Chapter 4

Chapter 4
Reporting and Analyzing Cash Flows
Learning Objectives coverage by question

Mini- Cases and
Exercises Problems
Exercises Projects
LO1 Explain the purpose of the

statement of cash flows and how it 21, 22, 24 38, 39, 44 47, 51, 54 57 - 59
complements the income statement
and balance sheet.
LO2 Construct and explain the 21 - 31 34 - 44 45 - 56 57 - 59

statement of cash flows.
LO3 Compute and interpret ratios 32, 33, 46, 48, 50,
that reflect a companys liquidity and 59
35, 43 52, 55, 56
solvency.
LO4 Appendix 4A: Use a

spreadsheet to construct the 55
statement of cash flows.
Cambridge Business Publishers, 2014

Solutions Manual, Chapter 4 4-1
DISCUSSION QUESTIONS
Q4-1. Cash equivalents are short-term, highly liquid investments that firms acquire
with temporarily idle cash to earn interest on these excess funds. To qualify as
a cash equivalent, an investment must (1) be easily convertible into a known
cash amount and (2) be close enough to maturity so that its market value is not
sensitive to interest rate changes (generally, investments with initial maturities
of three months or less). Three examples of cash equivalents are treasury bills,
commercial paper, and money market funds.
Q4-2. Cash equivalents are included with cash in a statement of cash flows because
the purchase and sale of such investments are considered to be part of a firm's
overall management of cash rather than a source or use of cash. Similarly, as
statement users evaluate cash flows, it may matter very little to them whether
the cash is on hand, deposited in a bank account, or invested in cash
equivalents.
Q4-3. Operating activities

Inflow: Cash received from customers
Outflow: Cash paid to suppliers
Investing activities
Inflow: Sale of equipment
Outflow: Purchase of stocks and bonds
Financing activities
Inflow: Issuance of common stock
Outflow: Payment of dividends

4-2 Financial Accounting, 4th Edition
Q4-4. a. Investing; outflow.
b. Investing; inflow.
c. Financing; outflow.
d. Operating (direct method, not shown separately under indirect method);
inflow.
e. Financing; inflow.
f. Operating (direct method, not shown separately under indirect method);
inflow.
g. Operating (direct method, not shown separately under indirect method);
outflow.
h. Operating (direct method, not shown separately under indirect method);
inflow.
Q4-5. This is a noncash investing and financing event. It must be reported in a
supplementary schedule to the statement of cash flows.
Q4-6. Noncash investing and financing transactions are disclosed as supplemental
information to a statement of cash flows because a secondary objective of cash
flow reporting is to present information about investing and financing activities.
Noncash investing and financing transactions, generally, affect future cash
flows. Issuing bonds payable to acquire equipment, for example, requires future
cash payments for interest and principal on the bonds. On the other hand,
converting bonds payable into common stock eliminates future cash payments
related to the bonds. Knowledge of these types of events, therefore, should be
helpful to users of cash flow data who wish to assess a firm's future cash flows.
Q4-7. A statement of cash flows helps external users assess the amount, timing, and
uncertainty of future cash flows to the enterprise. These assessments help
users evaluate their own future cash receipts from their investments in, or loans
to, the firm. A statement of cash flows shows the periodic cash effects of a
firm's operating, investing, and financing activities. Distinguishing among these
different categories of cash flows helps users compare, evaluate, and predict
cash flows. With cash flow information, creditors and investors are better able
to assess a firm's ability to settle its liabilities and pay its dividends. Over time,
the statement of cash flows permits users to observe and analyze
management's investing and financing policies. A statement of cash flows also
provides information useful in evaluating a firm's financial flexibility (which is its
ability to generate cash to respond to unanticipated needs and opportunities).
Q4-8. The direct method presents the net cash flow from operating activities by
showing the major categories of operating cash receipts and cash payments
(such as cash received from customers, cash paid to employees and suppliers,
cash paid for interest, and cash paid for income taxes). The indirect (or
reconciliation) method, in contrast, presents the net cash flow from operating
activities by applying a series of adjustments to the accrual net income to
convert it to a cash basis.

Q4-9. Under the indirect method, depreciation is added to net income because, as a
noncash expense, it was deducted in computing net income. Adding
depreciation to net income, therefore, eliminates it from the cash-basis income
amount. Amortization and depletion expenses are handled the same way.
Q4-10. Under the indirect method, the $98,000 cash received from the sale of the land
will appear in the cash flows from investing activities section of the statement of
cash flows. In addition, the $28,000 gain from the sale will be deducted from
net income as one of the adjustments made to determine the net cash flow
from operating activities.
Q4-11. Net income $ 88,000
Add (deduct) items to convert net income to cash basis
Depreciation expense 6,000
Subtract change in accounts receivable 13,000
Subtract change in inventory (9,000)
Add change in accounts payable (3,500)
Add change in income tax payable 1,500
Net cash provided by operating activities $ 96,000
Q4-12. The separate disclosures required for a company using the indirect method in
the statement of cash flows are (1) cash paid during the year for interest (net of
amount capitalized) and for income taxes, (2) all noncash investing and
financing transactions, and (3) the policy for determining which highly liquid,
short-term investments are treated as cash equivalents.
Q4-13. The statement of cash flows will show a positive net cash flow from operating
activities if operating cash receipts exceed operating cash payments. This
could happen, for example, if noncash expenses (such as depreciation and
amortization) exceed the net loss. It would also happen if operating cash
receipts exceed sales by more than the loss or if operating cash payments are
less than accrual expenses by more than the loss (or some combination of
these events).
Q4-14. Sales $925,000
+ Accounts receivable decrease 14,000
= Cash received from customers $939,000
Q4-15. Wages expense $ 86,000
+ Wages payable decrease 1,100
= Cash paid to employees $ 87,100
Q4-16. Advertising expense $ 43,000
+ Prepaid advertising increase 1,600
= Cash paid for advertising $ 44,600
Q4-17. Under the direct method, the $5,100 cash received from the sale of equipment
will appear in the cash flows from investing activities section of the statement of
cash flows.

Q4-18. The separate disclosures required for a company using the direct method in the
statement of cash flows are (1) a reconciliation of net income to net cash flow
from operating activities, (2) all noncash investing and financing transactions,
and (3) the policy for determining which highly liquid, short-term investments
are treated as cash equivalents.
Q4-19. The operating cash flow to current liabilities ratio is calculated by dividing net
cash flow from operating activities by average current liabilities. This ratio is a
measure of a firm's ability to liquidate its current liabilities.
Q4-20. The operating cash flow to capital expenditures ratio is calculated by dividing a
firm's cash flow from operating activities by its annual capital expenditures. A
ratio below 1.00 means that the firm's current operating activities are not
providing enough cash to cover the capital expenditures. A ratio above 1.0 is
normally considered a sign of financial strength.

