CH 23

CHAPTER23
Statementof CashFlows
ASSIGNMENTCLASSIFICATIONTABLE(BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Conceptsfor
Analysis
1. Format, objectives
purpose, and source
of statement.
1, 2, 7,
8, 12
1, 2, 5, 6
2. Classifying investing,
financing, and operating
activities.
3, 4, 5, 6,
16, 17, 19
1, 2, 3,
6, 7,
8, 12
1, 2, 10, 16
1, 3, 4, 5
3. Direct vs. indirect

methods of preparing
operating activities.
9, 20
4, 5, 9,
10, 11
3, 4
4. Statement of cash flows 11, 13, 14

direct method.
4, 5, 7, 9,
12, 13
3, 4, 6,
7, 8
5. Statement of cash flows 10, 13,

indirect method.
15, 16
3, 6, 8, 11,
14, 15, 16,
17, 18
1, 2, 5, 6,
7, 8, 9
6. Preparing schedule
of noncash investing
and financing activities.
18
12
5, 7, 8, 9
7. Worksheet adjustments.
21
13
19, 20, 21
Copyright 2011 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 14/e, Solutions Manual (For Instructor Use Only)
23-1
ASSIGNMENTCLASSIFICATIONTABLE(BY LEARNINGOBJECTIVE)
Brief Exercises
LearningObjectives
Exercises
Problems
1.
Describe the purpose of the statement

of cash flows.
2.
Identify the major classifications

of cash flows.
1, 2, 10, 16
3.
Differentiate between net income and net

cash flows from operating activities.
4, 5, 9, 10, 11
2, 3, 4, 5, 6,
7, 8, 16
6, 7
4.
Contrast the direct and indirect methods

of calculating net cash flow from operating
activities.
4, 5, 6, 7, 9
3, 4, 5,
6, 7, 8
6, 7
5.
Determine net cash flows from investing

1, 2
16
6.
Prepare a statement of cash flows.
9, 11, 12, 13,

14, 15, 17, 18
7.
Identify sources of information

for a statement of cash flows.
8.
Discuss special problems in preparing

a statement of cash flows.
12
10, 18
9.
Explain the use of a worksheet in

preparing a statement of cash flows.
13
19, 20, 21
23-2
1, 2, 3, 4, 5,
6, 7, 8, 9
1, 2, 4,
5, 8, 9
1, 2, 4, 5,
6, 7, 8, 9
ASSIGNMENTCHARACTERISTICSTABLE
23-3
Ite
m
Description
Level of
Difficulty
Time
(minutes)
Classification of transactions.
Simple
1015
Moderate
2030
Preparation of operating activities sectionindirect method,

periodic inventory.
Simple
1525
Preparation of operating activities sectiondirect method.
Simple
2030
Preparation of operating activities sectiondirect method.
Simple
2030
Preparation of operating activities sectionindirect method.
Simple
1520
Computation of operating activitiesdirect method.
Simple
1520
Schedule of net cash flow from operating activities

indirect method.
Moderate
2030
SCFdirect method.
Moderate
2030
Classification of transactions.
Moderate
2535
SCFindirect method.
Moderate
3035
E
23
-1
Statement presentation of transactionsindirect method.
E
23
-2
E
23
-3
E
23
-4
E
23
-5
E
23
-6
E
23
-7
E
23
-8
E
23
-9
E
23
10
E
23
11
23-4
SCFdirect method.
Moderate
2030
SCFdirect method.
Moderate
3040
SCFindirect method.
Moderate
3040
SCFindirect method.
Moderate
2535
Cash provided by operating, investing, and financing

activities.
Moderate
3040
SCFindirect method and balance sheet.
Moderate
3040
Partial SCFindirect method.
Moderate
2530
Worksheet analysis of selected accounts.
Moderate
2025
Worksheet analysis of selected transactions.
Moderate
2025
Worksheet preparation.
Moderate
4555
SCFindirect method.
Moderate
4045
E
23
12
E
23
13
E
23
14
E
23
15
E
23
16
E
23
17
E
23
18
E
23
19
E
23
20
E
23
21
P
23
-1
23-5
SCFindirect method.
Moderate
5060
SCFdirect method.
Complex
5060
SCFdirect method.
Moderate
4560
SCFindirect method.
Complex
5065
SCFindirect method, and net cash flow from operating

activities, direct method.
Moderate
4050
SCFdirect and indirect methods from comparative

financial statements.
Moderate
3040
SCFdirect and indirect methods.
Moderate
3040
Indirect SCF.
Moderate
3040
Analysis of improper SCF.
Moderate
3035
SCF theory and analysis of improper SCF.
Moderate
3035
SCF theory and analysis of transactions.
Moderate
3035
Analysis of transactions effect on SCF.
Moderate
2030
P
23
-2
P
23
-3
P
23
-4
P
23
-5
P
23
-6
P
23
-7
P
23
-8
P
23
-9
C
A
23
-1
C
A
23
-2
C
A
23
-3
C
A
23
-4
23-6
Purpose and elements of SCF.
Complex
3040
Cash flow reporting, ethics.
Moderate
2030
C
A
23
-5
C
A
23
-6
23-7
SOLUTIONSTO CODIFICATIONEXERCISES
CE23-1
Master Glossary
(a)
Cash equivalents are short-term, highly liquid investments that have both of the following
characteristics:
1.
2.
Readily convertible to known amounts of cash

So near their maturity that they present insignificant risk of changes in value because of
changes in interest rates.
Generally, only investments with original maturities of three months or less qualify under that
definition. Original maturity means original maturity to the entity holding the investment. For example,
both a three-month U.S. Treasury bill and a three-year Treasury note purchased three months
from maturity qualify as cash equivalents. However, a Treasury note purchased three years ago
does not become a cash equivalent when its remaining maturity is three months. Examples of
items commonly considered to be cash equivalents are Treasury bills, commercial paper, money
market funds, and federal funds sold (for an entity with banking operations).
(b)
Financing activities include obtaining resources from owners and providing them with a return on,
and a return of, their investment; receiving restricted resources that by donor stipulation must be
used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise
settling the obligation; and obtaining and paying for other resources obtained from creditors on
long-term credit.
(c)
Investing activities include making and collecting loans and acquiring and disposing of debt or
equity instruments and property, plant, and equipment and other productive assets, that is,
assets held for or used in the production of goods or services by the entity (other than materials
that are part of the entitys inventory). Investing activities exclude acquiring and disposing of
certain loans or other debt or equity instruments that are acquired specifically for resale, as
discussed in paragraphs 230-10-45-12 and 230-10-45-21.
(d)
Operating activities include all transactions and other events that are not defined as investing or
financing activities (see paragraphs 230-10-45-12 through 45-15). Operating activities generally
involve producing and delivering goods and providing services. Cash flows from operating
activities are generally the cash effects of transactions and other events that enter into the
determination of net income.
CE23-2
According to FASB ASC 230-10-45-14 (Statement of Cash FlowOther Presentation MattersCash
Flows from Financing Activities):
All of the following are cash inflows from financing activities:
(a)
Proceeds from issuing equity instruments.
(b)
Proceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing.
23-8
CE23-2 (Continued)
(c)
Receipts from contributions and investment income that by donor stipulation are restricted for the
purposes of acquiring, constructing, or improving property, plant, equipment, or other long-lived
assets or establishing or increasing a permanent endowment or term endowment.
(d)
Proceeds received from derivative instruments that include financing elements at inception,
whether the proceeds were received at inception or over the term of the derivative instrument,
other than a financing element inherently included in an at-the-market derivative instrument with
no prepayments.
(e)
Cash retained as a result of the tax deductibility of increases in the value of equity instruments
issued under share-based payment arrangements that are not included in the cost of goods or
services that is recognizable for financial reporting purposes. For this purpose, excess tax
benefits shall be determined on an individual award (or portion thereof) basis.
CE23-3
According to FASB ASC 230-10-45-11 (Statement of Cash FlowsOther Presentation MattersCash
Flows from Investing Activities):
Cash flows from purchases, sales, and maturities of available-for-sale securities shall be classified as
cash flows from investing activities and reported gross in the statement of cash flows.
CE23-4
According to FASB ASC 230-10-50-3 (Statement of Cash FlowsDisclosureNoncash Investing and
Financing Activities):
Information about all investing and financing activities of an entity during a period that affect recognized
assets or liabilities but that do not result in cash receipts or cash payments in the period shall be
disclosed. Those disclosures may be either narrative or summarized in a schedule, and they shall
clearly relate the cash and noncash aspects of transactions involving similar items.
23-9
ANSWERSTO QUESTIONS
1. The main purpose of the statement of cash flows is to show the change in cash of a company from
one period to the next. The statement of cash flows provides information about a companys
operating, financing, and investing activities. More precisely, it provides information about the
companys cash inflows and outflows for the period.
2. Some uses of this statement are:
Assessingfuturecashflows: Income data when augmented with current cash flow data provide a better
basis for assessing future cash flows.
Assessing quality of income: Some believe that cash flow information is more reliable than
income information because income involves a number of assumptions, estimates and valuations.
Assessing operating capability: Whether an enterprise is able to maintain its operating capability,
provide for future growth, and distribute dividends to the owners depends on whether adequate
cash is being or will be generated.
Assessingfinancial flexibility and liquidity: Cash flow data indicate whether a company should be able
to survive adverse operating problems and whether a company might have difficulty in meeting
obligations as they become due, paying dividends, or meeting other recurring costs.
Providing information on financing and investing activities: Cash flows are classified by their effect on
balance sheet items; investing activities affect assets while financing activities affect liabilities and
stockholders equity.
3. Investing activities generally involve noncurrent assets and include (1) lending money and collecting
on those loans and (2) acquiring and disposing of investments and productive long-lived assets.
Financing activities, on the other hand, involve liability and owners equity items and include (1)
obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining capital from
owners and providing them with a return on their investment. Operating activities include all
transactions and events that are not investing and financing activities. Operating activities involve
the cash effects of transactions that enter into the determination of net income.
4. Examples of sources of cash in a statement of cash flows include cash from operating activities,
issuance of debt, issuance of capital stock, sale of investments, and the sale of property, plant,
and equipment. Examplesof uses of cash include cash used in operating activities, payment of cash
dividends, redemption of debt, purchase of investments, redemption of capital stock, and the
purchase of property, plant, and equipment.
5. Preparing the statement of cash flows involves three major steps:
(1) Determine the change in cash. This is simply the difference between the beginning and ending
cash balances.
(2) Determine the net cash flow from operating activities. This involves analyzing the current years
income statement, comparative balance sheets and selected transaction data.
(3) Determine cash flows from investing and financing activities. All other changes in balance
sheet accounts are analyzed to determine their effect on cash.
6. Purchase of landinvesting;
Payment of dividendsfinancing;
Cash salesoperating;
Purchase of treasury stockfinancing.
7. Comparative balance sheets, a current income statement, and certain transaction data all provide
information necessary for preparation of the statement of cash flows. Comparative balance sheets
indicate how assets, liabilities, and equities have changed during the period. A current income
statement provides information about the amount of cash provided from operating activities. Certain
23-10
transactions provide additional detailed information needed to determine whether cash was provided
or used during the period.
23-11
QuestionsChapter23 (Continued)
8. It is necessary to convert accrual-based net income to a cash basis because net income includes
items that do not provide or use cash. An example would be an increase in accounts receivable.
If accounts receivable increased during the period, revenues reported on the accrual basis would
be higher than the actual cash revenues received. Thus, accrual basis net income must be adjusted
to reflect the net cash flow from operating activities.
9. Net cash flow from operating activities under the direct method is the difference between cash
revenues and cash expenses. The direct method adjusts the revenues and expenses directly to
reflect the cash basis. This results in cash net income, which is equal to net cash flow from
operating activities.
The indirect method involves adjusting accrual net income. This is done by starting with accrual net
income and adding or subtracting noncash items included in net income. Examples of adjustments include depreciation and other noncash expenses and changes in the balances of current
asset and current liability accounts from one period to the next.
10. Net cash flow from operating activities is $3,820,000. Using the indirect method, the solution is:
Net income...................................................................................
$3,500,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense............................................................
$ 520,000
Accounts receivable increase................................................
(500,000)
Accounts payable increase....................................................
300,000
320,000
Net cash provided by operating activities....................................
$3,820,000
11. Accrual basis sales...............................................................
Less: Increase in accounts receivable................................
Less: Write-off of accounts receivable................................
Cash sales...........................................................................
$100,000
30,000
70,000
2,000
$ 68,000
12. A number of factors could have caused an increase in cash despite the net loss. These are: (1) high
cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3) sales
of investments, and (4) issuance of debt or capital stock.
13. Declared dividends...............................................................
Add: Dividends payable (beginning of year).......................
Deduct: Dividends payable (end of year)............................
Cash paid in dividends during the year................................
$260,000
85,000
345,000
90,000
$255,000
14. To determine cash payments to suppliers, it is first necessary to find purchases for the year. To
find purchases, cost of goods sold is adjusted for the change in inventory (increased when
inventory increases or decreased when inventory decreases). After purchases are computed, cash
payments to suppliers are determined by adjusting purchases for the change in accounts payable.
An increase (decrease) in accounts payable is deducted from (added to) purchases to determine
cash payments to suppliers.
15. Cash flows from operating activities
Net income...........................................................................
Depreciation expense..................................................
Amortization of patent..................................................
Loss on sale of plant assets.........................................
23-12
$320,000
$124,000
40,000
21,000
185,000
Net cash provided by operating activities............................
$505,000
23-13
16. (a) Cash flows from operating activities
Net income................................................................................
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of plant assets
[($18,000 10) x 31/2 ] $4,000.....................................
Cash flows from investing activities
Sale of plant assets...................................................................
XXXX
(b) Cash flows from financing activities

Issuance of common stock........................................................
(c)
2,300
4,000
$410,000
No effect on cash; not shown in the statement of cash flows or in any related schedules
or notes.
Note to instructor: The change in net accounts receivable is an adjustment to net income
under the indirect method.
(d) Cash flows from operating activities

Net loss.....................................................................................
Adjustments to reconcile net loss to net cash
Depreciation expense...............................................................
Gain on sale of available-for-sale securities.............................
Cash flows from investing activities
Sale of available-for-sale securities..........................................
17. (a)
(b)
(c)
(d)
(e)
(f)
Operating activity.
Financing activity.
Investing activity.
Operating activity.
Significant noncash investing
Financing activity.
$(50,000)
$22,000
(9,000)
$ 38,000
(g) Operating activity.

