Chapter 16 PDF

Principles of
Financial Accounting
John J Wild
Ken W Shaw
Barbara Chiappetta
Winston Kwok
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Chapter 16 - Statement of Cash Flows
Chapter 16
Statement of Cash Flows
QUESTIONS
1.
The purpose of the statement of cash flows is to report all major cash receipts (inflows)
and cash payments (outflows) during a period. It helps users to answer questions such
as:
How does a company obtain its cash?
Where does a company spend its cash?
What explains the change in the cash balance?
2.
The direct method of reporting cash flows from operating activities itemizes the major
classes of cash receipts such as sales to customers, and also itemizes the major
classes of cash payments such as for merchandise, interest, taxes, and other operating
expenses.
3.
On a statement of cash flows prepared according to the direct method, operating

activities generally include cash receipts from the sale of goods and services, cash
dividends received from share investments in other entities, and interest on loans to
others.
Operating activities also include cash outflows such as payments for
merchandise, salaries, rent, income taxes, utilities, and other operating expense items.
4.
The indirect method of reporting cash flows from operating activities begins with
income before taxes and then adjusts it for items that are necessary to reconcile net
income to the net cash provided or used by operating activities.
5.
On a statement of cash flows, investing activities include cash outflows from purchases
of long-term investments such as shares and bonds, from purchases of property, plant
and equipment such as land, buildings, and machinery, and from purchases of other
noncurrent assets such as natural resources and intangible assets. When these types
of assets are sold, the cash inflows from the sales are also reported as investing
activities.
6.
On a statement of cash flows, financing activities include cash inflows such as those
that result from issuing preference or ordinary shares, and from borrowing by issuing
bonds or signing long-term or short-term notes payable. Financing activities also
include cash outflows such as dividend payments to shareholders, purchases of
treasury shares, and repayments of debt.
7.
Payments of cash dividends can be reported on the statement of cash flows as

operating or financing activities.
8.
The amount of the land purchase that was paid for in cash ($20,000) should be reported
on the statement of cash flows as an investing activity. Also, a schedule of noncash
investing and financing activities or the notes to the statement should show the
16-1
$100,000 land investment, the $80,000 financing in the form of a long-term note payable,
and the net $20,000 cash outflow.
9. Since this cash inflow results from borrowing money, it is reported on the statement of
cash flows as a financing activity.
10. Yes; even though a company reports positive net income for the year, it may still show a
net cash outflow from operating activities. When income is reconciled to the net cash
flow from operating activities, the net effect of all the adjustment items may be a
subtraction from income (examples of such adjustments are accrued revenues, prepaid
expenses, and other gains). If the amount of this net subtraction is larger than the
income, the result is net cash used by operating activities.
11. Depreciation is not a source or a use of cash, even though it must be added to net
income when the net cash flow from operating activities is calculated by the indirect
method. (Note: When depreciation is deducted on the tax return of a corporation, the
effect is to reduce taxable income and reduce the cash outflow for income taxes.)
12. (a) Indirect method. (b) The increase in trade receivables represents an amount by
which the company had cash tied up in receivables versus being held in cash.
Therefore, the amount must be deducted from income.
13. Adidas statement of cash flows shows several major financing activities for the year
ended December, 2010 Euro millions):
Proceeds from long-term borrowings ...........................................................................
33
Dividends paid to shareholders of adidas AG .............................................................
(73)
Cash repayment of short-term borrowings ..................................................................
(198)
Net cash used in financing activities ............................................................................
(238)
14. Nestls net cash (Euro millions) from operating activities is 13,609; its net cash from
investing activities is 14,549, and its net cash used in financing activities is 25,808.
15. GOMEs four investing activities yielding cash outflows for the year ended December 31,
2010, are (RMB000):
Purchases of PPE ............................................................................................................ (507,287)
Proceeds from disposal of PPE .....................................................................................
746
Increase in a designated loan ........................................................................................ (48,000)
Proceeds from disposals of HK listed investments.
1,606
Net cash flows used in investing activities. (552,935)
QUICK STUDIES
Quick Study 16-1 (10 minutes)
1.
2.
3.
4.
5.
Operating
Financing or Operating
Operating
Operating
Operating
6.
7.
8.
9.
10.
Investing*
Operating or Investing
Operating
Financing
Investing
* For indirect method, the loss is reported as an adjustment (add-back) to income in operating section.
16-2

1. The statement of cash flows reports the cash (and cash equivalent)
activities of a business for a specific accounting period. The cash flows
are classified into operating, investing, and financing activities. The net
change in cash as well as the beginning and ending cash balances are also
reported on the statement.
2. Examples of significant noncash financing and investing activities
Exchange of shares or debt securities for noncash assets
Conversion of bonds into shares
Purchase of long-term assets by issuing notes payable to seller
Settle debt with noncash assets (such as giving equipment to pay off loan)
3. Examples of transactions classified as financing activities
Bond retirement and issuance
Issuance and settlement of notes payable
Ordinary shares issuance
Cash paid for dividends
Treasury shares acquisitions
Owner contributions and withdrawals
4. Examples of transactions classified as investing activities
Property, plant and equipment purchases
Property, plant and equipment sales
Investment in debt and equity securities (except trading securities)
Intangible asset acquisitions and disposals
16-3

Income taxes payable
Beg Bal
Income taxes paid
Income taxes expense
End Bal
8,800
30,800
8,200
8,800 + 30,800 Income taxes paid = 8,200

Solving for Income tax paid = 31,400
Cash flows from operating activities

Income before taxes ...............................................................
Adjustments to reconcile income to operating cash flow
Depreciation.......................................................................... $144,000
Accounts receivable decrease ............................................
28,000
Inventory increase ................................................................ (23,600)
Accounts payable increase..................................................
18,800
Cash flows generated from operations
Income taxes paid
Net cash provided from operating activities.........................
16-4
$103,600
167,200
270,800
(31,400)
$239,400