MINI EXERCISES
M4-21. (5 minutes)
a. Positive adjustment
b. Negative adjustment
c. Negative adjustment
d. Positive adjustment
e. Positive adjustment
M4-22. (10 minutes)
a. Cash flow from an operating activity.

b. Cash flow from an investing activity.
c. Cash flow from an investing activity.
d. Cash flow from an operating activity.
e. Cash flow from a financing activity.
f. Cash flow from a financing activity.
g. Cash flow from an investing activity.
M4-23. (15 minutes)
DOLE FOOD COMPANY, INC.

Selected Items from the Cash Flow Statement
1 Long-term debt repayments Financing
2 Change in receivables Operating
3 Depreciation and amortization Operating
4 Change in accrued liabilities Operating
5 Dividends paid Financing
6 Change in income taxes payable Operating
7 Cash received from sales of assets and businesses Investing
8 Net income Operating
9 Change in accounts payable Operating
10 Short-term debt borrowings Financing
11 Capital expenditures Investing

M4-24. (10 minutes)
a. (3) Cash flow from a financing activity.

b. (1) Cash flow from an operating activity.
c. (4) Noncash investing and financing activity.
d. (1) Cash flow from an operating activity.
e. (1) Cash flow from an operating activity.
f. (5) None of the above (a change in the composition of cash and cash equivalents).
M4-25. (30 minutes)
a.
Balance Sheet Income Statement
Trans- Accts.
Cash Inven- Accts. Contrib. Earned Net
+ Receiv- + = + + Revenue - Expenses =
action Asset tories Payable Capital Capital Income
able
(1) + +507,400 + = + + +507,400 +507,400 - = +507,400
(2) +91,500 + + = + + +91,500 +91,500 - = +91,500
(3) + + 320,100 = + + 320,100 - +320,100 = 320,100
(4) + + 63,400 = + + 63,400 - +63,400 = 63,400
(5) + + +351,600 = +351,600 + + - =
(6) -47,700 + + +47,700 = + + - =
(7) +483,400 + 483,400 + = + + - =
(8) 340,200 + + = 340,200 + + - =
(9) -172,300 + + = + + -172,300 - +172,300 = -172,300
Total +14,700 + +24,000 + +15,800 = +11,400 + + +43,100 +598,900 - +555,800 = +43,100
b. Net income was 43,100 (from the net income column), and cash flow from
operating activities was 14,700 (from the cash column).
c. 1. Accounts receivable increased by 24,000,

2. Inventories increased by 15,800, and
3. Accounts payable increased by 11,400.
continued next page

M4-25. concluded
d. The accounting equation is kept with every entry, so it is kept for the totals over the
period.
Cash flow + change in accounts receivable + change in inventory
= Change in accounts payable + net income.
This relationship can be presented in the following indirect method cash flow from
operating activities.
Net income 43,100
- Change in accounts receivable 24,000
- Change in inventories 15,800
+ Change in accounts payable +11,400
Cash flow from operating activities 14,700
M4-26. (15 minutes INDIRECT METHOD)
Net income $ 45,000

Add back depreciation 8,000
Subtract gain on sale of investments (9,000)
Subtract change in operating assets:
Accounts receivable (9,000)
Inventory (6,000)
Prepaid rent 2,000
Add change in operating liabilities:
Accounts payable 4,000
Income tax payable (2,000)

M4-27. (30 minutes)
a.
Trans- Accts.
Cash Prepaid Accum. Wages Contr. Earned Net
+ Receiv- + - = + + Revenue - Expenses =
action Asset Rent Deprec. Payable Capital Capital Income
able
(1) + +769,200 + - = + + +769,200 +769,200 - = +769,200
(2) +46,200 + + - = + + +46,200 +46,200 - = +46,200
(3) + + - = +526,700 + + 526,700 - +526,700 = 526,700
(4) 149,100 + + +149,100 - = + + - =
(5) 521,600 + + - = 521,600 + + - =
(6) + + 117,900 - = + + 117,900 - +117,900 = 117,900
(7) +724,100 + 724,100 + - = + + - =
(8) 122,800 + + - = + + 122,800 - +122,800 = 122,800
(9) + + - +23,000 = + + -23,000 - +23,000 = -23,000
Total 23,200 + +45,100 + +31,200 - +23,000 = +5,100 + + +25,000 +815,400 - +790,400 = +25,000
b. Net income was $25,000 (from the net income column), and cash flow from
operating activities was $23,200 (from the cash column).
c. 1. Accounts receivable increased by $45,100,

2. Prepaid rent increased by $31,200,
3. Accumulated depreciation (a contra-asset) increased by $23,000 due to
depreciation expense. and
4. Wages payable increased by $5,100.
d. The accounting equation is kept with every entry, so it is kept for the totals over the
period.
Cash flow + change in accounts receivable + change in prepaid rent

change in accumulated depreciation
= Change in wages payable + net income.
This relationship can be presented in the following indirect method cash flow from
operating activities.
Net income $ 25,000
+ Depreciation expense 23,000
Change in accounts receivable 45,100
Change in prepaid rent 31,200
+ Change in wages payable +5,100
Cash flow from (used in) operating activities ($ 23,200)

M4-28. (15 minutesINDIRECT METHOD)
Net loss $(21,000)

Add (deduct) items to convert net loss to cash basis
Add back depreciation 8,600
Subtract change in operating assets:
Accounts receivable 9,000
Inventory 3,000
Prepaid expenses 3,000
Add change in operating liabilities:
Accounts payable 4,000
Accrued liabilities (2,600)
Weber Company's 2013 operating activities provided $4,000 cash. The dividend paid to
shareholders affects cash flows from financing activities.
M4-29. (20 minutes)
A + indicates that the amount is added and a - indicates that it is subtracted when
preparing the cash flow statement using the indirect method.
NORDSTROM, INC.
Consolidated Statement of Cash Flows Selected Items
1 Increase in accounts receivable Operating -
2 Capital expenditures Investing -
3 Proceeds from long-term borrowings Financing +
4 Increase in deferred income tax net liability Operating +
5 Principal payments on long-term borrowings Financing -
6 Increase in merchandise inventories Operating -
7 Decrease in prepaid expenses and other assets Operating +
8 Proceeds from issuances under stock compensation plans Financing +
9 Increase in accounts payable Operating +
10 Net earnings Operating +
11 Payments for repurchase of common stock Financing -
12 Increase in accrued salaries, wages and related benefits Operating +
13 Cash dividends paid Financing -
14 Depreciation and amortization expenses Operating +

M4-30. (15 minutesDIRECT METHOD)
a. Rent expense $ 60,000

Prepaid rent decrease (2,000)
= Cash paid for rent $ 58,000

Noncash Contr. Earned Net
Transaction Cash + = Liabilities + + Revenue - Expenses =
Assets Capital Surplus Income
10,000
Begin
+ Prepaid = + + - =
Balance
rent
+X
Make rent
-X + Prepaid = + + - =
payment
Rent
-60,000 -60,000 60,000
Record rent
+ Prepaid = + + Retained - Rent = -60,000
expense
Rent Earnings Expense
End Balance + 8,000 = + + - =
X must equal $58,000 to make the FSET balance.
b. Interest income $ 16,000

