Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 13
Cash Flow Statement
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
1.
Indicate the primary
purpose of the cash
flow statement.
1, 2, 3
2.
Distinguish among operating, investing, and
financing activities.
4, 5, 6, 7, 8 1, 2, 3
3.
Prepare a cash flow
statement using one of
two approaches:
4.
Exercises
1, 2
A
Problems
B
Problems
1A
1B
2A
2B
9, 10, 11
4, 5
(a) the indirect method
or
12, 13, 14
6, 7, 8
3, 4, 5, 6
(b) the direct method.
15, 16, 17,
9, 10, 11,
12
7, 8, 9, 10, 4A, 5A,
4B, 5B,
11
6A, 7A, 8A 6B, 7B, 8B
Use the cash flow
statement to evaluate a
company.
18, 19, 20
13, 14
6, 11, 12,
13
3A, 4A,
3B, 4B,
5A, 6A, 8A 5B, 6B, 8B
8A, 9A,
10A, 11A
8B, 9B,
10B, 11B
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
Simple
20-30
1A
Classify activities.
2A
Calculate cash flows.
Moderate
20-30
3A
Prepare cash flow statement—indirect method.
Moderate
20-30
4A
Prepare operating activities section—indirect method
and direct method.
Moderate
40-50
5A
Prepare operating activities section—indirect method
and direct method.
Moderate
40-50
6A
Prepare cash flow statement—indirect method and
direct method.
Moderate
50-60
7A
Prepare statement of earnings and cash flow statement—direct method.
Moderate
30-40
8A
Prepare cash flow statement – indirect method and
direct method – and calculate cash-based ratios.
Moderate
50-60
9A
Use cash-based ratios to compare two companies.
Moderate
20-30
10A
Use cash-based ratios to compare two companies.
Moderate
20-30
11A
Discuss cash position.
Moderate
20-30
1B
Classify activities.
Simple
20-30
2B
Calculate cash flows.
Moderate
20-30
3B
Prepare cash flow statement—indirect method.
Moderate
20-30
4B
Prepare the operating activities section—indirect
method and direct method.
Moderate
40-50
5B
Prepare operating activities section—indirect method
and direct method.
Moderate
40-50
6B
Prepare cash flow statement—indirect method and
direct method.
Moderate
50-60
7B
Prepare statement of earnings and cash flow statement—direct method.
Moderate
30-40
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Kimmel, Weygandt, Kieso, Trenholm
Problem
Number
Financial Accounting, Second Canadian Edition
Description
Difficulty
Level
Time
Allotted (min.)
8B
Prepare cash flow statement – indirect method and
direct method – and calculate cash-based ratios.
Moderate
50-60
9B
Use cash-based ratios to compare two companies.
Moderate
20-30
10B
Use cash-based ratios to compare two companies.
Moderate
20-30
11B
Discuss cash position.
Moderate
20-30
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
ANSWERS TO QUESTIONS
1.
(a) The cash flow statement reports the cash receipts, cash payments, and net change in
cash resulting from the operating, investing, and financing activities of an enterprise
during a period. It concludes by reconciling the beginning and ending cash balances.
(b) Disagree. The cash flow statement is required. It is the fourth basic financial statement.
2.
The cash flow statement answers the following questions about cash: (a) Where did the
cash come from during the period? (b) What was the cash used for during the period? and
(c) What was the change in cash during the period?
3.
Cash equivalents are short-term, highly liquid investments that are readily convertible to
cash within a very short period of time (usually within 3 months). Sometimes short-term
demand bank advances are included as well. The cash flow statement may include cash
equivalents because they are by definition readily converted to cash, therefore, a more
complete picture of cash activities would result.
4.
The three activities are:
Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net earnings.
Investing activities include: (a) acquiring and disposing of investments and productive
long-lived assets and (b) lending money and collecting loans.
Financing activities include: (a) obtaining cash from issuing debt and repaying amounts
borrowed and (b) obtaining cash from shareholders and providing them with a return on
their investment (dividends).
5.
The cash flow statement presents cash investing and financing activities. However, companies often have significant noncash transactions such as the issuing of common shares
in return for the acquisition of a major asset. Because these transactions can have a profound impact on the financial results of the entity, it is important that users of the financial
statements be aware of these non-cash transactions. Therefore, if noncash transactions affect financial conditions significantly, the CICA requires that they be disclosed in either a
separate schedule at the bottom of the cash flow statement or in a separate note or supplementary schedule to the financial statements.
6.
Examples of noncash transactions are: (1) issue of shares for assets, (2) issue of shares to
reduce debt, and (3) issue of debt for assets.
7.
Comparative balance sheets, a current statement of earnings, and certain transaction data
all provide information necessary for preparation of the cash flow statement. Comparative
balance sheets indicate how assets, liabilities, and equities have changed during the period. A current statement of earnings provides information about the amount of cash provided from operating activities. Certain transactions provide additional detailed information
needed to determine how cash was provided or used during the period.
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Questions (Continued)
8.
A number of factors could have caused an increase in cash despite the net loss. These are
(1) high cash revenues relative to low cash expenses; (2) sales of property, plant and
equipment; (3) sales of investments; and (4) issue of debt or share capital.
9.
The advantage of the direct method is that it presents the major categories of cash receipts and cash payments in a format that is similar to the statement of earnings and familiar to statement users. Its principal disadvantage is that the necessary data can be expensive and time-consuming to accumulate.
The advantage of the indirect method is it is often considered easier to prepare, and it provides a reconciliation of net earnings to net cash provided by operating activities, while its
primary disadvantage is the difficulty in understanding the adjustments that comprise the
reconciliation.
Both methods are acceptable but the CICA expressed a preference for the direct method.
Yet, the indirect method is the overwhelming favourite of companies. Companies favour the
indirect method because it is easier to prepare, it focuses on the difference between net
earnings and net cash flow and it tends to reveal less company information to competitors.
10.
It is necessary to convert accrual-based net earnings to cash basis earnings because the
unadjusted net earnings includes items that do not provide or use cash. An example would
be an increase in accounts receivable. If accounts receivable increased during the period,
revenues reported on the accrual basis would be higher than the actual cash revenues received. Thus, accrual basis net earnings must be adjusted to reflect the net cash provided
by operating activities.
11.
Although the approaches are different, both the direct and indirect methods will produce the
same net cash provided by operating activities.
12.
Amortization expense (+)
Gain (-) or loss (+) on sale of a noncurrent asset
Increase (-) /decrease (+) in accounts receivable
Increase (+) / (-) decrease in accounts payable
Increase (-) /(+) decrease in inventory
(Note: only four were required)
13.
Under the indirect method, amortization is added back to net earnings to reconcile net
earnings to net cash provided by operating activities because amortization is an expense
but not a cash payment. Adding it back cancels the expense.
Example:
Revenue
Less: Amortization expense
Net earnings (loss)
Add back amortization
Cash provided by operating activities
$
0
1,000
(1,000)
1,000
$
0
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Financial Accounting, Second Canadian Edition
Questions (Continued)
14.
Under the indirect method, a gain on the sale of equipment is deducted from net earnings
to reconcile net earnings to net cash provided by operating activities. A gain is the difference between the proceeds received when the asset is sold and the book value of the asset and is not a cash inflow or outflow. Therefore, the noncash gain, which was included in
net earnings, must be deducted from earnings on the cash flow statement to convert net
earnings to net cash provided by operating activities.
+ Decrease in accounts receivable
15.
Cash receipts from customers
(a)
= Sales revenue
– Increases in accounts receivable
+ Increase in inventory
Purchases
(b)
= Cost of goods
– Decrease in inventory
+ Decrease in accounts payable
Cash payments to suppliers
= Purchases
– Increase in accounts payable
16.
Sales ............................................................................................................ $2,000,000
Add: Decrease in receivables ......................................................................
100,000
Cash receipts from customers ...................................................................... $2,100,000
17.
Amortization expense is not listed in the direct method operating activities section because
it is not a cash flow item—it does not affect cash.
18.
For common shareholders this means the company is generating less cash from operating
activities to pay future dividends and to expand the business in the form of future growth.
19.
Free cash flow is the cash from operating activities available to the company after considering all cash expenditures for capital expenditures and dividends paid during the year. The
potential increase in free cash flow means the company should have more cash available
to invest in new business opportunities or pay more dividends to the shareholders.
20.
(a) The cash current debt coverage ratio is a cash-based ratio that measures liquidity.
(b) Solvency can be measured by the cash total debt coverage ratio (cash-based).