Computation of cash inflow from sale of furniture
Cost of furniture sold (given) ................................................
$105,000
Accumulated depreciation at beginning of year (given) ..... $121,400
Increase from depreciation expense (given)........................
36,000
Total expected accumulated depreciation........................ 157,400
Actual accumulated depreciation at end of year (given) .... (74,400)
Accumulated depreciation on sold furniture .......................
83,000
Cash received from sale of furniture at carrying amount ...
$ 22,000
Part 1
Computation of cash received from the sale of ordinary shares
Increase in Share capital ($310,000 - $300,000) .................................. $ 10,000
Increase in Share premium
($1,134,000 - $684,000)....................................................................... 450,000
Cash received from the sale of ordinary shares................................. $460,000
Part 2
Computation of cash paid for dividends
Beginning retained earnings ................................................................ $575,000
Net income............................................................................................. 196,000
Total expected retained earnings..................................................... 771,000
Actual ending retained earnings.......................................................... (627,000)
Cash paid for dividends........................................................................ $144,000
16-5

Cash Flows from Operating Activities (Indirect)
Case A
Case B
Case C
Income before taxes ....................................... $ 30,000 $145,000 $120,000
Adjustments to reconcile income to net
cash provided by operations
Depreciation .............................................
60,000
16,000
48,000
Changes in assets and liabilities
Accounts receivable ................................
(80,000) (40,000)
8,000
Inventories................................................
40,000
20,000 (21,000)
Accounts payable ....................................
28,000
(44,000)
16,000
Accrued liabilities ....................................
Cash generated by operations
(88,000)
(10,000)
10,000
107,000
(16,000)
155,000
Tax paid
(10,000)
(20,000)
(15,000)
Cash provided by (used in) operations......... $ (20,000) $ 87,000 $140,000
16-6

Investing Activities
Purchase of used equipment............................................................ $(10,000)
Sale of short-term investments ........................................................ 16,000
Cash provided by investing activities.............................................. $ 6,000
Financing Activities
Additional short-term borrowings .................................................... $ 88,000
Cash dividends paid.......................................................................... (32,000)
Interest paid ....................................................................................... (17,000)
Cash provided by financing activities.............................................. $ 39,000
Beg Bal
Income taxes paid
End Bal
3,600
24,600
2,400

Income before taxes.......................................................................
Adjustments to reconcile net income to operating cash flow
Depreciation................................................................................. $38,600
Accounts receivable decrease ...................................................
10,000
Inventory decrease......................................................................
10,000
Prepaid expense increase...........................................................
(1,200)
Accounts payable decrease .......................................................
(6,000)
Wages payable increase .............................................................
4,000
Cash flows generated from operations
Income taxes paid
55,400
115,800
270,800
(25,800)
(31,400)
Net cash provided by operating activities ...................................
$90,000
16-7
$60,400

Computation of cash inflow from sale of furniture
Cost of furniture sold (given) ...............................................
Accumulated depreciation at beginning of year (given) ....
Increase from depreciation expense (given).......................
Total expected accumulated depreciation.......................
Actual accumulated depreciation at end of year (given) ...
Accumulated depreciation on sold furniture ......................
Cash received from sale of furniture at carrying amount ..
$54,000
$10,000
38,600
48,600
(18,000)
30,600
$23,400

1. Computation of cash paid for dividends
Beginning retained earnings................................................
Net income.............................................................................
Total expected retained earnings.....................................
Actual ending retained earnings..........................................
Decrease from (cash paid for) dividends ............................
$ 7,400
35,800
43,200
(34,600)
$ 8,600
2. Computation of cash payments for notes

Beginning notes payable......................................................
Increases to notes (given)....................................................
Total expected notes payable...........................................
Actual ending notes payable................................................
Decrease from (cash) payments toward notes ...................
$70,000
0
70,000
(30,000)
$40,000
Quick Study 16-12A (10 minutes)

1. Cash received from customers = Sales + Accounts receivable decrease
= $468,000 + ($52,000 - $42,000)
= $478,000
2. Net increase in cash flow
= $95,800 - $25,000 = $70,800
16-8

1.
Cash paid for merchandise

= Cost of goods sold - Inventory decrease + Accounts payable decrease
= $312,000 - ($96,800 - $86,800) + ($22,000 - $16,000)
= $308,000
2.
Cash paid for operating expenses

= Operating expenses (excluding depreciation)
+ Prepaid expenses increase - Wages payable increase
= $57,000 + ($6,400 - $5,200) - ($10,000 - $6,000)
= $54,200

Receipts from sales to customersa .................................. $478,000
Payments for merchandise inventoryb............................. (308,000)
Payments for other expensesc.......................................... (54,200)
Payments for taxesd .......................................................... (25,800)
Net cash provided by operating activities ......................... $ 90,000
a
d
b
c
From QS 16-12B
From QS 16-13B
From QS 16-13B
$24,600 (income tax expense) + $1,200 (decrease in income taxes payable)

1. Z-Best is probably in the strongest position of the three competing companies
on the basis of the statement of cash flows. Z-Bests cash flows from
operations are able to finance reinvestment in operating assets as well as help
in paying down some debt. Lopez is in the second strongest position as it is
able to reinvest 50% of its operating cash flows into new productive assets.
Ahmed is the weakest as it experienced negative cash flows from operations
and generates cash by selling productive assets and by taking on new debt.
2. Lopezs cash flow on total assets ratio is slightly stronger than that for Z-Best.
Lopez has a 10.77% ratio ($70,000/$650,000) compared to Z-Bests 10.0% ratio
($80,000/$800,000).
16-9

Beg Bal
Income taxes paid
Income tax expense
End Bal
0
3,375
0
Part 1
KRUG, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended December 31, 2012
Income before taxes ..............................................
Adjustments to reconcile income to net cash
provided by operating activities
Increase in accounts receivable ...........................