Interest receivable increase (700)
= Cash received as interest $ 15,300

3,000
Begin
+ Interest = + + - =
Balance
receivable
Record +16,000 +16,000 +16,000
interest + Interest = + + Retained Interest - = +16,000
income receivable Earnings income
Receive
interest +X + -X = + + - =
payment
End Balance + 3,700 = + + - =
X must equal $15,300 to make the FSET balance.
continued next page

M4-30. concluded
c. Cost of goods sold $ 98,000

+ Inventory increase 3,000
+ Accounts payable decrease 4,000
= Cash paid for merchandise purchased $105,000

11,000
Begin 19,000
+ = Accounts + + - =
Balance Inventory
Payable
Purchase
+ +X = +X + + - =
inventory
-Y
Pay
-Y + = Accounts + + - =
supplier
Payable
98,000
Recognize -98,000
-98,000 Cost of
Cost of + = + + Retained - = -98,000
Inventory Goods
Goods Sold Earnings
Sold
End Balance + 22,000 = 7,000 + + - =
To make the inventory account work properly, X (purchases) must equal $101,000. If
purchases were $101,000, then Y (payments to suppliers) must equal $105,000.
M4-31. (15 minutesDIRECT METHOD)
Operating cash flow + change in operating assets

= net income + change in operating liabilities
or
Net income - change in operating assets + change in operating liabilities
= operating cash flow
Effect of sales on net income $825,000

Change in accounts receivable (11,000)
= Effect of customers on cash $814,000
Effect of cost of goods sold on net income ($550,000)

- Change in inventory (13,000)
+ Change in accounts payable (6,000)
= Effect of merchandise purchases on cash ($569,000)
Howell Company received $814,000 in cash from its customers and paid $569,000
in cash to its suppliers.

EXERCISES
E4-32. (20 minutes)
(All dollar amounts in millions)
a. Merck: $12,383/$15,943 = 0.78

Pfizer: $20,240/$28,353 = 0.71
Abbott Labs: $8,970/$16,371 = 0.55
Johnson & Johnson: $14,298/$22,942 = 0.62
b. Merck: $12,383 ($1,723 $0) = $10,660

Pfizer: $20,240 ($1,660 $0) = $18,580
Abbott Labs: $8,970 ($1,492 $0) = $7,478
Johnson & Johnson: $14,298 ($2,893 1,342) = $12,747
c. None of the firms has sufficient cash flow to cover their current liabilities although
none of the ratios is of major concern. The industry ratios shown in Chapter 5 on
page 233 show that only Abbott Labs is below median. Pfizer is the largest of these
three companies and has relatively more cash left over after capital expenditures to
consider using on other activities that could strengthen the firms operating or
financial position. But all four have significant free cash flow that could be invested
or returned to shareholders in the form of dividends or stock repurchases. Given
that these firms are of different sizes and have different research program success,
it is difficult to generalize further.
E4-33. (20 minutes)
(All dollar amounts in millions)
a. Wal-Mart: $24,255/$60,452 = 0.40

Coca-Cola: $9,474/$21,396 = 0.44
ExxonMobil: $55,345/$70,069 = 0.79
b. Wal-Mart: $24,255 ($13,510 $580) = $11,325

Coca-Cola: $9,474 ($2,920 $101) = $6,655
ExxonMobil: $55,345 ($30,975 $7,533) = $31,903
c. All three companies are producing much more cash than needed for capital
expenditures. All of them are returning substantial amounts of cash to shareholders
through dividends and share repurchases (more than $11 billion for Wal-Mart,
almost $9 billion for Coca-Cola and more than $31 billion for ExxonMobil.
ExxonMobil appears to be in the best position with respect to OCFCL, but it is lower
than the industry average reported in Chapter 5 on page 233. Wal-Mart and Coca-
Cola have lower ratios, and are also below the average ratio for their industries.

E4-34. (30 minutesINDIRECT METHOD)
MASON CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2013
Cash flows from operating activities

Cash received from customers $194,000
Cash received as interest 6,000
Cash paid to employees and suppliers (148,000)
Cash paid as income taxes (11,000)
Cash flows from investing activities
Sale of land 40,000
Purchase of equipment (89,000)
Net cash used by investing activities (49,000)
Cash flows from financing activities
Issuance of bonds payable 30,000
Acquisition of treasury stock (10,000)
Payment of dividends (16,000)
Net cash provided by financing activities 4,000
Net decrease in cash (4,000)
Cash at beginning of year 16,000
Cash at end of year $ 12,000
E4-35. (15 minutesINDIRECT METHOD)
a. Net income $113,000

Accounts receivable increase (5,000)
Inventory decrease 6,000
Prepaid insurance increase (1,000)
Accounts payable increase 4,000
Wages payable decrease (2,000)
Net cash provided by operating activities $115,000
b. $115,000/[($31,000 + $29,000)/2] =3.83

E4-36. (15 minutesINVESTING ACTIVITIES)
The basic approach here is to use the beginning and ending balances and the
additional information to reconstruct what must have happened during 2013. Begin by
setting up the T-accounts for property, plant and equipment with the beginning and
ending balances.
Property, plant and - - Accumulated
+ +
equipment at cost (A) depreciation (XA)
Beg. balance 1000 350 Beg. balance
Ending balance 1,200 390 Ending balance
At this point in the book, we know four entries that can affect these two accounts (1)
acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals,
and (4) depreciation expense. The journal entries for these entries are given below,
with amounts given in the problem filled in.
(1) Property, plant and equipment at cost (+A) 300
Cash (-A) 300
To record purchase of property, plant and equipment with cash.

