013 124,000 Bal., 6/30/2013 27,000
(2) Carrying value of notes retired ..................................................................... $ 30,000

Cash payment to retire notes ........................................................................ $ 30,000
(3)
Retained Earnings
Bal., 6/30/2012 24,100
Dividends (plug) 90,310 Net income 99,510
Bal., 6/30/2013 33,300
Part 2
Cash flow on total assets ratio = Operating cash flows / Average total assets
= $151,410 / [($317,700 + $292,900)/2]
= $151,410 / $305,300
= 49.6%
Interpretation: A 49.6% result on the cash flow on total assets ratio is

indicative of very good performance. Also, this favorably compares to its
return on assets figure of 32.6% (high-quality earnings).
Part 1
IKIBAN, INC.
Statement of Cash Flows (Direct Method)
For Year Ended June 30, 2013
Cash received from customers (Note 1) ........... $664,000
Cash paid for merchandise (Note 2) ................. (393,300)
Cash paid for operating expenses (Note 3) ...... (75,000)
Cash paid for income taxes (Note 4) ................. (44,290)
Net cash provided by operating activities........ $151,410

Cash received from sale of equip. (Note 5) ...... 10,000
Cash paid for equipment (Note 5given) ........ (57,600)
Net cash used in investing activities ................ (47,600)

Cash received from stock issuance .................. 60,000
Cash paid to retire notes (Note 6) ..................... (30,000)
Cash paid for dividends (Note 7) ....................... (90,310)
Net cash used in financing activities ................ (60,310)
Net increase in cash .............................................. $ 43,500

Cash balance at prior year-end ............................ 44,000
Cash balance at current year-end ........................ $ 87,500
(See notes on next page)
Exercise 12-11B (continued)
Notes
(1) Sales ............................................................................................................... $678,000
Less increase in accounts receivable .......................................................... (14,000)
Cash received from customers ..................................................................... $664,000
(2) Cost of goods sold......................................................................................... $411,000

Less decrease in merchandise inventory .................................................... (22,700)
Purchases ....................................................................................................... 388,300
Plus decrease in accounts payable .............................................................. 5,000
Cash paid for merchandise ........................................................................... $393,300
(3) Other operating expenses ............................................................................. $ 67,000

Plus decrease in wages payable ................................................................... 9,000
Less decrease in prepaid expenses ............................................................. (1,000)
Cash paid for other operating expenses ...................................................... $ 75,000
(4) Income taxes expense ................................................................................... $ 43,890

Plus decrease in income taxes payable ....................................................... 400
Cash paid for income taxes ........................................................................... $ 44,290
(5) Cost of equipment sold (Given) .................................................................... $ 48,600

Accumulated depreciation of equipment sold* ............................................ (40,600)
Book value of equipment sold ...................................................................... 8,000
Gain on sale of equipment ............................................................................ 2,000
Cash receipt from sale of equipment............................................................ $ 10,000
Cost of equipment sold ................................................................................. $ 48,600

Plus net increase in the equipment account balance .................................. 9,000
Cash paid for new equipment (given) ........................................................... $ 57,600
Equipment Accumulated Depreciation, Equipment

Bal., 6/30/2012 115,000 Bal., 6/30/2012 9,000
Purchase 57,600 Sale 48,600 Sale *40,600 Depr. Expense 58,600
Bal., 6/30/2013 124,000 Bal., 6/30/2013 27,000
(6) Carrying value of notes retired ..................................................................... $ 30,000

Cash payment to retire notes ........................................................................ $ 30,000
(7)
Retained Earnings
Bal., 6/30/2012 24,100
Dividends (plug) 90,310 Net income 99,510
Bal., 6/30/2013 33,300
Cash flows from operating activitiesindirect method

Net income ....................................................................................................
$ 24,000
Depreciation expense .................................................................................. 12,000
Accounts receivable increase ....................................................................(10,000)
Inventory decrease ...................................................................................... 16,000
Salaries payable increase ........................................................................... 1,000
Net cash provided by operating activities .................................................
$ 43,000
1. Cash flows from operating activitiesindirect method

Net income (loss) .........................................................................................
$ (16,000)
Depreciation expense ..................................................................................
14,600
Accounts receivable decrease ................................................................... 24,000
Salaries payable increase............................................................................ 18,000
Accrued liabilities decrease ........................................................................ (8,000)
Net cash provided by operating activities ................................................. $ 32,600
2. One reason for the net loss was depreciation expense. Depreciation
expense is added to net income to adjust for the effects of a noncash
expense that was deducted in determining net income. It does not involve
an inflow of cash. Depreciation expense, along with a decrease in accounts
receivable and an increase in salaries payable, turned the net loss into
positive operating cash flow.
3. Differences between cash flow from operations and net income can be
caused by various items. The most important causes for investors are
differences arising from: (1) changes in management of operating activities
and (2) changes in revenue and expense recognition.
Exercise 12-14A (30 minutes)
SCORETECK CORPORATION
Spreadsheet for Statement of Cash Flows
December Analysis of Changes December
31, 2012 Debit Credit 31, 2013
Balance sheetdebit bal. accounts
Cash .......................................................... $ 80,000 60,000 $
Accounts receivable .............................. 120,000 (f) $ 70,000 190,000
Merchandise inventory .......................... 250,000 (g) $ 20,000 230,000
Plant assets ............................................. 600,000 (d) 70,000 670,000
$1,050,000 $1,150,000
Balance sheetcredit bal. accounts
Accum. depreciationPlant assets.... $ 100,000 (c) 70,000$ 170,000
Accounts payable................................... 150,000 (h) 10,000 140,000
Notes payable.......................................... 370,000 (e) 20,000 390,000
Common stock........................................ 200,000 200,000
Retained earnings................................... 230,000 (b) 80,000 (a) 100,000 250,000
$1,050,000 $1,150,000
Statement of cash flows
Operating activities
Net income ............................................... (a) 100,000
Increase in accounts receivable ......... (f) 70,000
Decrease in merch. inventory .............. (g) 20,000
Decrease in accounts payable ............. (h) 10,000
Depreciation expense ............................ (c) 70,000
Investing activities
Payment for plant assets....................... (d) 70,000
Financing activities
Paid cash dividends ............................... (b) 80,000
Issued note payable ............................... (e) 20,000 _______
$440,000 $440,000
FERRON COMPANY
Statement of Cash Flows
Receipts from customers ........................................... $ 495,000
Receipts of interest..................................................... 3,500
Payments for merchandise ........................................ (254,500)
Payments for salaries ................................................. (76,500)
Payments for other expenses .................................... (20,000)
Net cash provided by operating activities ................ $147,500