Increase in inventory .............................................
Decrease in accounts payable..............................
Increase in salaries payable .................................
Depreciation expense............................................
Cash generated from operations
Income tax paid
Net cash provided by operating activities ...........
Cash flows from investing activities
Cash paid for equipment (Note 1).........................
Net cash used in investing activities ...................
Cash flows from financing activities
Cash received from share issuance.....................
Net cash used in financing activities ...................
Net decrease in cash ................................................
Cash balance at beginning of year..........................
Cash balance at end of year ....................................
16-10
(1,900)
(19,950)
(2,050)
450
4,200
(5,400)
7,000
$ 16,875
$ (19,250)
(2,375)
(3,375)
$ (5,750)
(5,400)
7,000
$ (4,150)
30,550
$ 26,400
Quick Study 16-16 (Concluded)

Note 1
Bal., 12/31/2011
Purchase
Bal., 12/31/2012
Equipment
44,500
plug Sale
49,900
plug = $5,400
Part 2
The companys operating cash flows are negative, $(5,750). This is not a good
omen. However, much of this is attributed to a huge increase in inventory. Thus,
an assessment of the saleable nature of that inventory, and why it is being built
up, is crucially important. Also, the level of cash has only marginally declined,
from $30,550 to $26,400. Thus, there seems to be sufficient cash. However, one
should question why so much of its assets is in the form of cash (more than 16%)
as this is not a productive use of assets.

1.
Under IFRS (as with U.S. GAAP), both the indirect method and direct
method of reporting operating cash flows are acceptable.
2.
IFRS and US GAAP differ on the classification of the following cash flows
as operating, investing or financing:
Cash flow source
U.S. GAAP
IFRS
a. Interest paid
Operating
b. Dividends paid
Financing
c. Interest received
Operating
d. Dividends received
Operating
16-11
EXERCISES
Exercise 16-1 (10 minutes)
Income before tax..............................................................
$440,000
Adjustments to reconcile net income to operating cash

flow
Depreciation ....................................................................
Accounts receivable increase........................................
Prepaid expenses decrease ...........................................
Accounts payable increase ............................................
Wages payable decrease................................................
Gain on sale of machinery .............................................
Income taxes paid
Net cash provided from operating activities......................
16-12
$80,000
(40,000)
12,000
6,000
(2,000)
(20,000)
36,000
476,000
(20,000)
$456,000

Operating Investing
Activities Activities
a. Accounts receivable
decreased in the year
Financing
Activities
Not Reported
on Statement
or in Notes
b. Purchased land by
issuing ordinary shares
c. Paid cash to
purchase inventory
d. Sold equipment for

cash, yielding a loss
e. Accounts payable
decreased in the year
f. Income taxes payable

increased in the year
g. Declared and paid a

cash dividend
h. Recorded
depreciation expense
i. Paid cash to settle

long-term note
payable
j. Prepaid expenses
increased in the year
Noncash
Investing &
Financing
Activities
X
X
16-13
Exercise 16-3A (15 minutes)

Noncash
Investing & Not Reported
Operating Investing Financing Financing on Statement
Activities Activities Activities Activities or in Notes
a. Accepted six-month note
receivable in exchange for
property, plant and
equipment
b. Recorded depreciation
expense
c. Paid cash to acquire
treasury shares
d. Collected cash from sales
e. Borrowed cash from bank
by signing a 9-month note
payable
f. Paid cash to purchase a
patent
g. Retired long-term notes
payable by issuing
ordinary shares
h. Paid cash toward accounts
payable
i. Sold inventory for cash
j. Paid cash dividend that was
declared in a prior period
X
X
X
X
X
X
X
X
X
16-14

Income before tax ...........................................................
$405,000
Adjustments to reconcile net income to net cash

Decrease in accounts receivable ................................

Decrease in merchandise inventory ...........................
Increase in prepaid expenses .....................................
Decrease in accounts payable ....................................
Increase in other payables ..........................................
Depreciation expense ..................................................
Amortization expense ..................................................
Gain on sale of property, plant and equipment
Income taxes paid
17,100
42,000
(4,700)
(8,200)
1,200
44,000
7,200
(6,000)
497,600
31,000
Net cash provided by operating activities.......................
16-15
$466,600

Case A:
Case B:
Case C:
Sales revenue ...............................................

Accounts receivable, Dec. 31, 2012 ............ $ 34,800
Accounts receivable, Dec. 31, 2011 ............ (25,200)
Less increase in accounts receivable.........
Cash received from customers ...................
$510,000
Rent expense ................................................

Rent payable, Dec. 31, 2012......................... $ 7,200
(8,800)
Rent payable, Dec. 31, 2011.........................
Plus decrease in rent payable .....................
Cash paid for rent.........................................
$140,800
Cost of goods sold .......................................

Merchandise inventory, Dec. 31, 2012 ........ $131,400
Merchandise inventory, Dec. 31, 2011 ........ (159,600)
Less decrease in merch. inventory .............
Cost of goods purchased ............................
Accounts payable, Dec. 31, 2012 ................ $ 84,000
Accounts payable, Dec. 31, 2011 ................ (67,800)
Less increase in accounts payable.............
Cash paid for merchandise..........................
$528,000
16-16
(9,600)
$500,400
1,600
$142,400
(28,200)
$499,800
(16,200)
$483,600

Income before taxes..................................................................... $ 569,340
Increase in accounts receivable ...............................................
(40,500)
Increase in merchandise inventory ..........................................
(27,000)
Decrease in accounts payable..................................................
(13,500)
Decrease in salaries payable ....................................................
(4,500)
Depreciation expense................................................................
43,200
Amortization expensePatents ...............................................
5,400
Gain on sale of equipment ........................................................
(7,200)
Cash generated from operations.
525,240
Income tax paid..
(10,000)
Net cash provided by operating activities .................................... $ 515,240
16-17

