Hhtfa8e ch12 SM

Chapter 12
The Statement of Cash Flows
Short Exercises
(10 min.) S 12-1
The statement of cash flows helps investors and creditors:
a. Predict future cash flows by reporting past cash receipts and

payments, which are reasonably good predictors of future
cash receipts and payments.
b. Evaluate management decisions by reporting on how

managers got cash and how they used cash to run the
business.
Chapter 12 The Statement of Cash Flows 177

(10-15 min.) S 12-2
DATE: _______________
TO: Managers of U.S. Rondeau Inc.
FROM: Student Name
SUBJECT: Purposes of the statement of cash flows
The statement of cash flows is designed to help predict the

future cash flows of a business. The statement of cash flows
measures past cash flows, which are a reasonably good
predictor of future cash flows. Net income is an important
measure of management performance, but it takes cash to pay
the bills. Also, a manager’s performance should be evaluated
on how well he or she uses cash. This information is given in
the statement of cash flows.
In evaluating the ability to repay a loan, a creditor examines the

statement of cash flows to learn how the borrower has gained
and spent cash. As U.S. Rondeau’s situation indicates, income
may increase while cash decreases. Therefore, the statement of
cash flows should be used in conjunction with the income
statement and the balance sheet in evaluating a company.
Student responses may vary.
178 Financial Accounting 8/e Solutions Manual

S 12-3
Three things that could cause operating cash flows to be

positive (under the indirect method) are:
1. Increase in net income

2. Decreases rather than increases in current assets other
than cash
3. Increases rather than decreases in current liabilities
4. Depreciation and amortization
Students need to identify 3 items.

(15-30 min.) S 12-4
DATE: _______________
TO: Managers of Tranquility Inns
FROM: Student Name
SUBJECT: Assessment of 2010 and Outlook for the Future
2010 was not a good year. Most of the increase in net income
resulted from the extraordinary gain on the insurance proceeds
from fire damage to a building, which means that normal
operations were not very profitable. This is confirmed by the
increase in receivables, which hints that collections are
lagging.
The cash-flow data paint a similar picture. Operating activities

used cash, which is bad news. Over the long run, operations
should provide the bulk of the cash if the business expects to
succeed.

(continued) S 12-4
During 2010, the insurance recovery helped investing activities

produce a net cash inflow. Ordinarily, investing activities
should produce net cash outflows as the business invests in
new assets. Growth is usually indicated by investments in new
assets, but during 2010 net cash flows from investing activities
were positive, which means that net investments were negative.
Although the net cash flow provided by investing activities may
be temporary, it does not reflect especially well on the
company. It means that, in part at least, the company is
maintaining its cash position by liquidating fixed assets. This is
a bad sign.
Financing activities provided a net cash inflow, which is

normal. However, coupled with the net cash used for
operations and the net cash provided by investing activities,
the additional debt created in 2010 may be hard to pay back.
Unless next year turns out to be much better than 2010, the
outlook for the company is not bright.

Student responses may vary. The key conclusion is that 2010
was not a good year, and the outlook is not bright.

(5-10 min.) S 12-5
Cash flows from operating activities:

Net income……………………………………………….. $12,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation…………………………………………... 8,000
Loss on sale of land…………………………………. 2,000
Decrease in accounts receivable, inventory,
and prepaid expenses ($58,000 − $55,000)…... 3,000
Increase in current liabilities ($32,000 − $20,000). 12,000
Net cash provided by operating activities:…... $37,000

(10 min.) S 12-6
O+ a. Increase in accounts O− h. Decrease in accrued

payable liabilities
I b. Purchase of F i. Issuance of common
equipment stock
O+ c. Decrease in prepaid O− j. Gain on sale of
expense building
N d. Collection of cash O+ k. Loss on sale of land
from customers O+ l. Depreciation expense
O+ e. Net income O− m. Increase in inventory
N f. Retained earnings O+ n. Decrease in accounts
F g. Payment of dividends receivable
(10 min.) S 12-7
Ethan Corporation
Statement of Cash Flows (partial)
Year ended June 30, 2010
Net income……………………………………….. $ 68,000*
Depreciation…………………………………... $ 11,000
Decrease in current assets other than
cash…………………………………………. 35,000
Increase in current liabilities……………… 7,000 53,000
Net cash provided by operating activities….. $ 121,000
_____
*$228,000 − $116,000 − $33,000 − $11,000 = $68,000

(15 min.) S 12-8
Ethan Corporation
Statement of Cash Flows
Net income……………………………………….. $ 68,000*
Depreciation…………………………………... $ 11,000
Increase in current assets other than
cash…………………………………………. 35,000
Decrease in current liabilities……………… 7,000 53,000
Net cash provided by operating activities….. 121,000
Cash flows from investing activities:

Purchase of equipment………………………… $(43,000)
Proceeds from sale of land……………………. 29,000
Net cash provided by investing activities….. (14,000)
Cash flows from financing activities:

Proceeds from issuance of common stock… $ 26,000
Payment of note payable………………………. (32,000)
Payment of dividends………………………….. (5,600)
Purchase of treasury stock……………………. (6,000)
Net cash used for financing activities………. (17,600)
Net increase in cash……………………………….. $ 89,400
_____
*$228,000 − $116,000 − $33,000 − $11,000 = $68,000

(10 min) S 12-9
a. Acquisitions of plant assets = $71,000, as follows:

Plant Assets, net
Beg. Book value of End.
+ Acquisitions − Depreciation − =
bal. assets sold bal.
$188,000 + X − $ 30,000 − $0 = $229,000
X = $229,000 − $188,000 + $30,000
X = $ 71,000
Plant Assets, net

Beg. bal. 188,000
Acquisition 71,000 Depreciation 30,000
s
End. bal. 229,000
b. Proceeds from the sale of long-term investments = $25,000,

as follows:
Long-term investments
Book value of
Beg. bal. + Purchases − = End. bal.
investments sold
$79,000 + 0 − X = $54,000
X = $79,000 − $54,000
X = $25,000
With no gain or loss, proceeds from the sale must be the

same as the book value of the investments sold, $25,000.

Long-Term Investments
Beg. bal. 79,000 Book value of
investments 25,000
sold
End. bal. 54,000

(15 min.) S 12-10
a. New borrowing on long-term notes payable = $15,000

($69,000 − $54,000)
This is clear from the increase in long-term notes payable.
b. Issuance of common stock = $10,000 ($48,000 − $38,000)

This is clear from the increase in common stock.
c. Payment of dividends
(same as amount of = $196,000, as follows:
dividends declared)
Beginning Ending
Net Dividend
retained + − = retained
income declarations
earnings earnings
$237,000 + $200,00 − X = $241,000

0
X = $237,000 + $200,000 − $241,000
X = $196,000
Retained Earnings
Dividend declarations Beg. bal. 237,000
(same amount paid) 196,000 Net income 200,000
End. bal. 241,000

(15 min.) S 12-11
a. Collections from customers = $759,000, as follows:
Collections Sales
= − Increase in Accounts Receivable
from customers Revenue
= $770,000 − $11,000 ($54,000 − $43,000)
= $759,000
Accounts Receivable
Beg. Bal. 43,000
Sales 770,000 Collections 759,000
End. Bal. 54,000
b. Payments for inventory = $313,000, as follows:
Cost of
Payments for Decrease in Increase in
= Goods − −
inventory inventory Accounts Payable
Sold
= $330,000 − $12,000 $5,000

($89,000 − $77,000) ($48,000 − $43,000)
= $313,000
Inventory Accounts Payable

Beg. bal. 89,000 Payments for Beg. bal. 43,000

Purchases 318,000 Cost of goods sold 330,000 inventory 313,000 Purchases 318,000
End. bal. 77,000 End. bal. 48,000

(10 min.) S 12-12
a. Payments to employees = $38,000, as follows:
Payments to Salary Increase in

= −
employees expense Salary Payable
= $40,000 − $2,000
($26,000 − $24,000)
= $38,000
Salary Payable
Payments to Beg. bal. 24,000
employees 38,000 Salary expense 40,000
End. bal. 26,000
b. Payments for other expenses = $174,000, as follows:
Payments Other Increase in Decrease in

of other = expense + prepaid + accrued
expenses s expenses liabilities
= $170,000 + $1,000 + $3,000

($6,000 − $5,000) ($19,000 − $16,000)
= $174,000

(15 min.) S 12-13
Horse Heaven Horse Farm, Inc.