Receipt from sale of equipment ................................ 60,250
Payment for store equipment .................................... (24,750)
Net cash provided by investing activities ................ 35,500

Payment to retire long-term notes payable .............. (100,000)
Receipt from borrowing on six-month note ............. 35,000
Payment of cash dividends ....................................... (10,000)
Net cash used in financing activities ........................ (75,000)
Net increase in cash and cash equivalents................. $108,000

Cash and cash equivalents at prior year-end ............. 40,000
Cash and cash equivalents at current year-end ......... $148,000
Note No. ___

Noncash investing and financing activities
(1) Issued common stock to retire $185,500 of bonds payable.
(2) Purchased land financed with a $105,250 long-term note payable.
1.
THOMAS CORPORATION
Cash received from customers ........................................ $5,000,000
Cash received from dividends ......................................... 208,400
Cash paid for merchandise ..............................................(2,590,000)
Cash paid for wages ......................................................... (550,000)
Cash paid for rent.............................................................. (320,000)
Cash paid for interest ....................................................... (218,000)
Cash paid for taxes ........................................................... (450,000)
Net cash provided by operating activities ...................... $1,080,400
Cash paid for purchases of machinery ...........................(2,236,000)
Cash paid for purchases of long-term investments ......(1,260,000)
Cash received from sale of land ...................................... 220,000
Cash received from sale of machinery ............................ 710,000
Net cash used in investing activities ............................... (2,566,000)
Cash received from issuing stock ...................................1,540,000
Cash received from borrowing ........................................3,600,000
Cash paid for note payable .............................................. (386,000)
Cash paid for dividends.................................................... (500,000)
Cash paid for treasury stock purchases. ........................ (218,000)
Net cash provided by financing activities ....................... 4,036,000
Net increase in cash............................................................ $2,550,400
Beginning balance of cash ................................................. 333,000
Ending balance of cash ...................................................... $2,883,400
2.
a. (i) Financing section reported the largest cash inflow of $4,036,000.
(ii) Investing section reported the largest cash outflow of $2,566,000.
b. The largest individual item among the investing cash outflows is the purchase
of machinery at $2,236,000.
c. Proceeds for issuing notes are larger at $3,600,000 than for issuing stock
equity at $1,540,000 (see financing section).
d. The company has a net cash inflow from borrowing. This is computed from
the borrowing proceeds of $3,600,000 less the note payment of $386,000 (see
financing section).
2012: $102,920 / $1,240,000 = 8.3%

2013: $138,920 / $1,510,000 = 9.2%
Interpretation: Both years ratios are good in that they are positive and at
reasonable levels (that is, most businesses can survive with annual returns at
~10%). Further, the ratio improved from 8.3% to 9.2%, which is a good increase.

PEUGEOT S.A.
Net income........................................................................ 784
Net change (decrease) in working capital ..................... (1,183)
Depreciation and amortization ....................................... 3,037
Gains on disposals and other ........................................ (883)
Net cash from operating activities ................................. 1,755

Cash from disposal of plant assets & intangibles........ 189
Cash paid for plant assets and intangibles ................... (3,921)
Net cash used in investing activities ............................. (3,732)

Cash from purchases of treasury stock ........................ (199)
Cash paid for dividends .................................................. (290)
Cash paid for other financing activities ........................ (2,282)
Net cash from financing activities ................................. (2,771)
Net decrease in cash .......................................................... (4,748)
Cash and cash equivalents, Dec 31, 2010 ........................ 10,442
Cash and cash equivalents, Dec 31, 2011 ........................ 5,694
PROBLEM SET A
Problem 12-1A (50 minutes)
Part 1
FORTEN COMPANY
Net income ..........................................................................................
$114,975
cash provided by operating activities:
Increase in accounts receivable ($65,810 - $50,625) .................(15,185)
Increase in inventory ($275,656 - $251,800) ....................................(23,856)
Decrease in prepaid expenses ($1,875 - $1,250)........................ 625
Decrease in accounts payable ($114,675 - $53,141) ..................(61,534)
Depreciation expense ................................................................... 20,750
Loss on disposal of equipment .................................................. 5,125
Net cash provided by operating activities .................................... $ 40,900

Cash received from sale of equipment ......................................... 11,625
Cash paid for equipment..................................................................(30,000)
Net cash used in investing activities ............................................. (18,375)

Cash borrowed on short-term note ............................................... 4,000
Cash paid on long-term note...........................................................(50,125)
Cash received from issuing stock (2,500 x $20)............................ 50,000
Cash paid for dividends ...................................................................(50,100)
Net cash used in financing activities ............................................. (46,225)
Net decrease in cash ........................................................................... $(23,700)
Cash balance at December 31, 2012................................................. 73,500
Cash balance at December 31, 2013................................................. $ 49,800

Purchased equipment for $96,375 by signing a $66,375 long-term note payable
and paying $30,000 in cash.
Problem 12-1A (Concluded)
Part 2
Forten Company's operations provide a positive net cash inflow of $40,900a