Mortgage payable (+L) 100
To record purchase of property, plant and equipment with financing.
(3) Cash (+A) 100

Accumulated depreciation (-XA, +A) Y
Property, plant and equipment at cost (-A) X
Gain on equipment disposal (+R, +SE) 20
To record sale of used equipment.
(4) Depreciation expense (+E, -SE) Z

Accumulated depreciation (+XA, -A) Z
To record depreciation expense.
The three unknowns in the journal entries correspond to the three questions in the
problem. We begin by putting the journal entry amounts into the T-accounts.
continued next page

E4-36. concluded

+ +
(1) 300
(2) 100
(3) X Y (3)
Z (4)
Ending balance 1,200 390 Ending balance
a. The PPE at cost account will only balance if the value X equals 200. So, the original
cost of the used equipment that was sold is 200. We can put that amount in the T-
account (so it balances) and also in Journal entry (3).
b. Now, looking at journal entry (3), we see that there is only one unknown left the
depreciation that had accumulated on the used equipment. In order for the entry to
balance (with debits equal to credits), the accumulated depreciation must have been
120 (= Y). Cost of 200 and accumulated depreciation of 120 would produce a net
book value of 80, so when Meubles Fischer sold it for 100, they recorded a gain of
20 on the disposal.
c. Back at the Accumulated depreciation T-account, we can fill in the entry for (3),
leaving only the depreciation expense to determine for entry (4). Knowing that the
disposal reduced the contra-asset by 120, and that the contra-asset increased by 40
over the year, we can infer than the depreciation expense must have been 160 (=
Z).
E4-37. (15 minutesINVESTING ACTIVITIES)
The basic approach here is to use the beginning and ending balances and the
additional information to reconstruct what must have happened during 2013. Begin by
setting up the T-accounts for property, plant and equipment with the beginning and
ending balances.
+ +
Ending balance 183 83 Ending balance
continued next page

E4-37. concluded
At this point in the course, we know four entries that can affect these two accounts (1)
acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals,
and (4) depreciation expense. The journal entries for these entries are given below,
with amounts given in the problem filled in.
Cash (-A) 28
To record purchase of property, plant and equipment with cash.

Mortgage payable (+L) 0
To record purchase of property, plant and equipment with financing.
(3) Cash (+A) Z

Accumulated depreciation (-XA, +A) Y
Loss on equipment disposal (+E, -SE) 5
Property, plant and equipment at cost (-A) X
To record sale of used equipment.
(4) Depreciation expense (+E, -SE) 17

Accumulated depreciation (+XA, -A) 17
To record depreciation expense.
The three unknowns in the journal entries correspond to the three questions in the
problem. We begin by putting the journal entry amounts into the T-accounts.
+ +
(1) 28
(2) 0
(3) X Y (3)
17 (4)
Ending balance 183 83 Ending balance
a. The PPE at cost account will only balance if the value X equals 20. So, the original
cost of the used equipment that was sold is 20. We can put that amount in the T-
account (so it balances) and also in Journal entry (3).
b. The accumulated depreciation account will only balance if the value Y equals 12.
So, the accumulated depreciation on the used equipment sold must be 12, and that
amount can be entered into transaction (3) above.
c. Now, looking at journal entry (3), we see that there is only one unknown left the
amount of cash received from disposal of the used equipment. In order for the entry to
balance (with debits equal to credits), the cash amount must have been 3 million (= Z).
Cost of 20 and accumulated depreciation of 12 would produce a net book value of 8, so
when Kasznik Ltd. sold it for 3, they recorded a loss of 5 on the disposal.

E4-38. (30 minutes)
a. The analysis on page ***160*** on the text shows that
Net income
Cash flow Change in Change in accounts
+ = + (COGS
(payments) inventory payable
expense)
666 225
X + = + -51,692
(=8,044-7,378) (=4,810-4,585)
The solution to this is that X = -$51,692 666 + 225 = -$52,133. So, the payments to
suppliers reduced cash by $52,133 million in fiscal year 2011.
b. The net property and equipment account increased by $342 million (=$11,526
11,184). Depreciation expense would have decreased this balance by $809 million in
fiscal year 2011, so the net investment must have been $1,151 million (=$342 + 809)
to result in the ending balance of $11,526 million.
c. With the beginning balance of $16,848 million in retained earnings, net earnings of
$2,714 would have increased retained earnings to $19,562 million. But the ending
balance in retained earnings is $18,877 million, so Walgreens must have paid $685
million in dividends (=$19,562 - $18,877).
E4-39. (15 minutes)
a. Cash flows from investing activities will show:

Purchase of stock investments $ (80,000)
Sale of stock investments 59,000
b. Cash flows from financing activities will show:

Issuance of bonds $130,000
Retirement of bonds (131,000)

E4-40. (20 minutes)
a. The net increase in property and equipment was $4,635,377 (= $84,767,771 -

$80,132,394), and the expenditures should have increased this by $5,559,183.
Therefore the original cost of the property and equipment sold must have been
923,806 (= $5,559,183 - $4,635,377).
Depreciation expense should have increased the accumulated depreciation account by

$3,174,956, but the account increased by only $2,268,583. The accumulated
depreciation on the property and equipment sold must account for the difference,
making it $906,373 (= $3,174,956 2,268,583).
b. The book value of the property and equipment sold was $17,433 (=$923,806
906,373), and the reported gain on sale of the property and equipment was $79,483.
Therefore, the cash proceeds must have been $96,916 (= $17,433 + 79,483), which is
the amount reported in Golden Enterprises cash flows from investing activities.
c.
Cash (+A) $ 96,916
Accumulated depreciation (-XA, +A) 906,373
Property and equipment, cost (-A) $ 923,806
Gain on sale of property and equipment
79,483
(+R, +SE)
d. Retained earnings increased by $1,547,261 (= $18,866,264 17,319,003), and net

income was $3,014,768. The difference would be accounted for by cash dividends
paid to shareholders, and the amount is $1,467,507.
E4-41. (20 minutesDIRECT METHOD)
a. Advertising expense $ 62,000

+ Prepaid advertising increase 4,000
= Cash paid for advertising $ 66,000
b. Income tax expense $ 29,000

+ Income tax payable decrease 2,200
= Cash paid for income taxes $ 31,200
c. Cost of goods sold $180,000

Inventory decrease (5,000)
Accounts payable increase (2,000)
= Cash paid for merchandise purchased $173,000

E4-42.
HOSKINS CORPORATION
Year ended December 31, 2013
Cash Flows from Operations:
Net income $ 700
Adjustments:
Add back Depreciation 350
Change in Accounts Receivable (900)
Change in Inventory (100)
Change in Prepaid Expenses 250
+ Change in Accounts Payable 400
+ Change in Income Taxes Payable (100)
Cash Flows from Operating Activities $ 600
Cash Flows from Investing:

Purchases of Equipment (1,200)
Proceeds from Disposal of Equipment 600
Cash Flows from Investing Activities (600)
Cash Flows from Financing:

Dividends Paid (250)
Increase in Short-term Debt 1,500
Decrease in Long-term Debt (1,000)
Cash Flows from Financing Activities 250
Net Change in Cash 250

Beginning Cash Balance 300
Ending Cash Balance $ 550

E4-43. (30 minutesDIRECT METHOD)
a.
Sales $750,000
Accounts Receivable Increase (5,000)
= Cash Received from Customers $745,000
Cost of Goods Sold $470,000

Inventory Decrease (6,000)
Accounts Payable Increase (4,000)
= Cash Paid for Merchandise Purchased $460,000
Wages Expense $110,000

+ Wages Payable Decrease 2,000
= Cash Paid to Employees $112,000
Insurance Expense $ 15,000