Year 2010
Collections from customers………………… $ 480,000
Payments to suppliers and employees…… (310,000)
Net cash provided by operating activities.. $ 170,000

Purchase of equipment……………………… $(136,000)
Net cash used for investing activities……. (136,000)

Issued note payable to borrow money……. $ 26,000
Payment of dividends………………………... (49,000)
Net cash used for financing activities…….. (23,000)
Net increase in cash…………………………... $ 11,000
Cash balance, beginning……………………….. 170,000
Cash balance, ending…………………………… $ 181,000

(5 min.) S 12-14
Middleton Golf Club, Inc.

Statement of Cash Flows (partial)
Year ended September 30, 2010
Collections from customers………………… $203,000
Payments to suppliers……………………….. (90,000)
Payments to employees……………………… (75,000)
Payment of income tax………………………. (14,000)
Net cash provided by operating activities... $24,000

(15 min.) S 12-15
Middleton Golf Club, Inc.

Collections from customers…………………….. $203,000
Payments to suppliers…………………………… (90,000)
Payments to employees…………………………. (75,000)
Payment of income tax…………………………... (14,000)
Net cash provided by operating activities……. $ 24,000

Purchase of equipment………………………….. $ (42,000)
Proceeds from sale of land……………………… 61,000
Net cash provided by investing activities……. 19,000

Proceeds from issuance of common stock….. $ 16,000
Payment of note payable………………………… (15,000)
Payment of dividends……………………………. (8,000)
Purchase of treasury stock……………………... (5,700)
Net cash used for financing activities………… (12,700)
Net increase in cash…………………………………. $ 30,300

Exercises
Group A
( (10-15 min.) E 12-16A
I+ a. Sale of long-term F– k. Payment of long-term debt

investment
F+ b. Issuance of long-term note N l. Accrual of salary expense

payable to borrow cash
I+ m. Cash sale of land
O- c. Increase in prepaid
expenses I– n. Purchase of long-term
investment
F– d. Payment of cash dividend
I– o. Acquisition of building by
O+ e. Loss on the sale of cash payment
equipment
F– p. Purchase of treasury stock
O+ f. Decrease in merchandise
inventory F+ q. Issuance of common stock
for cash
NIF g. Acquisition of equipment
by issuance of note O– r. Decrease in accrued
payable liabilities
O+ h. Increase in accounts O+ s. Depreciation of equipment

payable
O+ i. Amortization of intangible
assets
O+ j. Net income

(5-10 min.) E 12-17A
a. Operating h. Operating
b. Financing i. Financing
c. Investing j. Financing
d. Investing k. Financing
e. Operating l. Operating
f. Investing m. Investing
g. Noncash investing and

financing

(10-15 min.) E 12-18A

Net income…………………………………. $ 38,000
net cash used for operating activities:
Depreciation…………………………….. $ 17,000
Loss on sale of land…………………… 22,000
Increase in current assets other
than cash……………………………… (24,000)
Decrease in current liabilities………... (19,000) (4,000)
Net cash provided by operating
activities…………………………………….. $34,000
Evaluation: Operating cash flow is positive, but relatively weak,

as shown by the fact that net cash provided by
operating activities was less than net income.
Normally, cash provided by operations is more than
net income because of the depreciation add-back.

(15-20 min.) E 12-19A

Net income…………………………………….. $20,000
Depreciation………………………………. $ 5,000
Increase in accounts receivable……... (100,000
)
Increase in inventory……………………. (102,000)
Increase in accounts payable…………. 111,000
Decrease in accrued liabilities………… (6,000) (92,000)
Net cash used by operating
activities………………………………………… $(72,000)
Wilderness seems to be having a very difficult time collecting

receivables and selling its inventory. There are large build-ups
in both Accounts Receivable and Inventory. All of the inventory
buildup is being financed by those companies supplying the
inventory as reflected in the growth of accounts payable. While
Wilderness is earning net income, cash flow from operations is
negative.

(20-30 min.) E 12-20A
Req. 1
Newbury Travel Products, Inc.

Year Ended December 31, 2010
Net income…………………………………………... $ 68,900
Depreciation……………………………………... $ 26,000
Decrease in accounts receivable……………. 17,000
Decrease in inventory………………………….. 61,000
Increase in prepaid expenses………………… (700)
Increase in accounts payable………………… 11,000
Decrease in accrued liabilities……………….. (81,000) 33,300
Net cash provided by operating activities…. 102,200

Acquisition of plant assets……………………….. $(160,000)
Proceeds from sale of land……………………….. 27,000
Net cash used for investing activities………. (133,000)

Proceeds from issuance of common stock…… $ 80,000
Payment of long-term note payable…………….. (17,000)
Payment of dividends …………………………….. (13,000)
Net cash provided by financing activities….. 50,000
Net increase in cash…………………………………… $ 19,200
Cash balance, December 31, 2009………………….. 10,800
Cash balance, December 31, 2010………………….. $ 30,000

Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable $ 52,000
(continued) E 12-20A
Req. 2
Evaluation: Newbury’s cash flows look strong. Operations are

the main source of cash. The company is investing
in new plant assets without having to borrow. It was
able to issue stock and pay off a long-term note
payable — both financing transactions. All of these
signs are favorable.
(5-10 min.) E 12-21A
Case A - Issuing stock generated the cash to acquire plant

assets. Operations used cash while in cases B and
C operations provided cash.
Case B - A combination of operations and issuing stock

generated most of the cash for acquisition of plant
assets. Operations provided more cash than did
cases A or C.
Case C - The sale of plant assets generated the cash needed

to acquire new plant assets.
Most healthy financially - Case B
Mid-range - Case C
Least healthy financially - Case A

(10-15 min.) E 12-22A
a. Cash proceeds of sale = Book value of asset sold, $28,000*

− Loss on sale, $4,000
= $24,000
_____
*$110,000 + $33,000 − $9,000 − Book value sold (X) = $106,000
Book value sold = $28,000
Plant Assets, Net

Beginning balance 110,000 Depreciation 9,000
Purchases 33,000 Book value sold 28,000
Ending balance 106,000
b. Cash dividend payments = $26,000
$49,000 + $58,000 − $7,000 − Cash dividends (X) = $74,000

Cash dividends = $26,000
Retained Earnings
Stock dividends 7,000 Beginning balance 49,000
Cash dividends 26,000 Net income 58,000

(10-15 min.) E 12-23A

Receipts:
Collections from customers
($50,000 + $33,000)……………….. $ 83,000
Collection of dividend revenue……. 10,000
Total cash receipts……………….. 93,000
Payments:
To suppliers…………………………… $(58,000)
To employees…………………………. (35,000)
For interest……………………………. (17,000)
For income tax………………………... (24,000)
Total cash payments……………... (134,000)
Net cash used by operating activities. $ (41,000)
Evaluation: Operating cash flow is weak as shown by the net

cash used by operating activities.

(5-10 min.) E 12-24A
Salary Payable — Report cash payments to employees as an

operating cash flow.
Buildings — Report acquisitions of buildings and the proceeds

from sales of buildings as investing cash flows.
Notes Payable — Report issuance and payments of notes

payable as financing cash flows.

(20-30 min.) E 12-25A
Req. 1
Cobbs Hill, Inc.
Year Ended April 30, 2010
Receipts:
($232,000 + $13,000)………………………….. $ 245,000
Dividends received………………………………. 11,000
Total cash receipts…………………………… 256,000
Payments:
To suppliers ($108,000 + $11,500 - $1,300)…. $(118,200)
To employees ($46,000 + $2,000)……………… (48,000)
For income tax……………………………………. (9,000)
For interest………………………………………… (2,100)
Total cash payments………………………… (177,300)
Net cash provided by operating activities…… 78,700

Acquisition of plant assets………………………… $(100,000)
Proceeds from sale of land………………………… 28,000
Net cash used for investing activities………... (72,000)

Proceeds from issuance of common stock……... $ 93,000
Payment of long-term note payable………………. (17,000)
Payment of dividends……………………………….. (8,500)
Net cash provided by financing activities…… 67,500
Net increase in cash…………………………………….. $ 74,200
Cash balance, April 30, 2009………………………….. 21,000
Cash balance, April 30, 2010………………………….. $ 95,200

(continued) E 12-25A
Req. 2
Evaluation: Cobb Hill’s cash flows look strong. Operations are

in new plant assets without having to borrow. Cobb
Hill was able to issue stock and pay off a long-term
note payable — both financing transactions. All of
these signs are favorable.

