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Chapter 12
Reporting and Analyzing Cash Flows
QUESTIONS
1.

The purpose of the cash flow statement 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 stock 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 net
income 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 stocks and bonds, from purchases of
plant assets 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 preferred or common stock, 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 stockholders, purchases of
treasury stock, and repayments of debt.

7.

Payments of cash dividends should be reported on the statement of cash flows as
financing activities.

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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 $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 net income is reconciled to
the net cash flow from operating activities, the net effect of all the adjustment items
may be a subtraction from net income (examples of such adjustments are accrued
revenues, prepaid expenses, and other gains). If the amount of this net subtraction
is larger than the net 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. But
this is driven by the activity of purchasing the asset.)
12. (a) Best Buy uses the indirect method. This is apparent from its adjustments to net
income when its reports net cash provided by operating activities.
(b) The increase in receivables represents an amount by which sales for the period
were more than cash receipts from customers. Since sales are a positive number in
the calculation of net income, an increase in the amounts not yet received from
customers (the increase in receivables) must be deducted from sales to determine
the net amount of cash provided by operations.

13. Circuit City’s statement of cash flows shows five major financing activities for the
year ended February 28, 2005:
Payments on short-term debt ..............................................................
Principal payments of long-term debt .................................................
Repurchases of common stock ...........................................................
Issuances of Circuit City common stock, net .....................................
Dividends paid ......................................................................................
Net cash used for financing activities .................................................

$

(1,853,000)
(28,008,000)
(259,832,000)
27,156,000
(13,848,000)
$(276,385,000)

14. Apple’s two investing activities yielding cash outflows for the year ended September
25, 2004, are ($ millions):
Purchases of short-term investments................................................... $
Purchases of property, plant, and equipment ......................................

3,270
176

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QUICK STUDIES
Quick Study 12-1 (20 minutes)
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 transactions classified as investing activities
Plant asset purchases
Plant asset sales
Investment in debt and equity securities (except trading securities)
Intangible asset acquisitions and disposals
Purchases and sales of natural resources
3. Examples of transactions classified as financing activities
Bond retirement and issuance
Issuance and settlement of notes payable
Common stock issuance
Cash paid for dividends
Treasury stock acquisitions
Owner contributions and withdrawals
4. Examples of significant noncash financing and investing activities
Exchange of stock or debt securities for noncash assets
Conversion of bonds into stock
Purchase of long-term assets by issuing notes payable to seller
Settle debt with noncash assets (such as giving equipment to pay off loan)


Quick Study 12-2 (10 minutes)
1.
2.
3.
4.
5.

Investing
Operating
Operating
Operating
Financing

6.
7.
8.
9.
10.

Financing
Operating
Operating
Investing*
Operating

* For the ―indirect‖ method, the loss is reported as an adjustment (addback) to net income in the operating section.

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Quick Study 12-3 (10 minutes)
Cash flows from operating activities

Net income ..................................................................................

$18,200

Adjustments to reconcile net income to operating cash flow

Depreciation .............................................................................$36,000
Accounts receivable decrease ............................................... 7,000
Inventory increase ................................................................... (5,900)
Accounts payable increase .................................................... 4,700
Income taxes payable decrease ............................................. (150) 41,650
Net cash provided from operating activities ...........................
$59,850

Quick Study 12-4 (10 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given) ......................................................
$52,500
Accumulated depreciation at beginning of year (given) ..........$110,700
Increase from depreciation expense (given) ............................. 18,000
Total ―expected‖ accumulated depreciation ............................. 128,700
Actual accumulated depreciation at end of year (given) ......... (88,700)

Accumulated depreciation on sold furniture ............................
40,000
Cash received from sale of furniture at book value .................
$12,500

Quick Study 12-5 (10 minutes)
Part 1
Computation of cash received from the sale of common stock
Increase in Common stock ($105,000 - $100,000) .....................................
$ 5,000
Increase in Paid-in capital in excess of par value
($567,000 - $342,000) .................................................................................
225,000
Cash received from the sale of common stock .........................................
$230,000
Part 2
Computation of cash paid for dividends
Beginning retained earnings .......................................................................
$287,500
Net income ....................................................................................................48,000
Total ―expected‖ retained earnings............................................................
335,500
Actual ending retained earnings.................................................................
(313,500)
Cash paid for dividends ...............................................................................
$ 22,000

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Quick Study 12-6 (10 minutes)
Cash flows from operating activities

Net income ..................................................................................

