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03 ISM Bergeron 7e - Finance for non-financial managers
chapter 3 learning exercises
Finance (Orta Doğu Teknik Üniversitesi)
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Chapter 3
Statement of Cash Flows
REVIEW QUESTIONS
1. Why is it important for managers to analyze changes in the flow of cash between two
consecutive accounting periods?
Managers should have an appreciation about where cash will be required (investing
activities) and where it will come from (operating activities and financing activities).
2. Differentiate between cash inflows and cash outflows.
Cash inflows are obtained from different sources (e.g., loans, selling assets). Cash
outflows are disbursed or expended for buying or paying something (e.g., paying a
mortgage, buying a car).
3. What are internal sources of financing?
Internal sources of financing are cash that will be generated by managers (operating
activities) in order to buy non-current assets (investing activities). The two main
sources of internal financing are profit for the year and depreciation. Working capital
can also be a source of cash if managers are able to reduce inventories and trade
receivables, and increase their trade and other payables, and borrowings.
4. What are external sources of financing?
External sources of financing are cash that will be obtained from investors (financing
activities) such as shareholders and long-term lenders in order to purchase noncurrent assets (investing activities).
5. Identify some of the key cash inflows and cash outflows.
Cash inflows include profit for the year, the sale of a non-current asset, the sale of
investment securities, and obtaining a new loan or new equity. Cash outflows take
place when there is a loss from operations, the purchase of a non-current asset, the
purchase of investment securities, and the payment of a loan.
6. Why is depreciation/amortization considered a cash inflow?
Depreciation/amortization is not a cash expense. It is considered an accounting entry.
Since it is not considered a cash expense like salaries or advertising, it is added back
to profit for the year.
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Chapter 3 Statement of Cash Flows
7. Why are working capital accounts part of the operating activities shown on the
statement of cash flows?
Managers are responsible for working capital accounts such as trade receivables and
inventories. These accounts are also called operating capital. If managers mismanage
the current asset accounts and show increases between two accounting periods in
these accounts, the business has to borrow funds (if internal cash is not sufficient)
from short-term lenders. These short-term borrowings are commonly called working
capital or operating loans.
8. Comment on the key guidelines that can be used to identify whether a change in the
accounts shown on a statement of financial position between two consecutive
accounting periods is a cash inflow or a cash outflow.
A cash inflow takes place when there is a decrease in an asset account or an increase
in a liability or equity account. A cash outflow takes place when there is an increase
in an asset account or a decrease in a liability or equity account.
9. Identify the basic structure of the statement of cash flows.
The statement of cash flows contains four sections: operating activities, financing
activities, investing activities, and the change in the cash balance.
10. What is the purpose of the statement of adjustments in non-cash working capital
accounts?
The statement of adjustments in non-cash working capital accounts shows the cash
flows provided (or used) by working capital accounts such as trade receivables,
inventories, and trade and other payables.
11. Comment on the important accounts usually shown under the operating activities
section in the statement of cash flows.
They are profit for the year and depreciation/amortization. However, working capital
can also be a source of cash if managers are able to reduce inventories, trade
receivables, and increase their trade and other payables, and short-term borrowings.
12. What financial statements are used to prepare the statement of cash flows?
They are the statement of income, the statement of changes in equity, and the
statement of financial position. The statement of income provides the profit for the
year and the depreciation/amortization expense. The statement of changes in equity
provides the dividends paid and other infusion of cash provided by the shareholders.
Two consecutive statements of financial position provide the increase or decrease of
the asset, equity, and liability accounts.
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Chapter 3 Statement of Cash Flows 3-3
13. What important accounts are usually shown under the financing activities section in
the statement of cash flows?
They are the funds provided by shareholders and long-term lenders. However, this
section can also show a cash outflow such as the payment of dividends and of a
mortgage or bond.
14. Comment on the important accounts usually shown under the investing activities
section in the statement of cash flows.
They are the purchase of non-current assets (i.e., land, buildings, equipment) and
acquisition of another business. The section can also show cash inflow if a business
sells one of its non-current assets.
15. How does the statement of cash flows complement the statement of income and the
statement of financial position?
The statement of income is like a movie in that it shows the amount of revenue
earned and expenses incurred between two dates or during a given time period. The
statement of financial position, like a snapshot, gives a picture of what a business
owns, and what the business owes to creditors and to the owner(s) at a given point in
time. These two financial statements have a specific purpose, giving important
information about the financial performance and financial condition of a business.
However, they do not show the funds flow or cash flows that take place between two
consecutive accounting periods; this is precisely what the statement of cash flows
does.
16. How can managers use the statement of cash flows to make important business
decisions?
This statement is a critical decision-making instrument since it tells managers who
want to invest cash in plant, property, and equipment (investing activities) if enough
funds will be generated from operations, and if there is not enough, how much will
have to be raised from external sources (shareholders and long-term lenders). If
managers are not able to raise the required amount of funds from these sources, they
will have to eliminate some of the projects listed in their capital budget.
17. How does the statement of cash flows prepared for not-for-profit organizations differ
from that prepared for profit-motivated businesses?
They don’t differ since both types of organizations present in their statement cash
flows under three activities: operating, investing and financing. Sometimes, the notfor-profit organizations will combine the sources and uses of cash under one
grouping: cash flows from financing and investing activities. Also, the terms used by
each organization vary somewhat: the for-profit organization will refer to profit for
the year while the not-for-profit organization will call it excess of revenue over
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Chapter 3 Statement of Cash Flows
expenses. The not-for-profit organizations will also include accounts specific to the
nature of their mandate such as contributions for cash endowments.
18. Give a few examples of accounts shown in the two main sections of the statement of
cash flows for a not-for-profit organization.
Operating activities list accounts such as excess of revenue over expenses,
amortization of capital assets, and net change in non-cash working capital accounts.