good result. At the same time, the cash balance decreased by $23,700 (32%)
during the year. Two major cash outflows are the retirement of debt ($50,125)
and the dividend payment ($50,100), which together represent 87% of net
income. Also, the $30,000 cash investment in equipment is presumably
necessary to replace the older equipment sold.
Helping fund these cash outflows is $50,000 cash from issuance of stock.
Moreover, the company took on additional debt (more than 30% increase in
indebtedness); namely, $66,375 in long-term notes. The company must
recognize that that the debt must eventually be repaid with interest.
In summary, perhaps the company should review the wisdom of paying cash
dividends that are considerably larger than cash provided from operations,
especially when the payment also results in a deteriorating cash position and
when the company is taking on additional debt.
Problem 12-2AA (60 minutes)
FORTEN COMPANY
31, 2012 Debit Credit 31, 2013
Balance sheetdebits
Cash .........................................................$ 73,500 $ 49,800
Accounts receivable.............................. 50,625 (b) $15,185 65,810
Merchandise inventory ......................... 251,800 (c) 23,856 275,656
Prepaid expenses .................................. 1,875 (d) $ 625 1,250
Equipment ............................................... 108,000 (h) 96,375 (g) 46,875 157,500
$485,800 $550,016
Balance sheet--credits
Accum. depreciationEquip...............$ 46,000 (g) 30,125 (f) 20,750 $ 36,625
Accounts payable .................................. 114,675 (e) 61,534 53,141
Short-term notes payable ..................... 6,000 (j) 4,000 10,000
Long-term notes payable...................... 48,750 (k) 50,125 (i) 66,375 65,000
Common stock, $5 par value ............... 150,250 (l) 12,500 162,750
Paid-in capital in excess of
par value, common stock .................. 0 (l) 37,500 37,500
Retained earnings.................................. 120,125 (m) 50,100 (a) 114,975 185,000
$485,800 $550,016
Net income .............................................. (a) 114,975
Increase in accts. receivable ................ (b) 15,185
Increase in merch. inventory................ (c) 23,856
Decrease in prepaid expenses ............ (d) 625
Decrease in accounts payable............. (e) 61,534
Depreciation expense ........................... (f) 20,750
Loss on sale of equipment ................... (g) 5,125
Receipt from sale of equipment .......... (g) 11,625
Payment to purchase equipment........ (h) 30,000
Borrowed on short-term note .............. (j) 4,000
Payment on long-term note.................. (k) 50,125
Issued common stock for cash ........... (l) 50,000
Payments of cash dividends................ (m) 50,100
Noncash investing and
financing activities
Purchase of equip. financed
by long-term note payable ......... (i) 66,375 (h) 66,375
$600,775 $600,775
Problem 12-2AA (Concluded)
FORTEN COMPANY
Net income ..........................................................................................
$114,975
cash provided by operating activities:
Increase in accounts receivable ($65,810 - $50,625) .................(15,185)
Increase in inventory ($275,656 - $251,800) ....................................(23,856)
Decrease in prepaid expenses ($1,875 - $1,250 )....................... 625
Decrease in accounts payable ($114,675 - $53,141) ..................(61,534)
Depreciation expense ................................................................... 20,750
Net cash provided by operating activities .................................... $ 40,900

Cash received from sale of equipment ......................................... 11,625
Cash paid for equipment..................................................................(30,000)

Cash paid on long-term note...........................................................(50,125)
Cash received from issuing stock (2,500 x $20)............................ 50,000
Cash paid for dividends ...................................................................(50,100)
Net decrease in cash ........................................................................... $(23,700)
Cash balance at beginning of 2013................................................... 73,500
Cash balance at end of 2013 .............................................................. $ 49,800

Problem 12-3AB (40 minutes)
FORTEN COMPANY
Cash received from customers (Note 1) .................... $567,315
Cash paid for merchandise (Note 2) .......................... (370,390)
Cash paid for other expenses (Note 3) ...................... (131,775)
Cash paid for income taxes ....................................... (24,250)
Net cash provided by operating activities ................ $ 40,900
Cash received from sale of equipment ..................... 11,625
Cash paid for equipment ............................................ (30,000)
Net cash used in investing activities ........................ (18,375)
Cash borrowed on short-term note ........................... 4,000
Cash paid on long-term note ..................................... (50,125)
Cash received from issuing stock (2,500 x $20) ........ 50,000
Cash paid for dividends ............................................. (50,100)
Net cash used in financing activities ....................... (46,225)
Net decrease in cash ..................................................... $(23,700)
Cash balance at December 31, 2012 ............................ 73,500
Cash balance at December 31, 2013 ............................ $ 49,800

Supporting calculations
(1) Sales - Increase in receivables = $582,500 - ($65,810 - $50,625) = $567,315
(2) Cost of Increase in Decrease in

+ + payables
goods sold inventory =
$285,000 + ($275,656 - $251,800) + ($114,675 - $53,141) = $370,390
(3) Other expenses - Decrease in prepaid expenses = $132,400 - ($1,875 - $1,250)

= $131,775
GOLDEN CORPORATION
Net income ................................................................................... $136,000
cash provided by operating activities
Increase in accounts receivable ($83,000 - $71,000) ........... (12,000)
Increase in inventory ($601,000 - $526,000)........................... (75,000)
Increase in accounts payable ($87,000 - $71,000)................ 16,000
Increase in taxes payable ($28,000 - $25,000)....................... 3,000
Depreciation expense ............................................................. 54,000

Cash paid for equipment ........................................................... (36,000)

Cash received from issuing stock (12,000 x $5) ..................... 60,000
Cash paid for cash dividends ................................................... (89,000)
Net cash used in financing activities ...................................... (29,000)
Net increase in cash...................................................................... $ 57,000
Cash balance at December 31, 2012 ......................................... 107,000

Cash balance at December 31, 2013 ......................................... $164,000
Problem 12-5AA (50 minutes)
GOLDEN CORPORATION
31, 2012 Debit Credit 31, 2013
Balance sheet--debits
Cash..........................................................$ 107,000 $ 164,000
Accounts receivable .............................. 71,000 (b) $ 12,000 83,000
Merchandise inventory .......................... 526,000 (c) 75,000 601,000
Equipment ............................................... 299,000 (g) 36,000 335,000
$1,003,000 $1,183,000
Accum. depreciationEquip. ..............$ 104,000 (f) $ 54,000 $ 158,000
Accounts payable................................... 71,000 (d) 16,000 87,000
Income taxes payable ............................ 25,000 (e) 3,000 28,000
Common stock, $2 par value................ 568,000 (h) 24,000 592,000
par value, common stock................... 160,000 (h) 36,000 196,000
Retained earnings .................................. 75,000 (i) 89,000 (a) 136,000 122,000
$1,003,000 $1,183,000
Net income............................................... (a) 136,000
Increase in accounts receivable ......... (b) 12,000
Increase in merch. inventory ................ (c) 75,000
Increase in accounts payable............... (d) 16,000
Increase in income tax payable............ (e) 3,000
Depreciation expense ............................ (f) 54,000
Payment for equipment ......................... (g) 36,000
Issued common stock for cash ........... (h) 60,000
Paid cash dividends............................... ________ (i) 89,000
$481,000 $481,000
Problem 12-5AA (Concluded)
GOLDEN CORPORATION
Net income ................................................................................... $136,000
Increase in accounts receivable ($83,000 - $71,000) ........... (12,000)
Increase in inventory ($601,000 - $526,000)........................... (75,000)
Increase in accounts payable ($87,000 - $71,000)................ 16,000
Increase in taxes payable ($28,000 - $25,000)....................... 3,000
Depreciation expense ............................................................. 54,000

Cash paid for equipment ........................................................... (36,000)

Cash received from issuing stock (12,000 x $5) ..................... 60,000
Cash paid for cash dividends ................................................... (89,000)
Net cash used in financing activities ...................................... (29,000)
Net increase in cash...................................................................... $ 57,000
Cash balance at beginning of 2013............................................ 107,000