+ Prepaid Insurance Increase 1,000
= Cash Paid for Insurance $ 16,000
Cash Flows from Operating Activities

Cash Received from Customers $745,000
Cash Paid for Merchandise Purchased $460,000
Cash Paid to Employees 112,000
Cash Paid for Rent 42,000
Cash Paid for Insurance 16,000 630,000
Net Cash Provided by Operating Activities $115,000
b. $115,000/[($31,000 + $29,000)/2] =3.83
E4-44. (15 minutes)
1. True ---
2. False $25
3. False $10
4. False $0

PROBLEMS
P4-45. (20 minutes)

Net income ........................................................................................... $135,000
Adjustments to reconcile net income to operating cash flows
Add back depreciation expense ...................................................... $25,000
Gain on sale of assets (5,000)
Subtract changes in:
Accounts receivable........................................................................ (10,000)
Prepaid expenses ........................................................................... 3,000
Add changes in:
Accounts payable ........................................................................... 6,000
Wages payable ............................................................................... (4,000) 15,000
Net cash provided from operating activities ......................................... $150,000
P4-46. (45 minutesINDIRECT METHOD)
a. Cash, December 31, 2013........................................................ $11,000

Cash, December 31, 2012........................................................ 5,000
Cash increase during 2013....................................................... $ 6,000
continued next page

P4-46. concluded
b. STATEMENT OF CASH FLOWS (INDIRECT METHOD)
WOLFF COMPANY
Net Cash Flow from Operating Activities

Net Income $56,000
Add (Deduct) Items to Convert Net Income to Cash Basis
Depreciation 17,000
Accounts Receivable Increase (9,000)
Inventory Increase (30,000)
Prepaid Insurance Decrease 2,000
Accounts Payable Decrease (3,000)
Wages Payable Increase 3,000
Income Tax Payable Decrease (1,000)
Net Cash Provided by Operating Activities $35,000
Cash Flows from Investing Activities
Purchase of Plant Assets (55,000)
Cash Flows from Financing Activities
Issuance of Bonds Payable 55,000
Payment of Dividends (29,000)
Net Cash Provided by Financing Activities 26,000
Net Increase in Cash 6,000
Cash at Beginning of Year 5,000
Cash at End of Year $11,000
c. (1) $35,000/(($23,000 + $24,000)/2) = 1.49

(2) $35,000/$55,000 = 0.64
Wolffs cash flow ratios indicate that, while the company has sufficient cash flow to
cover its current obligations, it must rely on external financing to pay for capital
expenditures.

P4-47. (30 minutes)
a.
Adjustments to Convert Income Statement Items to Operating Activity Cash Flows

Sales Cost of Wage Insurance Depreciation Interest Income
Net income +Gains Losses
revenue
= goods sold expenses expense expense expense tax expense
$ 56,000 0 0
$635,000 430,000 86,000 8,000 17,000 9,000 29,000
Adjustments:
Add back +Depreciation

depreciation expense
expense +17,000
Gains
Subtract (add) 0
non-operating
gains (losses) +Losses
0
Subtract the change

change in change change in
in
operating in prepaid
accounts
assets inventory insurance
receivable
(operating -30,000 -(-2,000)
investments) -9,000
Add the
change in +change in +change in +change in
operating accounts wages income tax
liabilities payable payable payable
(operating +(-3,000) +3,000 +(-1,000)
financing)
Cash Receipts Payments Payments Payments Payments Payments

from from for for for (zero) for (zero) (zero) for
operations =
customers merchandise Wages insurance interest income tax
0 +0 0
$ 35,000 $626,000 -463,000 -83,000 -6,000 -9,000 30,000
b. Computing cash flows from operating activities using the direct method provides
additional detail about the specific cash flows that occurred during the period. For
example, the indirect method does not reveal that Wolff paid $463,000 for merchandise
during 2013, or $83,000 for wages. Because this detail is missing, the FASB requires
supplemental disclosure of two specific (and important) cash payments interest and
taxes if the indirect method is used.

a. Cash, December 31, 2013 $49,000

Cash, December 31, 2012 28,000
Cash increase during 2013 $21,000

ARCTIC COMPANY

Net Loss $ (42,000)
Add (Deduct) Items to Convert Net Loss
to Cash Basis
Depreciation 22,000
Gain on Sale of Land (25,000)
Accounts Receivable Decrease 8,000
Inventory Decrease 6,000
Prepaid Advertising Decrease 3,000
Accounts Payable Decrease (14,000)
Interest Payable Increase 6,000
Net Cash Used by Operating Activities $ (36,000)
Cash Flows from Investing Activities
Sale of Land 70,000
Purchase of Equipment (183,000)*
Net Cash Used by Investing Activities (113,000)
Cash Flows from Financing Activities
Issuance of Bonds Payable 200,000
Purchase of Treasury Stock (30,000)
Net Cash Provided by Financing Activities 170,000
Net Increase in Cash 21,000
Cash at Beginning of Year 28,000
Cash at End of Year $ 49,000
* The sum of the increase in PPE assets account ($138,000) and the book value of the land sold ($45,000).
c. - $36,000/(($23,000 + $31,000)/2) = -1.33

- $36,000/$183,000 = -0.20
Arctics operating cash flows are negative, primarily because the firm reported a net
loss for the year. As a consequence, its cash flow ratios indicate insufficient cash
flows to fund operations and capital expenditures.

P4-49. (30 minutes)
a.
Adjustments to Convert Income Statement Items to Operating Activity Cash Flows

Net income Sales Cost of Wage Advertising Depreciation Interest +Gains Losses Income tax
(loss) revenue goods sold expenses expense expense expense expense
$ 42,000 $728,000 534,000 190,000 31,000 22,000 18,000 +25,000 0 0
Adjustments:
Add back +Depreciation

depreciation expense
expense +22,000
Gains
Subtract (add) 25,000
non-operating
gains (losses) +Losses
0
Subtract the
change in change change change in
operating in accounts in prepaid
assets receivable inventory advertising
(operating -(-8,000) -(-6,000) -(-3,000)
investments)
Add the
change in +change in +change in +change in +change in
operating accounts wages interest income tax
liabilities payable payable payable payable
(operating +(-14,000) +0 +6,000 +0
financing)
Cash Receipts Payments Payments Payments Payments Payments

from from for for for (zero) for (zero) (zero) for income
=
operations customers merchandise Wages advertising 0 interest +0 0 tax
$ 36,000 $736,000 542,000 190,000 28,000 12,000 0
b. Computing cash flows from operating activities using the direct method provides
additional detail about the specific cash flows that occurred during the period. For
example, the indirect method does not reveal that Arctic paid $542,000 for
merchandise during 2013, or $28,000 for advertising. Because this detail is missing,
the FASB requires supplemental disclosure of two specific (and important) cash
payments interest and taxes if the indirect method is used.

a. Cash, December 31, 2013................................................ $27,000