$30,000

Adjustments to reconcile net income to operating cash flow

Depreciation .............................................................................$37,600
Accounts receivable decrease ............................................... 10,000
Inventory decrease .................................................................. 10,000
Prepaid expense increase ....................................................... (1,200)
Accounts payable decrease ................................................... (6,000)
Wages payable increase ......................................................... 4,000
Income taxes payable decrease ............................................. (1,200) 53,200
Net cash provided from operating activities ...........................
$83,200

Quick Study 12-7 (15 minutes)
Computation of cash inflow from sale of furniture
Cost of furniture sold (given)......................................................
$55,000
Accumulated depreciation at beginning of year (given) .......... $ 9,000
Increase from depreciation expense (given) ............................. 37,600

Total ―expected‖ accumulated depreciation ............................. 46,600
Actual accumulated depreciation at end of year (given) ......... (17,000)
Accumulated depreciation on sold furniture ............................
29,600
Cash received from sale of furniture at book value .................
$25,400

Quick Study 12-8 (15 minutes)
1. Computation of cash paid for dividends
Beginning retained earnings ................................................. $ 8,400
Net income .............................................................................. 30,000
Total ―expected‖ retained earnings...................................... 38,400
Actual ending retained earnings........................................... (35,600)
Decrease from (cash paid for) dividends ............................. $ 2,800
2. Computation of cash payments for notes
Beginning notes payable ....................................................... $69,000
Increases to notes (given) .....................................................
0
Total ―expected‖ notes payable............................................ 69,000
Actual ending notes payable................................................. (29,000)
Decrease from (cash) payments toward notes ................... $40,000

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Quick Study 12-9B (10 minutes)
1. Cash received from customers = Sales + Accounts receivable decrease
= $488,000 + ($51,000 - $41,000)
= $498,000
2. Net increase in cash

= $94,800 - $24,000 = $70,800

Quick Study 12-10B (10 minutes)
1. Cash paid for merchandise
= Cost of goods sold - Inventory decrease + Accounts payable decrease
= $314,000 - ($95,800 - $85,800) + ($21,000 - $15,000)
= $310,000
2. Cash paid for operating expenses
= Operating expenses (excluding depreciation)
+ Prepaid expenses increase - Wages payable increase
= $89,100 + ($5,400 - $4,200) - ($9,000 - $5,000)
= $86,300

Quick Study 12-11B (10 minutes)
Cash flows from operating activities
Receipts from sales to customersa .........................................$498,000
Payments for merchandise inventoryb ....................................(310,000)
Payments for other expensesc ................................................. (86,300)
Payments for taxesd .................................................................. (18,500)
Net cash provided by operating activities.................................$ 83,200
a

B


From QS 12-9
B
From QS 12-10
c
B
From QS 12-10
d
$17,300 (income tax expense) + $1,200 (decrease in income taxes payable)
b

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Quick Study 12-12 (10 minutes)
1. Pena is probably in the strongest position of the three competing
companies on the basis of the statement of cash flows. Pena’s cash flows
from operations are able to finance reinvestment in operating assets as
well as help in paying down some debt. Garcia is in the second strongest
position as it is able to reinvest 57% of its operating cash flows into new
productive assets. Piniella 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. Garcia’s cash flow on total assets ratio is slightly stronger than that for
Pena. Garcia has a 9.6% ratio ($60,000/$625,000) compared to Pena’s 8.9%
ratio ($70,000/$790,000).

Quick Study 12-13A (10 minutes)
The balance sheet equation can be arranged so that the algebraic total of all
noncash items is equal to cash (see Exhibit 12.8). It follows that when all
changes in noncash balance sheet items are explained, the corresponding
change in cash is also explained. On the spreadsheet, when the changes in
all noncash balance sheet items have been accounted for, we can be
confident that the change in cash also has been fully accounted for.