Cash balance at end of 2013 ....................................................... $164,000
GOLDEN CORPORATION
Cash received from customers (Note 1) .................$1,780,000
Cash paid for merchandise (Note 2) ...................... (1,145,000)
Cash paid for other operating expenses .............. (494,000)
Cash paid for income taxes (Note 3) ...................... (19,000)
Net cash provided by operating activities ............ $122,000

Cash paid for equipment ......................................... (36,000)

Cash from issuing stock (12,000 x $5) .................... 60,000
Cash paid for cash dividends ................................ (89,000)
Net cash used in financing activities .................... (29,000)
Net increase in cash ................................................... $ 57,000
Cash balance at December 31, 2012 ......................... 107,000
Cash balance at December 31, 2013 ......................... $164,000
(1) Sales - Increase in receivables = $1,792,000 - ($83,000 - $71,000) = $1,780,000
(2) Cost of Increase in Increase in

goods sold + inventory
- accounts payable =
$1,086,000 + ($601,000 - $526,000) - ($87,000 - $71,000) = $1,145,000
(3) Income taxes expense - Increase in income taxes payable

= $22,000 - ($28,000 - $25,000) = $19,000
LANSING COMPANY
Cash Flows from Operating ActivitiesIndirect Method

Net income ............................................................................... $ 6,000
Depreciation expense ........................................................
$12,000
Decrease in accounts receivable ...................................... 200
Increase in merchandise inventory .................................. (440)
Decrease in accounts payable .......................................... (200)
Increase in salaries payable .............................................. 180
Increase in utilities payable ............................................... 60
Increase in prepaid rent ..................................................... (40)
Decrease in prepaid insurance ......................................... 20 11,780
Net cash provided by operating activities ............................ $17,780
LANSING COMPANY
Cash Flows from Operating ActivitiesDirect Method

Cash receipts from customers (1) .........................................................
$ 97,400
Cash payments to suppliers (2) .............................................................
(42,640) )
Cash payments for salaries (3) ..............................................................
(17,820) )
Cash payments for rent (4) .....................................................................(9,040) )
Cash payments for insurance (5)...........................................................(3,780) )
Cash payments for utilities (6) ...............................................................(2,740) )
Cash payments for interest ....................................................................(3,600) )
Net cash provided by operating activities ...............................................
$ 17,780
(1) Sales + Decrease in receivables = $97,200 + ($5,800 - $5,600) = $97,400
(2) Cost of + Increase in + Decrease in

goods sold inventory accts payable =
$42,000 + ($1,980 - $1,540) + ($4,600 - $4,400) = $42,640
(3) Salaries expense - Increase in salaries payable = $18,000 - ($880 - $700) = $17,820
(4) Rent expense + Increase in prepaid rent = $9,000 + ($220 - $180) = $9,040
(5) Insurance expense - Decrease in prepaid insurance = $3,800 - ($280 - $260) = $3,780
(6) Utilities expense - Increase in utilities payable = $2,800 - ($220 - $160) = $2,740
PROBLEM SET B
Problem 12-1B (40 minutes)
Part 1
GAZELLE CORPORATION
Net income ..........................................................................................
$158,100
Decrease in accounts receivable ($80,750 - $77,100)................ 3,650
Decrease in inventory ($250,700 - $240,600) ........................10,100
Decrease in prepaid expenses ($17,000 - $15,100).................... 1,900
Decrease in accounts payable ($102,000 - $17,750) ..................
(84,250)
Depreciation expense ...................................................................38,600
Net cash provided by operating activities .................................... $130,200
Cash received from sale of equipment .........................................26,050
Cash paid for equipment..................................................................
(43,250)
Cash paid on long-term note........................................................... (47,500)
Cash received from issuing stock (3,000 x $15)............................45,000
Cash paid for dividends ...................................................................
(53,600)
)
Net increase in cash............................................................................. $ 61,900
Cash balance at December 31, 2012 ................................................ 61,550
Cash balance at December 31, 2013 ................................................ $123,450

Purchased equipment for $113,250 by signing a $70,000 long-term note
payable and paying $43,250 in cash.
Problem 12-1B (Continued)
Part 2
Gazelle Corporation's dividend payments of $53,600 represent 34% of the

$158,100 net income for the year, and 41% of cash inflow provided by
operations of $130,200.
Further analysis reveals that investing activities used a modest $17,200 and,
including the dividends, financing activities used $51,100. This resulted in a
$61,900 increase in the company's cash balance for the year, a 101% increase.
Companies usually pay dividends that are substantially less than net income.
The analysis of cash flows for this company indicates no reason to question
the amount of the current dividend. Indeed, the liquidity position of the
company did not deteriorate as a result of its cash dividend.
Problem 12-2BA (60 minutes)
GAZELLE CORPORATION
31, 2012 Debit Credit 31, 2013
Cash.......................................................... $ 61,550 $123,450
Merchandise inventory .......................... 250,700 (c) 10,100 240,600
Prepaid expenses ................................... 17,000 (d) 1,900 15,100
Equipment ............................................... 200,000 (h) $113,250 (g) 51,000 262,250
$610,000 $718,500
Accum. depreciationEquip. .............. $ 95,000 (g) 22,850 (f) 38,600 $110,750
Accounts payable................................... 102,000 (e) 84,250 17,750
Short-term notes payable...................... 10,000 (j) 5,000 15,000
Long-term notes payable ...................... 77,500 (k) 47,500 (i) 70,000 100,000
Common stock, $5 par value................ 200,000 (l) 15,000 215,000
par value, common stock................... 0 (l) 30,000 30,000
Retained earnings .................................. 125,500 (m) 53,600 (a) 158,100 230,000
$610,000 $718,500
Net income............................................... (a) 158,100
Decrease in accounts receivable......... (b) 3,650
Decrease in merch. inventory .............. (c) 10,100
Decrease in prepaid expenses............. (d) 1,900
Decrease in accounts payable ............. (e) 84,250
Loss on sale of equipment ................... (g) 2,100
Receipt from sale of equipment ........... (g) 26,050
Payment to purchase equipment ........ (h) 43,250
Borrowed on short-term note............... (j) 5,000
Payment on long-term note .................. (k) 47,500
Issued common stock for cash ........... (l) 45,000
Payments of cash dividends ................ (m) 53,600
Noncash investing and financing

activities
Purchase of equip. financed
by long-term note payable ......... (i) 70,000 (h) 70,000
$681,950 $681,950
Problem 12-2BA (Concluded)
GAZELLE CORPORATION
Net income ..........................................................................................
$158,100
Decrease in accounts receivable ($80,750 - $77,100)................ 3,650
Decrease in inventory ($250,700 - $240,600) ........................10,100
Decrease in prepaid expenses ($17,000 - $15,100).................... 1,900
Decrease in accounts payable ($102,000 - $17,750) .................. (84,250)
Depreciation expense ...................................................................38,600
Net cash provided by operating activities .................................... $130,200