(h) Financing activity.
(i) Significant noncash investing
(j) Financing activity.
(k) Investing activity.
(l) Operating activity.
18. Examples of noncash transactions are: (1) issuance of stock for noncash assets, (2) issuance of stock
to liquidate debt, (3) issuance of bonds or notes for noncash assets, and (4) noncash exchanges of
property, plant, and equipment.
19. Cash flows from operating activities
Net income........................................................................................
Gain on redemption of bonds payable......................................
Cash flows from financing activities
Redemption of bonds payable..........................................................
XXXX
$ (120,000)
$(1,880,000)
20. Arguments for the indirect or reconciliation method are:

(a) By providing a reconciliation between net income and cash provided by operations, the
differences are highlighted.
(b) The direct method is nothing more than a cash basis income statement which will confuse
and create uncertainty for financial statement users who are familiar with the accrual-based
income statements.
23-14
(c) There is some question as to whether the direct method is cost/benefit-justified as this
method would probably lead to additional preparation cost because the financial records are
not maintained on a cash basis.
21. A worksheet is desirable because it allows the orderly accumulation and classification of data that
will appear on the statement of cash flows. It is an optional but efficient device that aids in the
preparation of the statement of cash flows.
23-15
SOLUTIONSTO BRIEFEXERCISES
BRIEFEXERCISE23-1
Cashflowfrominvestingactivities
Saleof land..........................................................................
Purchaseof equipment.........................................................
Purchaseof available-for-sale securities.................................
Net cashusedby investingactivities......................................
$ 180,000
(415,000)
(59,000)
$(294,000)
BRIEFEXERCISE23-2
Cashflowfromfinancingactivities
Issuanceof commonstock....................................................
Issuanceof bondspayable....................................................
Paymentof dividends............................................................
Purchaseof treasurystock....................................................
Net cashprovidedby financingactivities.................................
$ 250,000
510,000
(350,000)
(46,000)
$ 364,000
BRIEFEXERCISE23-3
(a)
(b)
(c)
(d)
(e)
(f)
P-I
A
R-F
A
R-I
R-I, D
(g)
(h)
(i)
(j)
(k)
(l)
P-F
D
P-I
A
D
R-F
(m)
(n)
(o)
(p)
(q)
(r)
N
D
R-F
P-F
R-I, A
P-F
BRIEFEXERCISE23-4
Cashflowsfromoperatingactivities
Cashreceivedfromcustomers
($200,000 $12,000)...............................................
Cashpayments:
To suppliers
($120,000+ $11,000 $13,000)..........................
For operatingexpenses
($50,000 $21,000)..........................................
23-16
$188,000
$118,000
29,000
147,000
Net cashprovidedby operatingactivities...................

BRIEFEXERCISE23-5
Net income...............................................................
Adjustmentsto reconcilenet income
to net cashprovidedby operating
activities:
Depreciationexpense.........................................
Increasein accountspayable...............................
Increasein accountsreceivable...........................
Increasein inventory..........................................
Net cashprovidedby operatingactivities.....................
$ 41,000
$30,000
$21,000
13,000
(12,000)
(11,000)
11,000
$41,000
BRIEFEXERCISE23-6
Sales
Add: Decreasein accountsreceivable
($72,000 $54,000)..................................................
Cashreceiptsfromcustomers............................................
$420,000
18,000
$438,000
BRIEFEXERCISE23-7
Cost of goodssold............................................................
Add: Increasein inventory($113,000 $95,000)...................
Purchases........................................................................
Deduct: Increasein accountspayable
($69,000 $61,000)............................................
Cashpaymentsto suppliers...............................................
$500,000
18,000
518,000
8,000
$510,000
BRIEFEXERCISE23-8
Net cashprovidedby operatingactivities..............................
Net cashusedby investingactivities....................................
Net cashprovidedby financingactivities..............................
Net increasein cash...........................................................
Cash,1/1/12.......................................................................
Cash,12/31/12....................................................................
$531,000
(963,000)
585,000
153,000
333,000
$486,000
23-17
BRIEFEXERCISE23-9
(a)
(b)
Cashreceivedfromcustomers................................
Cashpaid for expenses($60,000 $1,840)................
Net cashprovidedby operating
activities..................................................
$90,000
58,160
$31,840
Net income...........................................................
Increasein net accountsreceivable
($26,960a $18,800b)...........................................
activities..................................................
($29,000 $2,040)
$40,000
(8,160)
$31,840
($20,000 $1,200)
BRIEFEXERCISE23-10
Net income.....................................................................
Adjustmentsto reconcilenet incometo net cash
providedby operatingactivities
Depreciationexpense...............................................
Increasein accountspayable.....................................
Increasein accountsreceivable.................................
Increasein inventory................................................
Net cashprovidedby operatingactivities...........................
$50,000
17,000)
12,300)
(11,000)
(7,400)
10,900
$60,900
BRIEFEXERCISE23-11
Cashflowsfromoperatingactivities:
Net loss.........................................................................
Adjustmentsto reconcilenet income(loss)
to net cashprovidedby operatingactivities
23-18
($70,000)
81,000)
(8,100)
72,900
$ 2,900
BRIEFEXERCISE23-12
(a)
Land...........................................................................
..................................................................................
CommonStock...................................................
Paid-in Capital in Excessof Par
CommonStock..............................................
(b)
No effect
(c)
Noncashinvestingandfinancingactivities:
Purchaseof landthroughissuanceof
commonstock.................................................
40,000
10,000
30,000
$40,000
BRIEFEXERCISE23-13
(a)
(b)
(c)
(d)
OperatingNetIncome.................................................
RetainedEarnings..............................................
317,000
RetainedEarnings........................................................
FinancingCashDividends.................................
120,000
Equipment..................................................................
InvestingPurchaseof Equipment.......................
114,000
InvestingSaleof Equipment........................................
AccumulatedDepreciationEquipment..........................
Equipment.........................................................
OperatingGainon Sale of Equipment.................
10,000
32,000
317,000
120,000
114,000
40,000
2,000*
*$10,000 ($40,000 $32,000)
23-19
SOLUTIONSTO EXERCISES
EXERCISE23-1 (1015minutes)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Operatingaddto net income.

Financingactivity.
Investingactivity.
Significantnoncashinvestingandfinancingactivity.
Financingactivity.
Financingactivity.
Significantnoncashinvestingandfinancingactivity.
Financingactivity.
Operatingdeductfromnet income.
Investingactivity.
(a)
Plant assets(cost)..................................................................
Accumulateddepreciation([$25,000 10] X 6)............................
Bookvalueat date of sale........................................................
Saleproceeds........................................................................
Losson sale...........................................................................
$25,000)
15,000)
10,000)
(5,300)
$ 4,700)
The loss on sale of plant assets is reported in the operating activities section of the
statement of cash flows. It is added to net incometo arrive at net cash provided by
operatingactivities.
The sale proceeds of $5,300 are reported in the investing activities section of the
statementof cashflowsas follows:
Saleof plant assets..................................................................
(b)
Shownin the financingactivitiessectionof a statementof cashflowsas follows:

Saleof commonstock.............................................................
23-20
$ 5,300
$330,000
EXERCISE23-2 (Continued)
(c)
The write-off of the uncollectible accounts receivable of $27,000 is not reported on

the statement of cash flows. The write-off reduces the Allowance for Doubtful
AccountsbalanceandtheAccountsReceivablebalance.It doesnot affect cashflows.
Note to instructor: The change in net accounts receivable is some-times used to
computean adjustmentto net incomeunderthe indirectmethod.
(d)
The net loss of $50,000 should be reported in the operating activities section of the
statement of cash flows. Depreciation of $22,000 is reported in the operating
activities section of the statement of cash flows. The gain on sale of land also
appears in the operating activities section of the statement of cash flows. The
proceeds from the sale of land of $39,000 are reported in the investing activities
section of the statementof cash flows. Thesefour itemsmight be reportedas follows:
Net loss...............................................................
to net cashusedin operatingactivities*:
Depreciation..................................................
Gainon sale of land........................................
$(50,000)
22,000
(9,000)
*Either net cash usedor provideddependinguponother adjustments.Givenonly the

adjustmentsin (d), the net cashusedshouldbe employed.
Cashflowsfrominvestingactivities
Saleof land..........................................................
$39,000
(e)
The purchaseof the U.S. Treasurybill is not reportedin the statementof cash flows.
This instrument is considered a cash equivalent and therefore cash and cash
equivalentshavenot changedas a result of this transaction.
(f)
Patent amortization of $20,000 is reported in the operating activities section of the

statementof cash flows. It is addedto net incomein arrivingat net cash providedby
23-21
(g)
The exchange of common stock for an investment in Plumlee is reported as a

noncashinvestingand financingactivity.It is shownas follows:
Noncashinvestingandfinancingactivities
Purchaseof investmentby issuance
of commonstock.............................................
(h)
$900,000
The purchase of treasury stock is reported as a cash payment in the financing

activitiessectionof the statementof cashflows.
RODRIQUEZCOMPANY
Partial Statementof CashFlows
For the Year EndedDecember31, 2012
Net income.................................................................
to net cashprovidedby operatingactivities:
Depreciationexpense............................................
Decreasein accountsreceivable.............................
Decreasein inventory............................................
Increasein prepaidexpenses.................................
Decreasein accountspayable................................
Decreasein accruedexpensespayable....................
Net cashprovidedby operatingactivities.......................
23-22
$1,050,000
$ 60,000
310,000
300,000
(170,000)
(275,000)
(120,000)
105,000
$1,155,000
RODRIQUEZCOMPANY
Cashreceiptsfromcustomers.......................
Cashpayments:
To suppliers........................................
For operatingexpenses.........................
activities.................................................
$7,210,000 (a)
$4,675,000 (b)
1,380,000 (c)
$1,155,000
Computations:
(a) Cashreceiptsfromcustomers
Sales..................................................
Add: Decreasein accounts
receivable.................................
Cashreceiptsfromcustomers...............
(b)
(c)
$6,900,000
310,000
$7,210,000
Cashpaymentsto suppliers
Cost of goodssold...............................
Deduct: Decreasein inventories.............
Purchases...........................................
Add: Decreasein accounts
payable.....................................
Cashpaymentsto suppliers..................
Cashpaymentsfor operating
expenses
Operatingexpenses,exclusive
of depreciation.................................
Add: Increasein prepaid
expenses..................................
Add: Decreasein accrued
Add: expensespayable.....................
expenses.........................................
6,055,000
$4,700,000
300,000
4,400,000
275,000
$4,675,000
$1,090,000*
$170,000
120,000
290,000
$1,380,000
*$450,000+ ($700,000 $60,000)
23-23
NORMANCOMPANY
Cashreceiptsfromcustomers.................
Cashpayments:
For operatingexpenses...................
For incometaxes.............................
activities.............................................
(a)
(b)
(c)
23-24
$862,000 (a)
$609,000 (b)
44,500 (c)
Computationof cashreceiptsfromcustomers:
Servicerevenue.....................................................
Add: Decreasein accountsreceivable
Ad
($59,000 $37,000).......................................
Cashreceiptsfromcustomers.................................
Computationof cashpayments:
Operatingexpensesper incomestatement...............
Deduct ($46,000 $31,000).................................
Cashpaymentsfor operatingexpenses....................
Incometax expenseper incomestatement................
Add: Decreasein incometaxespayable
Add ($8,500 $4,000)..........................................
Cashpaymentsfor incometaxes.............................
653,500
$208,500
$840,000
22,000
$862,000
$624,000
15,000
$609,000
$ 40,000
4,500
$ 44,500
NORMANCOMPANY
Net income.................................................................
to net cashprovidedby operatingactivities:
Depreciationexpense..............................................
Losson sale of equipment.......................................
Decreasein accountsreceivable..............................
Increasein accountspayable...................................
Decreasein incometaxespayable............................
$90,000
$60,000
26,000
22,000
15,000
(4,500)
118,500
$208,500
SituationA:
SituationB:
Cashreceiptsfromcustomers
($200,000 $71,000)...............................................
Cashpaymentsfor operatingexpenses
($110,000 $39,000)...............................................
(a) Computationof cashpaymentsto suppliers
Cost of goodssold.........................................
Plus: Increasein inventory............................
Decreasein accountspayable...............
Cashpaymentsto suppliers.............................
(b) Computationof cashpaymentsfor
operatingexpenses
Operatingexpenses........................................
Deduct: Decreasein prepaidexpenses...........
Increasein accruedexpenses
payable.......................................
expenses....................................................
$129,000
71,000
$ 58,000
$310,000
21,000
17,000
$348,000
$230,000
8,000
11,000
$211,000
23-25
Net income
activities:
Gainon sale of investment
[($200 $165)X 100]........................................
Decreasein accountsreceivable..........................
Incomefromequitymethodinvestment
($27,000X .30)................................................
Dividendsfromequitymethod
investment($2,000X .30)..............................
Net cashprovidedby operatingactivities....................
$145,000
$39,000
(3,500)
12,000
(8,100)
600
40,000
$185,000
Othercomments:
No. 1 is shown as a cash inflow from the issuance of treasury stock and cash outflow for
the purchaseof treasurystock,bothfinancingactivities.
No. 2 is shownas a cash inflowfrominvestingactivitiesof $20,000and the gain of $3,500is
deductedfromnet incomein theoperatingactivitiessection.
No. 3 is a noncashexpense(Bad Debt Expense)in the incomestatement. Bad debt expense
is not handled separately when using the indirect method. It is part of the change in net
accountsreceivable.
No. 4 is a significantnoncashinvestingand financingactivity.
No. 6 is an increase in the investment account related to net income which does not
increase cash flow. The net income amount must be deducted from net cash flow from
No. 7 (dividends received) is added to net income. Another alternative is
to net the Companyspro-rata shareof the dividendagainstthe incomefromequity method
investmentamountreportedin the cashflowsfromoperatingactivities.
No. 8 is not shownon a statementof cashflows.
23-26
(a)
(b)
(c)
(d)
(e)
Sales
Deduct: Increasein accountsreceivable,
net of write-offs
[$33,000 ($30,000 $3,800)]................................
Cashcollectedfromcustomers............................................
$538,800
Cost of goodssold.............................................................
Deduct: Decreasein inventory($47,000 $31,000)..............
Purchases.........................................................................
($25,000 $17,000)..............................................
Cashpaymentsto suppliers................................................
$250,000
16,000
234,000
Interestexpense.................................................................
Deduct: Decreasein unamortizedbonddiscount
($5,000 $4,500)..................................................
Cashpaid for interest..........................................................
$ 4,300
Incometax expense............................................................
Add: Decreasein incometaxespayable
($29,100 $21,000)...................................................
Deduct: Increasein deferredincometaxes
($5,300 $4,600)..................................................
Cashpaid for incometaxes.................................................
$ 20,400
8,100
Sellingexpenses................................................................
Deduct: Depreciation($3,000*X 1/3)..................................
Baddebtsexpense..............................................
Cashpaid for sellingexpenses............................................
$141,500
6,800
$532,000
8,000
$226,000
500
$ 3,800
700
$ 27,800
$1,000
5,000
6,000
$135,500
*($16,500 $13,500)
23-27
(a)
The solution can be determined through use of a T-account for property, plant, and
equipment.
Property,Plant& Equipment
12/31/11
Equipmentfromexchangeof B/P
Paymentsfor purchaseof PP&E
247,000
25,000
?
12/31/12
277,000
45,000 Equipmentsold
Payments = $277,000+ $45,000 $247,000 $25,000