Quick Study 12-14 (20 minutes)
Cash Flows from Operating Activities (Indirect)
Case A
Case B
Case C
Net Income ............................................................ $ 4,000 $100,000 $72,000
Adjustments to reconcile net income to net
cash provided by operations
Depreciation .........................................................
30,000
8,000
24,000
Changes in assets and liabilities
Accounts receivable ............................................
(40,000) (20,000)
4,000
Inventories ............................................................
20,000
10,000 (10,000)
Accounts payable ................................................
24,000
(22,000)

14,000
Accrued liabilities ................................................
(44,000)
12,000
(8,000)
Cash provided by (used for) operations ............ $ (6,000) $ 88,000 $96,000

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Quick Study 12-15 (15 minutes)
Investing Activities
Purchase of used equipment ......................................................................
$(5,000)
Sale of short-term investments ..................................................................
6,000
Cash provided by investing activities .......................................................
$ 1,000

Quick Study 12-16 (15 minutes)
Financing Activities
Additional short-term borrowings ..............................................................
$20,000
Cash dividends paid ....................................................................................
(16,000)

Cash provided by financing activities .......................................................
$ 4,000

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EXERCISES
Exercise 12-1 (10 minutes)
Cash flows from operating activities

Net income ...............................................................................

$400,000

Adjustments to reconcile net income to operating cash
flow

Depreciation ..........................................................................
$80,000
Accounts receivable increase .............................................
(40,000)
Prepaid expense decrease ...................................................
12,000
Accounts payable increase .................................................. 6,000
Wages payable decrease......................................................(2,000)

Gain on sale of machinery ...................................................
(20,000)
36,000
Net cash provided from operating activities ...........................
$436,000

Exercise 12-2 (25 minutes)
Statement of Cash Flows
Operating Investing
Activities Activities
a. Paid cash to
purchase inventory
b. Purchased land by
issuing common stock
c. Accounts receivable
decreased in the year
d. Sold equipment for
cash, yielding a loss
e. Recorded
depreciation expense
f. Income taxes payable
increased in the year
g. Declared and paid a
cash dividend
h. Accounts payable
decreased in the year
i. Paid cash to settle
bond payable
j. Prepaid expenses
increased in the year


Financing
Activities

Noncash
Investing &
Financing
Activities

Not reported
on Statement
or in Notes

X
X
X
X

X

X
X
X
X
X
X

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Exercise 12-3B (15 minutes)
Statement of Cash Flows
Operating Investing
Activities Activities
a. Retired long-term bonds
payable by issuing stock
b. Depreciation expense
recorded
c. Paid cash dividend that
was declared in a prior
period
d. Sold inventory for cash
e. Borrowed cash from bank
by signing a 9-month note
payable
f. Paid cash to purchase a
patent
g. Accepted six-month note
receivable in exchange for
plant assets
h. Paid cash toward
accounts payable
i. Collected cash from sales
j. Paid cash to acquire
treasury stock


Financing
Activities

Noncash
Investing &
Financing
Activities

Not reported
on Statement
or in Notes

X
X
X
X
X
X
X
X
X
X

Exercise 12-4 (20 minutes)
Cash flows from operating activities
Net income.............................................................................. $374,000
Adjustments to reconcile net income to net cash
provided by operating activities


Decrease in accounts receivable .......................................
17,100
Decrease in merchandise inventory ..................................
42,000
Increase in prepaid expenses ............................................
(4,700)
Decrease in accounts payable ...........................................
(8,200)
Increase in other payables .................................................
1,200
Depreciation expense .........................................................
44,000
Amortization expense .........................................................
7,200
Gain on sale of plant assets ...............................................
(6,000)
Net cash provided by operating activities ............................. $466,600

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Exercise 12-5B (15 minutes)
Case A:

Case B:


Case C:

Sales revenue ...........................................................
Accounts receivable, Dec. 31, 2007 ........................
$ 27,200
Accounts receivable, Dec. 31, 2008 ........................
(33,600)
Less increase in accounts receivable ....................
Cash received from customers ...............................