Cash received from sale of equipment .........................................26,050
Cash paid for equipment..................................................................
(43,250)

Cash paid on long-term note........................................................... (47,500)
Cash received from issuing stock (3,000 x $15)............................45,000
Cash paid for dividends ................................................................... (53,600)
Net cash used in financing activities............................................. (51,100)
Net increase in cash............................................................................. )
$ 61,900
Cash balance at beginning of year 2013.......................................... 61,550
Cash balance at end of year 2013 ..................................................... $123,450

Purchased equipment for $113,250 by signing a $70,000 long-term note
payable and paying $43,250 in cash.
Problem 12-3BB (40 minutes)
GAZELLE CORPORATION
Cash received from customers (Note 1) .....................$1,188,650
Cash paid for merchandise (Note 2) ........................... (669,150)
Cash paid for other expenses (Note 3) ....................... (360,950)
Cash paid for income taxes ........................................ (28,350)
Net cash provided by operating activities ................. $130,200

Cash received from sale of equipment ...................... 26,050
Cash paid for equipment ............................................. (43,250)
Net cash used in investing activities ......................... (17,200)

Cash borrowed on short-term note ............................ 5,000
Cash paid on long-term note ...................................... (47,500)
Cash received from issuing stock (3,000 x $15) ......... 45,000
Cash paid for dividends .............................................. (53,600)
Net cash used in financing activities ........................ (51,100)
Net increase in cash ....................................................... $ 61,900
Cash balance at December 31, 2012 ............................. 61,550
Cash balance at December 31, 2013 ............................. $123,450

(1) Sales + Decrease in receivables = $1,185,000 + ($80,750 - $77,100) = $1,188,650
(2) Cost of Decrease in Decrease in
goods sold
- inventory + payables =
$595,000 - ($250,700 $240,600) + ($102,000 - $17,750) = $669,150
(3) Other expenses - Decrease in prepaid expenses = $362,850 - ($17,000 - $15,100)
= $360,950
SATU COMPANY
Net income ............................................................................... $202,767
Decrease in accounts receivable ($25,860 - $20,222)....... 5,638
Increase in inventory ($165,667 - $140,320)........................ (25,347)
Decrease in accounts payable ($157,530 - $20,372) ......... (137,158)
Decrease in taxes payable ($6,100 - $2,100) ...................... (4,000)
Depreciation expense .......................................................... 15,700
Net cash provided by operating activities ......................... $ 57,600

Cash paid for equipment....................................................... (30,250)

Cash received from issuing stock (3,000 x $21)................. 63,000
Cash paid for dividends ........................................................ (60,000)
Net cash provided by financing activities ......................... 3,000
Net increase in cash.................................................................. $ 30,350
Cash balance at December 31, 2012...................................... 28,400

Cash balance at December 31, 2013...................................... $ 58,750
Problem 12-5BA (50 minutes)
SATU COMPANY
31, 2012 Debit Credit 31, 2013
Cash.......................................................... $ 28,400 $ 58,750
Merchandise inventory .......................... 140,320 (c) $ 25,347 165,667
Equipment ............................................... 77,500 (g) 30,250 107,750
$272,080 $352,389
Accum. depreciationEquip. .............. $ 31,000 (f) 15,700 $ 46,700
Accounts payable................................... 157,530 (d) 137,158 20,372
Income taxes payable ............................ 6,100 (e) 4,000 2,100
Common stock, $5 par value................ 25,000 (h) 15,000 40,000
par value, common stock................... 20,000 (h) 48,000 68,000
Retained earnings .................................. 32,450 (i) 60,000 (a) 202,767 175,217
$272,080 $352,389

Net income............................................... (a) 202,767
Decrease in accounts receivable........ (b) 5,638
Increase in merch. inventory ................ (c) 25,347
Decrease in accounts payable ............. (d) 137,158
Decrease in income taxes payable...... (e) 4,000
Payment for equipment ......................... (g) 30,250
Issued common stock for cash ........... (h) 63,000
Paid cash dividends............................... ________ (i) 60,000
$543,860 $543,860
Problem 12-5BA (concluded)
SATU COMPANY
Net income ............................................................................... $202,767
Decrease in accounts receivable ($25,860 - $20,222)....... 5,638
Increase in inventory ($165,667 - $140,320)........................ (25,347)
Decrease in accounts payable ($157,530 - $20,372) ......... (137,158)
Decrease in taxes payable ($6,100 - $2,100) ...................... (4,000)
Depreciation expense .......................................................... 15,700
Net cash provided by operating activities ......................... $ 57,600

Cash paid for equipment....................................................... (30,250)

Cash received from issuing stock (3,000 x $21)................. 63,000
Cash paid for dividends ........................................................ (60,000)
Net cash provided by financing activities ......................... 3,000
Net increase in cash.................................................................. $ 30,350
Cash balance at beginning of 2013........................................ 28,400

Cash balance at end of 2013 ................................................... $ 58,750
SATU COMPANY
Cash received from customers (Note 1) .................. $756,438
Cash paid for merchandise (Note 2) ........................ (431,705)
Cash paid for other operating expenses ................. (173,933)
Cash paid for income taxes (Note 3) ........................ (93,200)
Net cash provided by operating activities ............... $57,600

Cash paid for equipment ........................................... (30,250)

Cash received from issuing stock (3,000 x $21) ...... 63,000
Cash paid for cash dividends ................................... (60,000)
Net cash provided by financing activities ............... 3,000
Net increase in cash ...................................................... $30,350
Cash balance at December 31, 2012 ............................ 28,400
Cash balance at December 31, 2013 ............................ $58,750
(1) Sales + Decrease in receivables = $750,800 + ($25,860 - $20,222) = $756,438
(2) Cost of + Increase in Decrease in

goods sold inventory + accounts payable =
$269,200 + ($165,667 - $140,320) + ($157,530 - $20,372) = $431,705
(3) Income taxes expense + Decrease in income taxes payable

= $89,200 + ($6,100 - $2,100) = $93,200
SALT LAKE COMPANY

Cash Flows from Operating ActivitiesIndirect Method

Net income ............................................................................... $ 20,000
Depreciation expense ..........................................................