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13-1
(a)
(b)
(c)
(d)
(e)
Cash inflow from financing activity, $200,000
Cash outflow from investing activity, $150,000
Cash inflow from investing activity, $30,000
Cash outflow from financing activity, $50,000
Noncash activity. Not shown on the cash flow statement
BRIEF EXERCISE 13-2
(a)
(b)
(c)
Investing activity
Investing activity
Operating activity
(d)
(e)
(f)
Financing activity
Financing activity
Financing activity
BRIEF EXERCISE 13-3
Financing activities
Proceeds from issue of bonds payable ..................................................
Payment of dividends .............................................................................
Net cash provided by financing activities .......................................
$200,000)
(50,000)
$150,000
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BRIEF EXERCISE 13-4
Original cost of equipment sold .........................................................................
Less: Accumulated amortization.......................................................................
Book value of equipment sold ...........................................................................
Less: Loss on sale of equipment ......................................................................
Cash received from sale of equipment ..............................................................
$22,000
5,500
16,500
7,500
$ 9,000
Note to instructor–some students may find journal entries helpful in understanding this exercise.
Amortization expense .............................................................................
Accumulated amortization ..............................................................
12,000
Equipment ..............................................................................................
Cash ...............................................................................................
41,600
Cash (plug) .............................................................................................
Accumulated amortization ......................................................................
Loss on sale of equipment .....................................................................
Equipment ......................................................................................
9,000
5,500
7,500
12,000
41,600
22,000
BRIEF EXERCISE 13-5
Beginning balance, retained earnings ....................................
Add: Net earnings ..................................................................
Less: Adjustment for share repurchases .................................
Less: Ending balance, retained earnings ...............................
Dividends paid ........................................................................
$ 973.1
202.4
(5.9)
(1,138.0)
$ 31.6
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BRIEF EXERCISE 13-6
1.
2.
3.
4.
5.
+
–
+
+
–
BRIEF EXERCISE 13-7
Operating activities
Net earnings ..................................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ...........................................
Accounts receivable decrease ..............................
Loss on the sale of equipment ..............................
)
Accounts payable decrease .................................
Net cash provided by operating activities ............................
$2,500,000
$260,000
350,000
10,000
(280,000 )
340,000
$2,840,000
BRIEF EXERCISE 13-8
Operating activities
Net earnings ........................................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Decrease in accounts receivable ................................
Increase in prepaid expenses .....................................
Increase in inventories ................................................
Net cash provided by operating activities .....................................
$200,000
$80,000 )
(18,000 )
(30,000 )
32,000
$232,000
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BRIEF EXERCISE 13-9
Cash payment
for income taxes
=
Income tax
expense
- Increase in income tax expense
+ Decrease in income tax payable
$67,000 = $70,000 - $3,000 (Increase in income taxes payable)
BRIEF EXERCISE 13-10
Receipts from
customers
=
Sales
revenues
+ Decrease in accounts receivable
- Increase in accounts receivable
$490,000 = $480,000 + $10,000 (Decrease in accounts receivable)
BRIEF EXERCISE 13-11
+ Increase in prepaid expenses
Cash
payments for
operating
expenses
=
Operating
expenses,
excluding
amortization
- Decrease in prepaid expenses
and
+ Decrease in accrued expenses payable
- Increase in accrued expenses payable
$49,000 = $60,000 – $6,600 – $4,400
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BRIEF EXERCISE 13-12
Purchases
= Cost of goods
+ Increase in inventory
– Decrease in inventory
sold
$438.8 - $20.0 = $418.8
Cash payments to suppliers
= Purchases
+ Decrease in accounts payable
– Increase in accounts payable
$418.8 - $17.3 = $401.5
BRIEF EXERCISE 13-13
(a)
Free cash flow = $300,000 – $200,000 – $0 = $100,000
(b)
Cash current debt coverage =
$300,000
 2 times
$150,000
(c)
Cash total debt coverage =
$300,000
 1.3 times
$225,000
BRIEF EXERCISE 13-14
(a)
Free cash flow = $44.6 million - $1.6 million = $43 million
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SOLUTIONS TO EXERCISES
EXERCISE 13-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Noncash investing (purchase of assets) and financing (issue of note) activities
Financing activities (cash provided)
Operating activities (cash provided)
Financing activities (cash used)
Investing activities (cash provided)
Financing activities (cash used)
Operating activities (cash used)
Noncash financing activity
EXERCISE 13-2
Indirect method assumed:
(a) Investing activity
(b) Financing activity
(c) Investing activity
(d) Noncash investing
(e) Operating activity
(f)
Financing activity
(g) Operating activity
(h) Financing activity
Direct method assumed:
(a) Investing activity
(b) Financing activity
(c) Investing activity
(d) Noncash investing
(e) No effect
(f)
Financing activity
(g) Operating activity
(h) Financing activity
(i)
(j)
Operating activity
Noncash investing activity (land);
financing (bonds) activity
(k) Operating activity
(l)
Noncash financing activity
(m) Operating activity (gain); investing activity
(cash proceeds from sale)
(n) Operating activity*
(i)
(j)
Operating activity
Noncash investing activity (land);
financing (bonds) activity
(k) Operating activity
(l)
Noncash financing activity
(m) No effect (gain); investing activity (cash proceeds from sale of land)
(n) Operating activity*
* Note to instructors—this assumes that the dividends have been received from equity investments recorded using the cost method. If the investment is recorded using the equity method, the
answer would change to an investing activity.
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EXERCISE 13-3
PESCI COMPANY LTD.
Cash Flow Statement (Partial)—Indirect Method
Year Ended July 31, 2004
Operating activities
Net earnings ..........................................................................
Adjustments to reconcile net earnings to net
cash provided by operating activities
Amortization expense ...................................................
Decrease in accounts receivable ..................................
Increase in accounts payable .......................................
Decrease in prepaid expenses .....................................
Loss on sale of equipment ............................................
Net cash provided by operating activities .......................................
$195,000
$45,000
15,000
10,000
4,000
5,000
79,000
$274,000
EXERCISE 13-4
BARTH INC.
Cash Flow Statement (Partial)—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ..........................................................................
Adjustments to reconcile net earnings to net
cash provided by operating activities
Amortization expense ...................................................
Increase in accounts receivable ...................................
Decrease in inventory ...................................................
Increase in prepaid expenses .......................................
Increase in accrued expenses payable ........................
Decrease in accounts payable .....................................
Net cash provided by operating activities .......................................
$153,000
$19,000)
(31,000)
25,000)
(5,000)
10,000)
(7,000)
11,000
$164,000
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EXERCISE 13-5
DUPRÉ CORP.
Cash Flow Statement (Partial)—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ..........................................................................
Adjustments to reconcile net earnings to net
cash provided by operating activities
Amortization expense ...................................................
Loss on sale of equipment ............................................
Net cash provided by operating activities .......................................
$ 67,000
$28,000
6,000
Investing activities
Sale of equipment ................................................................. $ 3,000*
Purchase of equipment ......................................................... (123,000)
Net cash used by investing activities ..............................................
34,000
101,000
(120,000)
Financing activities
Payment of cash dividends....................................................
(14,000)
Net decrease in cash ......................................................................
$(33,000)
*Cost of equipment sold ........................................................
*Accumulated amortization ....................................................
*Book value ...........................................................................
*Loss on sale of equipment ...................................................
*Cash proceeds .....................................................................
$39,000
30,000
9,000
6,000)
$ 3,000)
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Financial Accounting, Second Canadian Edition
EXERCISE 13-6
(a)
PUFFY LTD.
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings .................................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ..........................................
Increase in accounts receivable ..........................
Decrease in inventory ..........................................
Decrease in accounts payable.............................
Net cash provided by operating activities ........................
$105,000
$34,000
(9,000)
9,000
(8,000)
Investing activities
Sale of land ..................................................................
Purchase of equipment.................................................
Net cash used by investing activities .....................................
$25,000
(60,000)
Financing activities
Payment of cash dividends ...........................................
Redemption of bonds ...................................................
Issue of common shares ..............................................
Net cash used by financing activities .....................................
$(40,000)
(50,000)
35,000
Net increase in cash ..............................................................
Cash, January 1 ....................................................................
Cash, December 31 ..............................................................
26,000
131,000
(35,000)
(55,000)
41,000)
22,000)
$ 63,000)
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EXERCISE 13-6 (Continued)
(b)
1.
Free cash flow = $131,000 - $60,000 - $40,000 = $31,000
2.
Cash current debt coverage =
Net cash provided
by operating activities

3.