= $50,000
GAAPstates that investingactivities include the acquisition and dispositionof longterm productiveassets. Accordingly, the purchaseof property, plant, and equipment
is an investing activity. Note that the acquisition of property, plant, and equipmentin
exchange for bonds payable would be disclosed as a noncash investing and
financingactivity.
(b)
The solution can be determined through use of a T-account for accumulated

depreciation.
AccumulatedDepreciation
167,000
38,000
Equipmentsold
12/31/11
Depreciationexpense
?
178,000
12/31/12
Accumulated depreciation on equipment sold = $167,000 + $38,000 $178,000 =

$27,000
Theentryto reflectthe sale of equipmentis:
Cash(proceedsfromsale of equipment)
($45,000+ $14,500 $27,000)
Property,Plant, and Equipment
Gainon Sale of Equipment
23-28
32,500
27,000
45,000
14,500
(given)
(given)
The proceeds from the sale of equipment of $32,500 are considered an investing
activity. Investing activities include the acquisition and disposition of long-term
productiveassets.
(c)
The cash dividends paid can be determined by analyzing T-accounts for Retained
Earningsand DividendsPayable.
Dividendsdeclared
Dividendsdeclared
Cashdividendspaid
RetainedEarnings
91,000
?
31,000
104,000
12/31/11
Net income
12/31/12
= $91,000+ $31,000 $104,000

= $18,000
DividendsPayable
5,000
18,000
?
8,000
12/31/11
Dividendsdeclared
12/31/12
Cashdividendspaid = $5,000+ $18,000 $8,000

=
$15,000
Financingactivitiesincludeall cash flowsinvolvingliabilities and stock-holders equity
otherthanoperatingitems.Paymentof cashdividendsis thusa financingactivity.
(d)
The redemptionof bondspayableamountis determinedby settingup a T-accountfor

BondsPayable.
Redemptionof B/P
BondsPayable
46,000
25,000
?
49,000
12/31/11
Issuanceof B/P for PP&E
12/31/12
The problem states that there was no amortization of bond premium or discount;
thus,the redemptionof bondspayableis the onlychangenot accountedfor.
23-29
Redemptionof bondspayable= $46,000+ $25,000 $49,000
= $22,000
Financing activities include all cash flows involving liabilities and stockholders
equity other than operating items. Therefore, redemption of bonds payable is
considereda financingactivity.
FAIRCHILDCOMPANY
(IndirectMethod)
Net income..........................................................................
Adjustmentsto reconcilenet incometo net cash
providedby operatingactivities:
Depreciationexpense($1,200 $1,170)............................
Gainon sale of investments............................................
Decreasein inventory.....................................................
Increasein accountspayable..........................................
Increasein receivables...................................................
Decreasein accruedliabilities.........................................
Net cashprovidedby operatingactivities................................
$ 810
$ 30
(80)
300
400
(450)
(50)
Saleof held-to-maturityinvestments
[($1,470 $1,300)+ $80].....................................................
Purchaseof plant assets[($1,900 $1,700) $70]....................
Net cashprovidedby investingactivities.................................
250
(130)
Cashflowsfromfinancingactivities
Issuanceof capital stock[($1,900 $1,700) $70]......................
Retirementof bondspayable...................................................
Paymentof cashdividends.....................................................
Net cashusedby financingactivities.......................................
130
(250)
(260)
23-30
150
960
120
(380)
Net increasein cash....................................................................
Cash,January1, 2012..................................................................
Cash,December31, 2012..............................................................
700
1,100
$1,800
Issuanceof commonstockfor plant assets...........................
70
FAIRCHILDCOMPANY
(DirectMethod)
Cashcollectionsfromcustomers........................................
Cashpaid for merchandise...........................................
Cashpaid for selling/administrative
expenses................................................................
Cashpaid for incometaxes..........................................
Net cashprovidedby operatingactivities............................
Saleof held-to-maturityinvestments
[($1,470 $1,300)+ $80].................................................
Purchaseof plant assets[($1,900 $1,700) $70].................
Net cashprovidedby investingactivities.............................
Issuanceof capital stock[($1,900 $1,700) $70].................
Retirementof bondspayable..............................................
Paymentof cashdividends................................................
Net cashusedby financingactivities..................................
$6,450*
$4,000**
950***
540
5,490
960
250
(130)
120
130
(250)
(260)
Net increasein cash....................................................................

Cash,January1, 2012..................................................................
Cash,December31, 2012..............................................................
(380)
700
1,100
$1,800
23-31
Issuanceof commonstockfor plant assets.........................
70
*$6,900 ($1,750 $1,300)

**$4,700 ($1,900 $1,600) ($1,200 $800)
***($930 $30) + ($250 $200)
ANDREWSINC.
Cashreceivedfromcustomers...................................
Cashpaid to suppliers..........................................
Cashpaid for operatingexpenses..........................
Cashpaid for interest...........................................
Cashpaid for incometaxes...................................
Saleof equipment
[$30,000 ($30,000X .7)] + $2,000.............................
Purchaseof equipment
[$154,000 ($130,000 $30,000)].............................
Purchaseof available-for-sale investments..................
Net cashusedby investingactivities..........................
Principalpaymenton short-termloan..........................
Principalpaymenton long-termloan...........................
Dividendpayments...................................................
Net cashusedby financingactivities..........................
Net decreasein cash............................................................
Cash,January1, 2012..........................................................
Cash,December31, 2012.....................................................
23-32
$325,150a
$151,000b
82,000c
11,400c
8,750d
253,150a
72,000a
11,000
(54,000)
(17,000)
(60,000)
(2,000)
(7,000)
(6,000)
(15,000)
(3,000)
9,000
$ 6,000
a
Sales ...............................................................................
Increasein accountsreceivable..........................................
Cashreceivedfromcustomers..............................................
$338,150
(13,000)
$325,150
Cost of goodssold.............................................................
Increasein accountspayable.............................................
Decreasein inventories.....................................................
Cashpaid to suppliers.........................................................
$175,000
(4,000)
(20,000)
$151,000
Operatingexpenses............................................................
+ Increasein prepaidrent.....................................................
Depreciationexpense
$35,000 [$25,000 ($30,000X .70)]................................
Amortizationof copyright...................................................
Increasein salariesand wagespayable...............................
Cashpaid for operatingexpenses.........................................
$120,000
1,000
$ 6,750
2,000
$ 8,750
Incometax expense............................................................
+ Decreasein incometaxespayable......................................
Cashpaid for incometaxes...................................................
(31,000)
(4,000)
(4,000)
$ 82,000
23-33
ANDREWSINC.
Net income..................................................................
Adjustmentsto reconcilenet incometo net
cashprovidedby operatingactivities:
Depreciationexpense.............................................
Amortizationof copyright.......................................
Gainon sale of equipment......................................
Decreasein inventories..........................................
Increasein salariesandwagespayable....................
Increasein accountspayable..................................
Increasein prepaidrent..........................................
Increasein accountsreceivable..............................
Decreasein incometaxespayable...........................
Net cashprovidedby operatingactivities........................
Saleof equipment[($30,000X 30%)+ $2,000]...................
[$154,000 ($130,000 $30,000)]................................
Purchaseof available-for-sale investments......................
Net cashusedby investingactivities..............................
Principalpaymenton short-termloan.............................
Principalpaymenton long-termloan..............................
Dividendpayments.......................................................
Net cashusedby financingactivities..............................
$27,000
$31,000*
4,000
(2,000)
20,000
4,000
4,000
(1,000)
(13,000)
(2,000)
11,000
(54,000)
(17,000)
(60,000)
(2,000)
(7,000)
(6,000)
(15,000)
Net decreasein cash..............................................................

Cash,January1, 2012............................................................
Cash,December31, 2012........................................................
Supplementaldisclosuresof cashflowinformation:
Cashpaid duringthe year for:
Interest
Incometaxes
45,000
72,000
(3,000)
9,000
$ 6,000
$11,400
$ 8,750**
*$35,000 [$25,000 ($30,000X 70%)]
23-34
**$6,750+ ($6,000 $4,000)
23-35
MORGANSTERNCOMPANY
Net income...............................................................
Depreciationexpense............................................
Losson sale of investments...................................
Losson sale of plant assets
[($60,000X .20) $8,000]....................................
Increasein currentassets
otherthancash..................................................
Increasein currentliabilities..................................
Saleof plant assets....................................................
Saleof held-to-maturityinvestments............................
Purchaseof plant assets............................................
Net cashusedby investingactivities...........................
Issuanceof bondspayable.........................................
Paymentof dividends.................................................
Net cashprovidedby financingactivities......................
Net increasein cash............................................................
Cashbalance,January1, 2012..............................................
Cashbalance,December31, 2012.........................................
*Net income$59,000 $9,000 $4,000= $46,000
**Supportingcomputation
(purchaseof plant assets)
Plant assets,December31, 2011..................................
Less: Plant assetssold..............................................
Plant assets,December31, 2012..................................
Plant assetspurchasedduring2012.............................
23-36
$ 46,000*
$ 28,000
9,000
4,000
(27,000)
18,000
32,000
78,000
8,000
34,000
(180,000)**
(138,000)
75,000
(10,000)
65,000
5,000
10,000
$ 15,000
$215,000
(60,000)
155,000
335,000
$180,000
(a)
Computationof net cashprovidedby operatingactivities:

Net income($8,000+ $9,000) $5,000..............................
Depreciationexpense...........................................
Losson sale of equipment
($6,000 $3,000)...............................................
Increasein accountsreceivable
($45,000 $55,000)............................................
Increasein inventory
($45,000 $65,000)............................................
Decreasein prepaidexpenses
($25,000 $15,000)...........................................
Increasein accountspayable
($65,000 $52,000)............................................
Decreasein accruedexpenses
($15,000 $18,000)............................................
Net cashprovidedby operatingactivities.........................
$12,000
$17,000*
3,000
(10,000)
(20,000)
10,000
13,000
(3,000)
10,000
$22,000
*$18,000 [$8,000 ($13,000 $6,000)]

(b)
Computationof net cashprovided(used)by investingactivities:

Saleof equipment..........................................................
[$90,000 ($75,000 $13,000)].....................................
Net cashusedby investingactivities...............................
$ 3,000
(28,000)
$(25,000)
(c) Computationof net cashprovided(used)by financingactivities:

Cashdividendspaid......................................................
Paymentof notespayable..............................................
Issuanceof bondspayable.............................................
Net cashusedby financingactivities...............................
$ (9,000)
(23,000)
30,000
$ (2,000)
23-37
(a)
OCHOAINC.
Net income...................................................................
Depreciationexpense..............................................
Gainon sale of investment.......................................
Net cashprovidedby operatingactivities.........................
Purchaseof land...........................................................
Saleof available-for-sale investments..............................
Net cashprovidedby investingactivities..........................
Paymentof dividends.....................................................
Retirementof bondspayable..........................................
Issuanceof capital stock................................................
Net cashusedby financingactivities...............................
Net increasein cash................................................................
Cash,January1, 2012..............................................................
Cash,December31, 2012.........................................................
Issuanceof bondsfor land.............................................
23-38
$30,250
$13,500
(2,000)
11,500
41,750
(11,000)
12,875
1,875
(9,375)
(20,000)
10,000
(19,375)
24,250
8,500
$32,750
$22,500
(b)
OCHOAINC.
BalanceSheet
December31, 2012
Assets
Cash
Currentassets
otherthancash
Investments
Plant assets(net)
Land
$ 32,750
29,000
9,125a
54,000
73,500*
$198,375
Equities
Currentliabilities
Long-termnotes
payable
Bondspayable
Commonstock
Retainedearnings
$ 15,000
25,500
27,500**
85,000
45,375***
$198,375
$20,000 ($12,875 $2,000)

*$40,000+ $11,000+ $22,500
**$25,000 $20,000+ $22,500
***$24,500+ $30,250 $ 9,375
23-39
POPOVICHCOMPANY
Statementof CashFlows(partial)
Net income..................................................................
Depreciationexpense.............................................
Losson sale of equipment......................................
Purchaseof machinery.................................................
Saleof machinery
[($66,000 $25,200) $5,800].....................................
Extraordinaryrepairson machinery................................
Cost of machineryconstructed......................................
Net cashusedby investingactivities..............................
$ 50,000
$16,800
5,800
22,600
72,600
(62,000)
35,000
(21,000)
(48,000)
(96,000)
Paymentof cashdividends............................................
(15,000)
Decreasein cash....................................................................
Cash,January1, 2012..............................................................
Cash,December31, 2012.........................................................
(38,400)
xxx
$ xxx
RetainedEarnings...................................................................
FinancingCashDividends............................................
15,000
OperatingNetIncome............................................................
RetainedEarnings.........................................................
50,000
OperatingDepreciationExpense.............................................
AccumulatedDepreciationMachinery............................
16,800
23-40
15,000
50,000
16,800
Machinery..............................................................................
InvestingPurchaseof Machinery...................................
InvestingConstructionof Machinery..............................
110,000
AccumulatedDepreciationMachinery.....................................
InvestingExtraordinaryRepairsto Machinery.................
21,000
OperatingLosson Sale of Equipment.....................................