$515,000

Rent expense ............................................................
Rent payable, Dec. 31, 2007 ....................................
$ 7,800
Rent payable, Dec. 31, 2008 ....................................
(6,200)
Plus decrease in rent payable .................................
Cash paid for rent .....................................................

$139,800

Cost of goods sold ...................................................
Merchandise inventory, Dec. 31, 2008....................
$130,400
Merchandise inventory, Dec. 31, 2007....................
(158,600)
Less decrease in merch. inventory ........................
Cost of goods purchased ........................................

Accounts payable, Dec. 31, 2008 ............................
82,000
Accounts payable, Dec. 31, 2007 ............................
(66,700)
Less increase in accounts payable ........................
Cash paid for merchandise .....................................

$525,000

(6,400)
$508,600

1,600
$141,400

(28,200)
496,800

(15,300)
$481,500

Exercise 12-6 (30 minutes)
Cash flows from operating activities
Net income.............................................................................. $ 481,540
Adjustments to reconcile net income to net cash
provided by operating activities
Increase in accounts receivable ........................................
(30,500)
Increase in merchandise inventory ...................................
(25,000)

Decrease in accounts payable ...........................................
(12,500)
Decrease in salaries payable .............................................
(3,500)
Depreciation expense .........................................................
44,200
Amortization expense—Patents ........................................
4,200
Gain on sale of equipment .................................................
(6,200)
Net cash provided by operating activities ............................. $ 452,240

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Exercise 12-7B (20 minutes)
Cash flows from operating activities
Receipts from customers (see note a) ............................................
$1,797,500
Payments for merchandise (see note b) .........................................
(1,028,500)
Payments for salaries (see note c) .................................................. (249,035)
Payments for rent ............................................................................ (49,600)
Payments for utilities ...................................................................... (18,125)
Net cash provided by operating activities .......................................

$ 452,240

Note a:

Sales – Increase in receivables
$1,828,000 - $30,500 = $1,797,500

Note b:

Cost of goods sold + Increase in inventory + Decrease in payables
$991,000 + $25,000 + $12,500 = $1,028,500

Note c:

Salaries expense + Decrease in salaries payable
$245,535 + $3,500 = $249,035

Exercise 12-8 (10 minutes)
Cash flows from investing activities
Cash received from the sale of equipment* .................................. $ 51,300
Cash paid for new truck ................................................................... (89,000)
Cash received from the sale of land ............................................... 198,000
Cash received from the sale of long-term investments ...............
60,800
Net cash provided by investing activities ...................................... $221,100
* Cash received from sale of equipment = Book value - loss = $65,300 - $14,000 = $51,300

Exercise 12-9 (10 minutes)
Cash flows from financing activities
Sale of common stock .................................................................................

$ 64,000
Paid cash dividend .......................................................................................
(14,600)
Repaid bond payable ...................................................................................
(50,000)
Purchased treasury stock ...........................................................................
(12,000)
Net cash used by financing activities ........................................................
$(12,600)

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Exercise 12-10 (40 minutes)
Part 1
IKIBAN, INC.
Statement of Cash Flows (Indirect Method)
For Year Ended June 30, 2008
Cash flows from operating activities
Net income.....................................................................
$ 99,510
Adjustments to reconcile net income to net cash
provided by operating activities

Increase in accounts receivable ..................................(14,000)

Decrease in merchandise inventory ...........................22,700
Decrease in prepaid expenses .................................... 1,000
Decrease in accounts payable .................................... (5,000)
Decrease in wages payable
(9,000)
Decrease in income taxes payables ........................... (400)
Depreciation expense ...................................................58,600
Gain on sale of plant assets ........................................ (2,000)
Net cash provided by operating activities ..................
Cash flows from investing activities
Cash received from sale of equip. (Note 1) ......
Cash paid for equipment (Note 1) .....................
Net cash used in investing activities ................

10,000
(57,600)

Cash flows from financing activities
Cash received from stock issuance ..................
Cash paid to retire notes (Note 2) .....................
Cash paid for dividends (Note 3) .......................
Net cash used in financing activities ................

60,000
(30,000)
(90,310)

Net increase in cash ..............................................
Cash balance at prior year-end ............................
Cash balance at current year-end ........................