÷
Average current
liabilities
$131,000
 3.05 times
($39,000  $47,000)/2
Cash total debt coverage =
Net cash provided
by operating activities

÷
Average total
liabilities
$131,000
 0.60 times
($189,000 *  $ 247,000 * *)/2
*$39,000 + $150,000 = $189,000
**$47,000 + $200,000 = $247,000
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EXERCISE 13-7
Cost of goods sold........................................................................
Add: Increase in inventory ...........................................................
Purchases ....................................................................................
Add: Decrease in accounts payable .............................................
Cash payments to suppliers ..............................................
$14,535
135
14,670
800
$15,470
Operating expenses .....................................................................
Add: Increase in prepaid expenses .............................................
Decrease in accrued liabilities ............................................
Cash payments for operating expenses ............................
$8,068
160
10
$8,238
EXERCISE 13-8
Cash payments for rentals
Rent expense
Add: Increase in prepaid rent ($9,000 - $5,900)
Cash payments for rent
$31,000*
3,100*
$34,100*
Cash payments for salaries
Salaries expense
Add: Decrease in salaries payable ($10,000 - $8,000)
Cash payments for salaries
$54,000*
2,000*
$56,000*
Cash receipts from customers
Revenue from sales
Add: Decrease in accounts receivable ($12,000 - $7,000)
Cash receipts from customers
$180,000*
5,000*
$185,000*
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EXERCISE 13-9
Operating activities
Cash receipts from customers .......................................................
Cash payments
For operating expenses .........................................................
For income taxes ...................................................................
Net cash provided by operating activities .......................................
$130,000*
$57,000**
31,000
88,000*
$ 42,000*
*$182,000 - $52,000 = $130,000
** $78,000 - $21,000 = $57,000
EXERCISE 13-10
Operating activities
Cash receipts from
Customers ....................................................................
Dividends on investment ..............................................
Cash payments
To suppliers for merchandise .......................................
For operating expenses ................................................
For salaries and wages ................................................
For interest ...................................................................
For income taxes ..........................................................
Net cash provided by operating activities .......................................
$240,000*
14,000
254,000
$90,000
28,000
53,000
10,000
12,000
193,000*
$ 61,000*
*$48,000 + $192,000 = $240,000
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EXERCISE 13-11
(a)
PUFFY LTD.
Cash Flow Statement—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers* ....................................
Cash payments
To suppliers** ............................................................... $587,000
For operating expenses*** ............................................ 251,000
Net cash provided by operating activities ..............................
Investing activities
Sale of land ..................................................................
Purchase of equipment.................................................
Net cash used by investing activities .....................................
$25,000
(60,000)
Financing activities
Payment of cash dividends ...........................................
Redemption of bonds ...................................................
Issue of common shares ..............................................
Net cash used by financing activities .....................................
$(40,000)
(50,000)
35,000
Net increase in cash ..............................................................
Cash, January 1 ....................................................................
Cash, December 31 ..............................................................
$969,000
838,000
131,000
(35,000)
(55,000)
41,000)
22,000
$ 63,000)
*Cash receipts = sales – increase in accounts receivable
$978,000 – $9,000
**Cash payments to suppliers = cost of goods sold – decrease in inventories + decrease in
accounts payable
$588,000 - $9,000 + $8,000
***Operating expenses – amortization
$285,000 - $34,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 13-11 (Continued)
(b)
1.
Free cash flow = $131,000 - $60,000 - $40,000 = $31,000
2.
Cash current debt coverage =
Net cash provided
by operating activities

3.
÷
Average current
liabilities
$131,000
 3.05 times
($39,000  $47,000)/2
Cash total debt coverage =
Net cash provided
by operating activities

÷
Average total
liabilities
$131,000
 0.60 times
($189,000 *  $ 247,000 * *)/2
*$39,000 + $150,000 = $189,000
**$47,000 + $200,000 = $247,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 13-12
Ria
Corporation
Les
Corporation
Cash current debt coverage
$200,000
$50,000
= 4.0 times
$200,000
$100,000
= 2.0 times
(b)
Cash total debt coverage
$200,000
$200,000
= 1.0 times
$200,000
$250,000
= 0.80 times
(c)
Free cash flow
$200,000 – $20,000 –
$14,000 = $166,000
$200,000 – $35,000 –
$18,000 = $147,000
(a)
Ria’s liquidity and solvency ratios are higher (better) than Les’ comparable ratios. In particular,
Ria’s cash current debt coverage is twice as high as Les’. These ratios indicate that Ria is substantially more liquid than Les. Ria’s solvency, as measured by the cash total debt coverage ratio, is also better than Les’, although only marginally so. Finally, Ria has a higher free cash flow
which would give the company a better ability to invest in new opportunities without having to obtain outside financing.
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Chapter 13
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Financial Accounting, Second Canadian Edition
EXERCISE 13-13
PepsiCo
Coca-Cola
Cash current debt coverage
$4,627
$5,525
= 0.84 times
$4,742
$7,885
= 0.60 times
(b)
Cash total debt coverage
$4,627
$13,612
= 0.34 times
$4,742
$11,876
= 0.40 times
(c)
Free cash flow
(a)
$4,627 – $1,788 –
$1,041
=$1,798
$4,742 - $1,395 –
$1,987
= $1,360
PepsiCo’s liquidity, as measured by its cash current debt coverage is higher (better) than CocaCola’s comparable ratio. However, Coca-Cola’s cash total debt coverage ratio is almost 18%
[(0.40 – 0.34) ÷ 0.34] higher than PepsiCo’s.
PepsiCo has a higher free cash flow, which indicates the company is in a slightly better position
to use cash flows from operating activities to pay dividends or finance expansion and growth.
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Chapter 13
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Financial Accounting, Second Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 13-1A
Transaction
Classification
(a)
Recorded amortization expense.
NC
Cash Inflow
or Outflow?
No effect
(b)
Incurred a gain on the sale of
land
Recorded cash proceeds for a
sale of land.
Acquired land by issuing common shares.
Paid a cash dividend to preferred
shareholders.
Distributed a stock dividend to
common shareholders.
Recorded cash sales.
Recorded sales on account.
Purchased inventory for cash.
Purchased inventory on account.
Paid income taxes.
NC
No effect
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
I
NC
F
Inflow
No effect
Outflow
NC
No effect
O
NC
O
NC
O
Inflow
No effect
Outflow
No effect
Outflow
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-2A
(a) Net earnings:
Retained earnings, beginning of year ....................
Add: Net earnings (plug) ........................................
Less: Cash dividends.............................................
Stock dividends .............................................
Retained earnings, end of year ..............................
$240,000
78,400
318,400
10,000
8,400
$300,000
(b)
Cash inflow: Issue of common shares, $28,000
Cash outflow: Payment of dividends, $10,000
(c)
Both of the above activities (issue of common shares and payment of dividends) would be classified as financing activities on the cash flow statement.
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-3A
CORTINA LIMITED
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ..............................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ......................................... $70,000
Loss on sale of equipment .................................
1,000
Gain on sale of land ...........................................
(5,000)
Increase in accounts receivable ......................... (13,000)
Increase in inventory .......................................... (52,000)
Decrease in prepaid expenses ...........................
4,400
Decrease in accounts payable ........................... (12,000)
Net cash provided by operating activities ..........................
Investing activities
Sale of land ($150,000 - $105,000 + $5,000) ............. $50,000
Sale of equipment ...................................................... 12,000
Purchase of equipment .............................................. (65,000)
Net cash used by investing activities .................................
$26,890
(6,600)
20,290
(3,000)
Financing activities
Payment of cash dividends ........................................
(44,290)
Net decrease in cash.........................................................
Cash, January 1 ................................................................
Cash, December 31 ..........................................................
(27,000)
57,000
$30,000
Note: Significant noncash investing and financing activities
Conversion of bonds by issue of shares ............................
$30,000
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-4A
(a)
GUM SAN LTD.
Cash Flow Statement (Partial)—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings .......................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ..................................
Decrease in accounts receivable.................
Increase in inventory ...................................
Increase in prepaid expenses .....................
Increase in accounts payable ......................
Decrease in accrued expenses payable ......
Decrease in income taxes payable ..............
Net cash used by operating activities .........................
$728,000
$145,000
510,000
(220,000)
(170,000)
50,000
(165,000)
(26,000)
124,000
$852,000
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-4A (Continued)
(b)
GUM SAN LTD.
Cash Flow Statement (Partial)—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers .................