AccumulatedDepreciationMachinery.....................................
InvestingSaleof Machinery...................................................
Machinery.....................................................................
5,800
25,200
35,000
62,000
48,000
21,000
66,000
1.
2.
3.
4.
5.
BondsPayable..............................................................
CommonStock....................................................
(Noncashfinancingactivity)
300,000
OperatingNetincome..................................................
RetainedEarnings................................................
360,000
OperatingDepreciationExpense...................................
AccumulatedDepreciationBuilding......................
90,000
AccumulatedDepreciationOfficeEquipment..................
OfficeEquipment...........................................................
OperatingGainon Disposalof
Plant Assets.....................................................
InvestingPurchaseof Equipment.........................
30,000
5,000
RetainedEarnings.........................................................
DividendsPayable................................................
123,000
300,000
360,000
90,000
1,000
34,000
123,000
23-41
LOWENSTEINCORPORATION
Worksheetfor Preparationof Statementof CashFlows
2012
ReconcilingItems
Debit
Credit
(17)
$ 7,500
Balanceat
12/31/11
Debits
Cash
Short-term
investments
Accountsreceivable
Prepaidexpenses
Inventory
Land
Buildings
Equipment
Deliveryequipment
Patents
Total debits
Credits
Accountspayable
Short-termnotes
payable(trade)
Accruedpayables
Allowancefor doubtful
accounts
Accum.depr.bldg.
Accum.depr.equip.
Accum.depr.del.
equip.
Mortgagepayable
Bondspayable
Commonstock
Paid-in capitalin excess
Retainedearnings
Total credits
23-42
$ 24,000
19,000
45,000
2,500
57,000
50,000
78,500
46,000
39,000
(2)
$ 6,000
(4)
(5)
1,700
24,500
(10)
(11)
46,500
7,000
(12)
15,000
(3)
2,000
(6)
$10,000
$361,000
$ 16,000
Balanceat
12/31/12
$ 16,500
25,000
43,000
4,200
81,500
50,000
125,000
53,000
39,000
15,000
$452,200
$ 26,000
6,000 (7)
4,600 (8)
$ 2,000
1,600
4,000
3,000
2,000 (3)
23,000
15,500
200
1,800
30,000
19,000
20,500
53,400
62,500 (16)
102,000
4,000
51,500 (9)
$361,000
(13)
(13)
7,000
3,500
(13)
(14)
1,500
19,600
(15)
(15)
10,000 (1)
38,000
6,000
31,900
12,500
22,000
73,000
50,000
140,000
10,000
73,400
$452,200
Statementof CashFlowsEffects
Operatingactivities
Net income
Depreciation
Dec. in accounts
receivable(net)
Inc. in prepaidexpenses
Inc. in inventory
Inc. in accountspayable
Dec. in notespayable
Dec. in accruedpayables
(1)
(13)
31,900
12,000
(3)
1,800
(6)
(14)
(15)
(17)
1,700
24,500
(7)
(8)
2,000
1,600
(2)
(10)
(11)
(12)
6,000
46,500
7,000
15,000
(9)
10,000
(16)
12,500
253,800
10,000
Investingactivities
Purchaseof available-for-sale investments
Purchaseof building
Purchaseof patents
Financingactivities
Paymentof cashdividends
Issuanceof mortgagepayable
Sale of commonstock
Retirementof bonds
Totals
Decreasein cash
Totals
(4)
(5)
19,600
44,000
246,300
7,500
$253,800
$253,800
23-43
TIMEANDPURPOSEOF PROBLEMS
Problem23-1 (Time 4045 minutes)
Purposeto develop an understanding of the procedures involved in the preparation of a statement of
cash flows. The student is required to prepare the statement using the indirect method.
cash flows, including a schedule of noncash investing and financing activities. The student is required
to prepare the statement using the indirect method, and consider the proper treatment of an extraordinary item.
cash flows. The student is required to prepare the statement using the direct method.
cash flows. The student is required to prepare the statement using the direct method, including a
reconciliation schedule.
Purposeto develop an understanding of the procedures involved in the preparation of a statement
of cash flows, including the treatment accorded unusual and extraordinary items. The student is
required to prepare the statement using the indirect method, and include any supporting schedules or
computations.
cash flows. The student is required to prepare the statement using the indirect method. The student
also must calculate the net cash flow from operating activities using the direct method.
PurposeUsing comparative financial statement data, the student is required to prepare the statement
of cash flows, using the direct method. The student must also prepare the operating activities section of
the statement of cash flows using the indirect method.
Purposeto develop an understanding of both the direct and indirect method. The student is first asked
to compute net cash provided by operating activities under the direct method. In addition a statement of
cash flows using the indirect method must be computed.
Purposeto develop an understanding of the indirect method. In the second part, the student is asked
to determine how operating, investing and financing sections of the statement of cash flows will change
under various situations.
23-44
SOLUTIONSTO PROBLEMS
PROBLEM23-1
SULLIVANCORP.
Net income.........................................................
activities:
Depreciation................................................
Gainon sale of equipment.............................
Equityin earningsof MyersCo.......................
Decreasein accountsreceivable....................
Increasein inventories..................................
Increasein accountspayable.........................
Decreasein incometaxespayable..................
activities.........................................................
Cashflowsfrominvestingactivities:
Proceedsfromsale of equipment..........................
Loanto TLCCo...................................................
Principalpaymentof loanreceivable.....................
Net cashusedby investing
activities...........................................
Cashflowsfromfinancingactivities:
Dividendspaid....................................................
Net cashusedby financing
activities...........................................
Net increasein cash.....................................................
Cash,January1, 2012...................................................
Cash,December31, 2012..............................................
$370,000
$147,000 (a)
(2,000) (b)
(35,000) (c)
40,000
(135,000)
60,000
(20,000)
55,000
425,000
40,000
(300,000)
50,000
(210,000)
(100,000)
(100,000)
115,000
700,000
$815,000
23-45
PROBLEM23-1 (Continued)
Scheduleat bottomof statementof cashflows:
Issuanceof leaseobligationfor capital lease.................
$400,000
Explanationof Amounts
(a) Depreciation
Net increasein accumulated
depreciationfor the year ended
December31, 2012.........................................
Accumulateddepreciationon equipmentsold:
Cost...................................................................
Carryingvalue.....................................................
Depreciationfor 2012..................................................
$125,000
$60,000
38,000
22,000
$147,000
(b) Gainon sale of equipment

Proceeds.............................................................
Carryingvalue.....................................................
Gain.............................................................
$ 40,000
(38,000)
$ 2,000
(c) Equityin earningsof MyersCo.

Myerssnet incomefor 2012..................................
Sullivansownership............................................
Undistributedearningsof MyersCo.................
$140,000
X 25%
$ 35,000
23-46
PROBLEM23-2
HINCKLEYCORPORATION
Net income...........................................................
activities:
Losson sale of equipment...............................
Gainfromflooddamage..................................
Depreciationexpense.....................................
Patentamortization.........................................
Gainon sale of investments.............................
Increasein accountsreceivable(net)................
Increasein inventory......................................
Increasein accountspayable...........................
Net cashprovidedby operatingactivities.................
Saleof investments...............................................
Saleof equipment.................................................
Purchaseof equipment..........................................
Proceedsfromflooddamageto building..................
Net cashprovidedby investingactivities.................
Paymentof dividends............................................
Paymentof short-termnote payable........................
Net cashusedby financingactivities.......................
Increasein cash............................................................
Cash,January1, 2012....................................................
Cash,December31, 2012...............................................
$14,750(a)
$ 4,100 (b)
(8,250)*
1,900 (c)
1,250
(1,700)
(3,750)**
(3,000)
2,000
(7,450)
7,300
4,700
2,500
(20,000)(d)
32,000
19,200
(5,000)
(1,000)
(6,000)
20,500
13,000
$33,500
*($30,000+ $2,000) ($29,750 $6,000)

**($12,250 $3,000) ($10,000 $4,500)
23-47
Interest
Incometaxes:
$2,000
$6,500
Retirednotespayableby issuingcommonstock
Purchasedequipmentby issuingnotespayable
$10,000
16,000
$26,000
SupportingComputations:
(a) Endingretainedearnings..............................................
Beginningretainedearnings..........................................
Net income..................................................................
$20,750
(6,000)
$14,750
(b) Cost...........................................................................
$11,000
Accumulateddepreciation(40%X $11,000).....................
Bookvalue..................................................................
Proceedsfromsale......................................................
Losson sale................................................................
(4,400)
$ 6,600
(2,500)
$ 4,100
(c) Accumulateddepreciationon equipmentsold.................

Decreasein accumulateddepreciation...........................
Depreciationexpense...................................................
$ 4,400
(2,500)
$ 1,900
(d) Beginningequipmentbalance.......................................
Cost of equipmentsold.................................................
Remainingbalance.......................................................
Purchaseof equipmentwith note...................................
Adjustedbalance.........................................................
Endingequipmentbalance............................................
Purchasedwith cash....................................................
$20,000
(11,000)
9,000
16,000
25,000
(45,000)
$20,000
23-48
PROBLEM23-3
MORTONSONCOMPANY
($000Omitted)
Cashreceiptsfromcustomers.................................
Cashpayments:
Paymentsfor merchandise.................................
$1,270 (b)
Salariesandbenefits.........................................
725
Heat, light, and power........................................
75
Propertytaxes..................................................
19
Interest............................................................
30
Miscellaneous..................................................
10
Incometaxes....................................................
808 (c)
Net cashprovidedby operatingactivities.................
Saleof available-for-sale investments......................
Purchaseof buildingsand equipment......................
Purchaseof land...................................................
Net cashusedby investingactivities.......................
Sales
Deductendingaccountsreceivable.........................
Addbeginningaccountsreceivable.........................
Cashreceipts(collectionsfrom
customers).................................................
2,937
583
40
(310)
(80)
(350)
Increasein cash.............................................................
Cash,January1, 2012.....................................................
Cash,December31, 2012.................................................
(a)
$3,520(a)
233
100
$ 333
$3,800
(780)
3,020
500
$3,520
23-49
(b) Cost of goodssold............................................
Addendinginventory.........................................
Goodsavailablefor sale..............................
Deductbeginninginventory................................
Purchases..................................................
Deductendingaccountspayable.........................
Addbeginningaccountspayable.........................
Cashpurchases(paymentsfor
merchandise)..........................................
(c) Incometaxes....................................................
Deductendingincometaxespayable...................
Addbeginningincometaxespayable...................
Incometaxespaid....................................
23-50
$1,200
720
1,920
(560)
1,360
(420)
940
330
$1,270
$818
(40)
778
30
$ 808
PROBLEM23-4
MICHAELSCOMPANY
(DirectMethod)
Cashreceipts:
Cashreceivedfromcustomers................................
Dividendsreceived.................................................
Cashpayments:
Cashpaid to suppliers.............................................
Cashpaid for operatingexpenses.............................
Taxespaid..............................................................
Interestpaid............................................................
Net cashprovidedby operatingactivities............................
Saleof short-terminvestments
($8,000+ $4,000)...................................................
Saleof land($175,000 $125,000)+ $8,000................
Purchaseof equipment...........................................
Net cashusedby investingactivities........................
Proceedsfromissuanceof commonstock................
Principalpaymenton long-termdebt........................
Dividendspaid.......................................................
Net cashusedby financingactivities........................
$1,152,450a
2,400
765,000b
226,350c
38,400d
57,300e
1,087,050
$ 67,800
12,000
58,000
(125,000)
(55,000)
27,500
(10,000)
(24,300)
(6,800)
Net increasein cash........................................................