Receipts from customers (see note a)...................................... $1,777,500
(931,500)
Payments for merchandise (see note b)...................................
Payments for salaries (see note c) ...........................................
(253,035)
(48,600)
Payments for rent .....................................................................
(19,125)
Payment for utilities ......
Income tax paid.........................................................................
(10,000)
Net cash provided by operating activities................................. $ 515,240
Note a:
Sales Increase in receivables

$1,818,000 - $40,500 = $1,777,500
Note b:
Cost of goods sold + Increase in inventory + Decrease in payables

$891,000 + $27,000 + $13,500 = $931,500
Note c:
Salaries expense + Decrease in salaries payable

$248,535 + $4,500 = $253,035

Cash received from the sale of equipment* ................................... $ 46,500
Cash paid for new truck................................................................... (106,000)
Cash received from the sale of land ............................................... 400,000
94,700
Cash received from the sale of long-term investments ................
Net cash provided by investing activities ...................................... $435,200
* Cash received from sale of equipment = Carrying amount - loss =$80,500 - $34,000 = $46,500

Sale of ordinary shares.................................................................... $ 75,000
Paid cash dividend...........................................................................
(13,000)
Paid maturity amount on note payable........................................... (120,000)
Purchased treasury shares ............................................................. (118,000)
Net cash used by financing activities............................................. $(176,000)
16-18

Part 1
GECKO, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended June 30, 2011
Net income.
Income taxes expense.
$86,760
$45,640
Income before taxes.
$132,400

Increase in accounts receivable ..............................

Decrease in inventory ..............................................
Increase in prepaid expenses ..................................
Decrease in accounts payable.................................
Decrease in wages payable .....................................
Depreciation expense...............................................
Gain on sale of equipment .......................................
(18,000)
30,000
(200)
(6,000)
(9,000)
58,600
(2,000)
Cash generated from operations...

Income taxes paid (Note 1)..
(46,840)
Net cash provided by operating activities ..............
$138,960

Cash received from sale of equip. (Note 2).............
Cash paid for equipment (Note 2)............................
Net cash used in investing activities ......................
10,000
(58,600)

Cash received from share issuance........................
Cash paid to retire notes (Note 3)............................
Cash paid for dividends (Note 4) .............................
Net cash used in financing activities ......................
50,000
(30,000)
(69,560)
Net increase in cash ....................................................

Cash balance at beginning of year.............................
Cash balance at end of year .......................................
(See notes on next page)
16-19
53,400
185,800
(48,600)
(49,560)
$ 40,800
45,000
$ 85,800
Exercise 16-10 (Part 1 continued)

(1)
Beg Bal
Income taxes paid
End Bal
3,600
45,640
2,400

(2)
Cost of equipment sold ................................................................................

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

Plus increase in the equipment account balance......................................
Cash paid for new equipment......................................................................
$ 48,600
10,000
$ 58,600
Beg Bal
Purchase
End Bal
Equipment
120,000
58,600 Sale
130,000
48,600
Accumulated Depreciation, Equipment

Beg Bal
10,000
Sale (plug)*
40,600 Dep Expense
58,600
End Bal
28,000
Alternatively, some prefer a reconstructed journal entry as follows:

Cash......................................................... 10,000
Accumulated DepreciationEquip* ..... 40,600
Equipment .........................................
48,600
Gain....................................................
2,000
Reconstructed
(3)
Carrying amount of notes retired ................................................................

Cash payment to retire notes ......................................................................
$ 30,000
$ 30,000
(4)
Net income ....................................................................................................

Less increase in retained earnings .............................................................
Cash payment for dividends........................................................................
$ 86,760
17,200
$ 69,560
Dividends paid can also be classified under operating.

Alternatively computed as:
Retained Earnings
Beg Bal
Dividend (plug) 69,560 Net income
End Bal
16-20
7,400
86,760
24,600
Part 2
Cash flow on total assets ratio = Operating cash flows / Average total assets
= $138,960 / [($330,000 + $309,000)/2]
= $138,960 / $319,500
= 43.5%
Interpretation: A 43.5% result on the cash flow on total assets ratio is
indicative of very good performance. Also, this favorably compares to its
return on assets figure of 27.2% (high quality earnings), computed as
$86,760/$319,500.
16-21

GECKO, INC.
Statement of Cash Flows (Direct Method)
For Year Ended June 30, 2011
Cash received from customers (Note 1) ..........
$650,000
Cash paid for merchandise (Note 2).................
(388,000)
Cash paid for operating expenses (Note 3) .....
(76,200)
Cash paid for income taxes (Note 4) ................
(46,840)
Net cash provided by operating activities .......
$138,960

Cash received from sale of equip. (Note 5)......
10,000
Cash paid for equipment (Note 5).....................
(58,600)
Net cash used in investing activities ...............
(48,600)

Cash received from share issuance.................
50,000
Cash paid to retire notes (Note 6).....................
(30,000)
Cash paid for dividends (Note 7) ......................
(69,560)
Net cash used in financing activities ...............
(49,560)
Net increase in cash .............................................
$ 40,800
Cash balance at beginning of year......................
45,000
Cash balance at end of year ................................
$ 85,800
(See notes on next page)
16-22
Exercise 16-11A (Continued)

Notes
Sales ..............................................................................................................
Less increase in accounts receivable.........................................................
Cash received from customers ...................................................................
$668,000
(18,000)
$650,000
(2)
Cost of goods sold .......................................................................................

Less decrease in merchandise inventory...................................................
Purchases......................................................................................................
Plus decrease in accounts payable ............................................................
Cash paid for merchandise..........................................................................
$412,000
(30,000)
382,000
6,000
$388,000
(3)
Other operating expenses............................................................................

Plus decrease in wages payable .................................................................
Plus increase in prepaid expenses .............................................................
Cash paid for other operating expenses ....................................................
$ 67,000
9,000
200
$ 76,200
(4)
Income taxes expense..................................................................................

Plus decrease in income taxes payable .....................................................
Cash paid for income taxes .........................................................................
$ 45,640
1,200
$ 46,840
(5)
Cost of equipment sold (given) ...................................................................