Cash, December 31, 2012................................................ 18,000
Cash increase during 2013............................................... $ 9,000
DAIR COMPANY

Net Income $ 85,000
Add (deduct) items to convert net income
to cash basis
Depreciation 22,000
Amortization of intangible assets 7,000
Loss on bond retirement 5,000
Inventory decrease 6,000
Prepaid expenses increase (2,000)
Interest payable decrease (3,000)
Income tax payable decrease (2,000)
Sale of equipment 17,000
Retirement of bonds payable (125,000)
Issuance of common stock 24,000
Net cash used by financing activities (127,000)
Net increase in cash 9,000
Cash at beginning of year 18,000
Cash at end of year $ 27,000
continued next page

P4-50. concluded
c. (1) Supplemental cash flow disclosures

Cash paid for interest ............................................................................ $ 13,000*
Cash paid for income taxes................................................................... $ 38,000
* Interest expense $10,000

+ Interest payable decrease 3,000
Cash paid for interest $13,000
Income tax expense $36,000
Cash paid for income taxes $38,000
(2) Schedule of noncash investing and financing activities

Issuance of bonds payable to acquire equipment................................. $ 60,000
d. (1) $119,000/[($42,000 + $41,000)/2] = 2.87.

(2) The firm did not spend any cash on capital investments. The firm did issue debt
for equipment, but this is not a capital expenditure.
(3) $119,000 + $17,000 = $136,000
P4-51. (45 minutes)
a. Depreciation and amortization are a noncash expenses that are deducted in the
computation of net income. The depreciation and amortization add-back zeros these
expenses out of the income statement to focus on cash profitability. The positive
amount for depreciation and amortization does not mean that the company is
generating cash from depreciation and amortization, a common misconception. It is
merely an adjustment to remove these expenses from the computation of profit.
b. The adjustments must be interpreted relative to the amounts included in net income.
The $(73,670,000) adjustment for receivables means that Staples collected this much
less than it recognized as revenue. The adjustment for accrued expenses implies that
Staples paid $117,389,000 more than the expenses already recognized in net income.
c. Acquisition of property and equipment are less than the depreciation and amortization
recognized for the year. Unless the prices for property and equipment are falling, that
relationship implies that Staples may not be replacing its capacity. A growing company
will have capital expenditures that exceed the depreciation on its existing property and
equipment.
continued next page

P4-51. concluded
d. Staples operates businesses in 26 countries outside of the U.S. including businesses

in Europe, Asia, South America, Australia, and Canada. This means that some of its
cash transactions occur in currencies other than the U.S. dollar. This fact requires the
company to hold cash in other currencies that may be revalued relative to the dollar
from one period to the next. When foreign cash balances are revalued in foreign
exchange markets relative to the U.S. dollar, the dollar value of the companys cash
balance changes even though there was no actual cash flow. Hence, this exchange
rate effect is listed in the cash flow statement to explain the change in the cash
balance.
e. Although net cash decreased during the period, Staples presents a healthy cash flow
picture for the year. It generated almost $1.6 billion of operating cash flow. Most of this
amount was returned to lenders and shareholders, rather than being used to grow the
business. Staples returned over $900 million to shareholders in the form of dividends
and share repurchases, plus it reduced its net borrowings by about $500,000.
a. Cash and cash equivalents, December 31, 2013............................ $19,000

Cash and cash equivalents, December 31, 2012............................ 25,000
Cash and cash equivalents decrease during 2013.......................... $ 6,000
b. See the cash flow statement provided on the following page.
c. (1) Supplemental Cash Flow Disclosures

Cash paid for interest $ 12,000*
Cash paid for income taxes $ 46,000
* Interest expense $13,000

- Interest payable increase (1,000)
Cash paid for interest $12,000
Income tax expense $44,000

Cash paid for income taxes $46,000

Issuance of preferred stock to acquire patent $ 25,000
d. (1) $101,000/[($34,000 + $31,000)/2] = 3.11.

(2) $101,000/($185,000) = 0.55.
(3): $101,000 ($90,000 + $95,000 - $14,000) = -$70,000

P4-52. concluded
b.
RAINBOW COMPANY
Net cash flow from operating activities

Net income $ 90,000
Add (deduct) items to convert net income
to cash basis
Depreciation 39,000
Patent amortization 7,000
Loss on sale of equipment 5,000
Gain on sale of investments (3,000)
Inventory increase (26,000)
Interest payable increase 1,000
Sale of investments 60,000
Purchase of land (90,000)
Improvements to building (95,000)
Sale of equipment 14,000
Net cash used by investing activities (111,000)
Issuance of bonds payable 30,000
Issuance of common stock 24,000
Net decrease in cash and cash equivalents (6,000)
Cash and cash equivalents at beginning of year . 25,000
Cash and cash equivalents at end of year $ 19,000

P4-53. (35 minutes)
a. Cash and cash equivalents, December 31, 2013 .. $19,000

Cash and cash equivalents, December 31, 2012 .. 25,000
Cash and cash equivalents decrease during 2013 .. $ 6,000
b.
RAINBOW COMPANY
Statement of Cash Flows (Direct Method)
Cash received from customers $740,000
Cash received as dividends .. 15,000 $755,000
Cash paid for merchandise purchased .. 462,000
Cash paid for wages and other operating expenses 134,000
Cash paid for interest .. 12,000
Cash paid for income taxes 46,000 (654,000)
Net cash provided by operating activities .. 101,000
Sale of investments .. 60,000
Purchase of land (90,000)
Improvements to building (95,000)
Sale of equipment .. 14,000
Net cash used by investing activities ... (111,000)
Issuance of bonds payable . 30,000
Issuance of common stock . 24,000
Net decrease in cash and cash equivalents .. (6,000)
Cash and cash equivalents at beginning of year . 25,000
Cash and cash equivalents at end of year . $ 19,000
continued next page

P4-53. concluded
c. (1) Reconciliation of net income to net cash flow from operating activities
Net income $ 90,000
Depreciation 39,000
Patent amortization 7,000
Loss on sale of equipment 5,000
Gain on sale of investments (3,000)
Inventory increase (26,000)
Interest payable increase 1,000

Issuance of preferred stock to acquire patent $ 25,000
P4-54. (30 minutes)
Operating cash flow + change in operating assets

= net income + change in operating liabilities
or
Net income - change in operating assets + change in operating liabilities
= operating cash flow
a. Apples adjustment for accounts receivable is (plus) $143 million. This adjustment
represents minus the change in receivables, so Apples accounts receivable must have
gone down by $143 million.
($ millions)
Net sales $108,249
- Change in accounts receivable +143
+ Change in deferred revenue +1,654
Cash collected from customers .. $110,046
b. ($ millions)
- Cost of goods sold . ($64,431)
- Change in inventories .. +275
+ Change in accounts payable 2,515
- Cash paid for purchases of inventories ($61,641)
continued next page
P4-54. concluded
c. ($ billions)
Property, plant and equipment, ending balance $7.8
- Purchases of property, plant and equipment (4.3)
+ Book value of PPE assets sold ... none
+ Depreciation of property, plant and equipment 1.6
Property, plant and equipment, beginning balance $5.1
d. Stock-based compensation expense is deducted when calculating net income similar

to cash compensation. The only difference is that the compensation is paid in shares
of stock (or stock options) instead of cash. Because stock-based compensation does
not require the payment of cash, it is treated as a noncash expense, much like
depreciation, and added back to net income when the indirect method is used in the
cash flow statement. Generally speaking, compensation cost is classified as part of
operating activities whether or not the compensation is paid in cash.
P4-55. (75 minutes)
a.