(10-15 min.) E 12-26A
$5,000 decrease in
a. Cash collections = $ 62,000 + Accounts Receivable
($25,000 − $20,000)
= $ 67,000
$3,000 increase in $2,000 decrease in

Cash payments
b. = $79,000 + Inventory + Accounts Payable
for inventory
($29,000 − $26,000) ($11,000 − $9,000)
= $84,000

Exercises
Group B
(10-15 min.) E 12-27B
I– a. Acquisition of building by I+ k. Sale of long-term

cash payment investment
O+ b. Decrease in merchandise F+ l. Issuance of common stock

inventory for cash
O+ c. Depreciation of equipment O+ m. Increase in accounts

payable
O– d. Decrease in accrued
liabilities O+ n. Amortization of intangible
assets
F– e. Payment of cash
dividend O+ o. Loss on sale of equipment
I– f. Purchase of long-term F– p. Payment of long-term debt

investment
I+ q. Cash sale of land
F+ g. Issuance of long-term note
payable to borrow cash F– r. Purchase of treasury stock
O– h. Increase in prepaid O+ s. Net income

expenses
N i. Accrual of salary expense
NIF j. Acquisition of equipment

by issuance of note
payable

(5-10 min.) E 12-28B
a. Financing h. Financing
b. Investing i. Operating
c. Operating j. Noncash investing and

financing
d. Investing
k. Financing
e. Operating
l. Operating
f. Investing
m. Financing
g. Investing

(10-15 min.) E 12-29B

Net income…………………………………. $ 40,000
Depreciation…………………………….. $ 15,000
Loss on sale of land…………………… 19,000
Decrease in current assets other
than cash……………………………… 28,000
Increase in current liabilities………... 23,000 85,000
activities…………………………………….. $125,000
Evaluation: Operating cash flow is strong, as shown by the net

cash provided by operating activities.

(15-20 min.) E 12-30B

Net income…………………………………….. 35,000
Depreciation………………………………. $ 9,000
Increase in accounts receivable……... (1,000)
Increase in inventory……………………. (3,000)
Increase in accounts payable…………. 109,000
Decrease in accrued liabilities………… (6,000) 108,000
activities………………………………………… $143,000
Lawrence Fur Traders shows no sign of trouble collecting

receivables or selling inventory. There is no large build-up in
either Accounts Receivable or Inventory. Lawrence Fur Traders
have done an excellent job getting their suppliers to finance
their costs. Also, cash flow from operations is positive and
exceeds net income.

(20-30 min.) E 12-31B
Req. 1
Norton Travel Products, Inc.

Net income…………………………………………... $ 32,600
Depreciation……………………………………... $ 33,000
Decrease in accounts receivable……………. 16,000
Decrease in inventory………………………….. 39,000
Increase in accounts payable………………… 15,000

Acquisition of plant assets……………………….. $(140,000)
Proceeds from sale of land……………………….. 48,000

Proceeds from issuance of common stock…… $ 31,000
Payment of long-term note payable…………….. (16,000)
Payment of dividends …………………………….. (10,000)


(continued) E 12-31B
Req. 2
Evaluation: Norton’s cash flows look strong. Operations are the

main source of cash. The company is investing in
new plant assets without having to borrow. It was
able to issue stock and pay off a long-term note
payable — both financing transactions. All of these
signs are favorable.
(5-10 min.) E 12-32B

Case A - The sale of plant assets generated the cash needed
to acquire new plant assets. Operations provided
more cash that Case B but less than Case C.
Case B - Issuing stock generated the cash to acquire plant

Assets but operations did not provide positive
cash flow.
Case C - A combination of operations and issuing stock

generated most of the cash for acquisition of plant
assets. Operations provided more cash than did
cases A and B.
Most healthy financially - Case C

Mid-range - Case B

Least healthy financially - Case A

(10-15 min.) E 12-33B
a. Cash proceeds of sale = Book value of asset sold, $23,000*

+ Gain on sale, $5,000
= $28,000
_____
*$102,000 + $30,000 − $12,000 − Book value sold (X) = $97,000
Book value sold = $23,000
Plant Assets, Net

Beginning balance 102,000 Depreciation 12,000
Purchases 30,000 Book value sold 23,000
b. Cash dividend payments = $13,000
$46,000 + $48,000 − $11,000 − Cash dividends (X) = $70,000

Cash dividends = $13,000
Retained Earnings
Stock dividends 11,000 Beginning balance 46,000
Cash dividends 13,000 Net income 48,000

(10-15 min.) E 12-34B

Receipts:
($80,000 + $36,000)……………….. $ 116,000
Collection of dividend revenue……. 7,000
Total cash receipts……………….. 123,000
Payments:
To suppliers…………………………… $(51,000)
To employees…………………………. (40,000)
For interest……………………………. (13,000)
For income tax………………………... (8,000)
Total cash payments……………... (112,000)
Net cash provided by operating activities. $ 11,000
Evaluation: Operating cash flow is satisfactory, but not great,

as shown by the net cash provided by operating
activities.

(5-10 min.) E 12-35B
Salary Payable — Report cash payments to employees as an

operating cash flow.
Buildings — Report acquisitions of buildings and the proceeds

from sales of buildings as investing cash flows.
Notes Payable — Report issuance and payments of notes

payable as financing cash flows.

(20-30 min.) E 12-36B
Req. 1
Happy Life, Inc.
Year Ended November 30, 2010
Receipts:
($223,000 + $16,500)………………………….. $ 239,500
Dividends received………………………………. 10,500
Payments:
To suppliers ($102,000 + $14,000 + $1,200)…. $(117,200)
To employees ($42,000 - $1,700)……………… (40,300)
For income tax……………………………………. (8,000)
For interest………………………………………… (4,500)

Acquisition of plant assets………………………… $(108,000)
Proceeds from sale of land………………………… 21,000

Proceeds from issuance of common stock……... $ 86,000
Payment of long-term note payable………………. (13,000)
Payment of dividends……………………………….. (9,000)
Net increase in cash…………………………………….. $ 57,000
Cash balance, November 30, 2009…………………… 23,000
Cash balance, November 30, 2010…………………… $ 80,000

(continued) E 12-36B
Req. 2
Evaluation: Happy Life’s cash flows look strong. Operations are

in new plant assets without having to borrow.
Happy Life was able to issue stock and pay off a
long-term note payable — both financing
transactions. All of these signs are favorable.

(10-15 min.) E 12-37B
$3,000 decrease in
a. Cash collections = $ 61,000 − Accounts Receivable
($20,000 − $17,000)
= $ 64,000
$4,000 decrease in $1,000 increase in

Cash payments
b. = $79,000 − Inventory - Accounts Payable
for inventory
($28,000 − $24,000) ($12,000 − $13,000)
= $74,000

Challenge Exercises
Group A
(20-30 min.) E 12-38

(All amounts in thousands)
Decrease in
Sales + Accounts Receivable
a. Collections = $23,995 = $23,984 + ($614 − $603)
Cost Increase in Increase in

b. Payments for of sales + Inventory − Accounts Payable
inventory = $18,114 = $18,026 + $268* − $180**
*$3,140 − $2,872 = $ 268 **$1,551 − 1,371 = $ 180
Other Operating Increase in

c. Payments for Expenses − Accrued Liabilities
other operating = $3,572 = $3,875 − ($935 − $632)
expenses
Income Increase in
d. Payment of Tax Expense − Income Tax Payable
income tax = $532 = $536 − ($197 − $193)
e. Proceeds from Beg. Common End. Common

Issuance of Stock + Issuance = Stock
stock = $70 = $445 + X = $515
X = $ 70
Beg. Ret. Net End. Ret.

f. Payment of Earnings + Income − Dividends = Earnings
dividends = $682: $3,828 + $1,281 − X = $4,427
X = $682

(20 min.) E 12-39
a.
(All in thousands)
Loss on sale of
Proceeds from Book value
property and = −
dispositions sold
equipment
$80 = $740 − $820
Property & Equipment, Net