Cash payments
To suppliers ..................................... $3,460,000 (2)
For operating expenses.................... 1,260,000 (3)
For income taxes..............................
338,000 (4)
Net cash provided by operating activities ........
$5,910,000 (1)
5,058,000
$ 852,000
Calculations
(1) Cash receipts from customers
Sales ........................................................................
Add: decrease in accounts receivable .....................
Cash receipts from customers ..................................
$5,400,000
510,000
$5,910,000
(2) Cash payments to suppliers
Cost of goods sold ...................................................
Add: Increase in inventories ....................................
Cost of purchases ....................................................
Deduct: Increase in accounts payable .....................
Cash payments to suppliers .....................................
$3,290,000
220,000
3,510,000
50,000
$3,460,000
(3) Cash payments for operating expenses
Operating expenses .................................................
Add: Decrease in accrued expenses payable ...........
Add: Increase in prepaid expenses ..........................
Cash payments for operating expenses ....................
$ 925,000
165,000
170,000
$1,260,000
(4) Cash payments for income taxes
Income tax expense .................................................
Add: Decrease in income tax expense ....................
Cash payments for income taxes .............................
$312,000
26,000
$338,000
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-5A
(a)
HANALEI INTERNATIONAL INC.
Cash Flow Statement (Partial)—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings .......................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Decrease in accounts receivable.................
Decrease in accounts payable ....................
Increase in income taxes payable ...............
Net cash used by operating activities .........................
$131,250
$10,000
(11,000)
4,000
3,000
$134,250
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-5A (Continued)
(b)
HANALEI INTERNATIONAL INC.
Cash Flow Statement (Partial)—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers ......................
Cash payments
For operating expenses......................... $381,000 (2)
For income taxes................................... 39,750 (3)
Net cash provided by operating activities .............
$555,000 (1)
420,750
$134,250
Calculations
(1) Cash receipts from customers
Revenues ...................................................................
Add: Decrease in accounts receivable ......................
($50,000 - $60,000) .............................................
Cash receipts from customers ....................................
(2) Cash payments for operating expenses
Operating expenses ...................................................
Add: Decrease in accounts payable
($30,000 - $41,000) .............................................
Cash payments for operating expenses .....................
(3) Cash payment for income taxes
Income tax expense ...................................................
Deduct: Increase in income taxes payable
($8,000 - $4,000) .................................................
Cash payments for income taxes ...............................
$545,000
10,000
$555,000
$370,000
11,000
$381,000
$43,750
4,000
$39,750
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-6A
(a)
NORWAY INC.
Cash Flow Statement —Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ............................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ....................................... $58,700
Gain on sale of property, plant and equipment . (8,750)
Increase in accounts receivable ....................... (53,800)
Increase in inventory ........................................ (19,250)
Increase in accounts payable ...........................
4,420
Decrease in accrued expenses payable ........... (6,730)
Net cash provided by operating activities ........................
$91,480
(25,410)
66,070
Investing activities
Sale of investments ................................................. $ 22,500
Sale of property, plant and equipment ..................... 15,550
Purchase of property, plant and equipment ............. (141,000)
Net cash used by investing activities ...............................
(102,950)
Financing activities
Sale of common shares ........................................... $50,000
Issue of bonds ......................................................... 70,000
Payment of cash dividends ...................................... (37,670)
Net cash provided by financing activities .........................
82,330
Net increase in cash ........................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
45,450
47,250
$92,700
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Financial Accounting, Second Canadian Edition
PROBLEM 13-6A (Continued)
(b)
NORWAY INC.
Cash Flow Statement —Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers (1) ...........................
Cash payments
To suppliers (2) ............................................... $114,290
For operating expenses (3) .............................
21,400
For Interest......................................................
2,940
For income taxes.............................................
39,000
Net cash provided by operating activities ........................
$243,700
177,630
66,070
Investing activities
Sale of investments ................................................. $ 22,500
Sale of property, plant and equipment ..................... 15,550
Purchase of property, plant and equipment ............. (141,000)
Net cash used by investing activities ...............................
(102,950)
Financing activities
Sale of common shares ........................................... $50,000
Issue of bonds ......................................................... 70,000
Payment of cash dividends ...................................... (37,670)
Net cash provided by financing activities .........................
82,330
Net increase in cash ........................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
45,450
47,250
$ 92,700
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-6A (Continued)
(b)
(Continued)
Calculations
(1) Cash receipts from customers
Revenues ...................................................................
Less: Increase in accounts receivable .......................
Cash receipts from customers ....................................
$297,500
53,800
$243,700
(2) Cash payments to suppliers
Cost of goods sold ...................................................
Add: Increase in inventories ....................................
Cost of purchases ....................................................
Deduct: Increase in accounts payable .....................
Cash payments to suppliers .....................................
$ 99,460
19,250
118,710
4,420
$114,290
(3) Cash payments for operating expenses
Operating expenses ...................................................
Add: Decrease in accrued expenses payable ...........
Cash payments for operating expenses .....................
$14,670
6,730
$21,400
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-7A
(a)
DESROCHES INC.
Statement of Earnings
Month Ended January 31, 2005
Sales ($2,500 + $15,000) .............................................
Expenses
Interest expense ($15,000 X 7% x 1/12) .................
Rent expense–space ..............................................
Insurance expense .................................................
Rent expense–equipment .......................................
Supplies expense ($1,000 - $300) ..........................
Operating expenses ...............................................
Salary expense.......................................................
Net earnings ..................................................................
$17,500
$ 88
1,000
100
750
700
2,000
500
5,138
$12,362
DESROCHES INC.
Cash Flow Statement—Direct Method
Month Ended January 31, 2005
Operating activities
Cash receipts from customers ($2,500 + $12,200) ..
Cash payments
To suppliers ........................................................... $ 800
For space rent ($1,000 X 3) ................................... 3,000
For equipment rent ................................................
750
For insurance......................................................... 1,200
For operating expenses ......................................... 2,000
Net cash provided by operating activities ......................
Financing activities
Borrowing from note payable ................................. $15,000
Sale of common shares ......................................... 5,000
Net cash provided by financing activities .......................
Increase in cash during the year ...................................
$ 14,700
7,750
6,950
20,000
$26,950
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-7A (Continued)
(b) The accrual-based statement of earnings shows net earnings of $12,362. The
cash flow statement shows cash provided by operating activities of $6,950 and
total increase in cash of $26,950. Some decision makers will find the accrualbased statement of earnings more useful. Others will find the cash flow statement more useful.
For example, shareholders investing in the company’s common shares for the
long-term will find the accrual-based statement of earnings more useful as it
provides a better indication of the long-term profitability of the company. Shortterm creditors will find the cash flow statement more useful as it provides a
better indication of the company’s ability to generate cash and repay its current obligations.
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-8A
(a)
SEYMOR LIMITED
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings.......................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense* ................................ $11,000
Increase in accounts receivable.................. (14,000)
Increase in inventory .................................. (13,000)
Decrease in accounts payable .................... (14,000)
Decrease in income taxes payable .............
(5,000)
Net cash provided by operating activities ...................
$36,000
(35,000)
1,000
Investing activities
Sale of equipment .............................................. $10,000
Purchase of equipment**....................................
(7,000)
Net cash provided by investing activities....................
3,000
Financing activities
Issue of bonds .................................................... $10,000
Payment of cash dividends ................................ (21,000)
Net cash used by financing activities .........................
(11,000)
Net decrease in cash .................................................
Cash, January 1 ........................................................
Cash, December 31 ...................................................
(7,000)
33,000
$26,000
* [$30,000 – ($24,000 - $5,000)] = $11,000
** $70,000 - $78,000 + $15,000 = $7,000
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-8A (Continued)
(b)
SEYMOR LIMITED
Cash Flow Statement—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers (1) ...........................
$272,000
Cash payments
To suppliers (2) .................................................. $221,000
For operating expenses ($34,000 – $11,000) .....
23,000
For Interest.........................................................
7,000
For income taxes (3) ..........................................
20,000
271,000
Net cash provided by operating activities ...................
1,000
Investing activities
Sale of equipment .............................................. $10,000
Purchase of equipment* .....................................
(7,000)
Net cash provided by investing activities....................
3,000
Financing activities
Issue of bonds .................................................... $10,000
Payment of cash dividends ................................ (21,000)
Net cash used by financing activities .........................
(11,000)
Net decrease in cash .................................................
Cash, January 1 ........................................................
Cash, December 31 ...................................................
(7,000)
33,000
$26,000
* $70,000 - $78,000 + $15,000 = $7,000
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-8A (Continued)
(b) (Continued)
Calculations
(1) Cash receipts from customers
Revenues ....................................................................