$32,000
Increase in accounts receivable ......................................... (600)
Decrease in merchandise inventory .................................. 120
Decrease in accounts payable ........................................... (200)
Increase in salaries payable ............................................... 300
Increase in utilities payable ................................................ 200
Decrease in prepaid insurance ........................................... 40
Decrease in prepaid rent ..................................................... 100 31,960
Net cash provided by operating activities ............................ $ 51,960
SALT LAKE COMPANY

Cash Flows from Operating ActivitiesDirect Method

Cash receipts from customers (1) ........................................................
$ 155,400
Cash payments to suppliers (2) ............................................................
(72,080)
Cash payments for salaries (3) .............................................................
(19,700)
Cash payments for rent (4) ....................................................................(4,900)
Cash payments for insurance (5)..........................................................(2,560)
Cash payments for utilities (6) ..............................................................(1,800)
Cash payments for interest ...................................................................(2,400)
Net cash provided by operating activities ................................................
$ 51,960
(1) Sales - Increase in receivables = $156,000 - ($3,600 - $3,000) = $155,400
(2) Cost of Decrease in Decrease in

goods sold - inventory + accounts payable =
$72,000 - ($980 - $860) + ($2,600 - $2,400) = $72,080
(3) Salaries expense - Increase in salaries payable

= $20,000 - ($900- $600) = $19,700
(4) Rent expense - Decrease in prepaid rent

= $5,000 - ($200- $100) = $4,900
(5) Insurance expense - Decrease in prepaid insurance

= $2,600 - ($180- $140) = $2,560
(6) Utilities expense - Increase in utilities payable

= $2,000 - ($200- $0) = $1,800
SERIAL PROBLEM SP 12
Serial Problem SP 12, Success Systems (45 minutes)
SUCCESS SYSTEMS
Statement of Cash Flows (Indirect)
For Quarter Ended March 31, 2014
Net income ..........................................................................................
$ 18,686
Increase in accounts receivable ($22,720 - $5,668) ...................(17,052)
Increase in inventory ($704 - $0) .................................................. (704)
Increase in computer supplies ($2,005 - $580) .......................... (1,425)
Decrease in prepaid insurance ($1,665 - $1,110) ....................... 555
Decrease in accounts payable ($1,100 - $0)............................... (1,100)
Increase in wages payable ($875 - $500) ................................... 375
Decrease in unearned computer service revenue .................. (1,500)
Depreciation expenseOffice Equipment................................. 400
Depreciation expenseComputer Equipment ......................... 1,250
Net cash used by operating activities ........................................... $ (515)

Net cash used in investing activities ............................................. 0

Cash received from stock issuance ..............................................25,000
Cash paid for dividends ................................................................... (4,800)
Net cash provided by financing activities .................................... 20,200
Net increase in cash............................................................................. $ 19,685
Cash balance at December 31, 2013................................................. 58,160

Cash balance at March 31, 2014 ........................................................ $ 77,845
Reporting in Action BTN 12-1
1. Polaris uses the indirect method of reporting operating cash flows. We

readily know this because the operating activity section of the cash flow
statement starts with net income, and makes adjustments for items such as
depreciation and changes in working capital.
2. In all three years, Polariss cash flows from operating activities markedly
exceed the cash dividends paid, as can be seen from the table below:
($ thousands) 2011 2010 2009
Cash provided by operating activities ...... $302,530 $297,619 $193,201
Cash dividends paid ...................................(61,585) (53,043) (50,177)
3. In 2011, the largest item in reconciling the difference between net income
and cash flow from operations was the change (increase) in accrued
expenses of $80,668 thousand.
In 2010, the largest item in reconciling the difference between net income
and cash flow from operations was the change (increase) in accrued
expenses of $107,363 thousand.
In 2009, the largest item in reconciling the difference between net income
and cash flow from operations was depreciation and amortization of
$64,593 thousand.
4. In 2011, the largest cash inflow from investing activities was $11,950
thousand from distributions from financing affiliate. The largest cash
outflow from investing activities was for acquisitions of property and
equipment, in the amount of $84,484 thousand.
In 2011, the largest cash inflow from financing activities was $100,000
thousand from borrowings under credit agreement/senior notes. The
largest cash outflow from financing activities was $202,333 thousand
repayments under credit agreement.
In 2010, the largest cash inflow from investing activities was $17,910
thousand from distributions from financing affiliate. The largest cash
outflow from investing activities was for acquisition of property and
equipment, in the amount of $55,718 thousand.
In 2010, the largest cash inflow from financing activities was $68,105
thousand from proceeds from stock issuances under employee plans. The
largest cash outflow from financing activities was $53,043 thousand for
cash dividends to shareholders.
5. Answer depends on the financial statement information obtained.
Comparative Analysis BTN 12-2
1. Polariss cash flow on total assets ratio ($ thousands)
Current Year = Operating cash flows/Average total assets

= $302,530 / [($1,228,024 + $1,061,647)/2]
= $302,530 / $1,144,836 = 26.4%
Prior Year = Operating cash flows/Average total assets

= $297,619 / [($1,061,647 + $763,653)/2]
= $297,619 / $912,650 = 32.6%
Arctic Cats cash flow on total assets ratio ($ thousands)
Current Year = Operating cash flows/Average total assets

= $(5,123) / [($272,906 + $246,084)/2]
= $(5,123) / $259,495 = (2.0%)
Prior Year = Operating cash flows/Average total assets

= $29,315 / ($246,084+ $251,165)/2]
= $29,315 / $248,624.5 = 11.8%
2. The cash flow on total assets ratio reflects the return on average assets by
using actual operating cash flows instead of net income. This return
calculation is not affected by the accounting constraints of recognition and
measurement of revenues and expenses. Instead, it is based solely on
operating cash flows (which has its own strengths and weaknesses).
3. For both years, Polaris has a higher cash flow on total assets ratio than
Arctic Cat.
4. Many business decision makers (such as analysts) feel that the cash flow
on total assets ratio is one indicator of earnings quality in that it is a
measure of the ability of the company to realize its net income in the form
of cash for the period under analysis.
Ethics Challenge BTN 12-3
1. The business actions available include
a. Encourage early collection of receivables to reduce the accounts

receivable balance.
b. Defer payments to vendors due as of year-end to increase the accounts
payable balance.
c. Defer any other payments of operating expenses due near the year-end
to improve the level of cash flow from operations.
Many other business actions are possible that would accelerate cash
receipts and/or delay cash payments.
2. As a business owner, Katie Murphy certainly can exercise discretion over

business actions. However, the underlying economic realities should
support any proposed actions. It is not ethical to pursue actions that
purposely mislead users of financial statements.
In addition, Katie Murphys actions may be transparent to the banker when

s/he reviews the financial records of the business. If so, her reputation
may suffer in the eyes of her banker and she may jeopardize her ability to
obtain bank financing in the future or increase the cost of that financing.
Communicating in Practice BTN 12-4
Here is a sample of what the body of the memorandum might include:
TO: Diana Wood