Bal., 12/31/09 9,630
Capital Depreciation 1,950
expenditures 4,090 Book value of
property and
equipment X = 820
sold
Bal., 12/31/10 10,950
b.
Long-Term Notes Payable

Bal., 12/31/09 3,040
Repayment 80 Proceeds from
issuance 1,250
LT debt issued
for something

other than X = 290
cash
Bal. 12/31/10 4,500

Quiz
Q12-40 d
Q12-41 d
Q12-42 b
Q12-43 c
Q12-44 c
Q12-45 c
Q12-46 c
Q12-47 Paying dividends financing Receiving dividends
operating
Q12-48 c [Book value = $12,000 ($21,000 − $9,000; Gain =
$1,000; Proceeds = $13,000 ($12,000 + $1,000)]
Q12-49 c
Q12-50 b
Q12-51 c
Q12-52 c Net inc. Gain Depr. A / Rec Invy.
[$41,500 − $9,000 + $6,500 + ($13,000 − $5,000) − ($11,000− $10,000)
A / Pay Accr. Liab.
− ($9,000 − $8,000) + ($6,000 − $4,000) = $47,000]
Q12-53 d
Q12-54 a Cash received = $30,000 ($21,000 + $9,000)
Cash paid = $50,000 ($71,000 − $21,000 − $6,500
+ $X = $97,000; X = $53,500)
Net cash used = $23,500 ($53,500 − $30,000)
Q12-55 d
Q12-56 a
Q12-57 a Cash received from issuance of stock = $9,000
($18,000 − $9,000)
Cash paid for dividends (X) = $36,000 ($75,000 +
net income $41,500 − $X = $86,500; Dividends =
$30,000)
Net cash used = $21,000 ($30,000 − $9,000)
Q12-58 c ($820,000 − $50,000 = $770,000)
Q12-59 b [$59,500 − ($4,500 − $3,000) = $58,000]
Problems
Group A
(40 min.) P 12-60A
Req. 1
Antique Automobiles of Dallas, Inc.

Income Statement
Sales revenue…………………………........................... $488,000
Cost of goods sold [$203,000 + (1 × $40,000)]…. 243,000
Salary expense…………………………………………… 125,000
Depreciation expense ($180,000 / 5)…………………. 36,000
Rent expense……………………………………………... 17,000
Income tax expense……………………………………... 12,600
Net income………………………………………………... $ 54,400
Req. 2

Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Current: Current:
Cash 231,800* Accounts payable
Accounts receivable ($80,000 − $56,000) $ 24,000
(488,000 × .20) 97,600 Salary payable 7,000
Inventory (1 × $40,000) 40,000 Total current liabilities 31,000
Total current assets 369,400
STOCKHOLDERS’ EQUITY
Property, plant, and equipment: Common stock 440,000
Equipment $180,000 Retained earnings
Less Accumulated ($54,400 − $12,000) 42,400
depreciation (36,000) 144,000 Total equity 482,400

Total liabilities and
Total assets $513,400 stockholders' equity $513,400
_____
*$440,000 − $180,000 − $203,000 − $17,000 − $56,000 + $390,400 − $118,000 − $12,600
− $12,000 = $231,800.

(continued) P 12-60A
Req. 3
Net income………………………………………. $ 54,400
Depreciation………………………………….. $ 36,000
Increase in accounts receivable………….. (97,600)
Increase in inventory……………………….. (40,000)
Increase in accounts payable…………….. 24,000
Increase in salary payable………………… 7,000 (70,600)
Net cash used for operating activities.. (16,200)

Purchase of equipment……………………….. (180,000)
Net cash used for investing activities…… (180,000)

Issuance of common stock…………………… 440,000
Payment of dividend…………………………… (12,000)
Net cash provided by financing activities 428,000
Net increase in cash………………………………. $ 231,800
Cash balance, January 1, 2010…………………. 0
Cash balance, December 31, 2010……………... $ 231,800

(40 min.) P 12-61A
Req. 1

Income Statement
Sales revenue…………………………........................... $488,000
Cost of goods sold [$203,000 + (1 × $40,000)]…….. 243,000
Salary expense…………………………………………… 125,000
Depreciation expense ($180,000 / 5)…………………. 36,000
Rent expense……………………………………………... 17,000
Net income………………………………………………... $ 54,400
Req. 2

Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Current: Current:
Cash 231,800* Accounts payable
(488,000 × .20) 97,600 Salary payable 7,000
Inventory (1 × $40,000) 40,000 Total current liabilities 31,000

_____
*$440,000 − $180,000 − $203,000 − $17,000 − $56,000 + $390,400 − $118,000 − $12,600
− $12,000 = $231,800.

Req. 3
Receipts:
($488,000- $97,600)…………………………… $ 390,400
Payments:
To suppliers ($-243,000 - $40,000 + $24,000) $(259,000)
To employees ($-125,000 + $7,000)…………… (118,000)
For income tax……………………………………. (12,600)
For rent………………………………………..…… (17,000)
Net cash used by operating activities………… (16,200)

Purchase of equipment………………………..... (180,000)
Net cash used for investing activities…..… (180,000)

Issuance of common stock……………….…… 440,000
Payment of dividend………………………….… (12,000)
Net increase in cash…………………………….…. $ 231,800
Cash balance, January 1, 2010……………….…. 0
Cash balance, December 31, 2010…………….... $ 231,800

(35-45 min.) P 12-62A
Morgensen Software Corp.

Net income…………………………………………... $ 6,500
Depreciation …………………………………….. $ 17,000
Amortization…………………………………….. 5,000
Loss on sale of equipment…………………… 5,000
Increase in accounts receivable…………….. (5,500)
Decrease in inventories…………………… 71,400
Increase in prepaid expenses………………… (1,600)
Increase in accounts payable……………… 1,400
Increase in income tax payable……………… 1,900

Purchase of building………………………………. $(97,000)
Purchase of long-term investment……………… (44,600)
Proceeds from sale of equipment………………. 81,000
Collection of loan…………………………………... 10,600

Issuance of common stock………………………. $36,500
Issuance of long-term note payable……………. 34,500

Payment of cash dividends………………………. (9,300)
Purchase of treasury stock………………………. (10,700)


Acquisition of land by issuing long-term note payable… $ 201,000
Retirement of bonds payable by issuing common stock 64,000
Total noncash investing and financing activities…………… $265,000

(35-45 min.) P 12-63A
Req. 1
Maynard Movie Theater Company
Year Ended June 30, 2010
Net income…………………………………………… $ 54,000
Depreciation……………………………………… $ 15,700
Amortization……………………………………… 9,000
Decrease in accounts receivable…………….. 7,100
Increase in inventories…………………………. (2,400)
Decrease in prepaid expenses……………… 4,900
Increase in accounts payable…………………. 1,600
Increase in accrued liabilities………………... 20,000
Decrease in income tax payable……………… (1,000) 54,900

Purchase of equipment…………………………….. $(79,000)
Purchase of building……………………………….. (44,000)
Sale of long-term investment……………………... 12,700
Net cash used for investing activities……….. (110,300)

Issuance of long-term note payable……………... $ 42,000
Issuance of common stock………………………... 24,000
Payment of cash dividend…………………………. (29,000)
Net cash provided by financing activities…... 37,000
Net increase in cash…………………………………. $ 35,600
Cash balance, June 30, 2009………………….…….. 17,000
Cash balance, June 30, 2010………………….……. $ 52,600

Acquisition of land by issuing note payable…… $100,000

Req. 2
Evaluation: Maynard’s cash flows look strong. Operations are

in new plant assets, and borrowing — a financing
cash flow — appears reasonable. All of these signs
are favorable.

(30-40 min.) P 12-64A
Req. 1
Affordable Supply Corp.