Less: Increase in accounts receivable ........................
Cash receipts from customers .....................................
$286,000
14,000
$272,000
(2) Cash payments to suppliers
Cost of goods sold ......................................................
Add: Increase in inventories .......................................
Cost of purchases .......................................................
Add: Decrease in accounts payable ...........................
Cash payments to suppliers ........................................
$194,000
13,000
207,000
14,000
$221,000
(3) Cash payments for income taxes
Income tax expense ...................................................
Add: Decrease in income taxes payable ....................
Cash payments for income taxes ................................
$15,000
5,000
$20,000
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-8A (Continued)
(c)
1.
Cash current debt coverage =
Net cash provided
Average current
by operating activities ÷
liabilities

2.
$1,000
 0.02 times
($44,000 $63,000)/2
Cash total debt coverage =
Net cash provided
÷
by operating activities

3.
Average total
liabilities
$1,000
 0.015 times
($64,000 $73,000)/2
Free cash flow = $1,000 - $7,000 - $21,000 = $(27,000)
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-9A
Cash current debt coverage
Cash total debt coverage
Free cash flow
Air Canada
WestJet
$(95)
$161
$2,730
$135
= - 0.03 times
= 1.19 times
$(95)
$161
$9,954
$300
= -0.01 times
= 0.54 times
$(95) – $109
= $(204)
$161 – 345
= $(184)
WestJet is significantly more liquid than Air Canada. As evidenced by its cash current debt coverage ratio, WestJet is able to generate sufficient cash to meet all of
its currently maturing liabilities. Air Canada’s negative ratio indicates the company
is not generating any positive cash flows at all.
In terms of solvency, we again see that Air Canada is generating no positive cash
flows that can be used to repay the company’s liabilities. WestJet however, does
have a positive cash flow that can be used to repay its liabilities. WestJet is definitely the more solvent of the two companies.
The negative free cash flow indicates that neither company has cash from operating activities that can be used for future investment purposes or the payment of dividends. However, given WestJet’s rapid expansion over the past several years this
is to be expected for this company.
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PROBLEM 13-10A
(a) Burrard is definitely the more liquid of the two companies. The company has
more assets to repay its currently maturing liabilities as evidenced by its higher acid test ratio and current ratio. Burrard is also turning its receivables into
cash every 60 days (365 ÷ 6 times) which is quicker than Pender who is currently taking over 90 days on the average to collect its receivables. As well,
Burrard is moving its inventory faster than Pender, which again indicates that
the company is the more liquid. Finally, Burrard’s cash current debt coverage
is higher than Pender’s. This indicates that Burrard is generating more cash
from operating activities that can be used to repay current obligations.
(b) Burrard has a much higher percentage of debt to total assets than Pender,
which would indicate that the company is the less solvent of the two. However, Burrard is generating more cash to use for the repayment of long-term
debt as can be seen by examining the cash total debt coverage ratios of the
two companies. Finally, the times interest earned ratio indicates that Burrard’s
earnings when compared to its required interest payments (the companies
times interest earned ratio is 6 times) is higher than the same ratio for Pender.
Therefore, although Burrard carries more debt than Pender, the company
seems to be in a better position to meet its obligations regarding repayment of
principal and interest.
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-11A
(a)
A review of the company’s cash flow statement will probably reveal that Nexfor collected a significant amount of receivables over the year or had large
increases in the amounts owed to current creditors such as suppliers or employees. Decreases in current assets and increase in current liabilities would
cause cash to be higher than accrual based net income. As well, the company could have had losses relating to the sale of assets or high amounts of
amortization, which would have reduced net earnings, but would have no effect on cash flows from operating activities.
(b)
Cash flow from operating activities can increase because of increased cash
receipts or decreased cash payments. These cash flows may or may not result in accrual based revenues and expenses. Cash flow and net earnings do
not have a direct correlation in any one period. In addition, earnings may not
have increased as much as cash flow because of an increase in accrual
based expenses, such as losses from investments, property, plant, and
equipment, or intangible assets, losses from discontinued operations, or an
increase in future income tax.
(c)
Nexfor might have been able to increase its free cash flow by increasing
cash from operating activities as explained in parts (a) and (b) or by decreasing the cash it spent on capital expenditures or by reducing its dividend payments.
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Chapter 13
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Financial Accounting, Second Canadian Edition
PROBLEM 13-1B
(a)
(b)
(c)
(d)
Transaction
Classification
Recorded amortization ex- NC
pense.
Removed, from the account- NC
ing records, accumulated
amortization on equipment
that was sold during the year.
Incurred a loss on sale of NC
equipment.
Acquired a building by paying 10% in cash and signing
a mortgage payable for the
balance.
I (for the cash downpayment)
NC (for the exchange)
Cash Inflow or Outflow?
No effect
(Amortization expense is a
noncash expense on the
statement of earnings. To
cancel out the subtraction
of this expense using the
indirect method of preparation in getting to net
earnings, amortization expense is added on the
cash flow statement in operating activities.)
No effect
(The proceeds from the
sale is the cash inflow in
investing activities)
No effect
(A loss is the noncash
component of a transaction. To cancel out the
subtraction of this item in
getting to net earnings
when using the indirect
method of preparation, the
loss is added on the cash
flow statement in operating activities.)
The 10% down payment is
a cash outflow.
The acquisition of the
building and assumption
of a mortgage is a noncash transaction that is
disclosed in the notes to
the cash flow statement.
Solutions Manual
13-42
Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-1B (CONTINUED)
(e)
(f)
(g)
(h)
(i)
Transaction
Made principal repayments on
the mortgage.
Issued common shares.
Purchased shares of another
company to be held as a longterm equity investment.
Paid dividends to common
shareholders.
Sold inventory on credit. The
company uses a perpetual inventory system.
(j)
Purchased inventory on
credit.
(k)
Paid wages owing to employees.
Classification
F
Cash Inflow or Outflow?
Cash outflow
F
I
Cash inflow
Cash outflow
F
Cash outflow
NC
NC
O
No effect
(Indirect method–The increase in accounts receivable is subtracted in
operating activities. The
decrease in inventory is
added in operating activities)
No effect
(Indirect method–The increase in inventory is
subtracted in operating
activities. The increase in
accounts payable is added in operating activities.)
Cash outflow
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13-43
Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-2B
(a)
Cash inflows (outflows) related to property, plant and equipment in 2004:
Equipment purchase
Land purchase
Proceeds from equipment sale
($80,000)
(30,000)
5,000*
* Cost of equipment sold $240,000 + $80,000 - $300,000 = $20,000
Accumulated amortization removed from accounts
($300,000 + $96,000 + $101,500 - $337,500 - $144,000) = $16,000
Cash proceeds = NBV ($20,000 – accumulated amortization $16,000) +
gain $1,000 = $5,000
Note to instructor–some students may find journal entries helpful in understanding this exercise.
Equipment .............................................................................. 80,000
Cash ................................................................................
80,000
Land ....................................................................................... 30,000
Cash ................................................................................
30,000
Cash (plug)............................................................................. 5,000
Accumulated amortization ...................................................... 16,000
Gain on sale of equipment ...............................................
Equipment .......................................................................
1,000
20,000
(b)
Equipment purchase
Land purchase
Proceeds from equipment sale
Investing activities (use)
Investing activities (use)
Investing activities (source)
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-3B
COUSIN TOMMY’S TOYS LTD.
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ............................................................
Adjustments to reconcile net earnings to net
cash provided by operating activities
Amortization expense .......................................
Loss on sale of equipment ...............................
Decrease in accounts receivable......................
Increase in inventory ........................................
Decrease in prepaid expenses .........................
Increase in accounts payable ...........................
Net cash provided by operating activities ........................
$ 38,000
$42,000
1,900
14,500
(9,450)
4,220
13,730
Investing activities
Sale of land..............................................................
Sale of equipment ....................................................
Purchase of equipment ............................................
Net cash used by investing activities ...............................
$40,000
8,100
(95,000)
Financing activities
Payment of cash dividends ......................................
Net cash used by financing activities ...............................
$(22,000)
66,900
104,900
(46,900)
(22,000)
Net decrease in cash.......................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
36,000
45,000
$ 81,000
Note: Significant noncash investing and financing activities
Conversion of bonds by issue of common shares ...........
$40,000
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-4B
(a)
BRECKENRIDGE LTD.