P4-55. concluded
b. The following statement of cash flows from operations combines the effects of the
income tax asset and liability and combines the effects of the deferred tax asset and
liability. In addition, the effects of changes in current and noncurrent salary
continuation plan liabilities have been combined in the operating cash flow.
GOLDEN ENTERPRISES, INC.

Consolidated Statement of Cash Flows
Year ended June 3, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 3,014,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 3,174,956
Deferred income taxes 1,329,868
Gain on sale of property and equipment (79,483)
- Change in receivables, net (685,678)
- Change in inventories (94,964)
- Change in prepaid expenses (230,574)
- Change in cash surrender value of insurance 364,240
- Change in other assets (167,256)
+ Change in accounts payable 186,036
+ Change in accrued expenses 138,626
+ Change in salary continuation plan (92,506)
+ Change in accrued income taxes (1,103,498)
Net cash provided by operating activities 5,754,535
CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property, plant and equipment (5,559,183)
Proceeds from sale of property, plant and equipment 96,916
Net cash used in investing activities (5,462,267)
CASH FLOWS FROM FINANCING ACTIVITIES:

Debt proceeds 38,903,745
Debt repayments (36,328,583)
Change in checks outstanding in excess of bank balances (85,126)
Purchase of treasure shares (36,960)
Cash dividends paid (1,467,507)
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,277,837
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,443,801
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,721,638
c. OCFCL = $5,754,535 [(14,216,457 + 14,212,044) 2] = 0.40
OCFCX = $5,754,535 5,559,183 = 1.04

P4-56. (20 minutes)
a. The positive adjustment of $314,872 thousand (say, $315 million) is caused by the
change in the amount that Groupon owes its merchants. When a customer
purchases, Groupon gets the cash quickly and then waits to pay the merchants
(recognizing the accrued merchant payable liability). If we add the fact that Groupon
is growing very quickly, it means that the accrued merchant payable grows over the
period. The adjustment reflects the fact that the merchant share of the amount
collected from customers is $315 million more than the amount that Groupon paid to
the merchants.
Will this continue into the future? Only if Groupon continues to grow and if its
payment terms to merchants remain unchanged. If Groupons growth went to zero,
then the accrued merchant payable would level out and the change would go to
zero. Likewise, if competitors forced Groupon to speed up its payments to
merchants, the accrued merchant payable liability would decrease, and the
companys ability to generate a positive cash flow from operations would be
impaired.
In the risk factors section of the SEC document, Groupon states Our operating cash
flow and results of operations could be adversely impacted if we change our
merchant payment terms or our revenue does not continue to grow.
b. While Groupon used $121 million in cash for investing activities, most of this was for
acquisitions of businesses and investments, rather than for capital expenditures
(only about $30 million). The OCFCX ratio was $129,511 $29,825 = 4.34.
Groupon appears to be growing more by acquisition than by organic growth.
c. Groupon used $353,550 thousand to repurchase its own common stock and another
$35,221 to redeem its own preferred stock, a total of about $389 million. This might
prompt a financial statement reader to look at the related party transactions section
of the companys filing with the SEC prior to its initial public offering. For example, in
December 2010 and January 2011, Groupon issued new preferred stock in
exchange for $942.2 million in cash. Of this amount, $132.4 million was retained in
the company. The remaining $809.8 million was used to redeem shares of common
and preferred stock, mostly from current and former board members and from
entities that they control.
In the use of proceeds section of the SEC document, Groupon states Based on our
current cash and cash equivalents, together with cash generated from operations,
we do not expect that we will utilize any of the net proceeds of this offering to fund
operationsduring the next twelve months.

CASES AND PROJECTS
C4-57. (30 minutes)
The required debt to equity ratio allows for total liabilities to be up to $477 million. That is
$477 / ($125+$148) =1.747 < 1.75. This implies total short-term borrowing of $107 million
and an ending cash balance of $70 million.
LAMBERT CO.
Statement of Cash Flows (projected)
Cash from operations
Net income $ 18
Depreciation expense 120
Increase in accounts receivable . (40)
Decrease in inventory 20
Increase accounts payable .. 30
Decrease in income taxes payable . (10)
Cash provided by (used in) operations .. $ 138
Cash from investing
Acquisitions of property, plant and equipment (225)
Disposal proceeds .. 75
Cash provided by (used in) investing . (150)
Cash from financing
Issue long-term debt .. 80
Repay long-term debt .. (100)
Common stock issue .. 25
Shareholder dividends (30)
Increase (decrease) in short-term borrowing 57
Cash provided by (used in) financing .. 32
Net change in cash .. 20
Beginning cash balance . 50
Ending cash balance .. $ 70

C4-58. (45 minutes)
a.
1 Accounts receivable (+A) 3,800
Sales revenue (+R,+SE) 3,800
2 Cash (+A) 3,500
Accounts receivable (-A) 3,500
3 Cost of goods sold (+E,-SE) 1,800
Inventory (-A) . 1,800
4 Inventory (+A) 1,200
Accounts payable (+L) .... 1,200
5 Accounts payable (-L) .. 1,100
Cash (-A) ... 1,100
6 Salaries and wages expense (+E,-SE) . 700
Salaries and wages payable (+L) . 700
7 Salaries and wages payable (-L) 730
Cash (-A) .... 730
8 Rent expense (+E,-SE). 200
Prepaid rent (-A) .. 200
9 Prepaid rent (+A) .. 600
Cash (-A) ... 600
10 Depreciation expense (+E,-SE) . 150
Accumulated depreciation (+XA,-A) . 150
11 Cash (+A) . 10
Accumulated depreciation (-XA,+A) 70
Fixtures and equipment (-A) 80
12 Fixtures and equipment (+A) .. 800
Cash (-A) .. 800
13 Interest expense (+E,-SE) .... 16
Cash (-A) .. 16
14 Bank loan payable (-L) ... 1,600
Cash (-A) .. 1,600
15 Cash (+A) .. 2,000
Long-term loan payable (+L) 2,000
continued next page