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

Plus increase in the equipment account balance......................................
Cash paid for new equipment......................................................................
$ 48,600
10,000
$ 58,600
(1)
Equipment
Bal., 6/30/2010 120,000
Purchase
58,600 Sale
Bal., 6/30/2011
130,000
48,600
Accumulated Depreciation, Equipment

Bal., 6/30/2010
10,000
Sale*
40,600 Depr.
58,600
Expense
Bal., 6/30/2011
28,000
(6)
Carrying amount of notes retired ................................................................

Cash payment to retire notes ......................................................................
$ 30,000
$ 30,000
(7)
Net income ....................................................................................................

Less increase in retained earnings .............................................................
Cash payment for dividends........................................................................
$ 86,760
17,200
$ 69,560
16-23

KANSAS COMPANY
Receipts from customers........................................
Receipts of interest .................................................
Payments for merchandise .....................................
Payments for salaries..............................................
Payments for other expenses.................................
Net cash provided by operating activities .............
$ 485,000
2,500
(252,500)
(72,500)
(40,000)

Receipt from sale of equipment..............................
Payment for store equipment .................................
Net cash provided by investing activities..............
61,250
(23,750)

Payment to retire long-term notes payable ...........
Receipt from borrowing on six-month note...........
Payment of cash dividends.....................................
Net cash used in financing activities .....................
(125,000)
25,000
(15,000)
$122,500
37,500
Net increase in cash and cash equivalents ..............

Cash and cash equivalents at beginning of year .....
Cash and cash equivalents at end of year................
Note No. ___

Noncash investing and financing activities
(1) Issued ordinary shares to retire $187,500 of bonds payable.
(2) Purchased land financed with a $106,250 long-term note payable.
16-24
(115,000)
$ 45,000
25,000
$ 70,000

1.
TEXAS CORPORATION
Cash received from customers.................................... $6,000,000
208,400
Cash received from dividends .....................................
Cash paid for merchandise .......................................... (1,590,000)
Cash paid for wages .....................................................
(550,000)
(320,000)
Cash paid for rent..........................................................
(218,000)
Cash paid for interest ...................................................
Cash paid for taxes .......................................................
(450,000)
$3,080,400
Net cash provided by operating activities ..................

Cash paid for purchases of machinery ....................... (2,236,000)
Cash paid for purchases of long-term investments .. (2,260,000)
Cash received from sale of land ..................................
220,000
Cash received from sale of machinery........................
710,000
Net cash used in investing activities...........................
(3,566,000)

Cash received from issuing shares.............................
Cash received from borrowing ....................................
Cash paid for note payable ..........................................
Cash paid for dividends................................................
Cash paid for treasury share purchases.....................
Net cash provided by financing activities...................
3,036,000
Net increase in cash........................................................

Beginning balance of cash.............................................
Ending balance of cash ..................................................
1,540,000
2,600,000
(386,000)
(500,000)
(218,000)
$2,550,400
135,200
$2,685,600
2.
a. (i) Operating section reported the largest cash inflow of $3,080,400.
(ii) Investing section reported the largest cash outflow of $3,566,000.
b. The largest individual item among the investing cash outflows is the purchase
of investments at $2,260,000.
c. Proceeds for issuing notes are larger at $2,600,000 than for issuing shares at
$1,540,000 (see financing section).
d. The company has a net cash inflow from borrowing. This is computed from
the borrowing proceeds of $2,600,000 less the note payment of $386,000 (see
financing section).
16-25

Cash flows from operating activitiesindirect method
Net income................................................................................................$ 12,000
Depreciation expense ..............................................................................
6,000
Accounts receivable increase ................................................................
(9,000)
Inventory decrease ..................................................................................
3,000
Salaries payable increase .......................................................................
800
Net cash provided by operating activities .............................................$ 12,800

1. Cash flows from operating activitiesindirect method
Net income (loss) .....................................................................................$(32,000)
Depreciation expense .............................................................................. 29,200
Accounts receivable decrease ............................................................... 28,000
Salaries payable increase........................................................................ 26,000
Accrued liabilities decrease .................................................................... (16,000)
Net cash provided by operating activities..............................................$ 35,200
2. One major reason for the discrepancy between the loss and the positive
operating cash flow was the depreciation expense. This item is deducted
from revenues on the income statement when computing net income or net
loss. However, because depreciation expense is a noncash expense
(meaning it does not reflect a cash outflow for the current period), we add it
back when computing cash flow from operations. Thus, depreciation
expense, along with the large decrease in accounts receivable and the
large increase in salaries payable, turned the net loss into positive
operating cash flow.
3. Differences between cash flow from operations and income can be caused
by various items. The most important causes for investors are differences
arising from: (1) changes in management of operating activities and (2)
changes in revenue and expense recognition.
16-26

2010: $20,575 / $248,000 = 8.3%
2011: $27,750 / $302,000 = 9.2%
Interpretation: Both years ratios are good in that they are positive and at
reasonable levels (that is, most businesses can survive with annual returns at
~10%). Further, the ratio improved from 8.3% to 9.2%, which is a good increase.
16-27
PROBLEM SET A
Problem 16-1A (50 minutes)
Part 1
KAZAAM COMPANY
Income before taxes..................................................................
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accounts receivable ($65,000 - $49,625)...........
Increase in inventory ($273,750 - $252,500).............................
Decrease in prepaid expenses ($6,250 - $5,375) .................
Decrease in accounts payable ($116,625 - $88,125) ...........
Depreciation expense ...........................................................

Loss on disposal of equipment...........................................
$85,875
(15,375)
(21,250)
875
(28,500)
18,750
5,125 (40,375)
45,500
Income tax paid
(12,125)
Net cash provided by operating activities.............................
$ 33,375

Cash received from sale of equipment..................................
Cash paid for equipment..........................................................
Net cash used in investing activities ......................................
13,625
(25,000)

Cash borrowed on short-term note........................................
Cash paid on long-term note...................................................
Cash received from issuing shares (2,500 x $18) ..................
Cash paid for dividends............................................................
Net cash used in financing activities......................................
3,750
(31,375)
45,000
(62,125)
Net decrease in cash....................................................................