Cash,January1, 2012......................................................
Cash,December31, 2012.................................................
6,000
4,000
$ 10,000
SalesRevenue...............................................................
Increasein AccountsReceivable....................................
Cashreceivedfromcustomers.........................................
$1,160,000
(7,550)
$1,152,450
$ 748,000
7,000
10,000
$ 765,000
Cost of GoodsSold........................................................
+ Increasein Inventory....................................................
+ Decreasein AccountsPayable.......................................
Cashpaid to suppliers.....................................................
1,154,850
23-51
c
OperatingExpenses....................................................
Depreciation/Amortizationexpense..............................
Decreasein prepaidrent.............................................
+ Increasein prepaidinsurance.....................................
+ Increasein officesupplies..........................................
Increasein wagespayable..........................................
Cashpaid for operatingexpenses...........................
$276,400
(40,500)
(9,000)
1,200
250
(2,000)
$226,350
Incometax expense.....................................................
Increasein incometaxespayable................................
Taxespaid...........................................................
$ 39,400
(1,000)
$ 38,400
$ 51,750
5,550
$ 57,300
InterestExpense.........................................................
+ Decreasein bondpremium.........................................
Interestpaid.........................................................
Reconciliationof Net Incometo Net Cash
Providedby OperatingActivities:
Net income
Depreciation/amortizationexpense.........................
Decreasein prepaidrent........................................
Increasein incometaxespayable...........................
Increasein salariesand wagespayable...................
Increasein accountsreceivable..............................
Increasein inventory.............................................
Increasein prepaidinsurance.................................
Increasein officesupplies.....................................
Decreasein accountspayable................................
Gainon sale of land..............................................
Gainon sale of short-terminvestments...................
Amortizationof bondpremium...............................
Total adjustments...........................................
23-52
$58,850
$40,500
9,000
1,000
2,000
(7,550)
(7,000)
(1,200)
(250)
(10,000)
(8,000)
(4,000)
(5,550)
8,950
$67,800
PROBLEM23-5
ALEXANDERCORPORATION
(IndirectMethod)
Net income.............................................................
to net cashusedby operating
activities:
Losson sale of machinery.................................
Gainon retirementof bonds...............................
Depreciationof machinery.................................
Depreciationof building....................................
Amortizationof patents.....................................
Amortizationof copyright..................................
Amortizationof bonddiscount...........................
Amortizationof bondpremium...........................
Equityin earningsof subsidiary.........................
Increasein accountsreceivable
(net)..............................................................
Increasein inventory.........................................
Increasein prepaidexpenses.............................
Increasein taxespayable...................................
Increasein accountspayable.............................
Net cashusedby operatingactivities.........................
Saleof machinery....................................................
Investmentin subsidiary..........................................
Additionto buildings...............................................
Extraordinaryrepairsto building...............................
Purchaseof machinery............................................
Purchaseof patent..................................................
Increasein cashsurrendervalueof life
insurance.............................................................
Net cashusedby investingactivities.........................
$115,000*
2,200 (4)
(1,425) (5)
48,200 (4)
31,200 (8)
10,000 (3)
10,000
87 (6)
(75) (5)
(10,500) (7)
(121,124)
(131,700)
(4,000)
10,650
19,280
(137,207)
(22,207)
9,000 (4)
(100,000) (7)
(127,300)
(7,200) (8)
(33,400) (4)
(15,000) (3)
(504)
(274,404)
23-53
Redemptionof bonds.............................................
Saleof bondslessexpenseof sale...........................
Saleof stock..........................................................
Net cashprovidedby financingactivities..................
(100,900)(5)
120,411 (6)
257,000
276,511
Decreasein cash...........................................................
Cash,January1, 2012....................................................
Cash,December31, 2012................................................
*Net incomeper retainedearningsstatement
($25,000+ $90,000).....................................................
(20,100)
298,000
$277,900
$115,000
Interest.................................................................
Incometaxes.........................................................
Reductionin statedvalueof stockto
eliminatedeficit...................................................
$10,500
$34,000
$425,000
Commentson NumberedItems
(1)
Write-off of deficit has no effect on cash. Analysis of the capital stock accountshows
the following:
Balance12/31/11....................................................
$1,453,200
Restatementof statedvalueof stock........................
(425,000)
Balance4/1/12.......................................................
1,028,200
(2) Saleof 29,600shares11/1/12for $257,000

with statedvalueof $5 per share..............................
Balance12/31/12....................................................
23-54
148,000
$1,176,200
(3) A patentwaspurchasedfor $15,000cash.Theaccountactivityis analyzedas follows:
Balance12/31/11..........................................................
$64,000
Purchase....................................................................
15,000
Total..........................................................................
79,000
Balance12/31/12..........................................................
Amortizationchargedagainstincomewhich
did not usecash........................................................
(69,000)
$10,000
(4) Analysisof the Machineryaccountshowsthe following:

Balance12/31/11..........................................................
Dispositionof machinery..............................................
Total.................................................................
Balance12/31/12..........................................................
Additionsrequiringcash.....................................
$190,000
(16,400)
173,600
(207,000)
$ (33,400)
Losson sale:
($16,400 $5,200) $9,000................................
$2,200
Cashreceivedfromdisposition............................
$9,000
Analysisof accumulateddepreciation
machinery:
Balance12/31/11of Accumulated
Depreciation.............................................
Amounton assetsold..................................
Balance......................................................
Balance12/31/12..........................................
Depreciationchargedagainstincome
whichdid not use cash.............................
$130,000
(5,200)
124,800
(173,000)
$ (48,200)
23-55
(5) Fundsto redeembonds($100,000X 1.009)......................
$100,900
Facevalueof bonds.....................................................
Unamortizedpremium12/31/11......................................
Amortizationto 3/31/12not requiringcash
($6,000 20) X 1/4......................................................
Balanceat date of redemption.................................
Bookvalueof bonds..............................................
Gainon redemption
($102,325 $100,900)..........................................
$100,000
(6) Faceamountof bondsissued........................................

Discounton $125,000of bondssold
($125,000X .03)........................................................
Expenseof issuance....................................................
Total.................................................................
Proceedsof issue........................................................
Amortizationfor ninemonths,which
did not requirecash.........................................
Changein discountaccount.................................
$2,400
75
2,325
$102,325
$ (1,425)
$125,000
$3,750
839
(4,589)
$120,411
(87)*
$4,502
*($4,589/477months(a)) X 9 months= $87

(a) (40 yearsX 12 months) 3
(7) Purchaseof stockrequiringcash...................................
70%of subsidiarysincomefor year
($15,000),whichdid not provide
cashbut wascreditedto income.................................
Balance12/31/12.................................................
(8) Analysisof accumulateddepreciation
Building
Balanceof accumulateddepreciation12/31/11.................
Chargefor majorrepairswhichusedcash......................
Balance12/31/12..........................................................
Depreciationchargedagainstincomewhich
did not requirecash...................................................
23-56
$100,000
10,500
$110,500
$400,000
(7,200)
392,800
(424,000)
($ 31,200)
Commentson OtherItems
(not required)
Increasein cashsurrendervalueof insurancerequiredcash........................
Increasein Buildingsrequiredcash...........................................................
Decreasein Copyrightswasa noncashchargeagainstincome.....................
Dividendsdeclareddid not requirecash....................................................
$
504
127,300
10,000
70,000
Accruedintereston retiredbondsand issuancedoesnot

affect the statementof cashflows.Theseitemsare
alreadyrecordedin income.
23-57
PROBLEM23-6
(a)
Net CashFlowfromOperatingActivities
Cashreceivedfromcustomers.......................................
Cashpayments:
Cashpaymentsto suppliers.....................................
Cashpaymentsfor operatingexpenses.....................
$524,8501
$375,7502
105,6753
481,425
$ 43,425
$540,000 $10,500 $4,650*= $524,850
$380,000+ $6,000 $10,250= $375,750
$120,450 $8,625 $750** $5,400= $105,675
*Writeoffof accountsreceivable.
($1,500+ $5,400 $2,250)
**Increasein accruedpayables
23-58
(b)
MARCUSINC.
Net income.........................................................
activities:
Depreciationexpense...................................
Gainon sale of investments...........................
Losson sale of machinery.............................
Increasein accountsreceivable(net)..............
Increasein inventory....................................
Increasein accruedpayables.........................
Net cashprovidedby operatingactivities...............
Purchaseof investments
$22,250 ($38,500 $25,000).............................
Purchaseof machinery
$30,000 ($18,750 $3,750)...............................
Additionto buildings............................................
Saleof investments..............................................
Saleof machinery................................................
Net cashusedby investingactivities......................
Reductionin long-termnote payable......................
Cashdividendspaid.............................................
Net cashusedby financingactivities......................
Net increasein cash....................................................
Cash,January1, 2012.................................................
Cash,December31, 2012.............................................
$42,500
$ 8,625
(3,750)
800
(9,750)*
(6,000)
10,250
750
925
43,425
(8,750)
(15,000)
(11,250)
28,750
2,200
(4,050)
(10,000)
(21,125)
(31,125)
8,250
33,750
$42,000
*($70,500 $2,250) ($60,000 $1,500)
23-59
PROBLEM23-7
(a) Both the direct method and the indirect method for reporting cash flows from
operating activities are acceptable in preparing a statement of cashflowsaccordingto
GAAP; however, the FASB encourages the use of the direct method. Under the direct
method, the statement of cash flows reports the major classes of cash receipts and
cash disbursements, and discloses more information; this may be the statements
principal advantage. Under the indirect method, net income on the accrual basis is
adjusted to the cash basis by adding or deducting noncash items included in net
income, thereby providing a useful link between the statement of cash flows and the
incomestatementand balancesheet.
(b) The Statementof Cash Flows for ChapmanCompany,for the year ended May 31, 2012,
usingthe direct method,is presentedbelow.
CHAPMANCOMPANY
For the Year EndedMay31, 2012
Cashreceivedfromcustomers..................................
Cashpayments:
To suppliers..................................................
To employees................................................
For otherexpenses........................................
For interest...................................................
For incometaxes...........................................
Net cashprovidedby operatingactivities...................
$1,238,250
$684,000
276,850
10,150
73,000
43,000
1,087,000
151,250
Purchaseof plant assets..........................................
Cashreceivedfromcommonstockissue...................
Cashpaid:
For dividends................................................
To retire bondspayable..................................
Net cashusedby financingactivities.........................
Net increasein cash.........................................................
Cash,June1, 2011...........................................................
Cash,May31, 2012...........................................................
23-60
(28,000)
$ 20,000
(105,000)
(30,000)
(115,000)
8,250
20,000
28,250
Note1:
Issuanceof commonstockfor plant assets$70,000.
SupportingCalculations:
Cashcollectedfromcustomers
Sales
Less: Increasein accountsreceivable.....................
Cashcollectedfromcustomers....................
$1,255,250
17,000
$1,238,250
Cashpaid to suppliers
Cost of merchandisesold......................................
Less: Decreasein merchandiseinventory................
Increasein accountspayable.......................
Cashpaid to suppliers................................
$ 722,000
30,000
8,000
$ 684,000
Cashpaid to employees
Salaryexpense.....................................................
Add: Decreasein salariesand
wagespayable.............................................
Cashpaid to employees...............................
Cashpaid for otherexpenses
Otherexpenses....................................................
Add: Increasein prepaidexpenses........................
Cashpaid for otherexpenses........................
Cashpaid for interest
Interestexpense...................................................
Less: Increasein interestpayable...........................
Cashpaid for interest..................................
Cashpaid for incometaxes:
Incometax expense(given)....................................
$ 252,100
24,750
$ 276,850
$
$
8,150
2,000
10,150
75,000
2,000
73,000
43,000
23-61
(c) The calculation of the cash flow from operating activities for ChapmanCompany, for
the year endedMay31, 2012,usingthe indirectmethod,is presentedbelow.
CHAPMANCOMPANY
For the Year EndedMay31, 2012
Net income............................................................
Depreciationexpense....................................
Decreasein inventory....................................
Increasein interestpayable...........................
Increasein accountsreceivable......................
Increasein prepaidexpenses.........................
Decreasein salariesand
wagespayable..........................................
23-62
$130,000
$25,000
30,000
8,000
2,000
(17,000)
(2,000)
(24,750)
21,250
$151,250
PROBLEM23-8
(a)
Net CashProvidedby OperatingActivities

Cashreceiptsfromcustomers
Cashpayments:
Cashpaymentsto suppliers
Cashpaymentsfor operatingexpenses
Cashpaymentsfor incometaxes
Net cashprovidedby operatingactivities
$925,000(1)
$608,000(2)
226,000(3)
43,000(4)
(1)
(Sales)less(Increasein AccountsReceivables)
$950,000 $25,000= $925,000
(2)
(Costof GoodsSold) plus (Increasein Inventory)less

(Increasein AccountsPayable)
$600,000+ $14,000 $6,000= $608,000
(3)
(OperatingExpenses)less (DepreciationExpense)less
(BadDebtExpense)
$250,000 $22,000* $2,000= $226,000
(4)
(IncomeTaxes)less(Increasein IncomeTaxesPayable)
$45,000 $2,000= $43,000
*$21,000 [$14,000 ($10,000X .60)]

$37,000 $28,000
877,000
$ 48,000
= $13,000 Equipmentdepreciation
=
9,000 Buildingdepreciation
$22,000
23-63
(b)
SHARPECOMPANY
Net income..............................................................
activities:
Gainon sale of investments................................
Losson sale of equipment..................................
Increasein accountsreceivable(net)...................
Increasein accountspayable..............................
Increasein incometaxespayable........................
Purchaseof investments
[$55,000 ($85,000 $35,000)]...............................
[$70,000 ($48,000 $10,000)]...............................
Saleof investments($35,000+ $15,000)......................
Saleof equipment
[$10,000 ($10,000X 60%)] $3,000........................
Net cashprovidedby investingactivities....................
Paymentof long-termnotespayable...........................
Cashdividendspaid
[($95,000+ $67,000) $92,000]...............................
Issuanceof commonstock........................................
Net cashusedby financingactivities..........................
$67,000
$22,000
(15,000)
3,000
(23,000)
(14,000)
6,000
2,000
(19,000)
48,000
(5,000)
(32,000)
50,000
1,000
14,000
(8,000)
(70,000)
35,000*
(43,000)
Net increasein cash..........................................................