$151,410

(47,600)

(60,310)
$ 43,500
44,000
$ 87,500

(Notes 1, 2, and 3 on next page.)

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Exercise 12-10 (Part 1 continued)
(1)

Cost of equipment sold .................................................................................
Accumulated depreciation of equipment sold .............................................
Book value 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 (given) ...........................................................

$ 48,600
9,000
$ 57,600

Equipment
Bal., 6/30/2007 115,000
Purchase
57,600 Sale
Bal., 6/30/2008 124,000

48,600

Accumulated Depreciation, Equipment
Bal., 6/30/2007
9,000
Sale
40,600 Depr. expense 58,600
Bal., 6/30/2008
27,000

(2)


Carrying value of notes retired .....................................................................
Cash payment to retire notes ........................................................................

$ 30,000
$ 30,000

(3)

Net income......................................................................................................
Less increase in retained earnings ...............................................................
Cash payment for dividends .........................................................................

$ 99,510
9,200
$ 90,310

Part 2
Cash flow on total assets ratio = Operating cash flows / Average total assets
= $151,410 / [($317,700 + $292,900)/2]
= $151,410 / $305,300
= 49.6%
Interpretation: A 49.6% 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 32.6% (high quality earnings).

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Exercise 12-11B (40 minutes)
Part 1
IKIBAN, INC.
Statement of Cash Flows (Direct Method)
For Year Ended June 30, 2008
Cash flows from operating activities
Cash received from customers (Note 1) ...........
$664,000
Cash paid for merchandise (Note 2) .................
(393,300)
Cash paid for operating expenses (Note 3) ......
(75,000)
Cash paid for income taxes (Note 4) .................
(44,290)
Net cash provided by operating activities ........
Cash flows from investing activities
Cash received from sale of equip. (Note 5) ......
Cash paid for equipment (Note 5) .....................
Net cash used in investing activities ................

10,000
(57,600)

Cash flows from financing activities
Cash received from stock issuance ..................
Cash paid to retire notes (Note 6) .....................

Cash paid for dividends (Note 7) .......................
Net cash used in financing activities ................

60,000
(30,000)
(90,310)

Net increase in cash ..............................................
Cash balance at prior year-end ............................
Cash balance at current year-end ........................

$151,410

(47,600)

(60,310)
$ 43,500
44,000
$ 87,500

(See notes on next page)

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Exercise 12-11B (continued)
Notes
Sales ...............................................................................................................
Less increase in accounts receivable ..........................................................
Cash received from customers .....................................................................

$678,000
(14,000)
$664,000

(2)

Cost of goods sold.........................................................................................
Less decrease in merchandise inventory ....................................................
Purchases .......................................................................................................
Plus decrease in accounts payable ..............................................................
Cash paid for merchandise ...........................................................................

$411,000
(22,700)
388,300
5,000
$393,300

(3)

Other operating expenses .............................................................................
Plus decrease in wages payable ...................................................................
Less decrease in prepaid expenses .............................................................
Cash paid for other operating expenses ......................................................


$ 67,000
9,000
(1,000)
$ 75,000

(4)

Income taxes expense ...................................................................................
Plus decrease in income taxes payable .......................................................
Cash paid for income taxes ...........................................................................

$ 43,890
400
$ 44,290

(5)

Cost of equipment sold .................................................................................
Accumulated depreciation of equipment sold .............................................
Book value 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 (given) ...........................................................

$ 48,600
9,000
$ 57,600

(1)

Equipment
Bal., 6/30/2007 115,000
Purchase
57,600 Sale
Bal., 6/30/2008 124,000

48,600

Accumulated Depreciation, Equipment
Bal., 6/30/2007
9,000
Sale
40,600
Depr. expense 58,600
Bal., 6/30/2008
27,000

(6)

Carrying value of notes retired .....................................................................

Cash payment to retire notes ........................................................................

$ 30,000
$ 30,000

(7)

Net income......................................................................................................
Less increase in retained earnings ...............................................................
Cash payment for dividends .........................................................................