FROM: (Your Name)
SUBJECT: Statement of Cash Flows
DATE: _________________
I am pleased to hear your business is more profitable this year than last.
However, I have been thinking about what you said regarding the statement of
cash flows and have some thoughts as to why you found it confusing.
The statement of cash flows (operating section) can be prepared using either
of two methodsthe direct or the indirect method. From what you describe,
your statement is probably prepared using the indirect method. This method
shows a determination of net cash flows in the operating (first) section by
listing the net income number and applying a series of accounting
adjustments. These adjustments often do not make sense to those that do
not have an accounting or finance background.
I recommend that you request your accountant to provide you with a

statement of cash flows that is prepared using the direct method. This will
identify exactly how much cash came in from operating activities like sales. It
will also identify exactly how much cash went out for operating expenses like
merchandise, wages, interest, and taxes. It will determine your net operating
cash flow by directly subtracting the total of these operating outflows from the
inflows. You should find this format more understandable.
Note that good cash management is essential to business success and

growth. The statement of cash flows will provide you with a lot more
information regarding your cash than a balance sheet can offer. It will allow
you to see exactly where your cash came from, where it went, and how much
it changed. It organizes these amounts into categories of operating,
financing, and investing. This organization of cash information will allow you
to better project and plan for the future.
Please reconsider the value of the statement of cash flows for your business
decisions. If you wish to discuss this further, please call me.
Taking It to the Net BTN 12-5
1. Mendocino Brewing Company uses the indirect method to construct the

consolidated statement of cash flows.
2. The largest reconciling item is for depreciation and amortization totaling

$1,488,000.
3. The following table shows the net income (or net loss) and the cash flows
from operations for Mendocino Brewing for 2010 and 2011. Over this two-
year period, Mendocino has generated more positive cash flows from
operations (relative to its net income); indeed, its operating cash flows
have been consistently positive and markedly larger than net income over
this period.
2010 2011
Net income (loss) .................................
$ 49,400 $(1,078,500)
Cash flows from operations ................

1,412,600 1,011,700
4. For the recent period, the largest cash outflow for investing was $1,025,900
for purchases of property, equipment and leasehold improvements.
For the recent period, the largest cash outflow for financing was $3,694,200
for repayment on long-term notes.
5. In the recent period, for supplementary cash flow information, the company
reports cash flows related to: Interest paid, and Income taxes paid.
6. Yes, the company reports non-cash financing information related to

Common stock issued to satisfy liabilities.
Teamwork in Action BTN 12-6
Part 1
a. The reporting objective of the statement of cash flows is to provide
information about important cash inflows and outflows for business
decision makers. It answers specific questions such as:
How does a company obtain its cash?
Where does a company spend its cash?
What is the change in the cash balance?
b. The statement can be prepared using the direct method or the indirect
method for reporting cash flows from operating activities.
Similarities
Both methods report the same net cash flow from operating activities.
Both methods classify cash flows into operating, financing, and
investing categories.
Both methods provide exactly the same information in the financing and
investing categories.
Both identify the change in cash, beginning cash, and ending cash.
Both are acceptable methods for financial reporting.
Differences
Cash flow from operating activities is determined differently. The direct
method determines all operating cash inflows and outflows, and then
subtracts total operating outflows from inflows. The indirect method
starts with net income and applies a series of adjustments to reconcile
this accrual basis number to a cash basis number.
The direct method requires an extra section reconciling net income to
cash flows from operating activities.
The direct method is recommended by the FASB.
*
The indirect method is more widely used.
Teamwork in Action (Continued)
c. Steps to prepare the statement of cash flows:

(i) Compute the net increase or decrease in cash using comparative
balance sheet data. This is the target number or the number the
statement will explain and prove.
(ii) Compute net cash flow in operating activities using the direct or
indirect method.
(iii) Compute net cash flows from investing activities.
(iv) Compute net cash flows from financing activities.
(v) Prove that the net cash flow from the three categories combined
equals the net change in cash. List the beginning and ending cash
balances to prove this.
Also, identify and list noncash financing and investing activities in a
separate schedule or note.
d. Common analyses made from information in the statement of cash flows

include assessing a companys:
Ability to generate future cash flows.
Ability to pay dividends.
Ability to meet obligations.
Ability to expand operations.
Ability to obtain financing.
Cash flow on total assets ratio.
Sources and uses of cash flows.
Part 2
Adjusting Net Income to Cash Flow from Operating Activities

Items to Add Items to Subtract
a. Noncash expenses Noncash revenues
b. Losses Gains
c. Decreases in current assets Increases in current assets
d. Increases in current liabilities Decreases in current liabilities
Teamwork in Action (Concluded)
Part 3
a. Cash receipts from customers = Sales - Increase in Accounts Receivable,
or, + Decrease in Accounts Receivable.
Explanation: Sales reflects what is earned during the period. If Accounts

Receivable increases, that increase represents earnings not yet collected,
so we subtract it. If Accounts Receivable decreases, the entity collected
that much more than the periods sales, so we add it.
b. Cash paid for merchandise requires a two-step computation.