Cash balance at beginning of 2011 ...........................................
Cash balance at end of 2011.......................................................
(11,375)
(44,750)
$(22,750)
76,625
$ 53,875

Purchased equipment for $96,375 by signing a $71,375 long-term note payable
and paying $25,000 in cash.
16-28
Problem 16-1A (Concluded)

Part 2
Kazaam Company's operations provide a positive net cash inflow of $33,375
a good result. At the same time, the cash balance decreased by $22,750 (30%)
during the year. Two major cash outflows are the retirement of debt ($31,375)
and the dividend payment ($62,125), which together represent 127% of net
income. Also, the $25,000 cash investment in equipment is presumably
necessary to replace the older equipment sold.
Helping fund these cash outflows is nearly $4,000 cash from issuance of debt
(over $75,000 was issued in new debt but only $3,750 was received in cash)
and $45,000 from issuance of shares. The company needs to be aware that
the debt must eventually be repaid with interest.
In summary, perhaps the company should review the wisdom of paying cash
dividends that are considerably larger than cash provided from operations,
especially when the payment also results in a deteriorating cash position and
when the company is taking on additional debt.
16-29
Problem 16-2AA (40 minutes)

KAZAAM COMPANY
Cash received from customers (Note 1) ................. $480,875
Cash paid for merchandise (Note 2) ........................ (299,750)
Cash paid for other expenses (Note 3) ................... (135,625)
Cash paid for income taxes ....................................
(12,125)
Cash received from sale of equipment ..................
Cash paid for equipment.........................................
Net cash used in investing activities .....................
Cash borrowed on short-term note ........................
Cash paid on long-term note ..................................
Cash received from issuing shares (2,500 x $18) ...
Cash paid for dividends ..........................................
Net cash used in financing activities.....................
Net decrease in cash ..................................................
Cash balance at beginning of 2011 ...........................
Cash balance at end of 2011......................................
$ 33,375
13,625
(25,000)
(11,375)
3,750
(31,375)
45,000
(62,125)
(44,750)
$(22,750)
76,625
$ 53,875

Supporting calculations
(1) Sales - Increase in receivables = $496,250 - ($65,000 - $49,625) = $480,875
(2)
Cost of
goods sold
$250,000
Increase in
inventory
+ ($273,750 - $252,500)
Decrease in
+ payables
+ ($116,625 - $88,125)
=
= $299,750
(3) Other expenses - Decrease in prepaid expenses = $136,500- ($6,250 - $5,375)

= $135,625
16-30

Beg Bal
Income taxes paid
End Bal
24,000
42,000
27,000

GALLEY CORPORATION
Income before taxes................................................................
$243,000

cash provided by operating activities
Increase in accounts receivable ($93,000 - $81,000) .........
(12,000)
Increase in inventory ($609,000 - $534,000).........................
(75,000)
Decrease in accounts payable ($96,000 - $69,000) ............
(27,000)
Depreciation expense ..........................................................
54,000
(60,000)
183,000
Income tax paid
(39,000)
Net cash provided by operating activities...........................
$144,000

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

Cash received from issuing shares (12,000 x $5) .................
60,000
Cash paid for cash dividends ................................................ (111,000)

Net cash used in financing activities ....................................
(51,000)
Net increase in cash...................................................................
$ 57,000
Cash balance at beginning of 2011 .........................................
117,000
Cash balance at end of 2011.....................................................
$174,000
16-31

GALLEY CORPORATION
Cash received from customers (Note 1) ............
$1,980,000
Cash paid for merchandise (Note 2) ..................
(1,296,000)
Cash paid for other operating expenses ..........
(501,000)
Cash paid for income taxes (Note 3) .................
(39,000)
Net cash provided by operating activities .......
$144,000

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

Cash from issuing shares (12,000 x $5) .............
60,000
Cash paid for cash dividends ...........................
(111,000)
Net cash used in financing activities ...............
(51,000)
Net increase in cash ..............................................
$ 57,000
Cash balance at beginning of 2011 ......................
117,000
Cash balance at end of 2011.................................
$174,000
(1) Sales - Increase in receivables = $1,992,000 - ($93,000 - $81,000) = $1,980,000
(2)
Cost of
Increase in
Decrease in
+
+
goods sold
inventory
payables
=
$1,194,000 + ($609,000 - $534,000) + ($96,000 - $69,000) = $1,296,000
(3) Income taxes expense - Increase in income taxes payable

= $42,000 - ($27,000 - $24,000) = $39,000
16-32

RAPTURE COMPANY
Cash Flows from Operating ActivitiesIndirect Method
Net income...........................................................................
$ 13,000
Adjustments to reconcile net income to net cash

Depreciation expense ........................................................ $6,000
Decrease in accounts receivable......................................
10
Increase in merchandise inventory ..................................
(22)
Decrease in accounts payable ..........................................
(10)
Increase in salaries payable..............................................
Increase in utilities payable...............................................
Decrease in prepaid insurance .........................................
Increase in prepaid rent.....................................................
(2)
Net cash provided by operating activities ........................
16-33
5,989
$ 18,989