Cash,January1, 2012........................................................
Cash,December31, 2012...................................................
19,000
51,000
$70,000
Issuanceof commonstockfor land............................
$15,000
*$310,000 $260,000= $50,000;$50,000 ($40,000 $25,000)= $35,000

23-64
PROBLEM23-9
(a)
DINGELCORPORATION
Net income...............................................................
Losson sale of equipment..................................
Gainfromflooddamage.....................................
Copyrightamortization.......................................
Gainon sale of investment..................................
Increasein accountsreceivable(net)...................
Increasein accountspayable..............................
Netcashflowprovidedbyoperatingactivities..................
Sale of investments...................................................
Sale of equipment......................................................
Purchaseof equipment(cash).....................................
Proceedsfromflooddamageto building......................
Net cashprovidedby investingactivities......................
$15,750(a)
$ 5,200(b)
(13,250)*
800(c)
250
(1,500)
(3,750)
(2,000)
1,000
(13,250)
2,500
4,500
2,500
(15,000)
37,000
29,000
(5,000)
Paymentof short-termnotespayable...........................
(1,000)
Net cashusedby financingactivities...........................
(6,000)
Increasein cash.............................................................
Cash,January1, 2012.....................................................
Cash,December31, 2012................................................
25,500
13,000
$38,500
Interest..............................................
$2,000
23-65
Incometaxes......................................
$5,000
*[($33,000+ $4,000) ($29,750 $6,000)]
23-66
Retirednotepayableby issuingcommonstock.......................
Purchasedequipmentby issuingnotespayable.......................
$ 5,000
16,000
$21,000
(a)
Endingretainedearnings.......................................................
Beginningretainedearnings..................................................
Net income..................................................................
(b) Cost ........................................................................ $11,000

Accumulateddepreciation(30%X $11,000)..............................
Bookvalue..........................................................................
Proceedsfromsale...............................................................
Losson sale................................................................
(c)
(b) (1)
Accumulateddepreciationon equipmentsold..........................
Decreasein accumulateddepreciation....................................
Depreciationexpense....................................................
(3,300)
$ 7,700
(2,500)
$ 5,200
$ 3,300
(2,500)
$ 800
For a severelyfinanciallytroubledfirm:
Operating:
Investing:
Financing:
(2)
$20,750
(5,000)
$15,750
Probablya small cashinflowor a cashoutflow.

Probably a cash inflow as assets are sold to provide needed
cash.
Probablya cashinflowfromdebt financing(borrow-ing funds)as
a sourceof cashat highinterestcost.
For a recentlyformedfirmwhichis experiencingrapidgrowth:

Operating:
Investing:
Financing:
Probablya cashinflow.
Probablya largecashoutflowas the firmexpands.
Probablya largecashinflowto financeexpansion.
23-67
TIMEANDPURPOSEOF CONCEPTSFORANALYSIS
CA 23-1 (Time 3035 minutes)
Purposeto develop an understanding of the proper composition and presentation of the statement of
cash flows. The student is required to analyze a statement of sources and application of cash and
indicate the proper treatment of various transactions.
Purposeto illustrate the proper form of the statement of cash flows. The student is required to prepare
the statement using the indirect method, and to discuss the rationale behind the statement.
Purposeto help a student identify whether a transaction creates a cash inflow or a cash outflow. The
student is required to indicate whether a cash inflow or a cash outflow results from the transaction.
The student must also discuss the proper disclosure of the transaction.
Purposeto help the student identify the sections of the statement of cash flows. The student is
required to indicate whether a transaction belongs in the investing, financing, or operating section of the
statement.
Purposeto identify and explain reasons and purposes for preparing a statement of cash flows, to
identify the categories of activities reported in the statement of cash flows, to identify and describe the
two methods of reporting cash flows from operations, and to describe the presentation of noncash
transactions.
Purposeprovides the student the opportunity to examine the effects of a securitization on the statement
of cash flows, including ethical dimensions.
23-68
SOLUTIONSTO CONCEPTSFORANALYSIS
CA 23-1
(a) The main purpose of the statement of cash flows is to show the change in cash from one period to
the next. Another objective of a statement of the type shown is to summarize the financing and
investing activities of the entity, including the extent to which the enterprise has generated cash or
near cash assets from operations during the period. Another objective is to complete the
disclosure of changes in financial position during the period. The information shown in such a
statement is useful to a variety of users of financial statements in making economic decisions
regarding the enterprise.
(b) The following are weaknesses in form and format of Maloney Corporations Statement of Sources
and Application of Cash:
1. The title of the statement should be Statement of Cash Flows.
2. The statement should add back to (or deduct from) net income certain items that did not use
(or provide) cash during the period. The resulting total should be described as net cash provided
by operating activities. Cash flows from extraordinary items, if any, should be presented with
appropriate modifications in terminology as investing or financing activities.
The only apparent adjustments in this situation are the amounts to be added back to net
income for the depreciation and depletion expense, for any wage or salary expense related to
the employee stock option plans, and for changes in current assets and liabilities.
3. The format used should separate the cash flows into investing, financing, and operating
activities. Noncash investing and financing activities, if significant, should be shown in a separate
schedule or note.
4. Individual items should not be grouped together, as was the case for the $14,000 item.
(c) 1. (i) The $25,000 option plan wage and salary expense should be included in the statement as
an amount added back to net income, an expense not requiring the outlay of cash during
the period.
(ii) Since the statement balances and no reference is made to the $25,000 payroll expense, it
appears the expense was not recorded or that there is an offsetting error elsewhere in the
statement.
2. The expenditures for plant-asset acquisitions should not be reported net of the proceeds from
plant-asset retirements. Both the outlay for acquisitions and the proceeds from retirements
should be reported as investing activities. The details provide useful information about changes
in financial position during the period.
3. Stock dividends or stock splits need not be disclosed in the statement because these transactions do not significantly affect financial position.
4. The issuance of the 16,000 shares of common stock in exchange for the preferred stock
should be shown as a noncash financing activity. Since these transactions significantly change
the corporations capital structure, they should be disclosed.
5. The presentation of the combined total of depreciation and depletion is probably acceptable.
The general rule is that related items should be shown separately in proximity when the result
contributes information useful to the user of the statement, but immaterial items may be
combined. In this situation, it is likely that no additional relevant information would be added by
showing depletion as a separate item. The total should be added back to net income in the
computation of the net cash flow from operating activities.
23-69
CA 23-1 (Continued)
6. The details of changes in long-term debt should be shown separately. Payments should not be
netted against increases in long-term borrowings. The long-term borrowing of $620,000 should
be shown as cash provided and the retirement of $441,000 of debt should be shown as use of
cash from financing activities.
CA 23-2
(a) From the information given, it appears that from an operating standpoint Pacific Clothing Store did
not have a superb first year, having suffered an $11,000 net loss. Lenny is correct; the statement of
cash flows is not prepared in correct form. The sources and uses format is not an acceptable form.
The correct form classifies cash flows from three activitiesoperating, investing, and financing;
and it also presents significant noncash investing and financing activities in a separate schedule.
Lenny is wrong, however, about the actual increase in cash$109,000 is the correct increase
in cash.
(b)
PACIFICCLOTHINGSTORE
For the Year EndedJanuary31, 2012
Net loss...................................................................
activities:
Gainfromsale of investment...............................
Saleof investment....................................................
Purchaseof fixturesandequipment...........................
Purchaseof investment.............................................
Net cashusedby investingactivities..........................
Saleof capital stock.................................................
Purchaseof treasurystock........................................
Net cashprovidedby financingactivities....................
Supplementaldisclosureof cashflowinformation:
Cashpaid for interest................................................
23-70
$ (11,000)*
$ 80,000
(25,000)
55,000
44,000
120,000
(330,000)
(95,000)
(305,000)
380,000
(10,000)
370,000
$109,000
$3,000
CA 23-2 (Continued)
Issuanceof notefor truck..............................................
*Computationof net income(loss)
Salesof merchandise....................................................
Interestrevenue............................................................
Gainon saleof investment($120,000 $95,000)..................
Total revenues......................................................
Merchandisepurchases.................................................
Operatingexpenses($170,000 $80,000).........................
Depreciation.................................................................
Interestexpense...........................................................
Total expenses.....................................................
Net loss.......................................................................
$ 30,000
$382,000
8,000
25,000
415,000
$253,000
90,000
80,000
3,000
(426,000)
$ (11,000)
CA 23-3
1.
The earnings are treated as an inflow of cash and should be reported as part of the net cash
provided by operating activities in the statement of cash flows. There should be $810,000 of
income before extraordinary items because extraordinary items should be separated from operating
activities.
2.
The $315,000 depreciation expense is neither an inflow nor an outflow of cash. Because
depreciation is an expense, it was deducted in the computation of net income. Accordingly, the
$315,000 must be added back to income before extraordinary items in the operating activities
section because it was deducted in determining earnings, but it was not a use of cash.
3.
The write-off of uncollectible accounts receivable against the allowance account has no effect on
cash because the net accounts receivable remain unchanged. An adjustment to income is only
necessary if the net receivable amount increases or decreases. Because the net receivable amount
is the same before and after the write-off, an adjustment to income would not be made.
The $51,000 of bad debt expense does not affect cash would be added back to income because it
affects the amount of net accounts receivable. The recording of bad debt expense reduces the net
receivable because the allowance account increases. Although bad debt expense is not usually
treated as a separate item to be added back to income from operations, it is accounted for by
analyzing the accounts receivable at the net amount and then making the necessary adjustment to
income based on the change in the net amount of receivables.
4.
The $6,000 gain realized on the sale of the machine is an ordinary gain, not an extraordinary gain,
for accounting purposes. This $6,000 gain must be deducted from net income to arrive at net
cash provided by operating activities. The proceeds of $36,000 ($30,000 + $6,000) are shown as a
cash inflow from investing activities.
5.
Generally, extraordinary items are investing or financing activities and the cash inflow or outflow
resulting from such events should be reported in the investing or financing activities section of the
statement of cash flows. In this case, no cash flow resulted from the lightning damage. The net
loss (a noncash event) must be added back to net income (under the indirect method) as one of
the adjustments to reconcile net income to net cash flow provided by operating activities.
23-71
CA 23-3 (Continued)
6.
The $75,000 use of cash should be reported as a cash outflow from investing activities. The
$200,000 issuance of common stock and the $425,000 issuance of the mortgage note, neither of
which affects cash, should be reported as noncash financing and investing activities.
7.
This conversion is not an inflow or an outflow of cash, but it is a significant noncash financing
activity and should be reported in a separate schedule or note.
CA 23-4
Where to Present
How to Present
1.
Investing and operating
Cash provided by sale of fixed assets, $4,750 as an investing

activity. In addition, the loss of $2,250 [($20,000 x 3 1/2) 10]
$4,750 on the sale would be added back to net income.
2.
Operating
The impairment reduced earnings from operations but did not

use cash. The amount of $15,000 is added back to net income.
3.
Financing
Cash provided by the issuance of capital stock of $16,000.
4.
Operating
The net loss of $2,100 is presented as loss from operations, and

depreciation of $2,000 and amortization of $400 are added
back to the loss from operations. Net cash provided by operating
activities is $300.
5.
Not reported in statement.
6.
Investing and operating
Cash provided by the sale of the investment, $10,600 as an

investing activity. The loss of $1,400 is added back to net
income.
7.
Financing and operating
The retirement is reported as cash used by financing activities of

$24,240. Additionally, the gain (of $1,760 = $26,000 $24,240)
is deducted from net income in the operating activities section.
CA 23-5
(a) The primary purpose of the statement of cash flows is to provide information concerning the cash
receipts and cash payments of a company during a period. The information contained in the
statement of cash flows, together with related disclosures in other financial statements, may help
investors and creditors
1. assess the companys ability to generate future net cash inflows.
2. assess the companys ability to meet its obligations, e.g., pay dividends and meet needs for
external financing.
3. analyze the differences between net income and the associated cash receipts and payments.
(b) The statement of cash flows classifies cash inflows and outflows as those resulting from operating
activities, investing activities, and financing activities.
Cash inflows from operating activities include receipts from the sale of goods and services,
receipts from returns on loans and equity securities (interest and dividends), and all other receipts
that do not arise from transactions defined as financing and investing activities. Cash outflows for
operating activities include payments to buy goods for manufacture and resale, payments to
employees for services, tax payments, payments to creditors for interest, and all other payments
that do not arise from transactions defined as financing and investing activities.
23-72
CA 23-5 (Continued)
Cash inflows from investing activities include receipts from collections or sales of debt instruments
of other companies, from the sale of the investments in those stocks, and from sales of various
productive fixed assets. Cash outflows for investing activities include payments for stocks of other
companies, purchase of productive fixed assets, and debt instruments of other companies.
Cash inflows from financing activities include proceeds from the company issuing its own stock or
its own debt. Cash outflows for financing activities include payments to shareholders and
debtholders for dividends or retirement of its own stocks and bonds (i.e., treasury stock).
(c) Cash flows from operating activities may be presented using the direct method or the indirect
method. Under the direct method, the major classes of operating cash receipts and cash payments
are shown separately. The indirect method involves adjusting net income to net cash flow from
operating activities by removing the effects of deferrals of past cash receipts and payments,
accruals of future cash receipts and payments, and noncash items from net income.
(d) Noncash investing and financing transactions are to be reported in the related disclosures, either
in a narrative form or summarized within a schedule. Examples of noncash transactions are the
conversion of debt to equity, acquiring assets by assuming directly related liabilities, and exchanging noncash assets or liabilities for other noncash assets or liabilities. For transactions that
are part cash and part noncash, only the cash portion should be reported in the statement of cash
flows.
CA 23-6
(a) It is true that selling current assets, such as receivables and notes to factors, will generate cash
flows for the company, but this practice does not cure the systemic cash problems for the
organization. In short, it may be a bad business practice to liquidate assets, incurring expenses
and losses, in order to window dress the cash flow statement.
The ethical implications are that Brockman creates a short-term cash flow at the longer-term
expense of the companys operations and financial position. Barbaras idea creates the deceiving
illusion that the company is successfully generating positive cash flows.
(b) Barbara Brockman should be told that if she executes her plan, the company may not survive.
While the factoring of receivables and the liquidation of inventory will indeed generate cash, the
actual amount of cash the company receives will be less than the carrying value of the receivables
and the raw materials. In addition, the company would still have the future expenditure of
replenishing its raw materials inventories, at a cost higher than the sales price.
As chief accountant for Brockman Guitar, it is your responsibility to work with the companys chief
financial officer to devise a coherent strategy for improving the companys cash flow problems.
One strategy may be to downsize the organization by selling excess property, plant, and
equipment to repay long-term debt. In addition, Brockman Guitar may be a good candidate for a
quasi-reorganization discussed on KWW website.
23-73
FINANCIALREPORTINGPROBLEM
(a)
P&G uses the indirect method to compute and report net cash provided by operating
activities.The amountsof net cashprovidedby operating activities for 2007, 2008, and
2009 are $13,410 million, $15,008 million, and $14,919 million, respectively. The two
items most responsible for the decrease in cash provided by operating activities in
2009are net earnings($13,436)and depreciationand amortization($3,082).
(b)
The most significant item in the investingactivities section is the $3,238millionthat