Cash Flow Statement (Partial)—Indirect Method
Year Ended November 30, 2004
Operating activities
Net earnings .......................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense .................................. $ 90,000
Increase in accounts receivable .................. (200,000)
Decrease in inventory ................................. 500,000*
Increase in prepaid expenses ..................... (150,000)
Decrease in accounts payable .................... (300,000)
Increase in income taxes payable ...............
20,000
Decrease in accrued expenses payable ...... (100,000)
Net cash provided by operating activities ...................
$875,000
(140,000)
$735,000
*$1,900,000 - $1,400,000 = $500,000
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-4B (Continued)
(b)
BRECKENRIDGE LTD.
Cash Flow Statement (Partial)—Direct Method
Year Ended November 30, 2004
Operating activities
Cash receipts from customers ...............
Cash payments
To suppliers ................................... $4,700,000 (2)
For operating expenses.................. 1,210,000 (3)
For income taxes............................
355,000 (4)
Net cash provided by operating activities ......
$7,000,000 (1)
6,265,000
$ 735,000
Calculations
(1) Cash receipts from customers
Sales
Less: Increase in accounts receivable
Cash receipts from customers
$7,200,000
200,000
$7,000,000
(2) Cash payments to suppliers
Cost of goods sold
Deduct: Decrease in inventories
Cost of purchases
Add: Decrease in accounts payable
Cash payments to suppliers
$4,900,000
500,000
4,400,000
300,000
$4,700,000
(3) Cash payments for operating expenses
Operating expenses, exclusive of amortization
$ 960,000*
Add: Increase in prepaid expenses
$150,000
Decrease in accrued expenses payable 100,000
250,000
Cash payments for operating expenses
$1,210,000
* $1,050,000 - $90,000 = $960,000
(4) Cash payments for income taxes
Income tax expense
Deduct: Increase in income taxes payable
Cash payments for income taxes
$375,000
20,000
$355,000
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-5B
(a)
VAIL LIMITED
Cash Flow Statement (Partial)—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ............................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense....................................... $60,000
Loss on sale of equipment ............................... 26,000
Decrease in accounts receivable...................... 10,000
Increase in accounts payable ...........................
5,000
Decrease in income taxes payable ................... (5,000)
Net cash provided by operating activities ........................
$142,500
96,000
$238,500
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-5B (Continued)
(b)
VAIL LIMITED
Cash Flow Statement (Partial)—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers ......................
Cash payments
For operating expenses......................... $619,000 (2)
For income taxes...................................
52,500 (3)
Net cash provided by operating activities .............
$910,000 (1)
671,500
$238,500
Calculations
(1) Cash receipts from customers
Revenues
Add: Decrease in accounts receivable
($47,000 - $57,000)
Cash receipts from customers
(2) Cash payments for operating expenses
Operating expenses per statement of earnings
Deduct: Increase in accounts payable
($41,000 - $36,000)
Cash payments for operating expenses
(3) Cash payments for income taxes
Income tax expense per statement of earnings
Add: Decrease in income taxes payable
($4,000 - $9,000)
Cash payments for income taxes
$900,000
10,000
$910,000
$624,000
5,000
$619,000
$47,500
5,000
$52,500
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-6B
(a)
E-PERFORM, INC.
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings ............................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ....................................... $46,500
Loss on sale of capital assets ..........................
7,500
Increase in accounts receivable ....................... (62,800)
Increase in inventory ........................................ (9,650)
Increase in prepaid expenses .......................... (12,400)
Increase in accounts payable ........................... 34,700
Decrease in accrued expenses payable ...........
(500)
Net cash provided by operating activities ........................
Investing activities
Purchase of investments ......................................... $(19,000)
Sale of capital assets ...............................................
1,500
Purchase of equipment ............................................ (85,000)
Net cash used by investing activities ...............................
Financing activities
Sale of common shares ........................................... $45,000
Repayment of bonds................................................ (25,000)
Payment of cash dividends ...................................... (12,630)
Net cash provided by financing activities .........................
Net increase in cash ........................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
$141,180
3,350
144,530
(102,500)
7,370
49,400
48,400
$ 97,800
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-6B (Continued)
(b)
E-PERFORM, INC.
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers (1) ...........................
$329,980
Cash payments
To suppliers (2) ............................................... $110,410
For operating expenses (3) .............................
25,310
For income taxes.............................................
45,000
For interest ......................................................
4,730 185,450
Net cash provided by operating activities .......................
144,530
Investing activities
Purchase of investments ......................................... $(19,000)
Sale of equipment ....................................................
1,500
Purchase of equipment ............................................ (85,000)
Net cash used by investing activities ...............................
(102,500)
Financing activities
Sale of common shares ........................................... $45,000
Repayment of bonds................................................ (25,000)
Payment of cash dividends ...................................... (12,630)
Net cash used by financing activities ...............................
Net increase in cash ........................................................
Cash, January 1 ..............................................................
Cash, December 31 ........................................................
7,370
49,400
48,400
$ 97,800
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Financial Accounting, Second Canadian Edition
PROBLEM 13-6B (Continued)
(b) (Continued)
Calculations
(1) Cash receipts from customers
Sales ..................................................................................
Deduct: Increase in accounts receivable ...........................
Cash receipts from customers ............................................
$392,780
62,800
$329,980
(2) Cash payments to suppliers
Cost of goods sold .............................................................
Add: Increase in inventory .................................................
Cost of purchases ..............................................................
Deduct: Increase in accounts payable ...............................
Cash payments to suppliers ...............................................
$135,460
9,650
145,110
34,700
$110,410
(3) Cash payments for operating expenses
Operating expenses exclusive of amortization
Add: Increase in prepaid expenses ..................... $12,400
Decrease in accrued expenses payable ......
500
Cash payments for operating expenses .............................
$12,410
12,900
$25,310
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-7B
(a)
GREAT BIG SEA INC.
Statement of Earnings
Year Ended July 31, 2005
Sales .........................................................................................
Cost of goods sold......................................................................
Gross profit.................................................................................
Interest expense .........................................................................
Amortization expense .................................................................
Loss on sale of equipment..........................................................
Net earnings ...............................................................................
$200,000
42,000
158,000
12,000
50,000
1,500
$ 94,500
GREAT BIG SEA INC.
Cash Flow Statement—Direct Method
Year Ended July 31, 2005
Cash flows from operating activities
Cash receipts from customers ............................
Cash payments for interest .................................
Net cash provided by operating activities ....
Cash from investing activities
Proceeds from sale of equipment .......................
Cash from financing activities
Payment on note payable .................................. $(15,000)
Sale of common shares.....................................
75,000
Net cash provided by financing activities .....
Increase in cash during the year ................................
$158,000 (1)
12,000
146,000
6,000
60,000
$212,000
Note to the Cash Flow Statement:
During the year, the company acquired recording equipment with a cost of
$200,000 by incurring a 6% note payable.
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Financial Accounting, Second Canadian Edition
PROBLEM 13-7B (Continued)
(a) (Continued)
Calculations
(1) Cash receipts from customers
Sales ..................................................................................
Deduct: Increase in accounts receivable ...........................
Cash receipts from customers ............................................
$200,000
42,000
$158,000
Note that cash payments to suppliers are nil.
Cash payments to suppliers
Cost of goods sold .............................................................
Add: Increase in inventory .................................................
Cost of purchases ..............................................................
Deduct: Increase in accounts payable ...............................
Cash payments to suppliers ...............................................
$42,000
33,000
75,000
75,000
$
0
(b) The accrual-based statement of earnings shows net earnings of $94,500. The
cash flow statement shows cash from operating activities of $146,000 and total
increase in cash of $212,000. Some decision makers will find the accrual
statements more useful. To others, the cash flow statement will be more useful.
Shareholders investing in the company’s common shares for the long-term will
find the accrual-based statement of earnings more useful as it provides a better indication of the long-term profitability of the company. Short-term creditors
will find the cash flow statement more useful as it provides a better indication
of the company’s ability to generate cash and repay its current obligations.
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-8B
(a)
SWAYZE INC.
Cash Flow Statement—Indirect Method
Year Ended December 31, 2004
Operating activities
Net earnings.......................................................
Adjustments to reconcile net earnings to
net cash provided by operating activities
Amortization expense ................................. $15,500*
Increase in accounts receivable.................. (24,000)
Increase in merchandise inventory .............
(7,000)
Increase in accounts payable .....................
2,000
Decrease in income taxes payable .............
(7,000)
Net cash provided by operating activities ...................
$27,000
(20,500)
6,500
Investing activities
Sale of equipment ..............................................