RAPTURE COMPANY
Cash Flows from Operating ActivitiesDirect Method
Cash receipts from customers (1)..................................................... $ 58,610
Cash payments to suppliers (2)......................................................... (21,032) )
Cash payments for salaries (3).......................................................... (10,991) )
Cash payments for rent (4) ................................................................
(2,502) )
Cash payments for insurance (5) ......................................................
(1,899) )
Cash payments for utilities (6) ..........................................................
(1,397) )
Cash payments for interest ...............................................................
(1,800) )
Net cash provided by operating activities ........................................ $ 18,989
(1)
Sales + Decrease in receivables = $58,600 + ($390 - $380) = $58,610
(2)
+
Cost of
goods sold
$21,000
+
Increase in
inventory
($99 - $77)
+
+
Decrease in
accts payable =
($130 - $120) = $21,032
(3)
Salaries expense - Increase in salaries payable = $11,000 - ($44 - $35) = $10,991
(4)
Rent expense + Increase in prepaid rent = $2,500 + ($11 - $9) = $2,502
(5)
Insurance expense - Decrease in prepaid insurance = $1,900 - ($14 - $13) = $1,899
(6)
Utilities expense - Increase in utilities payable = $1,400 - ($11 - $8) = $1,397
16-34
PROBLEM SET B
Problem 16-1B (40 minutes)
Part 1
KITE CORPORATION
Income before taxes..................................................................
Decrease in accounts receivable ($90,750 - $74,100) .........
Decrease in inventory ($490,200 - $454,500) .................
Decrease in prepaid expenses ($19,200 - $17,100) .............
Decrease in accounts payable ($123,450 - $117,450) .........
Depreciation expense ...........................................................

Loss on disposal of equipment...........................................
Cash generated from operations.............................................
Income tax paid..........................................................................
Net cash provided by operating activities.............................
$66,450
16,650
35,700
2,100
(6,000)
36,600
2,100
87,150
153,600
(9,450)
$144,150

Cash received from sale of equipment.................................. 28,050
Cash paid for equipment.......................................................... (38,250)
Net cash used in investing activities......................................
(10,200)

Cash borrowed on short-term note........................................
6,000
Cash paid on long-term note................................................... (45,000)
Cash received from issuing shares (3,000 x $11) .................. 33,000
Cash paid for dividends............................................................ (63,000)
Net cash used in financing activities......................................
(69,000)
Net increase in cash.....................................................................

Cash balance at beginning of year 2011...................................
Cash balance at end of year 2011..............................................
$ 64,950
71,550
$136,500

Purchased equipment for $113,250 by signing a $75,000 long-term note
payable and paying $38,250 in cash.
16-35
Problem 16-1B (Continued)

Part 2
Kite Corporation's dividend payments of $63,000 represent 111% of the
$57,000 net income for the year, which seems a bit high. However, operating
activities provide a net cash inflow of $144,150.
Further analysis reveals that investing activities used a modest $10,200 and,
excluding the dividends, financing activities used only $6,000. This resulted
in a $64,950 increase in the company's cash balance for the year, a 91%
increase.
Therefore, although companies usually pay dividends that are less than net
income, the analysis of cash flows indicates no strong reason to question the
amount of the current dividend. Indeed, the liquidity position of the company
did not deteriorate as a result of its cash dividend.
16-36
Problem 16-2BA (40 minutes)

KITE CORPORATION
Cash received from customers (Note 1) .................. $1,099,650
Cash paid for merchandise (Note 2) ......................... (555,300)
Cash paid for other expenses (Note 3) .................... (390,750)
Cash paid for income taxes .....................................
(9,450)
Net cash provided by operating activities ..............
Cash received from sale of equipment ...................
Cash paid for equipment..........................................
Net cash used in investing activities ......................
Cash borrowed on short-term note .........................
Cash paid on long-term note ...................................
Cash received from issuing shares (3,000 x $11) ....
Cash paid for dividends ...........................................
Net cash used in financing activities......................
Cash balance at beginning of 2011 ............................
Cash balance at end of 2011.......................................
$144,150
28,050
(38,250)
(10,200)
6,000
(45,000)
33,000
(63,000)
(69,000)
$ 64,950
71,550
$136,500

(1) Sales + Decrease in receivables = $1,083,000 + ($90,750 - $74,100)
(2)
Cost of
goods sold
$585,000
Decrease in
inventory
- ($490,200 $454,500)
= $1,099,650
Decrease in
payables
=
+ ($123,450 - $117,450) = $555,300
(3) Other expenses - Decrease in prepaid expenses = $392,850 - ($19,200 - $17,100)

= $390,750
16-37

Beg Bal
Income taxes paid
End Bal
6,750
44,850
4,500

TAURASI COMPANY
Income before taxes..............................................................
Decrease in accounts receivable ($23,250 - $19,425) .......
Increase in inventory ($175,350 - $139,875)........................

Increase in accounts payable ($38,475 - $35,625).............
Depreciation expense .........................................................
Cash generated from operations.........................................
Income tax paid.......................................................................
Net cash provided by operating activities.........................
$133,275
3,825
(35,475)
2,850
17,700

Cash paid for equipment......................................................
Cash received from issuing shares (3,000 x $14) ..............
Cash paid for dividends........................................................
Net cash used in financing activities..................................
Net increase in cash.................................................................
Cash balance at beginning of 2011 .......................................
Cash balance at end of 2011...................................................
16-38
(11,100)
122,175
(47,100)
$ 75,075
(28,950)
42,000
(66,000)
(24,000)
$ 22,125
31,800
$ 53,925

TAURASI COMPANY
Cash received from customers (Note 1) ................ $613,575
Cash paid for merchandise (Note 2) ....................... (311,625)
Cash paid for other operating expenses ................ (179,775)
Cash paid for income taxes (Note 3) ...................... (47,100)
$75,075

Cash paid for equipment .........................................
(28,950)

Cash received from issuing shares (3,000 x $14) ..
Cash paid for cash dividends .................................
Net cash used in financing activities .....................
Cash balance at beginning of 2011 ............................
Cash balance at end of 2011.......................................
42,000
(66,000)
(24,000)
$22,125
31,800
$53,925
(1) Sales + Decrease in receivables = $609,750 + ($23,250 - 19,425) = $613,575
(2)
Cost of
Increase in
Increase in
+
goods sold
inventory
payables
=
$279,000
+ ($175,350 - $139,875) - ($38,475- $35,625) = $311,625
(3) Income taxes expense + Decrease in income taxes payable