P&G spent on capital expenditures. The most significant item in the financing
activitiessectionis the $6,370millionthat P&Gpaid to purchasetreasurystock.
(c)
Deferred taxes are reported in the operating activities section of P&Gs statement of
cash flows. The $596 million is reportedas an add back to net incomebecauseit is a
noncash
charge
in
the
income
statement.
(d)
Depreciationand amortizationis reportedin the operatingactivities sectionof P&Gs

statementof cashflowsas an add backto net incomebecauseit is a noncashcharge
in the incomestatement.
23-74
COMPARATIVEANALYSISCASE
(a)
Both Coca-Cola and PepsiCo use the indirect method of computing and reporting net
cashprovidedby operatingactivitiesin 20072009.
(In millions)
Net cashprovidedby operatingactivities
(b)
Coca-Cola
PepsiCo
$8,186
$6,796
Themostsignificantinvestingactivitiesitemsin 2009:
Coca-Cola
Purchaseof otherinvestments
$2,152million
PepsiCo
Capitalspending
$2,128million
Themostsignificantfinancingactivitiesitemsin 2009:
Coca-Cola
Issuancesof debt
PepsiCo
Cashdividendspaid
$14,689million
$2,732million
(c)
The Coca-Cola Companyhas increasednet cash providedby operating activities from

2007 to 2009 by $1,036 million or 14.5%. PepsiCo, Inc. has decreased net cash
provided by operating activities by $138 million or 2.0%. Only Coca-Cola has a
favorabletrendin the generationof internalfundsfromoperations. PepsiCostrendis
relativelyflat.
(d)
Both Coca-Cola and PepsiCo report depreciation and amortization in the operating
activitiessection:
Coca-Cola, $1,236million
PepsiCo,$1,635million
Depreciationand amortizationis reportedin the operatingactivitiessectionbecauseit
is a noncashchargein the incomestatement.
23-75
COMPARATIVEANALYSISCASE(Continued)
(e)
Coca-Cola
1.
2.
(f)
PepsiCo
Currentcash
debt coverage
$8,186
($13,721+ $12,988)
2
= 0.61:1
$6,796
($8,756+ $8,787)
2
Cashdebt
coverage
$8,186
($23,325+ $19,657)
2
= 0.38:1
$6,796
($22,406+ $23,412) = 0.30:1
2
= 0.77:1
The current cash debt coverageratio uses cash generatedfromoperationsduringthe

period and providesa better representationof liquidity on an averageday. PepsiCos
ratio of $0.77 of cash flow from operations for every dollar of current debt was
approximately 26% higher (0.77 vs. 0.61) than Coca-Colas $0.61 of cash flow from
operations per dollar of current debt and indicates PepsiCo was more liquid in 2009
thanCoca-Cola.
The cash debt coverage ratio shows a companys ability to repay its liabilities from
cash generated from operating activities without having to liquidate the assets
employed in its operations. Since Coca-Colas cash debt coverage ratio was
approximately 27% larger (0.38 vs. 0.30) than PepsiCos, its ability to repay liabilities
with cashflowfromoperationswasgreaterthanPepsioCos in 2009.
23-76
FINANCIALSTATEMENTANALYSISCASE
VERMONTTEDDYBEARCO.
(a)
Even though prior year income exceeded the current year income by $821,432
($838,955 $17,523), the current year cash flow from operations exceeded prior
years cash flow from operationsby $937,437 [$236,480 ($700,957).]. This apparent
paradox can be explained by evaluating the components of cash from operating
activities. Significant contributors to the positive cash flow figure in the current year
were (1) the depreciation and amortization add-back of $316,416 versus $181,348 in
the prior year, and (2) accounts payable increase of $2,017,059 in the current year
versus a decline of $284,567 in the prior year. An increase in accounts payable
causes an increasein cash fromoperations;thus, the majority of the increasein cash
is explainedby the companysdramatic increasein accounts payable. An investor or
creditor would want to investigate this increase to ensure that the company is not
delinquenton its payments.However,it shouldbe notedthat inventoriesdid increaseby
$1,599,014.
(b)
Liquidity: current cash debt coverageratio (net cash providedby operatingactivities

averagecurrentliabilities)
$236,480 (($4,055,465+ $1,995,600) 2) = .078:1
Solvency: cash debt coverage ratio (net cash provided by operating activities
averagetotal liabilities)
$236,480 (($4,620,085+ $2,184,386) 2) = .070:1
Profitability: cash return on sales ratio (net cash providedby operating activities net
sales)
$236,480 $20,560,566= .012:1
All of these ratios are very low. This is not surprising, however, for a company like
the Vermont Teddy Bear Company that is in the early stages of its life. When a
companyis in the introductoryphaseof its mainproduct,it will not typicallygenerate
significant cash flow from operations. However, becauseof the precariousnature of
companies in this stage of their lives, the companys cash position should be
monitoredcloselyto ensurethat it doesnot slide into a distressfinancialstate due to
cashshortages.
ACCOUNTING,ANALYSIS,ANDPRINCIPLES
23-77
Accounting
LASKOWSKICOMPANY
Net income...................................................................
Losson sale of machinery........................................
Decreasein inventory...............................................
Increasein accountspayable....................................
Sale of machinery.........................................................
Purchaseof machinery..................................................
Net cashusedby investingactivities...............................
$ 430,000
$ 880,000
24,000
(165,000)
33,000
20,000
792,000
1,222,000
270,000
(750,000)
(480,000)
Paymentof cashdividends............................................
(200,000)

Cashat beginningof period................................................
Cashat end of period.........................................................
542,000
130,000
$ 672,000
Analysis
Laskowskisfree cashflowis:
Less: Purchaseof machinery....................................
Dividends.....................................................
Freecashflow.........................................................
23-78
$1,222,000
750,000
200,000
$ 272,000
ACCOUNTING,ANALYSIS,ANDPRINCIPLES(Continued)
Laskowskis free cash flow for the current year ($272,000) is less than the amount needed
for expansionnext year ($500,000). Thus, assumingoperationsat roughlythe samelevel in
future periods, Laskowskisfree cash flow will not be sufficient to fund the expansionplan.
The company might explore reducing the dividend or securing additional funds for the
expansionthrougha borrowing.
Principles
According to Statement of Financial Accounting Concepts No. 1, paragraph 37,
Financial reportingshouldprovideinformationto help present and potential investorsand
creditors and other users in assessingthe amounts, timing, and uncertaintyof prospective
cash receipts from dividends or interest and the proceeds from the sale, redemption, or
maturity of securities or loans. The prospects for those cash receipts are affected by an
enterprises ability to generate enoughcash to meet its obligationswhen due and its other
cashoperatingneeds,to reinvestin operations,and to pay cashdividendsand mayalso be
affected by perceptionsof investors and creditors generally about that ability, which affect
market prices of the enterprises securities. Thus, financial reporting should provide
information to help investors, creditors, and others assess the amounts, timing, and
uncertaintyof prospectivenet cashinflowsto the relatedenterprise.
By reporting cash provided by operations, and the inflows and outflows of cash from
investing and financing decisions, the statement of cash flows provides information
relevantto assessinga companysfuturecashflows.
23-79
PROFESSIONALRESEARCH
(a) Accordingto FASBASC230-10-10 (Statementof CashFlows/Overall/ Objectives):

10-1
The primary objective of a statement of cash flows is to provide relevant

information about the cash receipts and cash payments of an entity during a
period.
As indicated in the glossary at this same section (230-10-20), cash includes not only
currencyon hand but demanddeposits with banks or other financial institutions. Cash
also includesother kinds of accounts that have the general characteristics of demand
deposits in that the customer may deposit additional funds at any time and also
effectively may withdrawfunds at any time without prior notice or penalty. All charges
and credits to thoseaccountsare cash receiptsor paymentsto both the entity owning
the account and the bank holding it. For example, a banks granting of a loan by
crediting the proceedsto a customersdemanddeposit accountis a cash paymentby
the bankand a cashreceiptof the customerwhenthe entry is made.
Thus, the basis for the statement of cash flows is cash, not broader measures of
liquidity,like workingcapital.
(b) SeeFASBASC230-10-10 (Statementof CashFlowsObjectives)
10-2
The information provided in a statement of cash flows, if used with related

disclosures and information in the other financial statements, should help
investors,creditors,andothers(including donors)to do all of the following:
a. Assessthe entitysability to generatepositivefuturenet cashflows
b. Assessthe entitys ability to meet its obligations,its ability to pay dividends,
andits needsfor externalfinancing
c. Assessthe reasonsfor differencesbetweennet incomeand associatedcash
receiptsand payments
23-80
PROFESSIONALRESEARCH(Continued)
d. Assess the effects on an entitys financial position of both its cash and
noncashinvestingandfinancingtransactionsduringthe period.
(c) Accordingto FASBASC230-10-45-16 to 17:
45-16 All of the followingare cashinflowsfor operatingactivities:
a. Cash receipts from sales of goods or services, including receipts from
collection or sale of accounts and both short- and long-term notes
receivable
from
customers
arising
from those sales. The term goods includes certain loans and other debt
and equity instruments of other entities that are acquired specifically for
resale,as discussedin paragraph230-10-45-21.
b. Cash receipts from returns on loans, other debt instruments of other
entities,andequitysecuritiesinterestand dividends.
c. All other cash receipts that do not stem from transactions defined as
investingor financingactivities, suchas amountsreceivedto settle lawsuits;
proceedsof insurancesettlementsexceptsfor thosethat are directly related
to investing or financing activities, such as from destruction of a building;
and refundsfromsuppliers.
45-17 All of the followingare cashoutflowsfor operatingactivities:
a. Cash payments to acquire materials for manufacture or goods for resale,
including principal payments on accounts and both short- and long-term
notes payable to suppliers for those materials or goods. [FAS 095,
paragraph 23, sequence 101] [The term goods includes certain loans and
other debt and equity instruments of other entities that are acquired
specifically for resale, as discussed in paragraph 230-10-45-21, and
securities that are classified as trading securities, as discussed in Topic
320.]
b. Cash payments to other suppliers and employees for other goods or
services.
PROFESSIONALRESEARCH(Continued)
c. Cash payments to governments for taxes, duties, fines, and other fees or
penalties and the cash that would have been paid for income taxes if
23-81
increases in the value of equity instruments issued under share-based

payment arrangements that are not included in the cost of goods or
services recognizable for financial reporting purposes also had not been
deductible in determining taxable income. (This is the same amount
reportedas a financingcashinflowpursuantto paragraph230-10-45-14(e).)
d. Cashpaymentsto lendersand othercreditorsfor interest.
e. Cashpaymentmadeto settle an assetretirementobligation.
f. All other cash payments that do not stem from transactions defined as
investing or financing activities, such as payments to settle lawsuits, cash
contributionsto charities,andcashrefundsto customers.
23-82
PROFESSIONALSIMULATION
FinancialStatements
ELLWOODHOUSE,INC.
Net income..................................................................
Depreciationexpense(a).......................................
Gainon sale of investment(b)...............................
Purchaseof land(c).....................................................
Saleof investments(d).................................................
$42,000
$13,550
(500)
13,050
55,050
(5,500)
15,500
Net cashprovidedby investingactivities........................

Paymentof dividends(e)..............................................
Retirementof bondspayable(f)....................................
Issuanceof commonstock(g).......................................
Net cashusedby financingactivities.............................
10,000
(19,000)
(10,000)
20,000
(9,000)
Net increase(decrease)in cash.............................................