Net income………………………………………………. $62,900
Depreciation…………………………………………. $ 17,700
Increase in accounts receivable………………… (1,200)
Increase in inventories……………………………. (14,400)
Decrease in prepaid expenses…………………… 2,100
Increase in accounts payable…………………….. 8,300
Increase in salary payable……………………….. 10,900
Decrease in other accrued liabilities……………. (1,600) 21,800

Purchase of land……………………………………...... $(46,500)
Purchase of equipment ($49,500 − depreciation
expense of $17,700 = $31,800; $53,100 −
$31,800)………………………………………………. (21,300)

Payment of dividends ($7,900 + $62,900 − $27,500) $(43,300)
Issuance of note payable……………………………… 17,000
Issuance of common stock…………………………… 22,700
Net increase in cash……………………………………….. $13,300

Cash balance, December 31, 2009……………………… 4,000
Cash balance, December 31, 2010……………………… $17,300

Req. 2
This problem will help students learn how operating activities,

investing activities, and financing activities generate cash
receipts and cash payments. By solving this problem, students
will learn how companies prepare the statement of cash flows
and will thus be able to understand the meaning of cash flows
from the three basic categories of business activities. This
knowledge will aid their analysis of investments. For example,
students should know that net cash provided by operating
activities conveys a more positive signal about a company than
net cash used for operations.
Student responses will vary.

(30-40 min.) P 12-65A
Req. 1
Affordable Supply Corp.
Receipts:
($446,000,000 - $1,200)…………………… $ 444,800
Total cash receipts………………………… $ 444,800
Payments:
To suppliers ($-186,600 - $14,400 + $8,300) $(192,700)
To employees ($-76,000 + $10,900)………… (65,100)
For income tax……………………………………. (29,000)
For Other operating expenses ($-49,700 +
$2,100 – 1,600) (49,200)
For interest…………………………………… (24,100)

Purchase of land…………………………………….. $(46,500)
Purchase of equipment ($49,500 − depreciation
expense of $17,700 = $31,800; $53,100 −
$31,800)………………………………………… (21,300)
Net cash used for investing activities… (67,800)

Payment of dividends ($7,900 + $62,900 −
$27,500) $(43,300)
Issuance of note payable……………………… 17,000
Issuance of common stock……………………… 22,700
Net cash used for financing activities…… (3,600)

Net increase in cash…………………………………… $13,300
Cash balance, December 31, 2009………………… 4,000
Cash balance, December 31, 2010………………… $17,300
Req. 2

Student responses will vary.

(35-45 min.) P 12-66A
Req. 1
Ramirez Furniture Gallery, Inc.
Year Ended May 31, 2010
Receipts:
($428,500 + $191,300)…………………….. $ 619,800
Interest received………………………………. 4,600
Dividends received…………………………… 8,900
Total cash receipts………………………... $ 633,300
Payments:
To suppliers……………………………………. $(368,000)
To employees………………………………….. (78,000)
For interest……………………………………... (13,400)
For income tax………………………………… (38,300)
Total cash payments……………………... (497,700)
Net cash provided by operating activities... 135,600
Purchase of plant assets……………………....... $ (72,100)
Sale of plant assets………………………………. 22,600
Collection of loans……………………………….. 11,900
Loan to another company………………………. (12,300)
Sale of investments………………………………. 9,500
Net cash used for investing activities…….. (40,400)
Payments of long-term notes payable………... $ (83,000)
Payment of dividends……………………………. (48,300)
Issuance of note payable………………………... 24,500
Issuance of common stock……………………... 7,000
Net cash used for financing activities…….. (99,800)

Net (decrease) in cash………………………………. $ (4,600)
Cash balance, May 31, 2009……………………….. 19,100
Cash Balance, May 31, 2010…………………….. $ 14,500

Noncash investing and financing transactions:

Payment of short-term note payable by
issuing long-term note payable……………………. $ 94,000
Acquisition of equipment by issuing
short-term note payable…………………………….. 16,000
Total noncash investing and financing transactions…. $ 110,000
Req. 2
Evaluation of 2010: Year 2010 was a strong year from a cash-

flow standpoint. Operations provided the
bulk of the company’s cash. The business
acquired additional plant assets to lay a
foundation for future operations. The
corporation also reduced its debt
position.

(45-60 min.) P 12-67A
Req. 1
Daisy Electric Company

Receipts:
Collections from customers………………………… $ 661,800
Dividends received ………………………………….. 16,900
Total cash receipts………………………………… $ 678,700
Payments:
To suppliers ($402,000+ $34,500)………………….. $(436,500)
To employees………………………………………….. (143,600)
For interest……………………………………………... (26,600)
For income tax…………………………………………. (17,000)
Total cash payments……………………………… (623,700)
Net cash provided by operating activities………... 55,000

Purchase of equipment…………………………………... $ (31,000)
Sale of long-term investments………………………….. 14,600
Net cash used for investing activities……………... (16,400)

Issuance of common stock……………………………… $ 61,000
Payment of long-term note payable…………………… (41,500)
Payment of dividends……………………………………. (47,900)
Purchase of treasury stock……………………………… (22,400)
Net cash used for financing activities…………….. (50,800)
Net (decrease) in cash……………………………………….. $ (12,200)
Cash balance, December 31, 2009………………………… 49,600
Cash balance, December 31, 2010………………………… $ 37,400

Acquisition of land by issuing common stock………. $ 80,800
Retirement of note payable by issuing common stock 20,000
Total noncash investing and financing activities………. $ 100,800

Req. 2
Daisy Electric Company

Cash Flows from Operating Activities
Net income……………………………… $127,900
Depreciation……………………………… $ 19,000
Loss on sale of investments………….. 22,100
Increase in accounts receivable……… (27,400)
Increase in inventories………………… (59,700)
Increase in prepaid expenses………… (600)
Decrease in accounts payable………... (8,300)
Increase in interest payable…………… 2,500
Decrease in salary payable……………. (7,800)
Decrease in other accrued liabilities… (10,200)
Decrease in income tax payable……… (2,500) (72,900)
Net cash provided by operating activities. $55,000

(45-60 min.) P 12-68A
Req. 1
Stephen Summers Design Studio, Inc.

Net income…………………………………………... $ 80,700
Depreciation……………………………………... $ 13,900
Loss on sale of land……………………………. 6,500
Increase in accounts receivable……………... (17,100)
Decrease in inventories……………………..… 2,300
Decrease in accounts payable……………..… (11,000)
Decrease in income tax payable……………... (1,200)
Decrease in accrued liabilities……………….. (5,700)
Increase in interest payable…………………... 1,000
Decrease in salary payable…………………… (3,400) ( 15,600)

Sale of land………………………………………….. $ 54,900
Purchase of long-term investment……………… (4,700)
Net cash provided by investing activities….. 50,200

Payment of long-term note payable…………….. $(61,400)
Payment of cash dividends………………………. (48,400)
Issuance of common stock………………………. 2,400
Cash balance, June 30, 2009………………………… 21,000
Cash balance, June 30, 2010………………………… $ 28,900

Req. 1

long-term note $14,600
payable…………………………...
Payment of short-term note payable by
issuing common stock………………………….. 5,000
Total noncash investing and financing $19,600
activities…...

Req. 2
Stephen Summers Design Studio, Inc.

Receipts:
Collections from customers…………….. $ 241,700
Interest received…………………………… 1,700
Total cash receipts…………………….. $ 243,400
Payments:
To suppliers………………………………… $(118,600)
To employees………………………………. (41,900)
For income tax……………………………... (12,900)
For interest………………………………….. (4,900)
Total cash payments………………….. (178,300)
Net cash provided by operating activities… $ 65,100

Problems
Group B
( (40 min.) P 12-69B

Req. 1
Sweet Automobiles of Pepperell, Inc.
Income Statement
Sales revenue…………………………………………….. $426,000
Cost of goods sold [$175,000 + (1 × $47,000)]….. 222,000
Salary expense…………………………………………… 90,000
Rent expense……………………………………………... 19,000
Depreciation expense ($140,000 / 5)………………… 28,000
Net income………………………………………………... $53,000
Req. 2

Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Current: Current:
Cash $87,000* Accounts payable
($426,000 × .10) 42,600 Salary payable 5,000
Inventory 235,000 Total current liabilities 89,600

_____
*$350,000 − $140,000 − $175,000 − $19,000 − $197,400 + $383,400 − $85,000 − $14,000
− $16,000 = $87,000.

(continued) P 12-69B
Req. 3

Net income……………………………………….… $53,000
Depreciation……………………………………. $ 28,000
Increase in accounts receivable……………. (42,600)
Increase in inventory…………………………. (235,000)
Increase in accounts payable…………….…. 84,600
Increase in salary payable…………………... 5,000 (160,000)
Net cash used by operating activities….. (107,000)