8,500
Financing activities
Redemption of bonds .........................................
(6,000)
Net increase in cash ..................................................
Cash, January 1 ........................................................
Cash, December 31 ...................................................
9,000
20,000
$29,000
Note: Significant noncash investing and financing activities
Stock dividend ..................................................................
$4,000
*$24,000 - ($18,000 - $8,500) = $14,500
*$30,000 - $14,500 = $15,500
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-8B (Continued)
(b)
SWAYZE INC.
Cash Flow Statement—Direct Method
Year Ended December 31, 2004
Operating activities
Cash receipts from customers ...............
Cash payments
To suppliers ................................... $185,000 (2)
For operating expenses .................
8,500 (3)
For interest ....................................
2,000
For income taxes ...........................
16,000 (4)
Net cash provided by operating activities ......
$218,000 (1)
211,500
6,500
Investing activities
Sale of equipment ..............................................
8,500
Financing activities
Redemption of bonds .........................................
(6,000)
Net increase in cash ..................................................
Cash, January 1 ........................................................
Cash, December 31 ...................................................
Note: Significant noncash investing and financing activities
Stock dividend ...................................................................
9,000
20,000
$ 29,000
$4,000
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-8B (Continued)
(b) (Continued)
Calculations
(1) Cash receipts from customers
Sales ...........................................................................
Deduct: Increase in accounts receivable ....................
Cash receipts from customers .....................................
$242,000
24,000
$218,000
(2) Cash payments to suppliers
Cost of goods sold .....................................................
Add: Increase in inventory .........................................
Cost of purchases ......................................................
Deduct: Increase in accounts payable .......................
Cash payments to suppliers .......................................
$180,000
7,000
187,000
2,000
$185,000
(3) Cash payments for operating expenses
Operating expenses ...................................................
Deduct: Amortization .................................................
Cash payments for operating expenses .....................
$24,000
15,500*
$ 8,500
*$24,000 - ($18,000 - $8,500) = $14,500; $30,000 - $14,500 = $15,500
(4) Cash payments for income taxes
Income tax expense ...................................................
Add: Decrease in income taxes payable ...................
Cash payments for income taxes ...............................
$ 9,000
7,000
$16,000
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Financial Accounting, Second Canadian Edition
PROBLEM 13-8B (Continued)
(c)
1.
Cash current debt coverage =
Net cash provided
Average current
by operating activities ÷
liabilities

2.
$6,500
 0.32 times
($18,000 $23,000)/2
Cash total debt coverage =
Net cash provided
Average total
÷
by operating activities
liabilities

3.
$6,500
 0.13 times
($45,000 $56,000)/2
Free cash flow = $6,500
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-9B
Cash current debt coverage
Cash total debt coverage
Free cash flow
Reitmans
La Senza
$42,742
$45,284
$18,528
$47,808
= 0.94 times
= 0.39 times
$42,742
$47,153
$18,528
$93,948
= 0.91 times
= 0.20 times
$42,742 – $41,010$6,749= $(5,017)
$18,528 –
$16,040 - $781
= $1,707
Reitmans seems more liquid than La Senza. As evidenced by its cash current debt
coverage ratio, Reitmans is able to generate more cash to meet all of its currently
maturing liabilities.
In terms of solvency, we again see that Reitmans has a higher cash total debt coverage ratio, which indicates that Reitmans is the more solvent of the two retailers.
The free cash flow indicates that La Senza has positive cash from operating activities (after the payment for dividends and capital expenditures) to use toward either
future investments or the payment of dividends. Reitmans would have to obtain
outside financing for further capital investment since its free cash flow is currently
negative.
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Chapter 13
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-10B
(a)
Grenville is appears to be the more liquid of the two companies. The company has more assets to repay its currently maturing liabilities as evidenced by
its higher acid test ratio and current ratio. Grenville is moving its inventory
faster than Robson, as indicated by the company’s higher inventory turnover
ratio, which again indicates that the company is the more liquid. Finally,
Grenville’s cash current debt coverage is higher than Robson’s. This indicates that Grenville is generating more cash from operating activities that can
be used to repay current obligations.
The only area of concern would be Grenville’s receivable turnover, which is
half of Robson’s. Grenville is turning its receivables into cash every 37 days
(365 ÷ 10 times), which is much slower than Robson who is currently taking
only 18 days (365÷ 20) on the average to collect its receivables. Investors
may want to compare the credit terms offered by the two companies to see
why there is such a discrepancy.
(b) Grenville has a much higher percentage of debt to total assets than Robson,
which would indicate that the company is the less solvent of the two. Robson
also has a much higher times interest earned ratio as well indicating that
Robson is better able to meet its interest obligations out of current earnings.
However, Grenville seems to be generating slightly more cash that can be
used toward the repayment of long-term debt as indicated by the company’s
higher cash total debt coverage ratio.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 13-11B
(a)
I don’t think Sleeman’s creditors should be worried about the cash overdraft.
The company generated $13.4 million in cash from operating activities in
2002 and has a current ratio of 1.1 to 1. This indicates the company is generating sufficient cash to repay its debts.
(b)
They may have used the cash for investing or financing activities such as the
purchase of property, plant and equipment or the repayment of long-term
debt.
(c)
As a creditor, I would want additional information concerning the company’s
solvency such as the debt to equity ratio and the cash total debt coverage ratio. To assess liquidity, I would like to have information concerning the company’s receivables and inventory turnover.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 13-1 FINANCIAL REPORTING PROBLEM
(a)
Cash is defined as cash and cash equivalents and not net of bank indebtedness.
(b)
Loblaw uses the indirect method to prepare its cash flow statement. It starts with net earnings and makes adjustments for noncash items.
(c)
There was an increase in cash of $248 million in 2002 and a decrease in cash of $111 million in 2001.
(d)
In 2002 cash flow from operating activities contributed $981 million; in 2001 $818 million.
The primary difference in the two years was an increase in net earnings of $165 million in
2002.
(e)
The significant investing activities in 2002 were fixed asset purchases ($1,079 million) and
short-term investments ($122 million). Significant financing activities for 2002 were the issue of commercial paper ($342 million), the issue of long-term debt ($200 million) and the
payment of dividends ($127 million).
(f)
No.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 13-2 COMPARATIVE ANALYSIS PROBLEM
(a)
Ratio
1. Cash current debt coverage
2. Cash total debt coverage
3. Free cash flow
(b)
Loblaw
(in millions)
$981
($3,154  $2,796)  2
= 0.33 times
Sobeys
(in thousands)
$348.10
($1,180.5  $990.4)  2
= 0.32 times
$981
($6,986  $6,456)  2
= 0.15 times
= 0.21 times
$981 - $1,079 - $127
= $(225)
$348.10 – $342.3 – $23.8
= $(18)
$348.10
($1,755.7  $1,591.9)  2
Sobeys appears to be slightly more efficient in managing its cash than Loblaw’s in 2002.
The cash current debt coverage ratio uses cash generated from operating activities during
the period and provides a better representation of liquidity on an average day. Loblaw’s ratio of $0.33 of cash provided by operating activities for every dollar of current debt is almost
exactly the same as Sobeys’ $0.32 of cash provided by operating activities per dollar of
current debt. This indicates that the two companies were of about the same liquidity in
2002.
The total cash debt coverage ratio shows a company’s ability to repay its liabilities from
cash generated from operating activities without having to liquidate the assets employed in
its operations. Since Loblaw’s total cash debt coverage ratio was lower than Sobeys’, Loblaw’s ability to repay liabilities with cash from operating activities was not as great as Sobeys’ in 2002.
Free cash flow is an indication of a company’s ability to invest in future operating activities
or pay future dividends out of its current cash from operating activities. Neither company
has a positive free cash flow but this is not surprising given the rapid expansion undertaken by both companies over the past several years.
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BYP 13-3 RESEARCH CASE
(a)
Three major components of a company’s financial health are its assets and liability position as reported by the balance sheet, its net earnings and income as reported on the
statement of earnings and its cash flows from operating activities as reported in the cash
flow statement.
(b)
Alliance Atlantis was forced to move the cash outflows from expenses related to acquire,
develop and produce films and television programs from investing activities to operating
activities. This caused a significant reduction in the company’s net cash flows from operating activities.
(c)
The expense was based on the company’s annual pension expense as determined by actuarial assumptions. The cash flow was the amount of contribution made to the pension
fund. The amounts differ because companies do not fully fund their pension accounts as
they expect returns on the already invested monies to cover some of the funding requirements.