Cash,January1, 2013..........................................................
Cash,December31, 2013......................................................
56,050
10,000
$66,050
Issuanceof bondsfor equipment...................................
$32,000
23-83
PROFESSIONALSIMULATION(Continued)
Explanation
DearMr. Brauer:
Enclosedis your statementof cash flowsfor the year endingDecember31, 2013. I would
like to take this opportunity to explain the changeswhich occurred in your business
as a result of cash activities during 2013. (Please refer to the attached statement of
cashflows.)
The first category shows the net cash flow which resulted from all of your operating
activities.Operatingactivitiesare thoseengagedin for the routineconductof business,
involving most of the transactionsused to determinenet income. The cash inflow from
operations which affects this category is net income. However, this figure must be
adjusted, first for depreciation (item a)becausethis expensedid not involve a cash
outlay in 2013andsecondfor the $500 gain on the sale of your investmentportfolio
(itemb). The gain must be subtractedfromthis sectionbecauseit was includedin net
income,but it is not the result of an operatingactivityitis an investingactivity.
The second category, cash flows from investing activities, results from the
acquisition/disposal of long-term assets including the purchase of another entitys
debt or equity securities. Your purchase of land (item c) as well as the sale of your
investment portfolio (item d) represent your investing activities during 2013, the
purchasebeinga $5,500outflowand the sale beinga $15,500inflow.
Cash flows arising from the issuanceand retirementof debt and equity securities are
properly classified as Cash flows from financing activities. These inflows and
outflowsgenerallyincludethe long-termliability and stockholdersequityitemson the
balance sheet. Examples of your financing activities resulting in cash flows are the
paymentof dividends(item e), the retirementof your bondspayable(item f), and your
issuanceof commonstock (item g). Note that, although$32,000 worth of bonds were
issued for the purchase of heavy equipment, the transaction has no effect on the
changein cashfromJanuary1, 2013to December31, 2013.
I hope this informationhelps you to better understandthe enclosedstatementof cash
flows.If I canfurtherassistyou, pleaselet me know.
Sincerely,
IFRSCONCEPTSANDAPPLICATION
IFRS23-1
23-84
IAS 7, Cash Flow Statements, provides the overall IFRS requirements for cash flow
information.
IFRS23-2
As in U.S. GAAP,the statementof cashflowsis a requiredstatementfor IFRS.In addition,the
content and presentation of an IFRS statement of cash flows is similar to one used for U.S.
GAAP.However,the disclosurerequirementsrelatedto the statementof cashflowsare more
extensiveunderU.S. GAAP.
Other similarities include: (1) Companies preparing financial statements under IFRS
must prepare a statement of cash flows as an integral part;
(2) Both IFRS and U.S. GAAP require that the statement of cash flows should have three
major sectionsoperating, investing and financingalong with changes in cash and cash
equivalents; (3) Similar to U.S. GAAP, the cash flow statement can be preparedusing either
the indirect or direct methodunder IFRS. In both U.S. and international settings, companies
choose for the most part to use the indirect method for reporting net cash flows from
Notable differences are (1) IFRS encourages companies to disclose the aggregate
amount of cash flows that are attributable to the increase in operating capacity separately
from those cash flows that are required to maintain operating capacity; (2) The definition of
cash equivalentsusedin IFRS is not the sameto that usedin U.S. GAAP.A major difference
is that in certainsituationsbankoverdraftsare consideredpart of cashand cashequivalents
under IFRS (which is not the case in U.S. GAAP). Under U.S. GAAP, bank overdrafts are
classified as financing activities; (3) IFRS requires that non-cash investing and financing
activities be excluded from the statement of cash flows. Instead, these non-cash activities
should be reported elsewhere. This requirement is interpreted to mean that non-cash
investingand financingactivitiesshouldbe disclosedin the notesto the financialstatements
instead of in the financial statements. Under U.S. GAAP, companies may present this
informationin the cashflowstatement.IFRSallowsinterestpaidandreceivedto be classified
as either operatingor investingactivities. U.S. GAAPclassifiesinterest paid and receivedas
an operatingactivity.
23-85
IFRS23-3
Presently, the FASB and the IASB are involved in a joint project on the presentation and
organization of information in the financial statements. The FASB favors presentation of
operating cash flows using the direct methodonly. However, the majority of IASB members
express a preferencefor not requiring use of the direct method of reporting operating cash
flows. So the two Boardswill have to resolvetheir differencesin this area in order to issuea
converged standard for the statement of cash flows. U.S. GAAP rules related to cash flow
reportingare lessflexiblethanIFRS,but this is not a majorconcern.
IFRS23-4
Examples of non-cash transactions are: (1) issuance of shares for non-cash assets, (2)
issuanceof shares to liquidate debt, (3) issuanceof bondsor notes for non-cash assets, (4)
non-cashexchangesof property,plant,andequipment,and(5) refinancingof long-termdebt.
IFRS23-5
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
23-86

Financingactivity.
Investingactivity.
Non-cashinvestingandfinancingactivity(presentedin the notes).
Financingactivity.
Financingactivity.
Non-cashinvestingandfinancingactivity(presentedin the notes).
Financingactivity.
Operatingdeductfromnet income.
Investingactivity.
IFRS23-6
1.
The solution can be determined through use of a T-account for property, plant, and
equipment.
Property,Plant& Equipment
12/31/11
Equipmentfromexchangeof B/P
Paymentsfor purchaseof PP&E
247,000
25,000
?
12/31/12
277,000
45,000 Equipmentsold
Payments = $277,000+ $45,000 $247,000 $25,000

= $50,000
IFRS states that investing activities include the acquisition and disposition of longterm productiveassets. Accordingly, the purchaseof property, plant, and equipment
is an investing activity. Note that the acquisition of property, plant, and equipmentin
exchangefor bondspayablewouldbe disclosedin the notes as a non-cash investing
and financingactivity.
2.
The solution can be determined through use of a T-account for accumulated

depreciation.
167,000
38,000
Equipmentsold
12/31/11
Depreciationexpense
?
178,000
12/31/12
Accumulated depreciation on equipment sold = $167,000 + $38,000 $178,000 =

$27,000
Theentryto reflectthe sale of equipmentis:
Cash(proceedsfromsale of equipment)
($45,000+ $14,500 $27,000)............................ 32,500
AccumulatedDepreciation.................................. 27,000
Property,Plant, and Equipment..................
Gainon Sale of Equipment........................
45,000
14,500
(given)
(given)
23-87
IFRS23-6 (Continued)
The proceeds from the sale of equipment of $32,500 are considered an investing
activity. Investing activities include the acquisition and disposition of long-term
productiveassets.
3.
The cash dividends paid can be determined by analyzing T-accounts for Retained
Earningsand DividendsPayable.
RetainedEarnings
Dividendsdeclared
91,000
31,000
104,000
Dividendsdeclared
12/31/11
Net income
12/31/12
= $91,000+ $31,000 $104,000

= $18,000
DividendsPayable
5,000
18,000
Cashdividendspaid
12/31/11
Dividendsdeclared
?
8,000
12/31/12
Cashdividendspaid = $5,000+ $18,000 $8,000

=
$15,000
Financing activities include all cash flows involving liabilities and equity other than
operatingitems.Paymentof cashdividendsis thusa financingactivity.
4.
The redemptionof bondspayableamountis determinedby settingup a T-accountfor

BondsPayable.
BondsPayable
Redemptionof B/P
46,000
25,000
12/31/11
Issuanceof B/P for PP&E
49,000
12/31/12
The problem states that there was no amortization of bond premium or discount;
thus,the redemptionof bondspayableis the onlychangenot accountedfor.
23-88
Redemptionof bondspayable= $46,000+ $25,000 $49,000
= $22,000
Financing activities include all cash flows involving liabilities and equity other than
operating items. Therefore, redemption of bonds payable is considered a financing
activity.
IFRS23-7
DINGELCORPORATION
Net income................................................................
Losson sale of equipment...................................
Gainfromflooddamage......................................
Patent amortization............................................
Gainon sale of equityinvestment.........................
Increasein accountsreceivable(net)....................
Increasein accountspayable...............................
Netcashflowprovidedbyoperatingactivities...................
Sale of equityinvestments..........................................
Sale of equipment......................................................
Purchaseof equipment(cash).....................................
Proceedsfromflooddamageto building.......................
Net cashprovidedby investingactivities......................
$14,750(a)
$ 4,100(b)
(8,250)(c)
1,900(d)
1,250
(1,700)
(3,750)
(3,000)
2,000
4,700
2,500
(20,000)
32,000
19,200
(5,000)
Paymentof short-termnote payable.............................
(1,000)
Net cashusedby financingactivities............................
(7,450)
7,300
(6,000)
23-89
Increasein cash..............................................................
Cash,January1, 2012......................................................
Cash,December31, 2012.................................................
Interest..............................................................................
Incometaxes.....................................................................
Non-cashinvestingand financingactivities:*
Retirednotepayableby issuingordinaryshares....................
Purchasedequipmentby issuingnote payable.......................
20,500
13,000
$33,500
$ 2,000
$ 6,500
$10,000
16,000
$21,000
*Presentedin the notesto the financialstatements.

23-90
(a) Endingretainedearnings.....................................................
Beginningretainedearnings................................................
Net income..................................................................
$20,750
(6,000)
$14,750
(b) Cost..................................................................................
Accumulateddepreciation(40%X $11,000)............................
Bookvalue.........................................................................
Proceedsfromsale.............................................................
Losson sale................................................................
$11,000
(4,400)
6,600
(2,500)
$ 4,100
(c) Cost..................................................................................
Accumulateddepreciation...................................................
Bookvalue.........................................................................
Proceedsfrominsurance.....................................................
Gainon flooddamage...................................................
$29,750
(6,000)
23,750
(32,000)
($ 8,250)
(d) Accumulateddepreciationon equipmentsold........................

Decreasein accumulateddepreciation..................................
Depreciationexpense....................................................
$ 4,400
(2,500)
$ 1,900
IFRS23-8
(a)
According to IAS 7, Information about the cash flows of an entity is useful in

providingusers of financial statementswith a basis to assessthe ability of the entity
to generate cash and cash equivalents and the needs of the entity to utilise those
cash flows. The economicdecisions that are taken by users require an evaluation of
the ability of an entity to generate cash and cash equivalents and the timing and
certaintyof their generation.The objectiveof this Standardis to require the provision
of
information about the historical changes in cash and cash equivalents
of an entity by meansof a statementof cash flowswhichclassifiescash flowsduring
the periodfromoperating,investingandfinancingactivities.
IAS 7 doesnot mentionanythingaboutworkingcapital.
(b)
According to paragraph 10, The statement of cash flows shall report cash flows
during the period classified by operating, investingand financingactivities. Further,
paragraph11 states An entity presents its cash flows from operating, investing and
financing activities in a manner which is most appropriate to its business.
Classificationby activity providesinformationthat allows users to assessthe impact
of those activities on the financial position of the entity and the amount of its cash
and cashequivalents.This informationmayalso be usedto evaluatethe relationships
amongthoseactivities.
(c)
According to paragraph 14, Cash flows from operating activities are primarily
derived from the principal revenue-producing activities of the entity. Therefore, they
generally result from the transactions and other events that enter into the
determinationof profitor loss.Examplesof cashflowsfromoperatingactivitiesare:
(a)
(b)
(c)
(d)
(e)
cashreceiptsfromthesaleof goodsandtherenderingof services;

cashreceiptsfromroyalties,fees,commissionsandotherrevenue;
cashpaymentsto suppliersfor goodsand services;
cashpaymentsto and on behalf of employees;
cash receipts and cash payments of an insurance entity for premiums and
claims,annuitiesand otherpolicybenefits;
(f) cash payments or refunds of income taxes unless they can be specifically
identifiedwith financingand investingactivities;and
(g) cash receipts and payments from contracts held for dealing or trading
purposes.
23-91
IFRS23-9
(a)
M&S uses the indirect method to compute and report net cash provided by operating
activities. The amountsof net cash providedby operatingactivities for 2010 and 2009
are 1,229.0 million and 1,290.6 million, respectively. The two items most responsible
for the decreasein cash providedby operating activities in 2010 comparedto 2009 are
theloweroperatingprofitandthesmallerincreasein payables.
(b)
The most significant item in the investingactivities section is the 352.0 millionthat
M&S spent on property, plant and equipment. The most significant item in the
financingactivitiessectionis repaymentof syndicatedbankfacility (SeeNote28).
(c)
M&S does not report deferred income taxes on its statement of cash flows. It does
report income tax expense as an add back to net income in the operating activities
section.
(d)
Depreciationand amortizationis reportedin the operatingactivities sectionof M&Ss

statementof cashflowsas an addbackto net incomebecauseit is a non-cashcharge
in the incomestatement.
23-92

CH 23

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 23

Uploaded by

Copyright:

Available Formats

CHAPTER23

3. Direct vs. indirect

4. Statement of cash flows 11, 13, 14

5. Statement of cash flows 10, 13,

Describe the purpose of the statement

Identify the major classifications

Differentiate between net income and net

Contrast the direct and indirect methods

Determine net cash flows from investing

Prepare a statement of cash flows.

9, 11, 12, 13,

Identify sources of information

Discuss special problems in preparing

Explain the use of a worksheet in

Preparation of operating activities sectionindirect method,

Preparation of operating activities sectiondirect method.

Preparation of operating activities sectiondirect method.

Preparation of operating activities sectionindirect method.

Computation of operating activitiesdirect method.

Schedule of net cash flow from operating activities

Cash provided by operating, investing, and financing

SCFindirect method and balance sheet.

Partial SCFindirect method.

Worksheet analysis of selected accounts.

Worksheet analysis of selected transactions.

SCFindirect method, and net cash flow from operating

SCFdirect and indirect methods from comparative

SCFdirect and indirect methods.

Analysis of improper SCF.

SCF theory and analysis of improper SCF.

SCF theory and analysis of transactions.

Analysis of transactions effect on SCF.

Purpose and elements of SCF.

Cash flow reporting, ethics.

Readily convertible to known amounts of cash

Proceeds from issuing equity instruments.

Net cash provided by operating activities............................

(b) Cash flows from financing activities

(d) Cash flows from operating activities

(g) Operating activity.

20. Arguments for the indirect or reconciliation method are:

Net cashprovidedby operatingactivities...................

*$10,000 ($40,000 $32,000)

Operatingaddto net income.

Shownin the financingactivitiessectionof a statementof cashflowsas follows:

The write-off of the uncollectible accounts receivable of $27,000 is not reported on

*Either net cash usedor provideddependinguponother adjustments.Givenonly the

Patent amortization of $20,000 is reported in the operating activities section of the

The exchange of common stock for an investment in Plumlee is reported as a

The purchase of treasury stock is reported as a cash payment in the financing

*$450,000+ ($700,000 $60,000)

Payments = $277,000+ $45,000 $247,000 $25,000

The solution can be determined through use of a T-account for accumulated

Accumulated depreciation on equipment sold = $167,000 + $38,000 $178,000 =

= $91,000+ $31,000 $104,000

Cashdividendspaid = $5,000+ $18,000 $8,000

The redemptionof bondspayableamountis determinedby settingup a T-accountfor

Net increasein cash....................................................................

*$6,900 ($1,750 $1,300)

Net decreasein cash..............................................................

*$35,000 [$25,000 ($30,000X 70%)]

**$6,750+ ($6,000 $4,000)

Computationof net cashprovidedby operatingactivities: