Chapter 21 The Statement of Cash Flows Revisited

Chapter21
TheStatementofCashFlowsRevisited
Everycashfloweventuallyaffects
QUESTIONSFORREVIEWOFKEYTOPICS
thebalanceofoneormoreaccounts
on the balance sheet, and the cash

flows related to incomeproducing
activities also arerepresented onthe
income statement. The cash flows,
though,arenotnecessarilyreportedintheperiodthecashflowsoccur.Thisisbecausetheincome
statementmeasuresactivitiesonanaccrualbasisratherthanacashbasis.TheStatementofCash
Flowsfillstheinformationgapbyreportingthecashflowsdirectlyandintheperiodthecashflows
occur.
No. Although the Statement of Cash Flows has been a required financial
Question212statement only since 1988, the relatively recent requirement completes a "full
cycle"movementofaccountingthoughtbacktocashflowreporting,whichwas
commonpracticeseveraldecadesago.Priortothemid1930s,thepreparationof
financial statements on a cash basis was common although todays cash flow
reportingrequirementsarequitedifferentfromthecashflowreportingpracticedduringthatearlier
period(whenemphasis wasplacedoncashbasedincome determination). Later, in1971,APB
Opinion19requiredaStatementofChangesinFinancialPositionthatreportedfundsflowsthat
couldbedefinedaseithercashorworkingcapital.
No,aninvestment intreasurybills need notalways be classified as acash
Question213equivalent.Aguidelinenotaruleforcashequivalentsisthattheseinvestments
musthaveamaturitydatenotlongerthanthreemonthsfromthedateofpurchase.
However, flexibility is permitted and each company must establish a policy
regarding which shortterm, highly liquid investments it classifies as cash
equivalents. The designation must be consistent with the company's customary motivation for
acquiringvariousinvestmentsandthepolicyshouldbedescribedindisclosurenotes.
Transactionsthatinvolvemerelytransfersfromcashtocashequivalentssuchas
Question214thepurchaseofathreemonthtreasurybill,orfromcashequivalentstocashsuchas
thesaleofatreasurybill,shouldnotbereportedontheStatementofCashFlows.
Adollaramountissimplytransferredfromonecashaccounttoanothercash
account so that the total of cash and cash equivalents is not altered by such
transactions.Anexceptionisthesaleofacashequivalentatagainorloss.Inthiscase,the totalof
cashandcashequivalentsactuallyincreasesordecreases.Theincreaseordecreaseisreportedasa
cashflowfromoperatingactivities.
Question211
SolutionsManual,Vol.2,Chapter21
TheMcGrawHillCompanies,Inc.,2007
211
"Cashflowsfromoperatingactivities"arebothinflows
AnswerstoQuestions(continued) andoutflowsofcashthatresultfromthesameactivitiesthat
arereportedontheincomestatement.However,theincome
statementreportstheactivitiesonanaccrualbasis(revenues
Question215
earnedduringthereportingperiod,regardlessofwhencash
isreceived,andtheexpensesincurredingeneratingthose
revenues, regardless of when cash is paid). Cash flows
fromoperatingactivities,ontheotherhand,reportthoseactivitieswhenthecashisexchanged(ona
cashbasis).
The generalization that "cash flows from operating activities" report all the
Question216elementsoftheincomestatementonacashbasisisnotstrictlytrueforallelements
of the income statement. No cash effects are reported for depreciation and
amortizationneitherofoperationalassets,norforgainsandlossesfromthesaleof
thoseassets.Cashoutflowsoccurwhenoperationalassetsareacquired,andcash
inflows occur when the assets are sold. However, the acquisition and subsequent resale of
operationalassetsareclassifiedasinvestingactivities,ratherthanasoperatingactivities.
"Cashflowsfrominvestingactivities"arebothoutflowsandinflowsofcash
Question217duetotheacquisitionanddispositionofassets. Thisclassificationincludescash
paymentstoacquire(1)property,plantandequipmentandotherproductiveassets
(2)investmentsinsecurities,and(3)nontradereceivables.Whentheseassetslater
are liquidated, any cash receipts from their disposition also are classified as
investingactivities.Thefourspecificexamplescancomefromanycombinationofthesecategories.
Twoexceptionsareinventoriesandcashequivalents.Thepurchaseandsaleofinventoriesare
notconsideredinvestingactivitiesbecauseinventoriesarepurchasedforthepurposeofbeingsoldas
partofthefirm'sprimaryoperationsandareclassifiedasoperatingactivities.Thepurchaseandsale
ofassetsclassifiedascashequivalentsarenotreportedontheStatementofCashFlowsunlessthe
totalofcashandcashequivalentschangesfromthesaleofacashequivalentatagainorloss.
The payment of cash dividends to shareholders is classified as a financing
Question218activity,butpayinginteresttocreditorsisclassifiedasanoperatingactivity.This
isbecause"cashflowsfromoperatingactivities"shouldreflectthecasheffectsof
items that enter into the determination of net income. Interest expense is a
determinantofnetincome.Adividend,ontheotherhand,isadistributionofnet
incomeandnotanexpense.
A Statement of Cash Flows reports transactions that
AnswerstoQuestions(continued) causeanincreaseoradecreaseincash. However,some
transactionsthatdonotincreaseordecreasecash,butwhich
resultinsignificantinvestingandfinancingactivities,must
Question219
be reported in related disclosures. Entering a significant
investingactivityandasignificantfinancingactivityastwo
parts of a single transaction does not limit the value of
reportingtheseactivities.Examplesofnoncashtransactionsthatwouldbereported:
1. Acquiringanassetbyincurringadebtpayabletotheseller.
2. Acquiringanassetbyenteringintoacapitallease.
3. Convertingdebtintocommonstockorotherequitysecurities.
4. Exchangingnoncashassetsorliabilitiesforothernoncashassetsorliabilities.
21-2
Intermediate Accounting, 4e
Theacquisitionofabuildingpurchasedbyissuingamortgagenotepayablein
Question2110addition to a significant cash down payment is an example of a transaction
involvinganinvestingandfinancingactivitythatispartcashandpartnoncash.
Thecashportionwouldbereportedunderthecaption"Cashflowsfrominvesting
activities," and the noncash portion of the transaction would be reported as a
"noncashinvestingandfinancingactivity."
Perhaps the mostnoteworthy item reported onan income statement is net
Question2111incometheamountbywhichrevenuesexceedexpenses. Themostnoteworthy
itemreportedonaStatementofCashFlowsisnottheamountofnetcashflows.
Infact,thismaybetheleastimportantnumberonthestatement.Theincreaseor
decreaseincashcanbeseeneasilyoncomparativebalancesheets.Thepurpose
oftheStatementofCashFlowsisnottoreportthatcashincreasedordecreasedbyacertainamount,
butwhycashincreasedordecreasedbythatamount. Theindividualcashinflowsandoutflows
providethatinformation.
Thespreadsheetentriesshowninthetwo"changes"columns,whichseparate
Question2112the beginning and ending balances, explain the increase or decrease in each
accountbalance.Spreadsheetentriesduplicatetheactualjournalentriesusedto
recordthetransactionsastheyoccurredduringtheyearRecordingspreadsheet
entriessimultaneouslyidentifiesandclassifiestheactivitiestobereportedonthe
Statement of Cash Flows because in order for cash to increase or decrease, there must be a
correspondingchangeinanoncashaccount.Thus,ifwecanidentifytheeventsandtransactionsthat
caused the change in each noncash account during the period, we will have identified all the
operating,investing,andfinancingactivities.
Ifsalesrevenueis$200,000,thisdoesnotnecessarily
AnswerstoQuestions(continued) mean that $200,000 cash was received from customers.
Amountsreportedontheincomestatementusuallydonot
represent the cash effects of the items reported. By
Question2113
referringtothebeginningandendingbalancesinaccounts
receivable,weseewhethercashreceivedfromcustomers
was more or less than $200,000. If accounts receivable
increasedduringtheyear,someofthesalesrevenueearnedmustnotyethavebeencollected.On
theotherhand,ifaccountsreceivabledecreasedduringtheyear,moremusthavebeencollectedthan
thesalesrevenueearned.
Whenanassetissoldatagain,thegainisnotreportedasacashinflowfrom
Question2114operating activities. A gain (or loss) is simply the difference between cash
receivedinthesaleofanassetandthebookvalueoftheassetnotacashflow.
Thecasheffectofthesaleisreportedasaninvestingactivity.Toreportthegain
asacashflowfromoperatingactivities,inadditiontoreportingtheentirecash
flowfrominvestingactivities,wouldbetoreportthegaintwice.
Whetherornotalossisextraordinary,itisnotreportedonthestatementof
Question2115cashflows,butthecashinflowfromthesaleisreportedasaninvestingactivity.
However,thespreadsheetentrywouldbeaffectedifthelossisextraordinary.The
incometaxeffectofanextraordinaryitemisnotreflectedinincometaxexpense,
213
butinsteadisseparatelyreportedasareductionintheextraordinaryitem.Forexample,ifalosson
thesaleofanassetwasduetoanextraordinaryevent,thetaxsavingsfromthatlosswouldbe
reportedasareductionintheextraordinarylossratherthanasareductioninincometaxexpense.
Thismustbeconsideredwhendeterminingthecashpaidforincometaxes.
Whendeterminingtheamountofcashpaidforincometaxes,anincreasein
Question2116thedeferredincometaxliabilityaccountwouldindicatethatlesscashhadbeen
paidthantheincometaxexpensereported.Thedifferencerepresentstheportion
oftheincometaxexpensewhosepaymentisdeferredtoalateryear.Noticethat
preciselythesameanalysiswouldapplyforanincreaseincurrentincometax
payable.
Whenusingtheindirectmethodofdeterminingnetcashflowsfromoperating
Question2117activities,thenetcashincreaseordecreasefromoperatingactivitiesisderived
indirectly by starting with reported net income and "working backwards" to
convertthatamounttoacashbasis.Amountsthatweresubtractedindetermining
net income, but which did not reduce cash, are added back to net income to
reversetheeffectoftheamountshavingbeensubtracted.Baddebtexpenseisoneexample.Other
examplesaredepreciationexpense,amortizationofotherintangibles,depletion,andalossonthe
saleofassets.
AnswerstoQuestions(concluded) Whenusingtheindirectmethodofdeterminingnetcash
flows from operating activities, when components of net
income increase or decrease cash, but by an amount
Question2118
differentfromthatreportedontheincomestatement,net
incomeisadjustedforchangesinthebalancesofrelated
balancesheetaccountstoconverttheeffectsofthoseitems
toacashbasis.Forcomponentsofnetincomethatincreaseordecreasecashbyanamountexactly
thesameasthatreportedontheincomestatement,noadjustmentofnetincomeisrequired.
Eitherthedirectmethodortheindirectmethodispermitted,buttheFASB
Question2119stronglyencouragescompaniestoreport"cashflowsfromoperatingactivities"by
thedirectmethod.Thedirectmethodreportsspecificoperatingcashreceiptsand
operatingcashpayments,consistentwiththeprimaryobjectiveoftheStatement
ofCashFlows.Thisallowsinvestorsandcreditorstogainadditionalinsightinto
thespecificsourcesofcashreceiptsandpaymentsfromoperatingactivities.Usersalsocanmore
easily interpret and understand the information presented because the direct method avoids the
confusioncausedbyreportingnoncashitemsandotherreconcilingadjustmentsunderthecaption
"cashflowsfromoperatingactivities.
Thedirectandindirectmethodsarealternativeapproachestoderivingnetcash
Question2120flowsfromoperatingactivitiesonly.Regardlessofwhichmethodisusedforthat
purpose,thewaycashflowsfrominvestingandfinancingactivitiesarepresented
ispreciselythesame.
21-4
BRIEFEXERCISES
($inmillions)
BriefExercise211
Cash(receivedfromcustomers)
Accountsreceivable
Salesrevenue
BriefExercise212
39
4
2
25
6
($inmillions)
5
26
17
($inmillions)
1
44
SummaryEntry
Salariesexpense
Salariespayable
Cash(paidtoemployees)
5
33
SummaryEntry
Costofgoodssold
Inventory
Accountspayable
Cash(paidtosuppliersofgoods)
BriefExercise214
38
SummaryEntry
Accountsreceivable
Baddebtexpense
Allowanceforuncollectibleaccounts
Salesrevenue
BriefExercise213
SummaryEntry
($inmillions)
3
14
215
BriefExercise215
($
inmillions)
Interestexpense(10%x1/2 x $380)
Discountonbondspayable
Cash(paidtobondholders)(9%x1/2 x $400)
19
1
18
Agee would report the cash inflow of $380 million from the sale of the bonds as a cash
inflow from financing activities in its statement of cash flows.
The $18 million cash interest paid is cash outflow from operating activities because
interest is an income statement (operating) item.
($
inmillions)
BriefExercise216
Interestexpense(10%x1/2 x $380)
Cash(paidtobondholders)(9%x1/2 x $400)
19
1
18
Agee would report the cash inflow of $380 million from the sale of the bonds as a cash
The $1 million discount would be added back to net income as a noncash adjustment
because the interest expense ($19 million) was subtracted in calculating net income and
yet the cash interest paid was only $18 million.
21-6
BriefExercise217
Merit would report the cash inflow of $41 million from the borrowing as a cash inflow
from financing activities in its statement of cash flows.
Each installment payment includes both an amount that represents interest and an
amount that represents a reduction of principal. In its statement of cash flows, then,
Merit reports the interest portion ($2,870,000 *) as a cash outflow from operating
activities and the principal portion ($7,130,000 *) as a cash outflow from financing
activities.
*December 31, 2006

Interest expense (7% x outstanding balance). . .
Note payable (difference)............................
Cash (given)..........................................
BriefExercise218
2,870,000
7,130,000
10,000,000
($
inmillions)
Cash.........................................................
Gain on sale of land (difference)............
Land (cost)...........................................
35
13
22
Morgan would report the cash inflow of $35 million from the sale as a cash inflow from
investing activities in its statement of cash flows.
The $13 million gain is not a cash flow and would not be reported when using the
direct method. For that reason, when using the indirect method, the gain would be
subtracted from net income (which includes the gain) to avoid double-counting it.
217
BriefExercise219
Cash Flows From Investing Activities:
Proceeds from sale of marketable securities
Proceeds from sale of land
Purchase of equipment for cash
(25)
Purchase of patent
(12)
Net cash inflows from investing activities
$8
Cash Flows From Financing Activities:
BriefExercise2110
Sale of common shares
$40
Purchase of treasury stock
(21)
Net cash inflows from financing activities
$19
Brief Exercise 21-11
Netincome
$90
Adjustmentsfornoncasheffects:
Depreciationexpense
Lossonsaleofequipment
Increaseinaccountsreceivable
Increaseinaccountspayable
Increaseininventory
Netcashflowsfrom
3
2
(1)
4
(3)
21-8
operatingactivities
$95
Brief Exercise 21-12
Netincome
$60
Amortizationexpense
Gainonsaleofequipment
Decreaseinaccountsreceivable
Decreaseinaccountspayable
Decreaseininventory
Netcashflowsfrom
operatingactivities
2
(1)
2
(5)
4
$62
EXERCISES
Exercise211
I
2.
F
3.
O 4.
F
5.
O 6.
F
7.
O 8.
I
9.
F 10.
I 11.
O 12.
Example F
1. Sale
commonstock
of
Saleofland
Purchaseoftreasurystock
Merchandisesales
Issuanceofalongtermnotepayable
Purchaseofmerchandise
Repaymentofnotepayable
Employeesalaries
Saleofequipmentatagain
Issuanceofbonds
Acquisitionofbondsofanothercorporation
Paymentofsemiannualinterestonbondspayable
219
F
I
I
I
F
O
F
I
13.
14.
15.
16.
17.
18.
19.
20.
Paymentofacashdividend
Purchaseofbuilding
Collectionofnontradenotereceivable(principalamount)
Loantoanotherfirm
Retirementofcommonstock
Incometaxes
Issuanceofashorttermnotepayable
Saleofacopyright
Exercise212 Requirement1
($inmillions)
Inventory
_________________________________________
Beginningbalance 90
Goodspurchased 303 300Costofgoodssold
Endingbalance
93
AccountsPayable
_________________________________________
14 Beginningbalance
Cashpaid
301 303 Goodspurchased
16 Endingbalance
Requirement2
SummaryEntry
Costofgoodssold
Inventory
($ in millions)
300
3
21-10
Accountspayable
2
301
Exercise213 ($inmillions)
Situation
Sales
revenue
Accounts
receivable
Baddebt
expense
increase
(decrease)
1
1.
SummaryEntry
2
2.
4.
(5)
95
5
100
105
100
95
105
5
100
95
Accountsreceivable
Baddebtexpense
100
100
Accountsreceivable
Salesrevenue
Cashreceived
from
customers
Accountsreceivable
Salesrevenue
100
SummaryEntry
Salesrevenue
100
SummaryEntry
100
SummaryEntry
3
3.
100
Allowancefor
uncollectible
accounts
increase
(decrease)
95
5
2
2111
Salesrevenue
2
100
Exercise213(concluded)
Situation
Sales
revenue
Accounts
receivable
Baddebt
expense
increase
(decrease)
5
5.
SummaryEntry
6
6.
100
100
SummaryEntry
Exercise214
revenue
(5)
Allowancefor
expense
1.
200
SummaryEntry
104
104
2
Sales
Cashreceived
uncollectible
accounts
increase
(decrease)
1
5
100
92
(1)
Baddebtexpense
Accountsreceivable
Salesrevenue
Situation
Baddebt
receivable
Cashreceived
from
customers
Baddebtexpense
Accountsreceivable
Salesrevenue
increase
(decrease)
Allowancefor
uncollectible
accounts
increase
(decrease)
92
2
1
5
100
Accounts
from
customers
200
0
200
21-12
Salesrevenue
2
2.
200
200
4.
10
200
Exercise215 Cashpaidto
1
1.
SummaryEntry
190
10
Situation
100
4
200
184
184
10
4
2
200
Accounts
goodssold
Inventory
increase(decrease)
increase(decrease)
Costofgoodssold
190
10
4
(2)
Costof
200
190
Accountsreceivable
Baddebtexpense
Salesrevenue
SummaryEntry
suppliers
10
190
Accountsreceivable
Baddebtexpense
Salesrevenue
SummaryEntry
Accountsreceivable
Salesrevenue
SummaryEntry
3
3.
10
200
payable
100
100
100
2113
2
2.
100
3.
100
4.
100
5.
100
100
3
97
93
100
7
93
107
(7)
Costofgoodssold
Accountspayable
SummaryEntry
103
97
Costofgoodssold
Accountspayable
SummaryEntry
100
3
Costofgoodssold
Inventory
SummaryEntry
(3)
103
Costofgoodssold
Inventory
SummaryEntry
100
7
107
Situation
Costof
goodssold
100
6.
SummaryEntry
Inventory
increase(decrease)
Accounts
payable
increase(decrease)
Cashpaidto
suppliers
96
Costofgoodssold
100
21-14
Inventory
Accountspayable
7
7.
9.
100
(3)
100
(3)
Exercise216 Cashpaidto
suppliers
Situation
200
100
3
7
100
7
3
104
90
Costof
110
104
(7)
Costofgoodssold
Inventory
Accountspayable
SummaryEntry
7
96
110
(7)
Costofgoodssold
Accountspayable
Inventory
SummaryEntry
Costofgoodssold
Inventory
Accountspayable
SummaryEntry
8
8.
100
100
3
7
90
Accounts
goodssold
Inventory
increase
(decrease)
increase
(decrease)
payable
200
2115
1.
Costofgoodssold
SummaryEntry
2
2.
200
200
200
200
(6)
Exercise217
Cashpaid
Situation
expense
206
186
200
14
186
192
200
6
14
192
208
(14)
Costofgoodssold
Accountspayable
Inventory
SummaryEntry
200
6
14
Costofgoodssold
Inventory
Accountspayable
SummaryEntry
5.
206
14
Costofgoodssold
Accountspayable
SummaryEntry
4.
200
Costofgoodssold
Inventory
SummaryEntry
3.
200
200
14
6
208
Bond
interest
Bondinterest
Unamortized
payable
discount
forinterest
21-16
1
1.
3.
10
(2)
10
10
2
8
12
0
10
2
12
(3)
Bondinterestexpense
Cash(paidtobondholders)
SummaryEntry
Bondinterestexpense
Bondinterestpayable
10
10
10
Bondinterestexpense
Bondinterestpayable
SummaryEntry
4
4.
10
SummaryEntry
increase
(decrease)
Bondinterestexpense
SummaryEntry
2
2.
10
increase
(decrease)
10
3
7
Situation
Bond
interest
expense
Bondinterest
payable
increase
(decrease)
Unamortized
discount
increase
(decrease)
Cashpaid
forinterest
2117
5
5.
10
10
(2)
10
2
3
5
(3)
Bondinterestexpense
Bondinterestpayable
SummaryEntry
(3)
Bondinterestexpense
Bondinterestpayable
SummaryEntry
6.
10
2
3
9
Exercise218
Situation
Bond
interest
expense
20
1.
2.
20
Cashpaid
forinterest
20
20
20
20
16
Bondinterestexpense
Bondinterestpayable
SummaryEntry
Unamortized
discount
increase
(decrease)
Bondinterestexpense
SummaryEntry
Bondinterest
payable
increase
(decrease)
(6)
20
4
16
14
21-18
3.
Bondinterestexpense
SummaryEntry
4
4.
20
(4)
20
4
Income
6
18
Deferred
tax
expense
Incometax
payable
increase
(decrease)
tax
liability
increase
(decrease)
Cashpaid
fortaxes
10
10
Incometaxexpense
Cash(paidforincometaxes)
SummaryEntry
10
SummaryEntry
10
(3)
Incometaxexpense
Incometaxpayable
10
10
7
Incometaxexpense
Incometaxpayable
SummaryEntry
3
3.
18
(6)
Situation
2
2.
6
14
Bondinterestexpense
Bondinterestpayable
SummaryEntry
Exercise219
1.
20
10
3
7
13
0
10
3
2119
13
4
4.
10
5.
10
10
2
8
12
(2)
Incometaxexpense
Deferredincometaxliability
SummaryEntry
Incometaxexpense
SummaryEntry
10
2
12
Situation
Income
tax
expense
10
6.
7.
SummaryEntry
Incometaxexpense
Incometaxpayable
SummaryEntry
Incometax
payable
increase
(decrease)
Deferred
tax
liability
increase
(decrease)
10
Cashpaid
fortaxes
5
10
3
2
5
(2)
Incometaxexpense
Incometaxpayable
10
2
3
9
21-20
8
8.
(3)
10
(3)
Income
Exercise2110
1.
11
10
3
2
11
Deferred
tax
expense
Incometax
payable
increase(decrease)
tax
liability
increase(decrease)
Cashpaid
fortaxes
10
10
Incometaxexpense
SummaryEntry
10
SummaryEntry
10
0
Incometaxexpense
10
10
7
Incometaxexpense
Incometaxpayable
SummaryEntry
3
3.
15
Situation
2
2.
10
3
2
Incometaxexpense
Incometaxpayable
SummaryEntry
15
(2)
Incometaxexpense
Incometaxpayable
SummaryEntry
9
9.
10
10
3
7
12
(2)
10
2
2121
12
4
4.
SummaryEntry
Incometaxexpense
Incometaxpayable
SummaryEntry
5
5.
10
10
(3)
10
3
2
5
15
(2)
Incometaxexpense
Incometaxpayable
10
3
2
15
Exercise2111 Most would report the cash inflow of $566,589,440 from the sale
of the bonds as a cash inflow from financing activities in its
statement of cash flows.
The $64,000,000 cash interest paid *, ** is a cash outflow from operating activities
because interest is an income statement (operating) item.
June 30, 2006*

Interest expense (6% x $566,589,440)...................
Discount on bonds payable (difference)...........
Cash (5% x $640,000,000)................................
33,995,366
December 31, 2006**

Interest expense (6% x [$566,589,440 + 1,995,366]) 34,115,088
Discount on bonds payable (difference)...........
Cash (5% x $640,000,000)................................
1,995,366
32,000,000
2,115,088
32,000,000
21-22
Exercise 21-12
National would report the cash inflow of $4 million from the borrowing as a cash
Each installment payment includes both an amount that represents interest and an
amount that represents a reduction of principal. In its statement of cash flows, then,
National reports the interest portion ($400,000*) as a cash outflow from operating
activities and the principal portion ($861,881*) as a cash outflow from financing
activities.
*December 31, 2006

Interest expense (10% x outstanding balance)
Note payable (difference)...........................
Cash (given).........................................
400,000
861,881
1,261,881
Exercise 21-13 Requirement 1

Proceeds from sale of land
Purchase of Microsoft common stock
Net cash outflows from investing activities
$ 12
(160)
$(148)
Requirement 2
2123
Payment for the early extinguishment of

long-term bonds (carrying amount: $97 million)
Proceeds from the sale of treasury stock (cost: $17 million)
Distribution of cash dividends declared in 2005
Net cash outflows from financing activities
$(102)
22
(40)
$(120)
Exercise 21-14 Requirement 1

Proceeds from sale of equipment
Acquisition of building for cash
(7)
Purchase of marketable securities (not a cash equivalent)
(5)
Collection of note receivable with interest (principal amount)

Net cash inflows from investing activities
$ 7
Requirement 2
Payment for the early extinguishment of
long-term notes (book value: $50 million)
$ (54)
Sale of common shares
176
Retirement of common shares
(122)
Issuance of short-term note payable for cash

Distribution of cash dividends declared in 2005
Net cash outflows from financing activities
(30)
$ (20)
Exercise 21-15
21-24
Wilson would report the $3,000,000* investment in the commercial food

processor and its financing with a capital lease as a significant noncash investing
and financing activity in the disclosure notes to the financial statements.
The $391,548 ($195,774 x 2) cash lease payments *, ** are divided into the
interest portion and the principal portion. The interest portion, $84,127, is
reported as cash outflows from operating activities. The principal portion,
$195,774 + 111,647, is reported as cash outflows from financing activities.
Note: By the indirect method of reporting cash flows from operating activities,
Wilson would add back to net income the $150,000 depreciation expense
since it didnt actually reduce cash. The $84,127 interest expense that
reduced net income actually did reduce cash [the interest portion of the
$391,548 ($195,774 x 2) cash lease payments], so for it, no adjustment to
net income is necessary.
Calculations:
September 30, 2006*
Leased equipment (calculated below)......................
Lease payable (calculated below)........................
Lease payable .....................................................
Cash (rental payment).......................................
3,000,000
3,000,000
195,774
195,774
Note:
$195,774 x 15.3238t = $3,000,000
t
present value of an annuity due of $1: n=20, i=3%
December 31, 2006**

Interest expense (3% x [$3 million 195,774])............
Lease payable (difference)........................................
Cash (lease payment)..........................................
Depreciation expense ($3 million / 5 years x year)....
Accumulated depreciation...............................
84,127
111,647
195,774
150,000
150,000
2125
Exercise 21-16
Investing Activities:
Beilich would report the $600 million investment as a cash outflow amonginvesting
activitiesinitsstatementofcashflows.
Operating Activities:
By the direct method of reporting cash flows from operating activities, Beilich would
report the $12 million cash dividend as a cash inflow from operating activities.
By the indirect method of reporting cash flows from operating activities, Beilich would
subtract from net income the $60 million investment revenue since it didnt actually
provide cash but would add the $12 million cash dividend. Alternatively, the company
might just subtract the $48 million difference.
Exercise 21-17
RECONCILIATIONOFNETINCOMETO
NETCASHFLOWSFROMOPERATINGACTIVITIES
Netincome
$50,000
Depreciationexpense
Increaseininventory
Decreaseinsalariespayable
Amortizationofpatent
Decreaseinbondpremium
Netcashflowsfrom
operatingactivities
7,000
(1,500)
(800)
2,000
500
(1,000)
4,000
$60,200
21-26
Exercise2118
($inmillions)
Netincomeclosedtoretainedearnings
Incomesummary......................................................................................
Retainedearnings(given).................................................
75
75
The operating activities summarized by this transaction are identified

individuallywhenweexplainthechangesinthecomponentsofnetincome.
Butincludingtheentryonthespreadsheetishelpfulinpartiallyexplaining
thechangeinretainedearnings.
Cashdividend
Retainedearnings(given).....................................................
Cash.............................................................................................................
25
25
This transaction identifies a $25 million cash outflow from financing

activities.
Stockdividend
Commonstock(1millionsharesat$1parpershare).................
Paidincapitalexcessofpar(remainder).........................
16
1
15
This transaction does not represent a significant investing or financing

activity,butincludingtheentryonthespreadsheetishelpfulinpartially
explainingchangesinthebalancesofthethreeaccountsaffected.
Propertydividend
Shortterminvestments....................................................................
12
12
This noncash transaction identifies both a $12 million financing activity

(distribution of a dividend to shareholders) and a $12 million investing
activity(dispositionofaninvestment).BotharereportedontheStatementof
CashFlows.
2127
Saleoftreasuryshares
Cash(difference)*..................................................................
Treasurystock(atcost,given)............................................
43
10
53
*Thistransactionidentifiesa$43millioncashinflowfromfinancingactivities.
Exercise2119
IncomeStatement
Sales
Costofgoodssold
Salariesexpense
Depreciationexpense
Insuranceexpense
Lossonsaleofland
Incometaxexpense
NetIncome
aSummaryEntry
bSummaryEntry
cSummaryEntry
360b
78c
18f
42d
12f
54e
$600a
(564
)
$36
Accountsreceivable
Salesrevenue
612
Costofgoodssold
Inventory
Accountspayable
360
24
36
Salariesexpense
Salariespayable
78
12
600
420
12
66
21-28
dSummaryEntry
eSummaryEntry
Insuranceexpense
Prepaidinsurance
Cash(paidforinsurance)
42
Incometaxexpense
Incometaxpayable
54
18
24
12
42
Depreciationexpenseandthelossonsaleoflandarenoncashreductionsin
income.
Exercise2120
NETCASHFLOWSFROMOPERATING
ACTIVITIES
Netincome
$26
(54)
Increase(decrease)ininventory
13
Increaseinsalariespayable
Decreaseinprepaidinsurance
Depreciationexpense
11
Depletionexpense
Decreaseinbonddiscount
(25)
Lossonsaleofland
Increaseinincometaxpayable
Netcashflowsfromoperatingactivities
8
12
$7
2129
Exercise2121 Requirement1:
a.SummaryEntry
Accountsreceivable
Salesrevenue
311
b.SummaryEntry
Costofgoodssold
Inventory
Accountspayable
185
13
8
c.SummaryEntry
d.SummaryEntry
e.SummaryEntry
Salariesexpense
Salariespayable
41
Insuranceexpense
Prepaidinsurance
19
Incometaxexpense
Incometaxpayable
22
6
305
206
5
36
9
10
20
2
Depreciationexpenseandthelossonsaleoflandarenotcashoutflows.
Requirement2:
CashFlowsfromOperatingActivities:
Cashreceivedfromcustomers
$311
Cashpaidtosuppliers
(206)
Cashpaidtoemployees
(36)
Cashpaidforinsurance
(10)
Cashpaidforincometaxes
(2)
21-30
Netcashflowsfrom
operatingactivities
Exercise2122
$57
NETCASHFLOWSFROMOPERATING
ACTIVITIES
Netloss
Depreciationexpense
Increaseininventory
Reductionindiscountonbonds
Exercise2123
$(5,000)
6,000
500
2,000
(2,300)
300
200
$1,700
DirectMethod
Cashpaidtosuppliers
Cashpaidtoemployees
Cashpaidforinterest
Cashdecreasefromsaleofcashequivalents
Exercise2124
$672
(234)
(116)
(15)
(3)
(81)
$223
IndirectMethod
2131
Netincome
Decreaseininventory
Increaseininterestpayable
Depreciationexpense
Patentamortizationexpense
Extraordinaryloss(earthquakedamage)
Exercise2125
$86
12
10
6
(6)
5
90
5
10
5
$223
DirectMethod
Cashdecreasefromsaleofcashequivalents
Cashpaidtosuppliers
Cashpaidtoemployees
Cashpaidforinterest
$1,332a
(6)
(484)b
(226)c
(35)d
(187)e
$394
Calculationsusingspreadsheetentries:
a.SummaryEntry
b.SummaryEntry
Accountsreceivable
Salesrevenue
Costofgoodssold
Inventory
Accountspayable
1,332
12
1,320
500
10
6
484
21-32
c.SummaryEntry
Salariesexpense
Salariespayable
220
6
d.SummaryEntry
Interestexpense
Interestpayable
Cash(paidforinterest)
e.SummaryEntry
Incometaxexpense
TaxonE.O.gain
Incometaxpayable
226
40
5
35
182
10
5
187
Depreciationexpense,patentamortization,andthegainonearlyextinguishmentof
debtarenotcashflows.
Exercise2126
IndirectMethod
CashFlowsFromOperatingActivities:
Netincome
Depreciationexpense
Extraordinarygain(saleofsubsidiary)
Decreaseininventory
$192
180
10
(20)
12
10
6
(6)
5
5
$394
2133
Exercise2127
Red,Inc.
SpreadsheetfortheStatementofCashFlows

BalanceSheet
Assets:
Cash
Accountsreceivable
Prepaidinsurance
Inventory
Buildingsandequipment
Less:Acc.depreciation
Liabilities:
Accountspayable
Accruedexpensespayable
Notespayable
Bondspayable
Shareholders'Equity:
Commonstock
Retainedearnings
IncomeStatement
Revenues:
Salesrevenue
Expenses:
Costofgoodssold
Depreciationexpense
Operatingexpenses
Netincome
Exercise2127(continued)
Changes
Debits
Credits
Dec.31
2005
110
132
3
175
350
(240)
530
100
11
0
0
400
19
530
(1)
(4)
(2)
(6)
(7)
(2)
(4)
46
4
110
230
171
(11)
86
(7)
180
50
(3)
13
5
(8)
(10)
(9)
(2)
(3)
(4)
(5)
50
1,400
50
447
103
Dec.31
2006
50
160
24
178
7
285
400
(119)
775
87
6
50
160
(5)
103
400
72
775
(1)
2,000
2,000
1,400
50
447
103
21-34
(continued)
Changes
Debits
Credits
Dec.31
2005
StatementofCashFlows
Operatingactivities:
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Foroperatingexpenses
Netcashflows
Investingactivities:
Purchaseofequipment
Saleofequipment
Netcashflows
Financingactivities:
Issuanceofnotepayable
Paymentofcashdividends
Issuanceofbondspayable
Netcashflows
Netdecreaseincash
Totals
(1)
Dec.31
2006
1,954
(2)
(4)
1,523
456
(25)
(6)
(7)
230
(221)
(8)
50
(9)
(10)
160
(11)
86
4,888
50
4,888
160
(86)
2135
Red,Inc.
ForyearendedDecember31,2006($inmillions)
Cashflowsfromoperatingactivities:
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Cashflowsfrominvestingactivities:
Purchaseofequipment
Saleofequipment
Netcashflowsfrominvestingactivities
Cashflowsfromfinancingactivities:
Netcashflowsfromfinancingactivities
Netdecreaseincash
Cashbalance,January1
Cashbalance,December31
Exercise2128
$1,954
(1,523)
(456)
(230)
9
50
160
(50)
$(25)
(221)
160
(86)
110
$24
Pensionexpense(given)
Prepaid(accrued)pensioncost(difference
betweenbeginningcreditbalanceandendingdebitbalance)
6
Cash(paidtothepensiontrustee)
82
88
21-36
Exercise2129
2.
3.
1.
a
d
2137
Exercise2130
Red,Inc.

BalanceSheet
Assets:
Cash
Accountsreceivable
Prepaidinsurance
Inventory
Liabilities:
Accountspayable
Accruedexpensespayable
Notespayable
Bondspayable
Commonstock
Retainedearnings
Changes
Debits
Credits
Dec.31
2005
110
132
3
175
350
(240)
530
100
11
0
0
400
19
530
(3)
(4)
(5)
(8)
(9)
(6)
(7)
46
4
110
230
171
(13)
86
(9)
180
50
(2)
13
5
(10)
(11)
(12)
50
Dec.31
2006
(1)
50
160
103
24
178
7
285
400
(119)
775
87
6
50
160
400
72
775

(continued)
Changes
Debits
Credits
Dec.31
2005
Netincome
Depreciationexpense
Increaseinprepaidinsurance
Increaseininventory
(1)
103
(2)
50
(3)
(4)
(5)
Dec.31
2006
46
4
110
21-38
Decreaseinaccruedexpenses
Netcashflows
Purchaseofequipment
Saleofequipment
Netcashflows
Netcashflows
Netdecreaseincash
Totals
(6)
(7)
13
5
(25)
(8)
(9)
230
(221)
(10)
(11)
50
160
(12)
(13)
86
1,087
50
1,087
160
(86)
2139
Red,Inc.
Netincome
Depreciationexpense
Increaseinprepaidinsurance
Increaseininventory
Decreaseinaccruedexpensespayable
$103
50
(46)
(4)
(110)
(13)
(5)
Purchaseofequipment
Saleofequipment
(230)
9
50
160
(50)
Netdecreaseincash
$(25)
(221)
160
(86)
110
$24
d.UnderSFAS95,astatementofcashflowsshould
reportasoperatingactivitiesalltransactionsandother
eventsnotclassifiedasinvestingorfinancingactivities.Ingeneral,thecash
flowsfromtransactionsandothereventsthatenterintothedeterminationof
incomearetobeclassifiedasoperating.Distributionstoowners(cash
Exercise 21-31
1.
21-40
dividendsonacompanysownstock)arecashflowsfromfinancing,not
operating,activities.
2. a.Investingactivitiesincludethelendingofmoneyandthecollectingofthose
loans,andtheacquisition,sale,orotherdisposalofsecuritiesthatarenot
cashequivalentsandofproductiveassetsthatareexpectedtogenerate
revenueoveralongperiodoftime.Investingactivitiesincludethepurchase
ofmachineryandthesaleofabuilding.Thenetinflowfromtheseactivities
is$700,000($1,200,000$500,000).Financingactivitiesincludethe
issuanceofpreferredstockandthepaymentofdividends.Thenetinflowis
$3,600,000($4,000,000$400,000).Theconversionofbondsintocommon
stockandthestockdividenddonotaffectcash.
3. c.Netoperatingcashflowmaybedeterminedbyadjustingnetincome.
Depreciationisanexpensenotdirectlyaffectingcashflowsthatshouldbe
addedbacktonetincome.Theincreaseinaccountspayableisaddedtonet
incomebecauseitindicatesthatanexpensehasbeenrecordedbutnotpaid.
Thegainonthesaleoflandisaninflowfromaninvesting,notanoperating,
activityandshouldbesubtractedfromnetincome.Thedividendspaidon
preferredstockarecashoutflowsfromfinancing,notoperating,activities
anddonotrequireanadjustment.Thus,netcashflowfromoperationsis
$4,600,000($3,000,000+$1,500,000$200,000+$300,000).
Exercise2132 BALANCESHEETACCOUNTS
Cash(StatementofCashFlows)
________________________________________________________
86
OperatingActivities:
Fromcustomers
(1) 1,954
1,523 (2) Tosuppliers
456 (4) Forexpenses
InvestingActivities:
Saleofequipment
(7)
230
(6)
Purchaseofequipment
2141
FinancingActivities:
Issuanceofnotes
Issuanceofbonds
(8)
(10)
50
160
50
(9)
Paymentofdividends
AccountsReceivable
PrepaidInsurance
________________________ ________________________
46
__________
(1)
46
4
__________
(4)
Inventory
BuildingsandEquipment
________________________ ________________________
(2)
110
__________
110
(6)
50
__________
230 180
(7)
AccumulatedDepreciation
AccountsPayable
________________________ ________________________
121
__________
(7) 171
50
(3)
(2)
13
__________
13
AccruedExpensesPayable
NotesPayable
________________________ ________________________
5
__________
5
50
__________
50
BondsPayable
RetainedEarnings
(4)
(8)
________________________ ________________________
160
53
21-42
__________
160
__________
(10)
(9)
50
103
(5)
INCOMESTATEMENTACCOUNTS
Sales
CostofGoodsSold
________________________ ________________________
2,000
2,000
1,400
(1)
(2)
1,400
DepreciationExpense
OperatingExpenses
________________________ ________________________
(3)
50
__________
50
(4)
447
__________
447
NetIncome(IncomeSummary)
________________________
(5)
103
__________
103
2143
Red,Inc.
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
$1,954
(1,523)
(456)
Purchaseofequipment
Saleofequipment
(230)
9
50
160
(50)
Netdecreaseincash
$(25)
(221)
160
(86)
110
$24
PROBLEMS
Problem211
Classifications
+I
Investingactivity(cashinflow)
I
Investingactivity(cashoutflow
21-44
+F
Financingactivity(cashinflow)
F
Financingactivity(cashoutflow)
N
Noncashinvestingandfinancingactivity
X
Notreportedasaninvestingand/orafinancingactivity
Transactions
Example
+I

1.Saleofland
+F
2.Issuanceofcommonstockforcash
F 3.Purchaseoftreasurystock
N 4.Conversionofbondspayabletocommonstock
N 5.Leaseofequipmentbycapitallease
+I

6.Saleofpatent
I 7.Acquisitionofbuildingforcash
N 8.Issuanceofcommonstockforland
+I

9.Collectionofnotereceivable(principalamount)
+F 10.Issuanceofbonds
X 11.Issuanceofstockdividend
N 12.Paymentofpropertydividend
F 13.Paymentofcashdividends
+F 14.Issuanceofshorttermnotepayableforcash
+F 15.Issuanceoflongtermnotepayableforcash
I 16.Purchaseofmarketablesecurities(notcashequivalent)
F 17.Paymentofnotepayable
X 18.Cashpaymentfor5yearinsurancepolicy
+I
19.Saleofequipment
N 20.Issuanceofnotepayableforequipment
I 21.Acquisitionofcommonstockofanothercorporation
N 22.Repaymentoflongtermdebtbyissuingcommonstock
X 23.Appropriationofretainedearningsforplantexpansion
X 24.Paymentofsemiannualinterestonbondspayable
F 25.Retirementofpreferredstock
I 26.Loantoanotherfirm
X 27.Saleofinventorytocustomers
X 28.Purchaseofmarketablesecurities(cashequivalents)
2145
Problem212
WrightCompany
BalanceSheet
Assets:
Cash
Accountsreceivable
Shortterminvestment
Inventory
Land
Liabilities:
Accountspayable
Salariespayable
Interestpayable
Incometaxpayable
Notespayable
Bondspayable
Commonstock
Paidincapitalex.ofpar
Retainedearnings
StatementofIncome
Revenues:
Salesrevenue
Expenses:
Costofgoodssold
Salariesexpense
Depreciationexpense
Interestexpense
Lossonsaleofland
Changes
Debits
Credits
Dec.31
2005
30
75
15
70
60
400
(75)
575
(15)
35
5
3
12
30
100
(2)
200
100
90
575
(9)
(2)
(10)
(3)
(7)
(11)
12
(1)
(6)
10
(4)
40
25
5
150
7
3
(2)
(3)
(4)
(5)
(6)
130
45
40
12
3
28
2
5
9
0
160
(12)
60
(13)
(8)
50
26
80
250
126
135
715
(1)
380
380
3
30
35
42
73
40
75
50
550
(115)
715
(5)
(13)
(14)
Dec.31
2006
(130)
(45)
(40)
(12)
(3)
21-46
Incometaxexpense
Netincome
(7)
(8)
70
80
(70)
80
Problem212(continued)

(continued)
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinterestexpense
Forincometaxes
Netcashflows
Saleofland
PurchaseofSTinvestment
Purchaseofequipment
Netcashflows
Repaymentofnotespayable
Saleofbondspayable
Saleofcommonstock
Netcashflows
Netincreaseincash
Totals
Changes
Debits
Credits
Dec.31
2005
(1)
Dec.31
2006
382
(2)
(3)
(5)
(7)
142
48
10
73
109
(6)
7
(9)
(10)
25
150
(168)
(12)
(13)
(11)
30
(14)
35
60
76
71
(15)
12
1,175
1,175
12
2147
Problem212(concluded)
WrightCompany
ForyearendedDecember31,2006(in$000)
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinterestexpense
Forincometaxes
$382
(142)
(48)
(10)
(73)
Saleofland
Purchaseofshortterminvestment
Purchaseofequipment
7
(25)
(150)
Repaymentofnotespayable
Saleofbondspayable
Saleofcommonstock
(30)
60
76
(35)
Netincreaseincash
$109
(168)
71
12
30
$42
21-48
Problem213
NationalIntercableCompany

BalanceSheet
Assets:
Cash
Accountsreceivable
Less:Allowance
Prepaidinsurance
Inventory
Longterminvestment
Land
Trademark
Liabilities:
Accountspayable
Salariespayable
Deferredtaxliability
Leaseliability
Bondspayable
Less:Discount
Commonstock
Paidincapitalexofpar
Preferredstock
Retainedearnings
Changes
Debits
Credits
Dec.31
2005
55
170
(6)
12
165
90
150
270
(75)
25
856
(18)
45
8
15
0
275
(25)
(4)
290
85
0
163
856
(1)
17
11
(8)
2
5
(3)
30
(11)
60
25
1
(1)
(4)
(2)
(13)
(11)
5
6
80
15
(6)
(7)
(5)
15
5
X (13)
3
80
(9)
(15)
20
10
50
25
(10)
(14)
130
(15)
(16)
(17)
30
Dec.31
2006
(12)
72
181
(8)
7
170
66
150
290
(85)
24
867
30
3
18
80
145
(22)
310
95
50
158
867
XNoncashinvestingandfinancingactivity
2149
(continued)
StatementofIncome
Revenues:
Salesrevenue
Investmentrevenue
Gainonsaleofinvestments
Expenses:
Costofgoodssold
Salariesexpense
Depreciationexpense
Trademarkamortization
Baddebtexpense
Insuranceexpense
Bondinterestexpense
Incometaxexpense
Extraordinaryloss(tornado)
Less:Taxsavings
Netincome
Changes
Debits
Credits
Dec.31
2005
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(1)
(8)
(9)
(10)
(11)
320
15
5
125
55
25
1
7
13
30
38
42
21
(10)
(12)
Dec.31
2006
25
320
15
5
(125)
(55)
(25)
(1)
(7)
(13)
(30)
(38)
(42)
21
25

(continued)
Cashinflows:
Fromcustomers
Frominvestmentrevenue
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinsuranceexpense
Forbondinterestexpense
Forincometaxes
Changes
Debits
Credits
Dec.31
2005
(1)
(2)
Dec.31
2006
304
9
(4)
(5)
(8)
(9)
(10)
145
60
8
27
14
21-50
Netcashflows
Saleoflongterminvestment
Saleofbuildingparts
Netcashflows
Retirementofbondspayable
Saleofcommonstock
Saleofpreferredstock
Netcashflows
59
(3)
(11)
35
3
38
(15)
(16)
(17)
30
(18)
____
130
30
50
Netincreaseincash
Totals
(14)
1,106
17
____
(80
)
17
1,106
2151
NationalIntercableCompany
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinsuranceexpense
Forincometaxes
$304
9
(145)
(60)
(8)
(27)
(14)
Saleofbuildingparts
Saleoflongterminvestment
3
35
Saleofcommonstock
(130)
30
50
(30)
Netincreaseincash
$59
38
(80)
17
55
$72
Noncashinvestingandfinancingactivities:
Acquired$80millionofequipmentby7yearcapitallease.
21-52
Problem214
DuxCompany

BalanceSheet
Assets:
Cash
Accountsreceivable
Less:Allowance
Dividendsreceivable
Inventory
Longterminvestment
Land
Liabilities:
Accountspayable
Salariespayable
Interestpayable
Incometaxpayable
Notespayable
Bondspayable
Less:Discountonbonds
Commonstock
Retainedearnings
Changes
Debits
Credits
Dec.31
2005
20
50
(3)
2
50
10
40
250
(50)
369
(17)
20
5
2
8
0
70
(3)
(3)
200
20
47
(1)
(1)
(2)
(3)
(10)
(11)
(12)
(7)
(4)
(8)
0
369
1
5
5
30
15
30
(7)
(5)
7
3
(6)
X (11)
30
25
1
(14)
10
4
210
24
(9)
25
45
(8)
420
(14)
(16)
14
13
8
40
5
33
48
(4)
3
55
15
70
225
(25)
420
13
2
4
7
30
95
(2)
(6)
(14)
2
1
(13)
(15)
Less:Treasurystock
13
Dec.31
2006
2153
Problem214(continued) SpreadsheetfortheStatementofCashFlows(continued)
StatementofIncome
Revenues:
Salesrevenue
Dividendrevenue
Expenses:
Costofgoodssold
Salariesexpense
Depreciationexpense
Baddebtexpense
Interestexpense
Lossonsaleofbuilding
Incometaxexpense
Netincome
Cashinflows:
Fromcustomers
Fromdividendsreceived
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinterestexpense
Forincometaxes
Netcashflows
Saleofbuilding
PurchaseofLTinvestment
Purchaseofequipment
Netcashflows
Saleofbondspayable
Netcashflows
Changes
Debits
Credits
Dec.31
2005
(1)
(2)
(3)
(4)
(5)
(1)
(6)
(7)
(8)
(9)
(1)
(2)
Dec.31
2006
200
3
120
25
5
1
8
3
16
25
200
3
(120)
(25)
(5)
(1)
(8)
(3)
(16)
25
202
2
(3)
(4)
(6)
(8)
132
28
5
17
22
(7)
7
(10)
(12)
5
15
(13)
(13)
25
(15)
(16)
13
8
21-54
Netincreaseincash
Totals
584
(17)
13
13
584
2155
DuxCompany
ForyearendedDecember31,2006($in000s)
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinterestexpense
Forincometaxes
$202
2
(132)
(28)
(5)
(17)
Saleofbuilding
Purchaseoflongterminvestment
Purchaseofequipment
7
(5)
(15)
Saleofbondspayable
25
(13)
(8)
Netincreaseincash
$22
(13)
4
13
20
$33
Acquired$30,000oflandbyissuinga13%,7yearnote.
$30
21-56
Problem215
MetagrobolizeIndustries
BalanceSheet
Assets:
Cash
Accountsreceivable
Inventory
Land
Building
Equipment
Patent
Liabilities:
Accountspayable
Accruedexpenses
Leaseliabilityland
Commonstock
Retainedearnings
375
450
525
600
900
(270)
2,250
(480)
1,500
5,850
(14)
(1)
(4)
(2)
(11)
(7)
225
150
375
150
900
270
3,000
675
1,500
5,850
75
(5)
30
300
315
300
(7)
(6)
(4)
(9)
X (2)
(12)
(12)
(12)
(13)
225
450
Dec.31
2006
(3)
(8)
450
225
0
IncomeStatement
Revenues:
Salesrevenue
Gainonsaleofland
Expenses:
Costofgoodssold
Depreciationexpensebuild.
Depreciationexpenseequip.
Changes
Debits
Credits
Dec.31
2005
(10)
300
75
150
750
300
150
150
75
975
3,150
750
(1) 2,645
(3)
(4)
(5)
(6)
(7)
600
30
315
15
600
600
900
675
900
(300)
2,850
(525)
1,200
6,900
90
1,800
6,900
2,645
90
(600)
(30)
(315)
(15)
2157
Operatingexpenses
Netincome
(8)
(9)
(10)
300
500
975
(300)
(500)
975
(continued)

Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Netcashflows
Changes
Debits
Credits
Dec.31
2005
Purchaseofequipment
Saleofland
Saleofequipment
Netcashflows
Netcashflows
Netincreaseincash
Totals
Dec.31
2006
(1) 2,495
(4)
(9)
675
425
1,395
(11)
(3)
(7)
165
15
900
(720)
(13)
8,155
450
(14)
225
8,155
(450)
225
21-58
ForyearendedDecember31,2006($in000)
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
$2,495
(675)
(425)
$1,395
Purchaseofequipment
Saleofland
Saleofequipment
(900)
165
15
(450)
Netincreaseincash
(720)
(450
)
225
375
$600
Landacquiredbycapitallease
$150
2159
Problem216 Requirement1
a.
b.
c.
d.
e.
f.
SummaryEntry
SummaryEntry
SummaryEntry
SummaryEntry
SummaryEntry
SummaryEntry
Baddebtexpense
Accountsreceivable
Allowanceforuncollectibleaccts.
Salesrevenue
153
2
Costofgoodssold
Inventory
Accountspayable
90
6
Salariesexpense
Salariespayable
20
Interestexpense
3
2
150
9
87
3
17
6
3
3
Insuranceexpense
Prepaidinsurance
10
Incometaxexpense
Incometaxpayable
13
2
8
6
7
Depreciationexpense,baddebtexpense,thegainonsaleofequipment,andthelosson
saleoflandarenotcashoutflows.
21-60
Requirement2
Cashpaidtosuppliers
Cashpaidtoemployees
Cashpaidforinterest
$153
(87)
(17)
(3)
(8)
(7)
Netcashflowsfrom
operatingactivities
$31
Problem217
$316a
2b
(114)c
(34)d
(11)e
(16)f
(52)g
$91
Cashincreasefromsaleofcashequivalents
Cashpaidtosuppliers
Cashpaidtoemployees
Cashpaidforinterest
a.
SummaryEntry
Accountsreceivable
Salesrevenue
316
6
310
b.
Thegainonsaleofcashequivalentsindicatesthattotalcashincreasedasaresultof
convertingcashinoneform(saya$10milliontreasurybill)tocashinanotherform
(checkingaccount)*:
2161
SummaryEntry
Cash[checkingaccount]
Gainonsaleofcashequivalents
Cash[treasurybill]
12
2
10
[*Anyotherexampleyouthinkofthatinvolvesagainonsaleofcashequivalentswouldworkaswell.]
c.
SummaryEntry
d.
SummaryEntry
e.
SummaryEntry
Costofgoodssold
Inventory
Accountspayable
120
12
Salariesexpense
Salariespayable
40
Interestexpense
12
18
114
6
34
1
11
f.
SummaryEntry
g.
SummaryEntry
Insuranceexpense
Prepaidinsurance
20
Incometaxexpense[onordinaryincome]
Incometaxexpenseonextraordinarygain
Incometaxpayable
50
12
4
16
10
52
Depreciationexpense,patentamortizationexpense,thelossonsaleofland,andthe
gainareneithercashinflowsnoroutflows.
Problem218
DirectMethod
21-62
Cashpaidtosuppliers
$692
(103)
Cashpaidtoemployees
(111)
(18)
Cashpaidforinterest
(40)
(70)
Netcashflowsfrom
operatingactivities
$350
IndirectMethod
Netincome
Decreaseininventory
Depreciationexpense
Decreaseinbonddiscount
Gainonsaleofbuildings
Lossonsaleofmachinery
$88
(108)
104
93
9
22
123
10
(11)
12
8
2163
Problem219
$350
DirectMethod
Cashincreasefromsaleofcashequivalents
Cashpaidtosuppliers
Cashpaidtoemployees
Cashpaidforinterest
$914
4
(384)
(228)
(35)
(54)
$217
IndirectMethod
Netincome
Increaseininventory
Depreciationexpense
Baddebtexpense
Extraordinaryloss(flooddamage)
Decreaseinincometaxpayable
Problem2110 1.
2. Costofgoodssold
3. ?insalariespayable
$40
14
(10)
(24)
(8)
5
190
12
12
(14)
$217
Cash received from customers
$306
$180
Increase
21-64
4. Cashpaidfordepreciation
[Notreportednocasheffect]
5. Interestexpense
6. Cashpaidforinsurance
7. Increaseinincometaxpayable
8. Netincome
0
$12
$12
$6
$27
2165
Problem2111
ArduousCompany

Changes
Debits
Credits
Dec.31
2005
BalanceSheet
Assets:
Cash
Accountsreceivable
Less:Allowance
Investmentrev.receivable
Inventory
Prepaidinsurance
Longterminvestment
81
202
(8)
4
200
8
125
(21)
Liabilities:
Accountspayable
Salariespayable
Bondinterestpayable
Incometaxpayable
Notespayable
Leaseliability
Bondspayable
Less:Discount
(2)
(4)
(2)
150
400
(120)
32
1,074
(14)
65
11
4
14
8
0
0
275
(25)
(4)
Commonstock
Preferredstock
Retainedearnings
410
85
0
227
(15)
(11)
(8)
2
5
6
25
46
82
35
X
X
(11)
(6)
(7)
(5)
(10)
15
5
(16)
(10)
X (15)
3
23
82
(9)
(17)
(18)
20
10
75
430
95
75
(12)
67
242
(9)
60
(20)
30
22
9
156
196
412
(97)
30
1,218
(9)
(17)
(17)
70
12
2
116
200
(10)
6
205
4
50
6
8
12
11
23
82
215
(22)
X (14)
(19)
Less:Treasurystock
(1)
2
2
(1)
(13)
Land
Patent
35
Dec.31
2006
21-66
1,074
1,218
(continued)

StatementofIncome
Revenues:
Salesrevenue
Investmentrevenue
Gainonsaleoftreasurybills
Expenses:
Costofgoodssold
Salariesexpense
Depreciationexpense
Baddebtexpense
Insuranceexpense
Bondinterestexpense
Incometaxexpense
Extraordinaryloss(flood)
Less:Taxsavings
Netincome
Dec.31
2005
Changes
Debits
Credits
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(1)
(8)
(9)
(10)
(11)
180
65
12
2
8
7
28
45
18
(10)
(12)
67
410
11
2
Dec.31
2006
410
11
2
(180)
(65)
(12)
(2)
(8)
(7)
(28)
(45)
(18)
9
67
2167
(continued)

Dec.31
2005
Cashinflows:
Fromcustomers
Fromsaleofcashequivalents
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinsuranceexpense
Forincometaxes
Netcashflows
Saleofmachinecomponents
Purchaseofland
Netcashflows
Netcashflows
Netincreaseincash
Totals
Changes
Debits
Credits
(1)
(2)
(3)
Dec.31
2006
406
3
2
(4)
(5)
(8)
(9)
(10)
200
70
3
21
35
82
(11)
17
(13)
(14)
25
23
(31)
(18)
(16)
60
(19)
22
9
75
(20)
(21)
1,314
35
1,314
(16
)
35
ArduousCompany
21-68
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinsuranceexpense
Forincometaxes
Purchaseofland
Netincreaseincash
$406
3
2
(200)
(70)
(3)
(21)
(35)
17
(25)
(23)
(60)
75
(22)
(9)
$82
(31)
(16
)
35
81
$116
Acquired$82millionbuildingby15yearcapitallease.
Acquired$46millionoflandbyissuingcashanda15%,4yearnoteasfollows:
Costofland
$46
Cashpaid
23
Noteissued
$23
2169
Problem2112 Requirement1
Retirementofcommonshares
($inmillions)
Commonstock(5millionsharesx$1parpershare)...............................
Paidincapitalexcessofpar($2252)...................................
Retainedearnings(given)............................................................
Cash(given)*...........................................................................
5
15
2
22
*Thistransactionidentifiesa$22millioncashoutflowfromfinancingactivities.
Netincomeclosedtoretainedearnings
Incomesummary................................................................................................
Retainedearnings(given).........................................................
88
88
*The operating activities summarized by this transaction are identified

individuallywhenweexplainthechangesinthecomponentsofnetincome.
Butincludingtheentryonthespreadsheetishelpfulinpartiallyexplaining
changeinretainedearnings.
Declarationofacashdividend
Cash........................................................................................................................
33
33
*Thistransactionidentifiesa$33millioncashoutflowfromfinancingactivities.
Declarationofastockdividend
Commonstock([1055]x4%)millionsharesat$1parpershare)...........
Paidincapitalexcessofpar(difference)................................
20
4
16
*This transaction does not represent a significant investing nor financing

activity,butincludingtheentryonthespreadsheetishelpfulinpartially
explainingchangesinthebalancesofthetwoaccountsaffected.
21-70
Problem2112(concluded) Requirement2
BrennerJudeCorporation
StatementsofRetainedEarnings
FORTHEYEARENDEDDECEMBER31,2006
($inmillions)
BalanceatJanuary1
Netincomefortheyear
Deductions:
Retirementofcommonstock
Cashdividendsof$.33pershare
4%stockdividend
BalanceatDecember31
$90
88
(2)
(33)
(20)
$123
Problem2113
Amount
1. Cashcollectionsfromcustomers(directmethod).
2. Paymentsforpurchaseofproperty,plant,and
equipment.
3. Proceedsfromsaleofequipment.
4. Cashdividendspaid.
5. Redemptionofbondspayable.
$145,0001
$50,0002
$31,0003
$12,0004
$17,0005
I
I
F
F
1SummaryEntry
Accountsreceivable($34,00024,000)
Salesrevenue(given)
145,000
10,000
Category
155,000
2P,P,&E
_________________________________________________________________
Beginningbalance
247
2171
AcquiredwithB/P
20
Purchased
40
Equipmentsold
____________
277
Endingbalance
$277,000+40,000247,00020,000=$50,000
3SummaryEntry
Cash(saleofequipment)
Accumulateddepreciation(determinedbelow)
P,P,&E(given)
Gainonsaleofequipment(given)
31,000
22,000
40,000
13,000
_________________________________________________________________
Equipmentsold
167 Beginningbalance
33 Depreciationexpense
____________
178 Endingbalance
$167,000+33,000178,000=$22,000
4SummaryEntry
Retainedearnings(determinedbelow)
Dividendspayable($8,0005,000)
Cash(paidfordividends)
15,000
3,000
12,000
RetainedEarnings
_________________________________________________________________
91 Beginningbalance
28 Netincome
Dividendsdeclared?
____________
104 Endingbalance
21-72
$91,000+28,000104,000=$15,000
5SummaryEntry
Bondspayable(determinedbelow)
Cash
17,000
17,000
Bondspayable
_________________________________________________________________
Bondsredeemed
46 Beginningbalance
20 IssuedforP,P,&E
____________
49 Endingbalance
$46,000+20,00049,000=$17,000
2173
Problem2114
SurmiseCompany

BalanceSheet
Assets:
Cash
Accountsreceivable
Less:Allowance
Prepaidexpenses
Inventory
Longterminvestment
Land
Buildingsandequip.
Patent
Liabilities:
Accountspayable
Accruedliabilities
Notespayable
Leaseliability
Bondspayable
Commonstock
Retainedearnings
Dec.31
2005
Changes
Debits
Credits
40
96
(4)
5
130
40
100
300
(120)
17
604
(16)
32
10
0
0
125
(7)
50
205
182
604
5
(5)
(3)
(10)
3
15
40
(11)
111
(8)
(6)
(4)
15
12
(12)
X (11)
(13)
60
(14)
(14)
(15)
20
4
8
X
(2)
(9)
Dec.31
2006
(1)
22
1
35
111
10
40
50
45
92
(12)
8
145
80
100
411
(142)
16
743
17
(2)
35
111
65
60
245
212
743
21-74
(continued)
Changes
Debits
Credits
Dec.31
2005
Netincome
Depreciationexpense
Baddebtexpense
Increaseininventory
Increaseinprepaidexpenses
Decreaseinaccruedliabilities
Netcashflows
Netcashflows
Saleofcommonstock
Netcashflows
Netincreaseincash
(1)
50
(2)
22
8
1
4
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Dec.31
2006
15
15
3
12
40
(10)
40
(40)
(12)
(14)
35
(13)
60
(15)
20
50
__
(16)
451
Totals
5
5
451
SurmiseCompany
Netincome
$50
2175
Depreciationexpense
Baddebtexpense
Increaseininventory
Increaseinprepaidexpenses
Decreaseinaccruedliabilities
22
8
1
4
(15)
(15)
(3)
(12)
(40)
Saleofcommonstock
35
(60)
50
(20)
Netincreaseincash
$40
(40)
5
5
40
$45
Acquiredbuildingsbycapitallease
$111
21-76
Problem2115
DuxCompany

BalanceSheet
Assets:
Cash
Accountsreceivable
Less:Allowance
Dividendsreceivable
Inventory
Longterminvestment
Land
Liabilities:
Accountspayable
Salariespayable
Interestpayable
Incometaxpayable
Notespayable
Bondspayable
Less:Discountonbonds
Commonstock
Retainedearnings
Dec.31
2005
Changes
Debits
Credits
20
50
(3)
2
50
10
40
250
(50)
369
(20)
20
5
2
8
0
70
(3)
(9)
200
20
47
(5)
(6)
(7)
(8)
(13)
(14)
(15)
(4)
(10)
(12)
0
369
1
5
5
30
15
30
(4)
(2)
7
3
(11)
X (14)
30
25
1
(17)
10
4
210
24
(1)
25
45
(8)
420
(17)
(19)
14
13
8
40
5
33
48
(4)
3
55
15
70
225
(25)
420
13
2
4
7
30
95
(2)
(3)
(17)
2
1
(16)
(18)
Less:Treasurystock
13
Dec.31
2006
2177
(continued)
Dec.31
2005
Netincome
Depreciationexpense
Amortizationofdiscount
Increaseinallowance
Increaseindividendsreceivable
Increaseininventory
Netcashflows
Saleofbuilding
Purchaseofequipment
Netcashflows
Saleofbondspayable
Netcashflows
Changes
Debits
Credits
(1)
25
(2)
5
1
3
2
1
(3)
(4)
(5)
(6)
(12)
(8)
(9)
22
(4)
7
(13)
(15)
5
15
(13)
(16)
25
(18)
(19)
Netincreaseincash
(20)
___
Totals
(10)
1
5
7
3
(7)
(11)
Dec.31
2006
216
13
8
13
___
4
13
216
21-78
2179
DuxCompany
Netincome
Depreciationexpense
Increaseinallowanceforuncollectibles
Increaseindividendsreceivable
Increaseininventory
$25
5
1
3
2
1
(1)
(5)
(7)
(3)
2
(1)
Saleofbuilding
Purchaseofequipment
7
(5)
(15)
Saleofbondspayable
25
(13)
(8)
Netincreaseincash
$22
(13)
4
13
20
$33
21-80
$30
Problem2116

BalanceSheet
Assets:
Cash
Accountsreceivable
Inventory
Land
Building
Equipment
Patent
Liabilities:
Accountspayable
Accruedexpenses
Leaseliabilityland
Commonstock
Retainedearnings
Dec.31
2005
375
450
525
600
900
(270)
2,250
(480)
1,500
5,850
Changes
Debits
Credits
(15)
(7)
(8)
(11)
(12)
(5)
225
150
375
150
900
270
(2)
75
(3)
30
300
315
300
(5)
(4)
(6)
450
225
0
3,000
675
1,500
5,850
(9)
(10)
X (11)
(13)
(13)
(13)
(14)
225
450
(1)
Dec.31
2006
600
600
900
675
900
(300)
2,850
(525)
1,200
6,900
300
75
150
750
300
150
150
75
975
3,150
750
1,800
6,900
2181
(continued)
Changes
Debits
Credits
Dec.31
2005
Netincome
Gainonsaleofland
Depreciationexpensebuild
Depreciationexpenseequip
Increaseininventory
Increaseinaccruedexpenses
Netcashflows
Purchaseofequipment
Saleofland
Saleofequipment
Netcashflows
(1)
(3)
(4)
(5)
(6)
975
30
315
15
300
(2)
90
(7)
150
375
(8)
(9)
(10)
Netcashflows
Netincreaseincash
300
75
1,395
(12)
(2)
(5)
165
15
900
(720)
(14)
450
(15)
225
4,935
4,935
Totals
Dec.31
2006
(450)
225
Netincome
$975
21-82
Gainonsaleofland
Depreciationexpensebuilding
Depreciationexpenseequipment
Increaseininventory
Increaseinaccruedexpenses
(90)
30
315
15
300
(150)
(375)
300
75
Purchaseofequipment
Saleofland
Saleofequipment
(900)
165
15
(450)
Netincreaseincash
$1,395
(720)
(450
)
225
375
$600
$150
2183
Problem2117
ArduousCompany

Dec.31
2005
BalanceSheet
Assets:
Cash
Accountsreceivable
Less:Allowance
Investmentrev.receivable
Inventory
Prepaidinsurance
Longterminvestment
81
202
(8)
4
200
8
125
Changes
Debits
Credits
(25)
Liabilities:
Accountspayable
Salariespayable
Bondinterestpayable
Incometaxpayable
Notespayable
Leaseliability
Bondspayable
Less:Discount
(7)
(10)
(8)
150
400
(120)
32
1,074
(18)
65
11
4
14
8
0
0
275
(25)
(11)
Commonstock
Preferredstock
Retainedearnings
410
85
0
227
(19)
(16)
(9)
2
5
6
25
46
82
35
X
X
(16)
(2)
(3)
(12)
(14)
15
5
(20)
(15)
X (19)
3
23
82
(4)
(21)
(22)
20
10
75
430
95
75
(1)
67
242
(9)
60
(24)
30
22
9
156
196
412
(97)
30
1,218
(13)
(21)
(21)
70
12
2
116
200
(10)
6
205
4
50
6
8
12
11
23
82
215
(22)
X (18)
(23)
Less:Treasurystock
(6)
2
2
(5)
(17)
Land
Patent
35
Dec.31
2006
21-84
1,074
1,218

(continued)
Dec.31
2005
Netincome
Depreciationexpense
Increaseinallowance
Increaseininvestmentrev.rec.
Equitymethodincome
Increaseininventory
Decreaseintaxpayable
Increaseindeferredtaxliability
Lossonflood(extraordinary)
Netcashflows
Purchaseofland
Netcashflows
Changes
Debits
Credits
(1)
67
(2)
12
2
3
2
2
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(12)
(14)
(11)
(15)
(16)
2
6
5
15
5
(10)
(13)
Dec.31
2006
4
3
18
82
(16)
17
(17)
(18)
25
23
(31)
(22)
(20)
60
(23)
22
9
75
(24)
2185
Netcashflows
Netincreaseincash
Totals
(16
)
(25)
588
35
35
588
ArduousCompany
Netincome
$67
Depreciationexpense
12
2
3
2
Increaseinallowanceforuncollectibleaccounts
2
Increaseininvestmentrevenuereceivable
(2)
Increaseininvestmentduetoequitymethodincome
(6)
4
Increaseininventory
(5)
(15)
(5)
4
(2)
Increaseindeferredtaxliability
3
Lossonflood(extraordinary)
18
$82
17
(25)
Purchaseofland
(23)
(31)
(60)
75
(22)
(9)
(16
)
21-86
Netincreaseincash
35
81
$116
Costofland
Cashpaid
Noteissued
$46
23
$23
2187
ThefollowingproblemsusethetechniquelearnedinAppendix21B.
Problem2118
BALANCESHEETACCOUNTS
_______________________________________________________________
13
Fromcustomers
(1)
(2)
Saleofbuilding
(7)
Saleofbondspayable
(13)
AccountsReceivable
________________________
2
___________________
2
(1)
Inventory
202
2
25
132
28
5
17
(3)
5
15
(10)
13
8
(15)
(4)
(6)
(8)
(12)
(16)
Tosuppliersofgoods
Toemployees
Forinterest
Forincometaxes
Purchaseofequipment
Paymentofdividends
AllowanceforUncollectibles
________________________________
1
(1)
DividendsReceivable
21-88
________________________
5
___________________
5
(3)
________________________
5
___________________
5
25
___________________
15
40
(7)
AccountsPayable
________________________
7
___________________
(3)
LongtermInvestments
Land
________________________________
30
X(11) 30
________________________
(12)
(2)
(10)
________________________________
________________________________
25
(7)
________________________
2
___________________
2
(6)
NotesPayable
(5)
SalariesPayable
________________________________
3
(4)
InterestPayable
30
IncomeTaxPayable
________________________________
1
(8)
1
BondsPayable
2189
________________________
30
___________________
30
1
___________________
25
________________________
4
___________________
(14)
(13)
CommonStock
________________________________
10
10
(6)
25
(11)X
DiscountonBonds
________________________
________________________________
(14)
PaidinCapital
RetainedEarnings
________________________________
2
(14)
(15)
14
13
25
(9)
TreasuryStock
________________________
8
___________________
(16)
Sales
DividendRevenue
21-90
________________________
200
___________________
200
120
___________________
120
DepreciationExpense
________________________
5
___________________
(5)
InterestExpense
________________________
8
___________________
(6)
IncomeTaxExpense
________________________
16
___________________
(8)
(1)
CostofGoodsSold
________________________
(3)
________________________________
16
(2)
SalariesExpense
________________________________
25
(4)
25
BadDebtsExpense
________________________________
1
(1)
LossonSaleofBuilding
________________________________
3
(7)
________________________________
25
(9)
25
2191
DuxCompany
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinterestexpense
Forincometaxes
$202
2
(132)
(28)
(5)
(17)
Saleofbuilding
Purchaseofequipment
7
(5)
(15)
Saleofbondspayable
25
(13)
(8)
Netincreaseincash
$22
(13)
4
13
20
$33
$30
21-92
Problem2119
_______________________________________________________________
Fromcustomers
Saleofland
Saleofequipment
225
(1)
(3)
(7)
2,495
165
15
675
425
(4)
900
(11)
Purchaseofequipment
450
(13)
Paymentofdiv.
(9)
Tosuppliers
Forexpenses
2193
AccountsReceivable
Inventory
________________________
________________________________
150
___________________
(1)
150
(4)
Land
________________________
75
___________________
X(2) 150
75
600
___________________
900
300
(7)
________________________
300
___________________
300
(8)
AccruedExpensesPayable
________________________
75
___________________
75
375
AccumulatedDepr.Buildings
________________________________
30
30
(3)
Equipment
________________________
(11)
375
(9)
(5)
AccumulatedDepr.Equipment
________________________________
45
(7)
270
315
(6)
Patent AccountsPayable
________________________________
300
300
(4)
LeaseLiabilityLand
________________________________
150
150
(2)X
21-94
CommonStock
PaidinCapital
________________________
________________________________
150
___________________
150
75
75
(12)
(12)
RetainedEarnings
________________________
300
___________________
(12)
(13)
225
450
975
(10)
Sales
________________________
2,645
___________________
2,645
GainonSaleofLand
________________________________
90
90
(1)
CostofGoodsSold
________________________
600
___________________
(4)
600
(3)
DepreciationExpenseBuild.
________________________________
30
(5)
30
2195
DepreciationExpenseEquip.
________________________
315
___________________
(6)
315
AmortizationofPatent
________________________
300
___________________
(8)
300
LossonSaleofEquipment
________________________________
15
(7)
15
OperatingExpenses
________________________________
500
(9)
500
________________________
975
___________________
(10)
975
21-96
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
$2,495
(675)
(425)
$1,395
Purchaseofequipment
Saleofland
Saleofequipment
(900)
165
15
(450)
Netincreaseincash
(720)
(450
)
225
375
$600
$150
2197
Problem2120
_________________________________________________________________
Fromcustomers
AccountsReceivable
________________________
2
___________________
2
(1)
35
(1)
(2)
(3)
(11)
(18)
406
3
2
17
75
200
70
3
21
35
(4)
(5)
(8)
(9)
(10)
25
23
(13)
60
22
9
(16)
(14)
(19)
(20)
Tosuppliersofgoods
Toemployees
Forinsurance
Forbondinterest
Forincometaxes
PurchaseofLTinvest.
Purchaseofland
Retirementofbonds
Paymentofdividends
Purch.oftreas.stock
AllowanceforUncollectibles
________________________________
2
(1)
21-98
PrepaidInsurance
________________________
4
___________________
4
(8)
Inventory
________________________________
5
(4)
InvestmentRevenueReceivable Longterm
Investments
________________________
________________________________
2
___________________
(2)
31
(2)
(13)
Land
________________________
46
___________________
X(14) 46
23
___________________
(11)
35
12
12
82
15
___________________
15
70
(11)
Patent
________________________________
2
(6)
AccountsPayable
________________________
(4)
________________________________
X(15)
________________________
6
25
(7)
SalariesPayable
________________________________
5
(5)
2199
BondInterestPayable
IncomeTaxPayable
________________________
________________________________
4
___________________
4
(9)
(10)
________________________
3
___________________
3
82
___________________
(15)X
DiscountonBonds
________________________
3
___________________
3
(9)
PaidinCapital
________________________
10
___________________
10
23
23
(10)
LeaseLiability
________________________
82
DeferredTaxPayable
NotesPayable
________________________________
(17)
(14)X
BondsPayable
________________________________
60
(16)
60
CommonStock
________________________________
20
20
(17)
PreferredStock
________________________________
75
75
(18)
21-100
RetainedEarnings
________________________
15
___________________
(17)
(19)
30
22
67
(12)
TreasuryStock
________________________________
9
(20)
Sales
________________________
410
___________________
410
2
___________________
(3)
SalariesExpense
________________________
65
___________________
(5)
InvestmentRevenue
________________________________
11
11
(1)
GainonSaleofTreasuryBills
________________________
65
(2)
CostofGoodsSold
________________________________
180
(4)
180
DepreciationExpense
________________________________
12
(6)
12
21101
________________________
2
___________________
(7)
7
___________________
7
45
___________________
45
28
9
___________________
9
(10)
28
ExtraordinaryLoss(Flood)
________________________________
18
(11)
TaxSavings
________________________
BondInterestExpense
________________________________
(9)
IncomeTaxExpense
________________________
(10)
(1)
InsuranceExpense
________________________
(8)
PatentAmortizationExpense
BadDebtsExpense
________________________________
18
________________________________
67
(12)
67
21-102
ArduousCompany
Cashinflows:
Fromcustomers
Cashoutflows:
Tosuppliersofgoods
Toemployees
Forinsuranceexpense
Forincometaxes
$406
3
2
(200)
(70)
(3)
(21)
(35)
Purchaseofland
17
(25)
(23)
(60)
75
(22)
(9)
Netincreaseincash
$82
(31)
(16
)
35
81
$116
Costofland
$46
21103
Cashpaid
Noteissued
CASES
23
$23
Memorandum
CommunicationCase211
To:
From:
Date:
RE:
Mr.RobertJames
YourName
CurrentDate
Discrepancybetweenprofitabilityandcashflows
Ouroperatingresultsforthefirsthalfoftheyeardemonstratethatitispossiblefor
operatingactivitiestosimultaneouslyproduceapositivenetincomeandnegative
netcashflows.Netincomewas$5million.Cashflowfromoperatingactivitiesfor
theperiodwasnegative$16million.
Generallyacceptedaccountingprinciplespermitustoreportcashflowsbyeitherof
twomethodsthedirectortheindirectapproachasfollows:
21-104
($inmillions)
[DirectMethod]
Cashinflows:
Fromcustomers($7520)
Cashoutflows:
Tosuppliersofgoods($30+152)
Forotherexpenses($357)
Case211(concluded)
Netincome
Depreciationexpense
Increaseininventory
Increaseinaccruedexpensespayable
$55
(43)
(28)
$(16)
[IndirectMethod]
$5
5
(20)
(15)
2
7
$(16)
Thereasonfortheapparentdiscrepancybetweencashflowsandnetincomeisdue
to the way the two items are measured. Net income (or loss) is the result of
combiningtherevenuesearnedduringthereportingperiod,regardlessofwhencash
isreceived,andtheexpensesincurredingeneratingthoserevenues, regardlessof
whencashispaid.Werefertothisastheaccrualconceptofaccounting.Onthe
otherhand,"cashflowsfromoperatingactivities"arebothinflowsandoutflowsof
cashthatresultfromthesameactivitiesthatarereportedontheincomestatement.
Inotherwords,thisclassificationofcashflowsincludestheelementsofnetincome,
butreportedonacashbasis.
LetmeknowifIcanprovideyouadditionaldetails.
21105
JudgmentCase212
DaringCompany
Cashinflows:
Fromcustomers($10025)
Cashoutflows:
Tosuppliersofgoods($50+2010)
Forremainingexpenses($255)
$75
(60)
(20)
Purchaseofoperationalassets(given)
Issuanceofcommonstock
Netincreaseincash
$(5)
(55)
$45
20
65
$5
0
$5
Yourconcernsarejustifiedinthesensethatcashflowsareinsufficienttocover
existinginterestcharges,nottomentionadditionalchargesfromnewdebt.Infact,the
principal on the debt of $45,000 will come due shortly in addition to additional
interest. Althoughnetincomeispositive,cashflowsfromoperatingactivitiesare
negative.Adifferencebetweencashflowsandnetincomecanexistduetotheway
the two items are measured. Net income, measured on an accrual basis, is the
difference between the revenues earned during the reporting period, regardless of
when cash is received, and the expenses incurred in generating those revenues,
regardlessofwhencashispaid.Cashflowsfromoperatingactivitiesareinflowsand
21-106
outflowsofcashresultingfromthesameactivitiesthatarereportedontheincome
statement.
Case212(concluded)
Ontheotherhand,thenegativecashflowfromoperations
is not reason, in and of itself, for rejecting the application.
Profitispositive.Thereasonnetincomeismeasuredonanaccrualbasisratherthana
cash basis is that very often, net income is a better indication of performance,
particularly longterm performance, than cash flow. However, many promising
companiesthathavereportedprofitshavefailedduetocashshortages.Goodbusiness
managersunderstandthatbottomlinenetincomehaslittletodowithmaintaining
solvency.Bybeingabletoaccuratelypredictthetimingandamountsofcashflows,
companiescanremainafloatandalsoavoidfinancingchargescausedbyhavingto
undertakeemergencyborrowing,asisthecasehere.
The bottom line is that additional information is needed. One cause of the
negativeoperatingcashflowsistheacquisitionofalargeamountofinventorythatis
unsold. Ifproductdemandisstrong,thisisfavorable. Whyarethoseinventories
unsold?Whatistheprojectedgrowthrateinrevenues?Anotherconcernmaybethe
ratherhighbalanceinaccountsreceivable.Cashcollectedfromcustomerswasonly
75% of sales for the year. Is credit policy too lax? On the other hand, if the
uncollectedreceivablesaroseprimarilyasaresultofheavyyearendsalesandare
eminently collectible, the cash flow situation will benefit. Another practical
considerationisthefactthatthebankalreadyhasa$45,000investmentinthisnew
company,aninvestmentthatlikelywillbelostifthecompanyisdeniedthenewfunds
itseeks.
Integrating Case 21-3
Requirement1
Calculation of the present value of lease payments

$391,548x15.32380
presentvalueofanannuitydueof$1:n=20,i=3%
$6,000,000
(rounded)
Richardswouldreportthe$6,000,000*investmentintheproteinanalyzerand
itsfinancingwithacapitalleaseasasignificantnoncashinvestingandfinancing
activityinthedisclosurenotestothefinancialstatements.
21107
The$783,096($391,548x2)cashleasepayments*,**aredividedintothe
interestportionandtheprincipalportion.Theinterestportion,$168,254,is
reportedascashoutflowsfromoperatingactivities.Theprincipalportion,
$391,548+223,294,isreportedascashoutflowsfromfinancingactivities.
Note:Bytheindirectmethodofreportingcashflowsfromoperatingactivities,
wewouldaddbacktonetincomethe$300,000depreciationexpense
sinceitdidntactuallyreducecash.The$168,254interestexpensethat
reducednetincomeactuallydidreducecash[theinterestportionofthe
$783,096($391,548x2)cashleasepayments],soforit,noadjustmentto
netincomeisnecessary.
Calculations:
September30,2006*
Leasedequipment(calculatedinreq.1)............................
Leasepayable(calculatedinreq.1)..............................
Leasepayable.................................................................
Cash(rentalpayment)...................................................
December31,2006**
Interestexpense(3%x[$6million391,548]).................
Leasepayable(difference)...............................................
Cash(rentalpayment)...................................................
Depreciationexpense($6million/5yearsxyear)........
Accumulateddepreciation...........................................
6,000,000
391,548
168,254
223,294
300,000
6,000,000
391,548
391,548
300,000
21-108
Case213(continued)
Requirement2
Advancedwouldreportthe$6,000,000*directfinancingleaseoftheprotein
analyzerasasignificantnoncashinvestingactivity(acquiringoneassetand
disposingofanother)inthedisclosurenotestothefinancialstatements.
The$783,096($391,548x2)cashleasepayments*,**aredividedintothe
interestportionandtheprincipalportion.Theinterestportion,$168,254,is
reportedascashinflowsfromoperatingactivities.Theprincipalportion,
$391,548+223,294,isreportedascashinflowsfrominvestingactivities.
the$168,254interestrevenuethatincreasednetincomeactuallydid
increasecash[theinterestportionofthe$783,096($391,548x2)cash
leasepayments],soforit,noadjustmenttonetincomeisnecessary.
Calculations:
September30,2006*
Leasereceivable($391,548x20).....................................
Unearnedinterestrevenue($7,830,9606,000,000)....
Inventoryofequipment(lessorscost).........................
Cash(rentalpayment).......................................................
Leasereceivable..........................................................
December31,2006**
Unearnedinterestrevenue..............................................
Interestrevenue(3%x[$6,000,000391,548])............
7,830,960
391,548
391,548
168,254
1,830,960
6,000,000
391,548
391,548
168,254
21109
Case213(continued)
Requirement3
Makerswouldreportthe$6,000,000*salestypeleaseoftheproteinanalyzeras
asignificantnoncashactivityinthedisclosurenotestothefinancialstatements.
The$783,096($391,548x2)cashleasepayments*,**areconsideredtobecash
flowsfromoperatingactivities.Asalestypeleasediffersfromadirect
financingleaseinthatweassumethelessorisactuallysellingitsproduct,an
operatingactivity.Thus,boththeinterestportion,$168,254,andtheprincipal
portion,$391,548+223,294,arereportedascashinflowsfromoperating
activities.
the$1,000,000(Salesrevenue:$6,000,000Costofgoodssold:
$5,000,000)dealersprofitmustbedeductedfromnetincomebecauseit
isincludedinnetincomebutwontincreasecashflowsuntilthelease
paymentsarecollectedoverthenextfiveyears.Thisaddition,however,
occursautomaticallyaswemaketheusualadjustmentsforthechangein
receivables(toadjustsalestocashreceivedfromcustomers)andforthe
changeininventory(toadjustcostofgoodssoldtocashpaidto
suppliers).
The$168,254interestrevenuethatincreasednetincomeactuallydid
increasecash[theinterestportionofthe$783,096($391,548x2)cash
leasepayments],soforit,noadjustmenttonetincomeisnecessary.The
principalportion,$391,548+223,294,mustbeaddedbecauseitisnot
otherwiseincludedinnetincome.This,too,though,occursautomatically
aswemaketheusualadjustmentsforthechangeinreceivables(toadjust
salestocashreceivedfromcustomers).
Noncashadjustmentstoconvertnetincometocashflowsfrom
operatingactivities:
Increaseinleasereceivable............................
($7,830,960)
Increaseinunearnedinterest(contraleasereceivable)
1,830,960
21-110
Decreaseininventoryofequipment...............
5,000,000
Decreaseinleasereceivable,Sept.30............
391,548
Decreaseinleasereceivable,Dec.31............
391,548
Decreaseinunearnedinterest(contraleasereceivable),Dec.31 (168,254)
21111
Case213(concluded)
Calculations:
September30,2006*
Leasereceivable($391,548x20).....................................
Costofgoodssold(lessorscost).....................................
Salesrevenue(presentvalue).......................................
Unearnedinterestrevenue($7,830,9606,000,000)....
Inventoryofequipment(lessorscost).........................
December31,2006**
Unearnedinterestrevenue..............................................
Interestrevenue(3%x[$6,000,000391,548])............
Research Case 21-4
7,830,960
5,000,000
391,548
391,548
168,254
6,000,000
1,830,960
5,000,000
391,548
391,548
168,254
Requirement 1
From Microsofts disclosure note regarding unearned revenue:

Unearned Revenue
. The percentage of revenue recorded as unearned due to undelivered elements
ranges from approximately 15% to 25% of the sales price for Windows XP Home,
approximately 5% to 15% of the sales price for Windows XP Professional, and
approximately 1% to 15% of the sales price for desktop applications. .
So, 5% to 15% of the sales price for Windows XP Professional is initially recorded as
unearned revenue.
Requirement 2
21-112
The statement of cash flows includes unearned revenue as an addition to net

income in the operations section because this is the amount of revenue collected in cash
but not included in the income statement. Conversely, recognition of unearned
revenue is included as a deduction from net income because this amount previously
recorded as unearned revenue when collected, now is being recognized included in
revenue. The recognition now does not increase cash, so subtracting this amount
serves to convert net income to a cash basis. Microsoft reported these two items
separately rather than just adjusting net income for the change in the unearned revenue
account balance because, even though adjusting for the net change would produce the
same net result, the dollar amounts are sufficiently large that separate reporting is
deemed more informative.
Requirement 3
Stock-based compensation is recorded as a fraction of the fair value of such
compensation (restricted stock, stock options, SARs) on the date of grant.
There is no cash flow associated with such compensation, so the expense is
added back to net income to remove this noncash item from the determination
of cash from operating activities.
Analysis Case 21-5

Requirement 1
(a)
Cash
_________________________________________________________________
Beginningbalance
?
Netincrease(fromSCF) 183
____________
Endingbalance
360
BeginningCash+Netincreaseincash=EndingCash
BeginningCash+183=360
BeginningCash=360183
21113
BeginningCash=177
(b)
AccountsReceivable
_________________________________________________________________
Beginningbalance
Sales(fromIS)
252
240
213 Collectedfromcustomers(fromSCF)
____________
Endingbalance
EndingAccountsReceivable=
BeginningAccountsReceivable+SalesCashcollections=
252
+240
213
= 279
Case215(continued)
(c)
AccountsPayable
_________________________________________________________________
90 Beginningbalance
Cashpaidtosuppliers
Purchases
90
____________
120 Endingbalance
BeginningA/P+PurchasesCashPaid=EndingA/P
90
+Purchases
90
=120.
90
+Purchases
90
=120.
Therefore,Purchases=120
Inventory
_________________________________________________________________
Beginningbalance
?
Purchases(fromabove) 120
96 Costofgoodssold(fromIS)
____________
21-114
Endingbalance
180
BeginningInventory+PurchasesEndingInventory=Costofgoodssold
BeginningInventory+120
180
=96
BeginningInventory=96120+180
BeginningInventory=156
Case215(continued)
(d)
Gainonsaleofequipmentwas45;Cashreceivedwas120;therefore,bookvalueof
equipmentwas75.Sincethecostofequipmentsoldwas150(600450),accumulated
depreciationmusthavebeen75.
SummaryEntry
Cash(fromSCF)
Accumulateddepreciation(tobalance)
P,P,&E(450600)
Gainonsaleofequipment(fromIS)
120
75
150
45
_________________________________________________________________
Beginningbalance
30 Depreciationexpense
Equipmentsold(fromabove) 75
____________
120 Endingbalance
BeginningAccumulateddepreciation+DepreciationexpenseAccumulated
depreciationonequipmentsold=EndingAccumulateddepreciation
BeginningAccumulateddepreciation+3075=120
BeginningAccumulateddepreciation=12030+75=165
(e)
IncomeTaxesPayable
_________________________________________________________________
Cashpaid(fromSCF)
27
Beginningbalance
21 Incometaxexpense
21115
____________
66 Endingbalance
Beg.Inc.taxespayable+Inc.taxexpenseInc.taxespaid=EndingInc.taxespayable
Beg.Inc.taxespayable=EndingInc.taxespayable+TaxespaidInc.taxexpense
Beg.Inc.taxespayable=
66
+27
21 =72
Case215(continued)
(f)
RetainedEarnings
_________________________________________________________________
Dividendsdeclared9
141 Beginningbalance
84 Netincome
____________
Endingbalance
EndingR/E=BeginningR/E+NetincomeDividends
=141
+84
9
=216
Distinctive Industries
Comparative Balance Sheets
At December 31
2006
2005
Assets:
Cash
Accounts receivable (net)
Inventory
Property, plant & equipment
Less: Accumulated depreciation
Total assets
$ 360
279
180
450
(120)
$1,149
$ 177
252
156
600
(165)
$1,020
Liabilities and shareholders equity:

Accounts payable
General and administrative expenses payable
Income taxes payable
Common stock
Retained earnings
$ 120
27
66
720
216
$ 90
27
72
690
141
21-116
Total liabilities and shareholders equity

Case215(concluded)
$1,149
$1,020
Requirement 2
DistinctiveIndustries
FortheYearEndedDecember31,2006
($inmillions)
Netincome
Adjustmentstonetincome:
Depreciationexpense
Increaseinaccountsreceivable(net)*
Increaseininventory**
Increaseinaccountspayable***
Decreaseinincometaxespayable****
Netcashinflowsfromoperatingactivities
$84
30
(45)
(27)
(24)
30
(6)
$42
*
$279252=$27
** $180156=$24
*** $12090=$30
**** $6672=$(6)
Real World Case 21-6
Requirement 1
In the three years, Cingulars largest investing activity was construction and capital
expenditures. Investments used a large amount of cash as well. In fact, the single
largest expenditure was for the acquisition of AT&T in 2004. A look at financing
activities reveals that funds from external financing were insufficient to fund these and
other investments. In fact, in 2003, financing activities produced a decrease, not an
increase, in cash. The bulk of the funds for investments came from cash provided by
operations (internal financing) in each year.
Requirement 2
21117
Transactions that involve merely transfers from cash to cash equivalents such as the
purchase of a CD should not be reported in the statement of cash flows. A dollar
amount is simply transferred from one "cash" account to another "cash" account so that
the total of cash and cash equivalents is not altered by such transactions. An exception
is the sale of a cash equivalent at a gain or loss. In this case, the total of cash and cash
equivalents actually increases or decreases. The increase or decrease is reported as a
cash flow from operating activities.
Requirement 3
The sale of debt and the sale of stock are reported as financing activities.
Requirement 4
The payment of cash dividends to shareholders is classified as a financing activity, but
paying interest to creditors is classified as an operating activity. This is because "cash
flows from operating activities" should reflect the cash effects of items that enter into
the determination of net income. Interest expense is a determinant of net income. A
dividend, on the other hand, is a distribution of net income and not an expense.
21-118
Case 21-6 (concluded)

Requirement 5
A statement of cash flows reports transactions that cause an increase or a decrease in
cash. However, some transactions that do not increase or decrease cash, but which
result in significant investing and financing activities, must be reported in related
disclosures. Entering a significant investing activity and a significant financing activity
as two parts of a single transaction does not limit the value of reporting these activities.
Examples of noncash transactions that would be reported:
Acquiring an asset by incurring a debt payable to the seller.
Acquiring an asset by entering into a capital lease.
Converting debt into common stock or other equity securities.
Exchanging noncash assets or liabilities for other noncash assets or liabilities.
21119
EthicsCase217
Discussionshouldincludetheseelements.
Theapparentsituation:
Thereseemstobeatleastsuperficialevidencethatincomeisbeingartificially
proppedupbymanagementpracticesthatmightnotbehealthyforthecompanyin
the long run. Ben apparently suspects the motivation may be partly due to
managementcompensationtiedtoreportedprofits.
EthicalDilemma:
DoesBenhaveanobligationtochallengethequestionablepractices? Ifhis
suspicionsareconfirmed,whataction,ifany,shouldhetake?
Whoisaffected?:
Ben
President,controller,andothermanagers
Shareholders
Potentialshareholders
Theemployees
Thecreditors
Thecompanysauditors
21-120
RealWorldCase218
Requirement 1
Cashflowsfromoperatingactivitiesarebothinflowsandoutflowsofcashthat
resultfromthesameactivitiesthatarereportedontheincomestatement.Theincome
statement,however,reportstheactivitiesonanaccrualbasis. Thismeansthatthe
incomestatementreportsrevenuesearnedduringthereportingperiod, regardlessof
when cash is received, and the expenses incurred in generating those revenues,
regardlessofwhencashispaid. Cashflowsfromoperatingactivities,ontheother
hand,reportthoseactivitieswhenthecashisexchanged(i.e.,onacashbasis).
Requirement 2
DepreciationisthemajorcontributortotheNorthwesthavingpositivecashflows
fromoperatingactivitiesdespiteanetloss.Whenusingtheindirectmethod,thenet
cashincreaseordecreasefromoperatingactivitiesisderivedindirectlybystarting
withreportednetincome,ornetlossinthiscase,and"workingbackwards"toconvert
thatamounttoacashbasis.Amountsthatweresubtractedindeterminingnetincome
orloss,butwhichdidnotreducecash,areaddedbacktonetincometoreversethe
effectoftheamountshavingbeensubtracted.Depreciationandamortizationexpense
isoneexample.In2004,thatwas$731millionforNorthwest.
Requirement 3
Whenassetsaresoldatagain,thegainisnotreportedasacashinflowfrom
operatingactivities.Again(orloss)issimplythedifferencebetweencashreceivedin
thesaleofanassetandthebookvalueoftheasset;itsnotacashflow. Thecash
effectofthetransactionisreportedasaninvestingactivity. Toreportthegainasa
cashflowfromoperatingactivities,inadditiontoreportingtheentirecashflowfrom
investingactivities,wouldbetoreportthegaintwice.
Theresultsstudentsreportwillvarydependingonthe
ResearchCase219companieschosen. Itcanbeinterestingtohavestudents
compare in class their findings with those of their

classmates.
Most companies use the indirect method to report operating activities.
Adjustmentstonetincomeinreconcilingnetincomeandcashflowsfromoperations
21121
arereportedonthefaceofthestatementofcashflowswhentheindirectmethodis
usedandinaseparatereconciliationschedulewhenthedirectmethodisused.
The cash payments for interest and for taxes are reported on the face of the
statementofcashflowswhenthedirectmethodisusedandinaseparatedisclosure
notewhentheindirectmethodisused.
Significantinvestingactivitiescanpointtonewdirectionsinwhichthecompany
maybemovingorperhapsmayindicatethatinvestmentfundsarebeinginvestedin
passive peripheral activities for lack of profitable opportunities in mainstream
operations.
Whatcombinationofdebtandequitydoesacompanyusetofinanceitsactivities?
Significantfinancingactivitiesinrecentyearscanpointtoshiftsinthatcombination.
AnalysisCase2110
1. FedExisexpandingitsbusinessasevidencedbytheinvestingactivities.External
financing need not be sufficient to fund those investments because of the
substantial internal financing provided by operating activities. Notice that
dividends to shareholders are relatively small, so most funds from operating
activitiesarebeingreinvestedinthebusiness.
2.
Thesixactivitieslistedunderfinancingactivitiesforthe2004fiscalyearare
($inmillions):
FinancingActivities
2004
2003
2002
Principalpaymentsondebt
(319)
(10)
(320)
Proceedsfromdebtissuances
1,599
Proceedsfromstockissuances
115
81
88
Dividendspaid
(66)
(60)
(179)
(186)
(177)
Other,net
1
3
Cashfromfinancingactivities
1,150
(174)
(406)
ThestatementtellsusthatFedExborrowedmuchmorecashin2004thanitpaidto
retiredebtafternotborrowinganythetwopreviousyears.Alsonoteworthyisthat
FedExpaidnodividendspriorto2003.Arelativelysmallamountofcashalsowas
received from sale of stock. [Reference to FedExs Statement of Changes in
21-122
CommonStockholdersInvestmenttellsusthatstockwassoldorgrantedunder
employeebenefitplansratherthanbeingsoldtothepublic.]
3. Companiesarerequiredtoseparatelydisclosecashpaymentsforbothinterestand
incometaxes.Whenthedirectmethodisusedtoreportoperatingactivities,those
amountsautomaticallyareshown.Butwhenacompanyusestheindirectmethod
asFedExdoes,supplementaldisclosureisneeded.Note14inthedisclosurenotes
servesthispurpose:
Note14:SupplementalCashFlowInformation
CashpaidforinterestexpenseandincometaxesfortheyearsendedMay31wasas
follows:
Inthousands
Interest(netofcapitalizedinterest)
Incometaxes
2004
$151
364
2003
$125
53
2002
$146
312
21123

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Chapter 21 The Statement of Cash Flows Revisited

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Chapter21

on the balance sheet, and the cash

*December 31, 2006

Net cash inflows from investing activities

Cash Flows From Financing Activities:

Purchase of treasury stock

Net cash inflows from financing activities

Brief Exercise 21-11

Brief Exercise 21-12

June 30, 2006*

December 31, 2006**

*December 31, 2006

Exercise 21-13 Requirement 1

Payment for the early extinguishment of

Exercise 21-14 Requirement 1

Purchase of marketable securities (not a cash equivalent)

Collection of note receivable with interest (principal amount)

Sale of common shares

Retirement of common shares

Issuance of short-term note payable for cash

Wilson would report the $3,000,000* investment in the commercial food

present value of an annuity due of $1: n=20, i=3%

December 31, 2006**

The operating activities summarized by this transaction are identified

This transaction identifies a $25 million cash outflow from financing

This transaction does not represent a significant investing or financing

This noncash transaction identifies both a $12 million financing activity

*The operating activities summarized by this transaction are identified

*This transaction does not represent a significant investing nor financing

Integrating Case 21-3

Calculation of the present value of lease payments

Research Case 21-4

From Microsofts disclosure note regarding unearned revenue:

The statement of cash flows includes unearned revenue as an addition to net

Analysis Case 21-5

Liabilities and shareholders equity:

Total liabilities and shareholders equity

Real World Case 21-6

Case 21-6 (concluded)

compare in class their findings with those of their

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