Purchase of equipment……………………….….. (140,000)
Net cash used for investing activities……… (140,000)

Payment of dividend……………………………… (16,000)
Net cash provided by financing activities…. 334,000
Net increase in cash…………………………………. $87,000
Cash balance, January 1, 2009…………………….. 0
Cash balance, December 31, 2010………………… $87,000

(40 min.) P 12-70B
Req. 1
Income Statement
Sales revenue…………………………………………….. $426,000
Cost of goods sold [$175,000 + (1 × $47,000)]….. 222,000
Salary expense…………………………………………… 90,000
Rent expense……………………………………………... 19,000
Depreciation expense ($140,000 / 5)………………… 28,000
Net income………………………………………………... $53,000
Req. 2

Balance Sheet
ASSETS LIABILITIES
Current: Current:
Cash $87,000* Accounts payable
($426,000 × .10) 42,600 Salary payable 5,000
Inventory 235,000 Total current liabilities 89,600
Less Accumulated ($53,000 − $16,000) 37,000)

_____
*$350,000 − $140,000 − $175,000 − $19,000 − $197,400 + $383,400 − $85,000 − $14,000
− $16,000 = $87,000.

Req. 3

Receipts:
($426,000 x .90)........................................... $ 383,400
Total cash receipts..................................... $ 383,400
Payments:
To suppliers ($175,000 + $197,400) ……….. $(372,400)
To employees ($90,000 - $5,000)…………… (85,000)
For income tax................................................. (14,000)
For rent............................................................. (19,000)
Total cash payments.................................. (490,400)
Net cash used by operating activities........... (107,000)

Purchase of equipment……………………….. (140,000)
Net cash used for investing activities…… (140,000)

Issuance of common stock…………………… 350,000
Payment of dividend…………………………… (16,000)
Net increase in cash……………………………… $87,000
Cash balance, January 1, 2009………………… 0
Cash balance, December 31, 2010……………… $87,000

(35-45 min.) P 12-71B
Neighbor Software Corp.

Net income……………………………………………. $ 58,000
Depreciation ………………………………………. $ 17,000
Amortization………………………………………. 6,000
Loss on sale of equipment……………………. 3,000
Decrease in accounts receivable……………… 42,100
Increase in inventories…………………………. (3,500)
Increase in prepaid expenses………………….. (800)
Increase in accounts payable………………….. 2,200
Increase in income tax payable………………. 12,100
Increase in accrued liabilities………………….. 7,900 86,000

Purchase of building…………………………....... $(159,000)
Purchase of long-term investment………………... (49,900)
Sale of equipment………………………………….. 12,900
Collection of loan……………………………………. 11,000

Issuance of long-term note payable……………… $ 34,000
Payment of cash dividends………………………… (18,800)
Purchase of treasury stock………………. (14,400)
Issuance of common stock………………………... 74,200
Net increase in cash………………………………….. $ 34,000
Cash balance, December 31, 2009…………………… 26,000
Cash balance, December 31, 2010…………………… $60,000

Acquisition of land by issuing long-term note payable… $198,000
Retirement of bonds payable by issuing common stock… 71,000
Total noncash investing and financing activities………………… $269,000

(35-45 min.) P 12-72B
Req. 1
Medford Movie Theater Company.
Net income……………………………………………. $ 50,000
Depreciation………………………………………. $ 15,600
Amortization……………………………………… 6,000
Decrease in accounts receivable……………... 7,700
Increase in inventories………………………… (2,200)
Increase in prepaid expenses…………………. (9,200)
Increase in accounts payable…………………. 2,100
Increase in accrued liabilities………………… 10,000
Decrease in income tax payable……………… (4,000) 26,000
Net cash provided by operating activities…... 76,000

Purchase of building……………………………...... $(59,000)
Purchase of equipment…………………………….. (45,600)
Sale of long-term investment……………………… 13,400
Net cash used for investing activities……….. (91,200)

Issuance of common stock………………………... $ 13,000
Issuance of long-term note payable……………... 26,000
Payment of cash dividends………………………... (34,000)
Net cash provided by financing activities…... 5,000_
Net decrease cash……………………………………. $ (10,200)
Cash balance, June 30, 2009…………………… 16,000
Cash balance, June 30, 2010…………………… $ 5,800

Acquisition of land by issuing note payable. $ 30,000
Req. 2
Evaluation: Medford’s cash flows look strong. Operations are a

significant source of cash. The company is
investing heavily in new plant assets. The company
is financing the new investments more by
borrowing than issuing stock.

(30-40 min.) P 12-73B
Req. 1
King Supply Corp.

Net income……………………………………………… $ 62,000
Depreciation ………………………………………… $ 17,400
Increase in accounts receivable ………………… (1,000)
Increase in inventories……………………………. (11,600)
Decrease in prepaid expenses…………………... 3,900
Increase in accounts payable…………………... 10,200
Increase in salary payable………………………... 6.400
Decrease in other accrued liabilities…………… (1,300) 24,000
Purchase of land……………………………………….. $(47,200)
Purchase of equipment ($49,200 −
depreciation expense of $17,400 = $31,800;
$53,100 − $31,800)………………………………... (21,300)
Net cash used for investing activities……… (68,500)
Payment of dividends
($27,400 + $62,000 − $47,200)…………………….. $(42,200)
Issuance of note payable…………………………… 13,000
Issuance of common stock…………………………... 24,300
Net cash used for financing activities….... (4,900)
Net increase in cash……………………………………… $ 12,600
Cash balance, December 31, 2009……………………... 5,000
Cash balance, December 31, 2010……………………... $ 17,600
Req. 2


(30-40 min.) P 12-74B
King Supply Corp.
Receipts:
($445,000 – 1,000)....................................... $ 444,000
Payments:
To suppliers ($185,100 + $11,600 - $10,200) $(186,500)
To employees ($76,400 - $6,400)…………… (70,000)
For operating expenses ($49,800 - $3,900 +
$1,300……………………………………….. (47,200)
For income tax................................................. (29,500)
For interest....................................................... (24,800)
Net cash provided by operating activities.... 86,000

Purchase of land…………………………………… $(47,200)
Purchase of equipment ($49,200 −
depreciation expense of $17,400 = $31,800;
$53,100 − $31,800)……………………………… (21,300)
Net cash used for investing activities… (68,500)
Payment of dividends
($27,400 + $62,000 − $47,200)………………… $(42,200)
Issuance of note payable……………………… 13,000
Net cash used for financing activities (4,900)
Net increase in cash…………………………… $ 12,600
Cash balance, December 31, 2009……………… 5,000
Cash balance, December 31, 2010………………… $ 17,600

Req. 2


(35-45 min.) P 12-75B
Req. 1
Dunleavy Furniture Gallery, Inc.
Receipts:
($406,000 + $201,000)................................. $ 607,000
Interest received.............................................. 4,200
Dividends received.......................................... 4,000
Payments:
To suppliers..................................................... $(387,200)
To employees.................................................. (93,700)
For income tax................................................. (36,800)
For interest....................................................... (13,700)
Net cash provided by operating activities.... 83,800

Purchase of plant assets..................................... $(59,900)
Collection of loans............................................... 12,100
Proceeds from sale of plant assets.................... 22,300
Loan to another company................................... (12,800)
Proceeds from sale of investments.................... 11,200
Net cash used for investing activities........... (27,100)

Proceeds from issuance of common stock....... $ 7,000
Payments of long-term note payable................. (69,000)
Payment of dividends.......................................... (48,000)
Proceeds from issuance of note payable.......... 19,300
Net cash provided by financing activities.... (90,700)
Net decrease in cash................................................. $ (34,000)
Cash balance, December 31, 2009........................... 40,000
Cash balance, December 31, 2010........................... $ 6,000


Payment of short-term note payable by issuing
long-term note payable…………………………… $68,000
short-term note payable…………………………… 16,500
Total noncash investing and financing activities……. $84,500
Req. 2
Evaluation of 2010: Year 2010 was a satisfactory year from a

cash-flow standpoint. Operations provided
cash of $83,800. The company was able to
pay off a long-term note payable in the
amount of $69,000 as well as converting a
sort-term note in the amount of $68,000 to a
long-term note. The business invested
almost $60,000 in plant assets. They paid a
dividend of $48,000 and cash decreased
during the year by $34,000.