(1) Purchases = Cost of goods sold + Increase in inventory, or, Decrease
in inventory.
(2) Cash paid for merchandise = Purchases + Decrease in Accounts
Payable, or, Increase in Accounts Payable.
Explanation for (1): If inventory increases, the entity bought more than was
sold, so we add it. If inventory decreases, the entity bought less than was
sold, so we subtract it.
Explanation for (2): If Accounts Payable decreases, the entity paid for more
than the periods purchases, so we add it. If Accounts Payable increases,
the entity paid for less than the periods purchases, so we subtract it.
c. Cash paid for wages and operating expenses = Wages and other operating
expenses [+ Increase in prepaid expenses, or, Decrease in prepaid
expenses] and [+ Decrease in accrued liabilities, or, Increase in accrued
liabilities].
Explanation: If prepaid expenses increase, the entity paid for more than
was incurred, so we add it. If prepaid expenses decrease, the entity paid
for less than was incurred, so we subtract it. Also, if the accrued liabilities
increase, the expense includes an amount not yet paid for, so we subtract
it. If the accrued liabilities decrease, the entity paid for more than the
periods expenses, so we add it.
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, Increase in related payable.
Explanation: If the related payable decreases, the entity paid for more than
was incurred, so we add it. If the related payable increases, the entity paid
for less than was incurred, so we subtract it.
Entrepreneurial Decision BTN 12-7
1. It is common that small businesses must pay cash in advance for items such
as rent, advertising, supplies, and facilities expansion. Consequently, those
costs are usually recorded before revenues are earned, and before those
revenues are ultimately collected in cash. If the business does not carefully
plan, it is possible that it could show a positive net income, but not be able to
effectively operate because it has little or no cash to pay its suppliers,
creditors, and others to whom it owes money.
2. As a privately held corporation, TOMS can potentially raise cash financing for
expansion by selling shares in the company or by borrowing the monies.
TOMS is not a publicly traded company, so the potential to raise capital by
selling stock is somewhat restricted. Moreover, potential lenders will want to
evaluate the future profitability, cash flows, and solvency of the company
before lending money.
Entrepreneurial Decision BTN 12-8
Memorandum
To: Jenna and Matt Wilder
From: Your name
Subject: Performance evaluation of Mountain High
Date: Current Date
I have completed my evaluation of your company, Mountain High. My conclusion
is that Mountain High is performing well. This is in spite of its reported net loss
and its negative net cash flow, which I explain in this memorandum.
First, with respect to the net loss, please note that it includes an $85,000
extraordinary loss. Absent this extraordinary loss, Mountain High would report a
$75,000 net income. Using year-end total assets, Mountain Highs return on
assets would be roughly 9.4% (computed as $75,000 divided by $800,000). This
return is reasonable for a company in its second year of operations.
Second, with respect to its net cash outflow of $(5,000), please note that this is
mainly due to Mountain Highs renovation and expansion activities. This is
reflected in its summarized statement of cash flows. Specifically, its cash flows
provided by operating activities are an impressive $295,000. Again, using year-
end total assets of $800,000, Mountain Highs operating cash flow on total assets
ratio is roughly 36.9%. This return is especially good for a companys second
year of operations.
Consequently, my evaluation is positive. Operating cash flows are very good and
attention should be directed at maintaining or increasing these amounts. Also,
income from continuing operations is a reasonable $75,000. Still, given the high
operating cash flows relative to income from continuing operations, special
scrutiny should be directed at identifying and assessing differences between
cash flow and accrual amounts for important individual operating activities.
Hitting the Road BTN 12-9
1. The Motley Fools Website defines cash flow as earnings before interest,
taxes, depreciation, and amortization (EBITDA). The schools justification
for this definition includes: Interest income and expense, as well as taxes, are
all tossed aside because cash flow is designed to focus on the operating business
and not secondary costs or profits As for depreciation and amortization, these are
called non-cash charges, as the company is not actually spending any money on
them. Rather, depreciation is an accounting convention for tax purposes that allows
companies to get a break on capital expenditures as plant and equipment ages and
becomes less useful. Amortization normally comes in when a company acquires
another company at a premium to its shareholder's equity -- a number that it
accounts for on its balance sheet as goodwill and is forced to amortize over a set
period of time, according to generally accepted accounting principles (GAAP). When
looking at a company's operating cash flow, it makes sense to toss aside
accounting conventions that might mask cash strength.
2. Some analysts tend to focus on this particular earnings definition

(earnings before interest and taxes or EBIT) as it purportedly allows a
focus on a companys real operating situation. For example, taxes can
depend on laws and can fluctuate from year to year. By using the
earnings before interest and taxes, the noise caused by such
fluctuations is minimized.
3. Answer depends on the links visited and chosen for the report.
Global Decision BTN 12-10
1. Piaggios cash flow on total assets ratio follows (in Euro thousands):
Current Year = Operating cash flows / Average total assets
= 155,624 / [(1,520,184 + 1,545,722)/2]
= 155,624 / 1,532,593 = 10.2%
Prior Year = Operating cash flows / Average total assets

= 122,541 / [(1,545,722 + 1,564,820)/2]
= 122,541 / 1,555,271 = 7.9%
2. For the current year, Piaggios ratio (10.2%) is lower than Polariss (26.4%)
and higher than Arctic Cats (-2.0%) ratio. In the prior year, Piaggios ratio
(7.9%) was also lower than Polariss (32.6%) and Arctic Cats (11.8%) ratio.

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Chapter 12

Reporting and Analyzing Cash Flows

3. Examples of transactions classified as financing activities

4. Examples of significant noncash financing and investing activities

Quick Study 12-2 (10 minutes)

* For the indirect method, the loss is reported as an adjustment (add-

Cash flows from operating activities

Quick Study 12-4 (10 minutes)

Quick Study 12-5 (10 minutes)

Quick Study 12-7 (15 minutes)

Quick Study 12-8 (15 minutes)

2. Computation of cash payments for notes

1. Cash received from customers = Sales + Accounts receivable decrease

2. Net increase in cash = $94,800 - $24,000 = $70,800

Quick Study 12-10B (10 minutes)

1. Cash paid for merchandise

2. Cash paid for operating expenses

Quick Study 12-11B (10 minutes)

Cash flows from operating activities

Quick Study 12-13A (10 minutes)

Quick Study 12-14 (20 minutes)

Quick Study 12-15 (15 minutes)

Quick Study 12-17 (25 minutes)

Quick Study 12-18 (15 minutes)

Cash flow source U.S. GAAP IFRS _

a. Interest paid Operating Financing or Operating

b. Dividends paid Financing Financing or Operating

c. Interest received Operating Operating or Investing

d. Dividends received Operating Operating or Investing

a. Declared and paid a

c. Paid cash to settle

h. Sold equipment for

j. Income taxes payable

Statement of Cash Flows Noncash

a. Retired long-term notes X

b. Paid cash toward accounts X

c. Sold inventory for cash X

d. Paid cash dividend that

e. Accepted six-month note

g. Paid cash to acquire

h. Collected cash from sales X

i. Borrowed cash from bank

j. Paid cash to purchase a X

Cash flows from operating activities

Exercise 12-4 (10 minutes)

Cash flows from operating activities

Case X: Sales revenue ........................................................... $515,000

Case Y: Rent expense ............................................................ $139,800

Case Z: Cost of goods sold ................................................... $525,000

Exercise 12-6 (30 minutes)

Cash flows from operating activities

Cash flows from operating activities

Note a: Sales Increase in receivables

Note b: Cost of goods sold + Increase in inventory + Decrease in accounts payable

Note c: Salaries expense + Decrease in salaries payable

Exercise 12-8 (10 minutes)

Cash flows from investing activities

Exercise 12-9 (10 minutes)

Cash flows from financing activities

(Notes 1, 2, and 3 on next page.)

(1) Cost of equipment sold (Given) .................................................................... $ 48,600

Cost of equipment sold ................................................................................. $ 48,600

Equipment Accumulated Depreciation, Equipment