$ 99,510
9,200
$ 90,310

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Exercise 12-12B (20 minutes)
FERRON COMPANY
Statement of Cash Flows
For Year Ended December 31, 2008
Cash flows from operating activities
Receipts from customers .............................................. $ 495,000
Receipts of interest ........................................................

3,500
Payments for merchandise ........................................... (254,500)
Payments for salaries ....................................................
(76,500)
Payments for other expenses .......................................
(20,000)
Net cash provided by operating activities ...................
Cash flows from investing activities
Receipt from sale of equipment ....................................
60,250
Payment for store equipment........................................
(24,750)
Net cash provided by investing activities ....................
Cash flows from financing activities
Payment to retire long-term notes payable ................. (100,000)
Receipt from borrowing on six-month note.................
35,000
Payment of cash dividends ...........................................
(10,000)
Net cash used in financing activities ...........................
Net increase in cash and cash equivalents ....................
Cash and cash equivalents at prior year-end .................
Cash and cash equivalents at current year-end.............

$147,500

35,500

(75,000)
$108,000

40,000
$148,000

Note No. ___
Noncash investing and financing activities
(1) Issued common stock to retire $185,500 of bonds payable.
(2) Purchased land financed with a $105,250 long-term note payable.

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Exercise 12-13B (40 minutes)
1.
THOMAS CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2008
Cash flows from operating activities
Cash received from customers .................................. $ 6,000,000
Cash received from dividends ....................................
208,400
Cash paid for merchandise ......................................... (1,590,000)
Cash paid for wages ....................................................
(550,000)
Cash paid for rent ........................................................
(320,000)

Cash paid for interest ..................................................
(218,000)
Cash paid for taxes......................................................
(450,000)
Net cash provided by operating activities .................
$3,080,400
Cash flows from investing activities
Cash paid for purchases of machinery......................
Cash paid for purchases of long-term investments .....
Cash received from sale of land .................................
Cash received from sale of machinery ......................
Net cash used in investing activities .........................

(2,236,000)
(2,260,000)
220,000
710,000

Cash flows from financing activities
Cash received from issuing stock..............................
Cash received from borrowing ...................................
Cash paid for note payable .........................................
Cash paid for dividends ..............................................
Cash paid for treasury stock purchases. ..................
Net cash provided by financing activities .................

1,540,000
2,600,000
(386,000)
(500,000)

(218,000)

Net increase in cash ......................................................
Cash at prior year-end...................................................
Cash at current year-end ..............................................

(3,566,000)

3,036,000
$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
stock equity 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).

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Exercise 12-14 (20 minutes)
Cash flows from operating activities—indirect method
Net income ....................................................................................................
$24,000
Depreciation expense .................................................................................. 12,000
Accounts receivable increase ....................................................................(10,000)
Inventory decrease ...................................................................................... 16,000
Salaries payable increase ........................................................................... 1,000
Net cash provided by operating activities .................................................$43,000

Exercise 16–15 (30 minutes)
1. Cash flows from operating activities—indirect method
Net income (loss) .........................................................................................
$(16,000)
Depreciation expense ..................................................................................
14,600
Accounts receivable decrease ...................................................................
24,000
Salaries payable increase............................................................................
18,000
Accrued liabilities decrease ........................................................................
(8,000)
Net cash provided by operating activities .................................................
$32,600
2. One reason for the net loss was depreciation expense. Depreciation
expense is added to net income to adjust for the effects of a noncash
expense that was deducted in determining net income. It does not
involve an inflow of cash. Depreciation expense, along with a decrease

in accounts receivable and an increase in salaries payable, turned the
net loss into positive operating cash flow.
3. Differences between cash flow from operations and net 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.

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PROBLEM SET A
Problem 12-1A (50 minutes)
Part 1
FORTEN COMPANY
Statement of Cash Flows
For Year Ended December 31, 2008
Cash flows from operating activities
Net income ..........................................................................................
$114,975
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accounts receivable ($65,810- $50,625) .................(15,185)
Increase in inventory ($275,656 - $251,800) ....................................(23,856)
Decrease in prepaid expenses ($1,875 - $1,250)........................
625

Decrease in accounts payable ($114,675 - $53,141) ..................(61,534)

Depreciation expense ................................................................... 20,750
Loss on disposal of equipment .................................................. 5,125
Net cash provided by operating activities ....................................
$ 40,900
Cash flows from investing activities
Cash received from sale of equipment ......................................... 11,625
Cash paid for equipment..................................................................(30,000)
Net cash used in investing activities .............................................