= $44,850 + ($6,750 - $4,500) = $47,100
16-39
Chapter 16 Statement of Cash Flow

TYRA COMPANY
Cash Flows from Operating ActivitiesIndirect Method
Income..................................................................................
$ 40,000
Adjustments to reconcile income to net cash provided

by operating activities
Depreciation expense ........................................................ $64,000
Increase in accounts receivable .......................................
(120)
Decrease in inventory........................................................
24
Decrease in accounts payable..........................................
(40)
Increase in salaries payable..............................................
60
Increase in utilities payable ..............................................
40
Decrease in prepaid insurance .........................................
Decrease in prepaid rent ...................................................
20
Interest expense .................................................................
4,800
68,792
Cash generated from operations......................................
108,792
Interest paid ........................................................................
(4,800)
Net cash provided by operating activities ........................
$ 103,992
Since there is no beginning or ending balance for interest payable, the

interest expense must be the same as interest paid.
16-40

TYRA COMPANY
Cash Flows from Operating ActivitiesDirect Method
Cash receipts from customers (1) ..................................................... $ 411,880
Cash payments to suppliers (2) ......................................................... (244,016)
Cash payments for salaries (3) ..........................................................
(29,940)
Cash payments for rent (4).................................................................
(19,980)
Cash payments for insurance (5).......................................................
(5,192)
Cash payments for utilities (6) ...........................................................
(3,960)
Cash payments for interest ................................................................
(4,800)
Net cash provided by operating activities ........................................ $ 103,992
(1) Sales - Increase in receivables = $412,000 - ($820 - $700) = $411,880
(2)
Cost of
goods sold
$244,000
Decrease in
inventory
- ($296 - $272)
+
+
Decrease in
payables
=
($520 - $480) = $244,016
(3) Salaries expense - Increase in salaries payable

= $30,000 - ($280- $220) = $29,940
(4) Rent expense - Decrease in prepaid rent
= $20,000 - ($60- $40) = $19,980
(5) Insurance expense - Decrease in prepaid insurance
= $5,200 - ($36- $28) = $5,192
(6) Utilities expense - Increase in utilities payable
= $4,000 - ($40- $0) = $3,960
16-41
SERIAL PROBLEM SP 16
Serial Problem SP 16, Business Solutions (45 minutes)
BUSINESS SOLUTIONS
Statement of Cash Flows (Indirect)
For Quarter Ended March 31, 2012
Net income.................................................................................. $ 18,833
Increase in accounts receivable ($22,867 - $5,668) ............
(17,199)
Increase in inventory ($704 - $0) ...........................................
(704)
Increase in computer supplies ($2,005 - $580) ...................
(1,425)
Decrease in prepaid insurance ($1,665 - $1,110) ................

Decrease in accounts payable ($1,100 - $0)........................
Increase in wages payable ($875 - $500) ............................
Decrease in unearned computer service revenue ...........
555
(1,100)
375
(1,500)
Depreciation expenseOffice Equipment..........................
400
Depreciation expenseComputer Equipment ..................
1,250
Net cash used by operating activities....................................
(515)

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

Cash received from share issuance.......................................
25,000
Cash paid for dividends............................................................
(4,800)
Net cash provided by financing activities .............................
20,200
Net increase in cash.....................................................................
$ 19,685
Cash balance at December 31, 2011 .........................................
48,372
Cash balance at March 31, 2012.................................................
$ 68,057
16-42

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Principles of

Proprietary and Confidential

Chapter 16 - Statement of Cash Flows

On a statement of cash flows prepared according to the direct method, operating

Payments of cash dividends can be reported on the statement of cash flows as

Chapter 16 - Statement of Cash Flows

Chapter 16 - Statement of Cash Flows

Quick Study 16-2 (20 minutes)

Chapter 16 - Statement of Cash Flows

Quick Study 16-3 (10 minutes)

8,800 + 30,800 Income taxes paid = 8,200

Cash flows from operating activities

Chapter 16 - Statement of Cash Flows

Quick Study 16-4 (10 minutes)

Chapter 16 - Statement of Cash Flows

Quick Study 16-6 (20 minutes)

Cash provided by (used in) operations......... $ (20,000) $ 87,000 $140,000

Chapter 16 - Statement of Cash Flows

Quick Study 16-7 (15 minutes)

3,600 + 24,600 Income taxes paid = 2,400

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

Chapter 16 - Statement of Cash Flows

Quick Study 16-10 (15 minutes)

Quick Study 16-11 (15 minutes)

2. Computation of cash payments for notes

Quick Study 16-12A (10 minutes)

= $95,800 - $25,000 = $70,800

Chapter 16 - Statement of Cash Flows

Quick Study 16-13A (10 minutes)

Cash paid for merchandise

Cash paid for operating expenses

Quick Study 16-14A (10 minutes)

Quick Study 16-15 (10 minutes)

Chapter 16 - Statement of Cash Flows

Quick Study 16-16 (25 minutes)

Solving for Income tax paid = 3,375

Increase in accounts receivable ...........................

Chapter 16 - Statement of Cash Flows

Quick Study 16-16 (Concluded)

Quick Study 16-17 (15 minutes)

Chapter 16 - Statement of Cash Flows

Income before tax..............................................................

Adjustments to reconcile net income to operating cash

Chapter 16 - Statement of Cash Flows

Exercise 16-2 (25 minutes)

d. Sold equipment for

f. Income taxes payable

g. Declared and paid a

i. Paid cash to settle

Chapter 16 - Statement of Cash Flows

Exercise 16-3A (15 minutes)

Chapter 16 - Statement of Cash Flows

Exercise 16-4 (20 minutes)

Adjustments to reconcile net income to net cash

Decrease in accounts receivable ................................

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

Chapter 16 - Statement of Cash Flows

Exercise 16-5A (15 minutes)

Sales revenue ...............................................

Rent expense ................................................

Cost of goods sold .......................................

Chapter 16 - Statement of Cash Flows

Exercise 16-6 (30 minutes)