(d)
No, all cash flows from operating activities are consolidated but only the holding company’s percentage share of income is consolidated.
(e)
Student answers may vary but most should realize that cash flows provided by operating
activities can be manipulated in the same manner as earnings.
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Financial Accounting, Second Canadian Edition
BYP 13-4 INTERPRETING FINANCIAL STATEMENTS
(a) Note: All numbers are stated in thousands.
Current ratio
2002
$143,015 ÷ $175,064 = 0.82:1
2001
$85,730÷ $95,095 = 0.90:1
Cash current debt coverage
2002
2001
$161,624
($175,064  $95,095)  2
= 1.20 times
$67,361
($95,095  $90,780)  2
= 0.72 times
When looking at the current ratio it appears that WestJet’s liquidity has declined in the past
year–its current ratio decreased from 0.90:1 to 0.82:1. However, its cash current debt coverage ratio improved significantly from 0.72 to 1.20 times. This indicates the company is
now generating more cash from operating activities to meet current liabilities and therefore
it would seem that liquidity has improved.
(b)
Debt to total assets
2002
$428,449 ÷ $784,205 = 54.6%
2001
$171,733 ÷ $393,413 = 43.7%
Cash total debt coverage
2002
2001
$161,624
($428,449  $171,733)  2
= 0.54 times
$67,361
($171,733  $156,080)  2
= 0.41 times
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BYP 13-4 (Continued)
(b)
(Continued)
WestJet’s solvency is mixed–its debt to total assets deteriorated from 43.7% in 2001 to
54.6% in 2002. However, its cash current debt coverage improved from 0.41 to 0.54 times.
(c)
Free Cash Flow
2002
$161,624 – $344,902 = $(183,278)
2001
$67,361 – $86,789 = $(19,428)
The company’s free cash flow has decreased in the year. However, this is not unexpected given the company’s rapid expansion over the past several years.
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Financial Accounting, Second Canadian Edition
BYP 13-5 A GLOBAL FOCUS
(a)
The most obvious similarity is that the statement presents the sources and uses of cash
broken down into operating, investing, and financing activities. This is the same as in Canada. Another similarity is that the operating section employs the indirect approach, which is
used by the majority of Canadian companies. (We can see that it uses the indirect approach because it starts with net operating income and makes adjustments to determine
cash from operating activities.) Another similarity is that the statement concludes with net
cash and cash equivalents at the end of the year, the amount that is shown on the balance
sheet.
(b)
There are a number of differences, some large and some small. For example, in the operating section, a subtotal is determined called “cash flows from operating activities” which is
presented before taking into consideration changes in current assets such as receivables
and inventories. As well, changes in current liabilities related to short-term debt and bank
indebtedness are considered to be financing activities and not operating activities, as they
would be in Canada.
(c)
Free cash flow is equal to cash provided by operating activities less capital expenditures
and cash dividends paid. Although alternative formulations could be argued, we would suggest that this would be:
Free cash flow = €2,542 - €1,430 - €357 = €755 million (Euro currency)
Thus, even though the format differs somewhat, it would appear that a fairly reliable determination of free cash flow can be calculated.
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BYP 13-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the World Wide Web, the
Accounting on the Web cases are updated as required. Their suggested solutions are also updated whenever necessary, and can be found online in the Instructor Resources section of our
home page (www.wiley.com/canada/kimmel).
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Financial Accounting, Second Canadian Edition
BYP 13-7 COLLABORATIVE LEARNING ACTIVITY
(a)
From the information given, it appears that from an operating standpoint, Tuktoyaktuk Trading Company Limited did not have a superb first year, having suffered a $50,000 net loss
[see calculation at end of part (b)]. Debra is correct; the cash flow statement is not prepared in correct form. The sources and uses format is no longer the acceptable form. The
correct format classifies cash flows from three activities—operating, investing, and financing; and it also presents significant noncash investing and financing activities in a separate
schedule. Debra is wrong, however, about the actual increase in cash not being $85,000;
$85,000 is the correct increase in cash.
(b)
TUKTOYAKTUK TRADING COMPANY LIMITED
Cash Flow Statement—Indirect Method
Year Ended January 31, 2005
Operating activities
Net loss ......................................................................
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization expense ........................................
Gain from sale of investment .............................
Net cash provided by operating activities ............................
$ (50,000)*
$ 55,000
(5,000)
Investing activities
Sale of investment ...................................................... $ 80,000
Purchase of fixtures and equipment ........................... (340,000)
Purchase of investment ..............................................
(75,000)
Net cash used by investing activities ...................................
50,000
0
(335,000)*
Financing activities
Sale of share capital ...................................................
420,000
Net increase in cash ............................................................
Cash, February 1, 2004 .......................................................
Cash, January 31, 2005 ......................................................
85,000
140,000
$225,000
Note: Significant noncash investing and financing activities
Issue of note for truck .................................................
$20,000
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Financial Accounting, Second Canadian Edition
BYP 13-7 (Continued)
(b)
(Continued)
*Calculation of net earnings (loss)
Sales of merchandise .............................................
Interest revenue .....................................................
Gain on sale of investment ($80,000 - $75,000) .....
Total revenues ...............................................
Merchandise purchased .........................................
Operating expenses ($170,000 - $55,000) .............
Amortization ...........................................................
Interest expense .....................................................
Total expenses ..............................................
Net loss ..................................................................
$370,000
6,000
5,000
381,000
$258,000
115,000
55,000
3,000
431,000
$ (50,000)
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BYP 13-7 (Continued)
(c)
TUKTOYAKTUK TRADING COMPANY LIMITED
Cash Flow Statement—Direct Method
Year Ended January 31, 2005
Operating activities
Cash receipts from customers ......................................
Cash receipts from interest ..........................................
Cash payments
To suppliers .....................................................
For operating expenses ($170,000 - $55,000)
For interest ......................................................
Net cash provided by operating activities ..........................
Investing activities
Sale of investment ....................................................
Purchase of fixtures and equipment .........................
Purchase of investment ............................................
Net cash used by investing activities .................................
$258,000
115,000
3,000
(376,000)
0
$ 80,000
(340,000)
(75,000)
(335,000)*
Financing activities
Sale of share capital .................................................
420,000
Net increase in cash ..........................................................
Cash, February 1, 2004 .....................................................
Cash, January 31, 2005 ....................................................
85,000
140,000
$225,000
Note: Significant noncash investing and financing activities
Issue of note for truck ......................................................
(d)
$370,000
6,000
$20,000
A cash dividend this year would be possible, due to the large increase in net cash over the
year. This increase is a result of the sale of share capital. However, I would not recommend the payment of a dividend this year as the company did not generate any cash from
operating activities. Such a dividend would be the equivalent of a return of invested capital.
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BYP 13-8 COMMUNICATION ACTIVITY
MEMO
To:
Investors
From:
Accountant
Re:
Cash flow statement
Both cash based and non-cash based data are subject to possible manipulation. It is possible to
manipulate cash flows from operating activities by reclassifying operating cash flows as investing
to financing activities. As well, it is possible to manipulate cash balances. For example management could reduce discretionary expenditures such as advertising, which would improve operating cash flows from operating activities.
Which statement provides a better measure of the company’s performance will depend upon the
investor. For example, shareholders investing in the company’s common shares for the long-term
will find the accrual-based statement of earnings more useful as it provides a better indication of
the long-term profitability of the company. Short-term creditors will find the cash flow statement
more useful as it provides a better indication of the company’s ability to generate cash and repay
its current obligations.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 13-9 ETHICS CASE
(a)
The stakeholders in this situation are:
Phil Monat, president and CEO of Paradis Corporation
Rick Rodgers, controller
The board of directors
The shareholders of Paradis Corporation
(b)
The president’s statement, “We must get that amount above $1 million,” puts undue pressure on the controller. This statement along with his statement, “I know you won’t let me
down Rick,” encourages Rick to do something unethical.
Controller Rick Rodgers’ reclassification (intentional misclassification) of a cash inflow from
a long-term note (financing activity) issue to an “increase in payables” (operating activity) is
inappropriate and unethical.
(c)
It is unlikely that any board members (other than board members who are also officers of
the company) would discover the misclassification. Board members generally do not have
detailed enough knowledge of their company’s transactions to detect this misstatement. It
is possible that an officer of the bank that made the loan would detect the misclassification
upon close reading of Paradis Corporation’s cash flow statement. It is also possible that
close scrutiny of the balance sheet showing an increase in notes payable (long-term debt)
would reveal that there is no comparable financing activity item (proceeds from note payable) in the cash flow statement.
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