(18,375)

Cash flows from financing activities
Cash borrowed on short-term note ............................................... 4,000
Cash paid on long-term note...........................................................(50,125)
Cash received from issuing stock (2,500 x $20)............................ 50,000
Cash paid for dividends ...................................................................(50,100)
Net cash used in financing activities .............................................

(46,225)

Net decrease in cash ...........................................................................
Cash balance at December 31, 2007.................................................
Cash balance at December 31, 2008.................................................

$(23,700)
73,500
$ 49,800


Noncash investing and financing activities
Purchased equipment for $96,375 by signing a $66,375 long-term note
payable and paying $30,000 in cash.

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Problem 12-1A (Concluded)
Part 2
Forten Company's operations provide a positive net cash inflow of $40,900—a
good result. At the same time, the cash balance decreased by $23,700 (32%)
during the year. Two major cash outflows are the retirement of debt ($50,125)
and the dividend payment ($50,100), which together represent 87% of net
income. Also, the $30,000 cash investment in equipment is presumably
necessary to replace the older equipment sold.
Helping fund these cash outflows is $50,000 cash from issuance of stock.
Moreover, the company took on additional debt (more than 30% increase in
indebtedness); namely, $66,375 in long-term notes. The company must
recognize that 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.

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Problem 12-2AA (60 minutes)
FORTEN COMPANY
Spreadsheet for Statement of Cash Flows
For Year Ended December 31, 2008
December
Analysis of Changes
31, 2007
Debit
Credit
Balance sheet—debits
Cash..........................................................$ 73,500
Accounts receivable .............................. 50,625
Merchandise inventory.......................... 251,800
Prepaid expenses................................... 1,875
Equipment ............................................... 108,000

(b)
(c)

$15,185
23,856

(h)


96,375

(g)
(e)

30,125
61,534

(d)
(g)

$ 625
46,875

(f)

20,750

(j)
(i)
(l)

4,000
66,375
12,500

(l)
(a)


37,500
114,975

(b)
(c)

15,185
23,856

(e)

61,534

(h)

30,000

(k)

50,125

(m)

50,100

$485,800
Balance sheet--credits
Accum. depreciation—Equip. .............. $46,000
Accounts payable .................................. 114,675
Short-term notes payable ..................... 6,000

Long-term notes payable ...................... 48,750
Common stock, $5 par value ............... 150,250
Paid-in capital in excess of
0
par value, common stock ..................
Retained earnings .................................. 120,125

(k)

50,125

(m)

50,100

(a)

114,975

$485,800
Statement of cash flows
Operating activities
Net income ..............................................
Increase in accts. receivable ................
Increase in merch. inventory................
Decrease in prepaid expenses.............
Decrease in accounts payable.............
Depreciation expense............................
Loss on sale of equipment ...................
Investing activities

Receipt from sale of equipment...........
Payment to purchase equipment ........
Financing activities
Borrowed on short-term note...............
Payment on long-term note..................
Issued common stock for cash ...........
Payments of cash dividends ................
Noncash investing and
financing activities
Purchase of equip. financed
by long-term note payable .........

(d)

20,750
5,125

(g)

11,625

(l)

(i)

$ 49,800
65,810
275,656
1,250
157,500

$550,016
$ 36,625
53,141
10,000
65,000
162,750
37,500
185,000
$550,016

625

(f)
(g)

(j)

December
31, 2008

4,000
50,000

66,375 (h)
66,375
$600,775
$600,775

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Problem 12-3AB (40 minutes)
FORTEN COMPANY
Statement of Cash Flows
For Year Ended December 31, 2008
Cash flows from operating activities
Cash received from customers (Note 1) .................... $567,315
Cash paid for merchandise (Note 2) .......................... (370,390)
Cash paid for other expenses (Note 3) ...................... (131,775)
Cash paid for income taxes ....................................... (24,250)
Net cash provided by operating activities ................