C4-58. continued
16 Income tax expense (+E,-SE) . 374

Taxes payable (+L) .. 374
17 Retained earnings (-SE) . 80
Cash (-A) 80
18 Revenue (-R) . 3,800
Cost of goods sold (-E) . 1,800
Salaries and wages expense (-E) 700
Rent expense (-E) 200
Depreciation expense (-E) 150
Interest expense (-E) .. 16
Income tax expense (-E) 374
Retained earnings (+SE) 560
Entry 18 closes revenue and expense accounts to retained earnings.
b.
+ Cash (A) - - Accounts Payable (L) + - Common Stock (SE) +
600 3,000 4,600
2 3,500 5 1,100 1,200 4 4,600 Bal
1,100 5 3,100 Bal
730 7
600 9 - Retained Earnings (SE)+
11 10 - Salaries and Wages + 1,300
800 12 Payable (L) 17 80 560 18
16 13 100 1,780 Bal
1,600 14 7 730 700 6
15 2,000 70 Bal
80 17 - Revenue (R) +
Bal 1,184 3,800 1
- Taxes Payable (L) + 18 3,800
0 0 Bal
374 16
+ Accounts Rec. (A) - 374 Bal + Cost of Goods Sold (E) -
6,500 3 1,800
1 3,800 3,500 2 - Bank Loan Payable (L) + 1,800 18
Bal 6,800 1,600 Bal 0
14 1,600
0 Bal + Salaries & Wages (E) -
+ Inventory (A) - 6 700
2,400 - Long-term Loan (L) + 700 18
4 1,200 1,800 3 0 Bal 0
Bal 1,800 2,000 15
2,000 Bal
continued next page

C4-58. concluded
+ Prepaid Rent (A) - + Rent Expense (E) -

0 8 200
9 600 200 8 200 18
Bal 400 Bal 0
+ Depreciation Exp. (E) -

10 150
150 18
+ Fixtures and - Bal 0
Equipment (A)
1,900 + Interest Expense (E) -
12 800 80 11 13 16
Bal 2,620 16 18
Bal 0
- Accum. Deprec. (XA) + + Income Tax Exp (E) -

800 16 374
11 70 150 10 374 18
880 Bal Bal 0
C4-59. (30 minutes)
a. Depreciation and amortization are noncash expenses that are deducted in the
computation of net income. The depreciation and amortization add-back zeros these
expenses out of the income statement to focus on operating cash flow. The positive
amount for depreciation and amortization does not mean that the company is
generating cash from depreciation and amortization, a common misconception. It is
merely an adjustment to remove these expenses from net income to convert profit to
cash flow.
b. Gains on disposals of asset are the result of investing activity, not operating activity,
but these gains are recognized in net income. When we start with net income in an
indirect method cash from operations, subtracting the gain removes this investing item
from the determination of cash from operations.
Daimler reports cash proceeds from disposals of PPE and intangible assets of 252
million. If the recognized gain is 102 million, then the book value of the assets
disposed would be 150 million (= 252 million 102 million).
c. It does not. The adjustments can only be interpreted relative to the amounts that are
included in net income. The negative 2,328 million inventory adjustment means that
Daimlers cost to acquire inventory for the year exceeded its cost of goods sold for the
year by 2,328 million.
continued next page

C4-59. concluded
d. Free cash flow ( millions): 696 $(4,158 252) = -4,602.
Daimlers operating cash flow is negative, as is its free cash flow. We did not include
acquisition of intangible assets in the calculation. Doing so would have reduced free
cash flow by another 1.7 billion. Daimler financed its investing activities by additions
to long-term financing.
e. Daimlers cash flow from operating activities is negative, as is its cash flow from
investing activities. It generated a positive cash flow of 5,842 million from financing
activities. As a result, the net decrease in cash was 1,327million. Daimler appears
to be strong enough to withstand a reduction in cash of this magnitude, especially
given that it has a record (in 2010 and 2009) of reporting very positive cash flows
from operations.
To be thorough in analyzing Daimlers liquidity and solvency, one would want to ask
why operating cash flows were negative. A closer look at the companys business
segments reveals that the Industrial Business had cash from operations of 7.3
billion and free cash flow of about 3.4 billion. Daimler Financial Services had cash
from operations of (8.0) billion, resulting from large increases in financial services
receivables and vehicles on operating leases. In its analysis of cash flows, Daimler
reports that The positive effect from the improvement in net profit before income
taxes was reduced in particular by increased new business in leasing and sales
financing as well as by significantly higher allocations to the pension funds.


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Reporting and Analyzing Cash Flows

Learning Objectives coverage by question

LO1 Explain the purpose of the

LO2 Construct and explain the 21 - 31 34 - 44 45 - 56 57 - 59

LO4 Appendix 4A: Use a

Cambridge Business Publishers, 2014

Q4-3. Operating activities

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

M4-22. (10 minutes)

a. Cash flow from an operating activity.

M4-23. (15 minutes)

DOLE FOOD COMPANY, INC.

Cambridge Business Publishers, 2014

a. (3) Cash flow from a financing activity.

M4-25. (30 minutes)

c. 1. Accounts receivable increased by 24,000,

continued next page

Cambridge Business Publishers, 2014

M4-26. (15 minutes INDIRECT METHOD)

Net income $ 45,000

Cambridge Business Publishers, 2014

c. 1. Accounts receivable increased by $45,100,

Cash flow + change in accounts receivable + change in prepaid rent

Cambridge Business Publishers, 2014

Net loss $(21,000)

M4-29. (20 minutes)

Cambridge Business Publishers, 2014

a. Rent expense $ 60,000

Balance Sheet Income Statement

X must equal $58,000 to make the FSET balance.

b. Interest income $ 16,000

Balance Sheet Income Statement

X must equal $15,300 to make the FSET balance.

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Cambridge Business Publishers, 2014

c. Cost of goods sold $ 98,000

Balance Sheet Income Statement

M4-31. (15 minutesDIRECT METHOD)

Operating cash flow + change in operating assets

Effect of sales on net income $825,000

Effect of cost of goods sold on net income ($550,000)

Cambridge Business Publishers, 2014

(All dollar amounts in millions)

a. Merck: $12,383/$15,943 = 0.78

b. Merck: $12,383 ($1,723 $0) = $10,660

E4-33. (20 minutes)

(All dollar amounts in millions)

a. Wal-Mart: $24,255/$60,452 = 0.40

b. Wal-Mart: $24,255 ($13,510 $580) = $11,325

Cambridge Business Publishers, 2014

Cash flows from operating activities

E4-35. (15 minutesINDIRECT METHOD)

a. Net income $113,000

b. $115,000/[($31,000 + $29,000)/2] =3.83

Cambridge Business Publishers, 2014

Ending balance 1,200 390 Ending balance

(2) Property, plant and equipment at cost (+A) 100

(3) Cash (+A) 100

(4) Depreciation expense (+E, -SE) Z

a. The analysis on page 160 on the text shows that