(45-60 min.) P 12-76B
Req. 1
Spencer Electric Company

Receipts:
Collections from customers…………...................... $ 661,600
Dividends received……………………………………. 16,800
Total cash receipts…………………………….….. $ 678,400
Payments:
To suppliers…………………………………………….. $(434,400)*
To employees…………………………………………... (143,300)
For interest……………………………………………… (27,100)
For income tax…………………………………………. (18,600)
Total cash payments……………………………… (623,400)
Net cash provided by operating activities…….….. 55,000
Purchase of equipment…………………………………... $ (31,700)
Sale of long-term investments………………………….. 20,000

Net cash used for investing activities……………... (11,700)
Payment of long-term note payable…………………… $ (41,300)
Issuance of common stock………………………….….. 22,200
Purchase of treasury stock………………………….….. (26,300)

Payment of dividends……………………………………. (27,600)
Net cash used for financing activities…………….. (73,000)
Net (decrease) in cash…………….……………………….… $ (29,700)
Cash balance, December 31, 2009………………………… 71,500
Cash balance, December 31, 2010………………………… $ 41,800
_____

*$399,500 + $34,900 = $434,400

Req. 1

Acquisition of land by issuing common stock……………… $ 61,700
Retirement of long-term note payable by
issuing common stock……………………………………….. 17,000
Total noncash investing and financing activities………………. $ 78,700

Req. 2
Spencer Electric Company

Net income…………………………………….. $4,300
Adjustments to reconcile net income to net
cash flow provided by operating activities:
Depreciation………………………………. $16,400
Loss on sale of investments…………… 16,700
Decrease in accounts receivable……… 14,400
Decrease in inventories………………… 12,900
Decrease in prepaid expenses………… 6,000
Decrease in accounts payable…………. (7,800)
Decrease in interest payable…………… (2,200)
Increase in salary payable…………….. 7,200
Decrease in other accrued liabilities…. (10,400)
Decrease in income tax payable………. (2,500) 50,700
Net cash provided by operating activities.. $55,000

(45-60 min.) P 12-77B
Req. 1
Franny Franklin Design Studio, Inc.

Net income…………………………………………… $ 73,400
Depreciation ……………………………………… $ 13,900
Loss on sale of land…………………………….. 7,000
Increase in accounts receivable…………..….. (36,700)
Increase in inventories ……………………….. (57,800)
Increase in prepaid expenses……………..….. (1,000)
Increase in accounts payable……………..….. 1,000
Increase in accrued liabilities……………….... 88,100
Decrease in taxes payable………………….…. (1,100)
Increase in interest payable…………………... 1,000
Decrease in salary payable ………………… (2,700) 11,700
Sale of land…………………………………………… $ 33,800
Purchase of long-term investments…………....... (5,000)
Net cash provided by investing activities…... 28,800
Payment of cash dividends……………………….. $(47,800)
Issuance of common stock……………………….. 21,100
Payment of long-term note payable……………... (60,700)
Net cash used for financing activities……….. (87,400)
Net increase in cash………………………………….… $ 26,500
Cash balance, June 30, 2009………………………….. 2,400
Cash balance, June 30, 2010…………………………. $ 28,900
Req. 1

long-term note payable…………………………….. $ 15,200
Paid off short-term note by issuing common stock 7,000
Total noncash investing and financing activities…….. $ 22,200

Req. 2
Franny Franklin Design Studio, Inc.

Receipts:
Collections from customers………………. $ 272,300
Interest received…………………………….. 1,400
Total cash receipts……………………… $ 273,700
Payments:
To suppliers………………………………….. $(130,900)
To employees………………………………… (40,000)
For income tax……………………………….. (12,500)
For interest…………………………………… (5,200)
Total cash payments……………………. (188,600)
Net cash provided by operating activities….. $ 85,100

Decision Cases
(45-60 min.) Decision Case 1
Req. 1 (indirect method for operating activities)
T-Bar-M Camp, Inc.

Cash flows from operating activities: (Thousands)
Net income…………………………………………………. $ 97
Depreciation……………………………………….…... $ 46
Amortization of patents…………………………….... 11
Increase in accounts receivable ($72 − $61)……… (11)
Increase in inventories ($194 − $181)………….….. (13)
Increase in accounts payable ($63 − $56)……….... 7
Decrease in accrued liabilities ($17 − $12)………... (5) 35
Net cash provided by operating activities……………. 132

Purchase of property, plant, and
equipment ($369 − $259)………………………….…. $(110)
Purchase of long-term investments ($31 − $0)……… (31)
Net cash used for investing activities………….…. (141)

Issuance of common stock ($149 − $61)…………….. $ 88
Payment of cash dividends ($156 + $97 − $213)……. (40)
Payment of long-term notes payable ($264 − $179) (85)
Net cash used for financing activities………..……. (37)
Net (decrease) in cash………………………….……………. $ (46)
Cash balance, December 31, 2010………………………… 63
Cash balance, December 31, 2011………………………… $ 17

(continued) Decision Case 1
Req. 2
The cash balance at the end of 2011 is low because:
• The camp paid $110,000 to buy new property, plant, and

equipment.
• The camp paid off $85,000 of notes payable.
Req. 3
Year 2011 was a good year. Net income was $97,000, and
operations were the largest source of cash. Also, the company
increased its property, plant, and equipment by $110,000 and
paid off $85,000 of debt. On this basis, business appears to
have been successful.

(15-25 min.) Decision Case 2
Four-Star Catering looks like the better investment because:
1. Operations provide far more cash for Four-Star than for

Applied Technology. Operations should be the main source
of cash for a healthy company.
2. Four-Star is investing more in long-term plant assets than

Applied is. Four-Star is laying a more solid foundation in
revenue-producing assets than Applied is.
3. Applied Technology’s main source of cash is the sale of

plant assets. This trend cannot continue for long without
hurting the company’s ability to produce revenue.
4. Four-Star is raising more cash by selling stock than Applied

is. This gives Four-Star more cash to invest in research and
development of new products and other innovations to
enhance the company’s competitiveness. Applied, on the
other hand, is paying off debt. That is not necessarily bad for
Applied, but Four-Star appears to be a step ahead in terms of
financing its operations with owners’ equity and investing
the cash in income-producing assets.

Ethical Issue
Req. 1
Cash flows from operating Without With

activities: Reclassification Reclassification
Net income…………….. $ 37,000 $37,000
Increase in accounts
receivable……………... (80,000) —
Net cash (used for) provided
by operating activities…. $(43,000) $37,000
Columbia looks better with the reclassification because net

cash flow from operations is positive.
Req. 2
The issue is whether or not it is ethical to reclassify accounts
receivable from current assets to long-term assets.
Req. 3 and Req. 4

The stakeholders are Columbia, its officers, directors and
employees, as well as their present and future creditors.
Economic analysis: The plan to reclassify accounts receivable

would have an immediate positive impact on Columbia and its
employees because it might enable Columbia to obtain the loan
it desperately needs. However, this might be to the detriment

of present and future creditors, because if Columbia can’t
collect the receivables, it may not be able to pay off its loans to
creditors.
(continued) Ethical case
Legal analysis: To reclassify receivables when, in fact, they are

not truly collectible, even in the long run, might leave the
company open later to a lawsuit for damages suffered by
creditors who loan Columbia money based on false
information.
Ethical analysis: To reclassify receivables when, in fact, they

are not truly collectible in the long run, deprives the banks of
accurate information they need to make sound financial
decisions. Reclassification would be unethical if Columbia
expects to collect within the current period. In that case, the
reclassification would appear to be designed to create a false
picture of cash flow from operations. It is not truthful and not
ethical. In the long run, no one benefits from this short-sighted
decision.
Req. 5

The receivables should be classified in the way that best
describes their collectability. In reality, most bank loan officers
who know financial accounting (and most do) will closely
examine these receivables classify them as long-term for their
own lender analysis.
Req. 6
The reclassification would be ethical if Columbia expects to

collect the receivables beyond the current operating cycle, or
one year if longer.

Focus on Financials: Amazon.com, Inc.
(40-50 min.)
Req. 1
Indirect method. The statement of cash flows begins with net

income. Also, Amazon.com, Inc. does not report collections
from customers, payments to suppliers, and so on, which are
reported under the direct method.
Req. 2 (Amounts in millions)
a. This problem requires an analysis of the activity in gross

accounts receivable. The account caption is listed as
Accounts receivable, net and other, meaning that several items
(debit and credit) were netted against one another in order to
get the balances listed on the balance sheet. It is necessary
first to isolate just the accounts receivable portion of these
amounts. In Footnote 1, under Accounts receivable, net and
other, it states: “Included in Accounts receivable, net, and
other on our consolidated balance sheets are amounts
primarily related to vendor receivables and customer
receivables. At December 31, 2008 and 2007, vendor

receivables, net, were $400 million and $280 million, and
customer receivables, net, were $311 million and $296 million.”
Immediately below that, under Allowance for doubtful
accounts, we find the following: “We estimate losses on
receivables based on known troubled accounts, if any, and
historical experience of losses incurred. The allowance for
doubtful customer and vendor receivables was $81 million and
$64 million at December 31, 2008 and 2007.”
In order to calculate gross accounts receivable from vendors

and customers at the beginning and end of the year, it is
necessary to add those two amounts to both beginning and
ending balances of the allowance for doubtful accounts as
shown in the T-accounts below. Then, add sales revenue to the
beginning gross balance ($19,166 from the income statement) ,
subtract write-offs and subtract the ending balance ($657). The
write off figure is calculated by taking the beginning balance of
the allowance for doubtful accounts ($64), adding assumed
expense (.5% x 19,166) and subtracting the ending balance
($81).
Gross Accounts Receivable, Vendors and Customers

Beg.Bal ($400+311+ $775

$64)
Sales (income 19,16
Write-offs (below) 79
statement) 6
Collections
($775+19,166-79-657) 19,205
End.Bal.($280+296+ $657
$81)
Allowance for Doubtful Accounts

Beg. Bal. $64
Write-offs Doubtful accounts expense:
($64 + 96 - 81) 79 ($19,166 x .005) 96
End. Bal. $81
b. Using the format provided in Exhibit 12-15:

(Amounts in millions)
Payments for Cost of Increase in Increase in

inventory = sales + Inventory − Accounts
Payable
$14,296 = $14,896 + ($1,399 − − ($3,594 - $2,795)

$1,200)

(continued) Focus on Financials: Amazon.com, Inc.
Req. 3 (Amounts in millions)

From Note 3 of the Footnotes to Consolidated Financial
Statements:
Property, Plant, and Equipment, Net

Bal., Dec. 31, 2007 543
($1,023 – 480)
Capital spending 333
(investing section,
Depreciation (Note 3) 311
statement of cash
flows)
Acquisitions of other
Companies (diff) 289
Bal., Dec. 31, 2008 854
($1,409 – 555)
Req. 4
In 2008, for Amazon.com, Inc.,
1. Net income increased from 2007 by $169 million ($645 -

$476).
2. Total assets increased from 2007 by $1,729 million ($8,314 -
$6,485).
3. Stockholders’ equity more than doubled from 2007 ($2,672 -
$1,197)

4. Cash flow from operations was almost 3 times net income
($1,697 - $645).
Overall, 2008 was a very good year for Amazon.com, Inc.

Focus on Analysis: Foot Locker, Inc.
(20-30 min.)
(All amounts are in thousands)
Req. 1
The main source of cash is sales of short-term investments

($1,620). This indicates that Foot Locker, Inc.’s basic
operations are not generating enough cash to finance current
operations. Fortunately, the company owned trading securities,
which they sold in order to raise enough cash to operate during
2007.
The main use of cash is purchase of short-term investments

($1,378). This too indicates that Foot Locker’s core operations
are not generating enough cash. However, they still have
enough cash from operations to purchase short-term
investments which will be available next period if they need to
be sold. This strategy will work as long as there is excess cash
to invest in these types of securities. However, over the long-
run, if operations start to use cash rather than generate it, the
supply of these securities will be depleted, placing the

company in a position of having to borrow short-term funds for
operating purposes.
(continued) Focus on Analysis: Foot Locker, Inc.
Req. 2
Why net cash provided by operations differs from net income:
1. Non-cash impairment charges and store closing costs (+

$124). These were expenses that did not use cash, so they
were added back to net income.
2. Depreciation and amortization (+$166). These expenses

decreased net income but didn’t decrease cash. Therefore,
cash flow from operations always exceeds net income
insofar as depreciation and amortization are concerned.
3. Decrease in deferred income taxes payable (-$129), meaning

that the company had to pay these taxes in the current year
in addition to its normal income tax expense.

(continued) Focus on Analysis: Foot Locker, Inc.
Req. 3
Foot Locker, Inc. bought more fixed assets ($148 million) than it
sold (none listed) during fiscal 2007. The amount purchased
comes from the investing section of the Consolidated
Statements of Cash Flows for 2007.
Req. 4
Cash returned to stockholders during fiscal 2007 (in millions):

Dividends……………………………………………… $77
Purchases of treasury stock……………………….. 50
Total…………………………………………………….. $127
Although profits were falling, management apparently felt compelled to

continue to pay a cash dividend to shareholders. Established
companies often feel this pressure during difficult economic times, in
order to bolster confidence on the part of shareholders in management’s
ability to lead. In addition, management apparently felt that the
purchase of the company’s own stock at a low price was a good use of
cash. As explained in Chapter 9, repurchasing treasury stock serves to
reduce the number of outstanding shares used in the earnings per share
(EPS) calculation, which in turn is a factor in helping increase the price
of the company’s common stock.

Group Projects
(2-3 hours)
Student responses will vary on this assignment.

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Chapter 12

The Statement of Cash Flows

(10 min.) S 12-1

The statement of cash flows helps investors and creditors:

a. Predict future cash flows by reporting past cash receipts and

b. Evaluate management decisions by reporting on how

Chapter 12 The Statement of Cash Flows 177

TO: Managers of U.S. Rondeau Inc.

FROM: Student Name

SUBJECT: Purposes of the statement of cash flows

The statement of cash flows is designed to help predict the

In evaluating the ability to repay a loan, a creditor examines the

Student responses may vary.

178 Financial Accounting 8/e Solutions Manual

Three things that could cause operating cash flows to be

1. Increase in net income

Students need to identify 3 items.

180 Financial Accounting 8/e Solutions Manual

TO: Managers of Tranquility Inns

FROM: Student Name

SUBJECT: Assessment of 2010 and Outlook for the Future

The cash-flow data paint a similar picture. Operating activities

Chapter 12 The Statement of Cash Flows 181

During 2010, the insurance recovery helped investing activities

Financing activities provided a net cash inflow, which is

182 Financial Accounting 8/e Solutions Manual

Chapter 12 The Statement of Cash Flows 183

Cash flows from operating activities:

184 Financial Accounting 8/e Solutions Manual

O+ a. Increase in accounts O− h. Decrease in accrued

(10 min.) S 12-7

186 Financial Accounting 8/e Solutions Manual

Cash flows from investing activities:

Cash flows from financing activities:

Chapter 12 The Statement of Cash Flows 187

a. Acquisitions of plant assets = $71,000, as follows:

$188,000 + X − $ 30,000 − $0 = $229,000

X = $229,000 − $188,000 + $30,000

Plant Assets, net

b. Proceeds from the sale of long-term investments = $25,000,

With no gain or loss, proceeds from the sale must be the

188 Financial Accounting 8/e Solutions Manual

Chapter 12 The Statement of Cash Flows 189

a. New borrowing on long-term notes payable = $15,000

b. Issuance of common stock = $10,000 ($48,000 − $38,000)

$237,000 + $200,00 − X = $241,000

X = $237,000 + $200,000 − $241,000

190 Financial Accounting 8/e Solutions Manual

a. Collections from customers = $759,000, as follows:

= $770,000 − $11,000 ($54,000 − $43,000)

b. Payments for inventory = $313,000, as follows:

= $330,000 − $12,000 $5,000

Inventory Accounts Payable

192 Financial Accounting 8/e Solutions Manual

Chapter 12 The Statement of Cash Flows 193

a. Payments to employees = $38,000, as follows:

Payments to Salary Increase in

b. Payments for other expenses = $174,000, as follows:

Payments Other Increase in Decrease in

= $170,000 + $1,000 + $3,000

194 Financial Accounting 8/e Solutions Manual

Horse Heaven Horse Farm, Inc.