$ 40,900

Cash flows from investing activities
Cash received from sale of equipment .....................
Cash paid for equipment ............................................
Net cash used in investing activities ........................

11,625
(30,000)
(18,375)

Cash flows from financing activities
Cash borrowed on short-term note ...........................

Cash paid on long-term note .....................................
Cash received from issuing stock (2,500 x $20)........
Cash paid for dividends .............................................
Net cash used in financing activities .......................

4,000
(50,125)
50,000
(50,100)
(46,225)

Net decrease in cash .....................................................
Cash balance at December 31, 2007 ............................
Cash balance at December 31, 2008 ............................

$(23,700)
73,500
$ 49,800

Noncash investing and financing activities
Purchased equipment for $96,375 by signing a $66,375 long-term note
payable and paying $30,000 in cash.

Supporting calculations
(1) Sales - Increase in receivables = $582,500 - ($65,810 - $50,625) = $567,315
(2)

Cost of
goods sold
$285,000


Increase in
inventory
+ ($275,656 - $251,800)

+

Decrease in

+ payables

+ ($114,675 - $53,141)

=
= $370,390

(3) Other expenses - Decrease in prepaid expenses = $132,400 - ($1,875 - $1,250)
= $131,775

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Problem 12-4A (35 minutes)
GOLDEN CORPORATION
Statement of Cash Flows

For Year Ended December 31, 2008
Cash flows from operating activities
Net income ................................................................................... $136,000
Adjustments to reconcile net income to net
cash provided by operating activities
Increase in accounts receivable ($83,000 - $71,000) ........... (12,000)
Increase in inventory ($601,000 - $526,000)........................... (75,000)
Increase in accounts payable ($87,000 - $71,000)................ 16,000
Increase in taxes payable ($28,000 - $25,000).......................
3,000
Depreciation expense ............................................................. 54,000
Net cash provided by operating activities .............................
$122,000
Cash flows from investing activities
Cash paid for equipment ...........................................................

(36,000)

Cash flows from financing activities
Cash received from issuing stock (12,000 x $5) ..................... 60,000
Cash paid for cash dividends ................................................... (89,000)
Net cash used in financing activities ......................................

(29,000)

Net increase in cash......................................................................
Cash balance at December 31, 2007 .........................................
Cash balance at December 31, 2008 .........................................

$ 57,000

107,000
$164,000

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Problem 12-5AA (50 minutes)
GOLDEN CORPORATION
Spreadsheet for Statement of Cash Flows
For Year Ended December 31, 2008
December
31, 2007
Balance sheet--debits
Cash..........................................................$ 107,000
Accounts receivable ..............................
71,000 (b)
Merchandise inventory .......................... 526,000 (c)
Equipment ............................................... 299,000 (g)

Analysis of Changes
Debit
Credit

December
31, 2008


$ 12,000
75,000
36,000

$ 164,000
83,000
601,000
335,000
$1,183,000

$1,003,000
Balance sheet--credits
Accum. depreciation—Equip. ..............$ 104,000
Accounts payable...................................
71,000
Income taxes payable ............................
25,000
Common stock, $2 par value................ 568,000
Paid-in capital in excess of
par value, common stock................... 160,000
Retained earnings ..................................
75,000

(f) $ 54,000
(d)
16,000
(e)
3,000
(h)

24,000
(h)
89,000 (a)

(i)

36,000
136,000

$1,003,000

$ 158,000
87,000
28,000
592,000
196,000
122,000
$1,183,000

Statement of cash flows
Operating activities
Net income...............................................
Increase in accounts receivable .........
Increase in merch. inventory ................
Increase in accounts payable...............
Increase in income tax payable............
Depreciation expense ............................

(a)


136,000

(d)
(e)
(f)

(h)

12,000
75,000

(g)

36,000

(i)

89,000
$481,000

16,000
3,000
54,000

Investing activities
Payment for equipment .........................
Financing activities
Issued common stock for cash ...........
Paid cash dividends...............................


(b)
(c)

60,000
_______
$481,000
_

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