In the second main section, investing activities list accounts such as the purchase of
assets, and financing activities list accounts such as long-term borrowings and
contributions from cash endowments.
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Chapter 3 Statement of Cash Flows 3-5
LEARNING EXERCISES
EXERCISE
1: SOURCES OF CASH FLOWS
Identify, under the appropriate heading, whether the following changes are an inflow of
cash or an outflow of cash. What amounts and percentages were used by internal and
external sources to finance the purchase of the assets?
House
Trailer
Furniture
Mortgage
RRSP
Loan made to a friend
Car loan
Visa
The Bay
Cash in the bank
Marketable securities
Total
House
Trailer
Furniture
Mortgage
RRSP
Loan made to a friend
Car loan
Visa
The Bay
Cash in the bank
Marketable securities
Total
This
Year
134,600
12,000
5,600
75,000
23,000
---12,000
1,250
---3,000
12,000
Last
Year
130,000
---4,000
60,000
20,000
5,000
8,000
600
450
2,000
10,000
In $
Cash
Cash
Inflows Outflows
---4,600
---12,000
---1,600
15,000
------3,000
5,000
---4,000
---650
------450
---1,000
---2,000
24,650
24,650
This
Year
134,600
12,000
5,600
75,000
23,000
---12,000
1,250
---3,000
12,000
Last
Year
130,000
---4,000
60,000
20,000
5,000
8,000
600
450
2,000
10,000
In %
Cash
Cash
Inflows Outflows
---18.7
---48.7
---6.5
60.9
------12.2
20.3
---16.2
---2.6
-----1.8
---4.0
---8.1
100.0
100.0
Note: Salary in excess of expenses is not a statement of cash flows account.
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Chapter 3 Statement of Cash Flows
EXERCISE
2: IDENTIFYING CASH INFLOWS AND CASH OUTFLOWS
From Vicky Subbarao’s statements of financial position shown below, identify whether
each account is an outflow of cash or an inflow of cash.
In %
This
Year
Last
Year
Assets
House
Cottage
Land
Car
Computers
Savings bonds
RRSP
Cash
Total assets
145,000
65,000
---12,000
7,500
5,000
20,000
2,000
256,500
136,000
---40,000
6,000
3,000
4,000
16,000
4,000
209,000
------40,000
------------2,000
Equity
105,000
92,000
13,000
Liabilities
Mortgage
Bank of Montreal
Bank loan
Visa
Sears
112,000
21,000
14,000
1,500
3,000
99,000
11,000
3,000
2,000
2,000
13,000
10,000
11,000
---1,000
---------500
----
Total liabilities
151,500
117,000
Total equity and liabilities
Total cash inflows and outflows
256,500
209,000
90,000
90,000
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Cash
Inflows
Cash
Outflows
9,000
65,000
6,000
4,500
1,000
4,000
----
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Chapter 3 Statement of Cash Flows 3-7
EXERCISE
3: MATCHING ACCOUNTS TO BUSINESS ACTIVITIES
Indicate under which activity (operating, financing, investing) the following accounts
belong in the statement of cash flows:
Activity
Trade receivables
Land
Mortgage payable
Profit for the year
Trade and other payables
Depreciation/amortization
Inventories
Prepaid expenses
Share capital (common)
Buildings
Accrued expenses
Current taxes payable
Equipment
Long-term borrowings
Purchase of a company
Dividends
Share capital (preferred)
EXERCISE
operating
investing
financing
operating
operating
operating
operating
operating
financing
investing
operating
operating
investing
financing
investing
financing
financing
4: WORKING CAPITAL ACCOUNTS
For the following accounts, identify the working capital accounts and prepare the
adjustments in non-cash working capital accounts statement.
(in $)
Cash inflows
Trade and other payables
Short-term borrowings
Total inflows
50,000
48,000
98,000
Cash outflows
Trade receivables
Inventories
Prepaid expenses
Revolving loan
Accrued expenses
Total outflows
Adjustments in non-cash
working capital accounts
(20,000)
(60,000)
(10,000)
(10,000)
(10,000)
(110,000)
( 12,000)
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Chapter 3 Statement of Cash Flows
EXERCISE
5: THE ADJUSTMENTS IN NON-CASH WORKING CAPITAL ACCOUNTS AND THE
STATEMENT OF CASH FLOWS
With the following financial statements, prepare
• the adjustments in non-cash working capital accounts statement, and
• the statement of cash flows.
1. the adjustments in non-cash working capital accounts statement
(in $)
Cash Inflows
Trade and other payables
Short-term borrowings
Total outflows
22,000
20,000
42,000
Cash Outflows
Trade receivables
Inventories
Accrued expenses
(50,000)
(70,000)
( 6,000)
Total inflows
Adjustments in non-cash
working capital accounts
(126,000)
(84,000)
2. the statement of cash flows
(in $)
Operating activities
Profit for the year
Depreciation
Adjustments in non-cash
working capital accounts
Total
Financing activities
Long-term borrowings
Dividends
Total
90,000
35,000
(84,000)
41,000
78,000
(70,000)
8,000
Investing activities
Property, plant and equipment
Decrease in cash
Cash at the beginning of the year
Cash at the end of the year
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(50,000)
1,000
4,000
3,000
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Chapter 3 Statement of Cash Flows 3-9
EXERCISE
6: THE STATEMENT OF CASH FLOWS
Use the following accounts to prepare a statement of cash flows for a not-for-profit
organization:
The statement of cash flows for a not-for for profit organization is as follows:
Cash provided by (used for):
Operating activities
Excess of revenue over expenses
Depreciation/amortization
Adjustments in non-cash working capital accounts
Cash provided from operating activities
$35,000
10,000
(5,000)
$ 40,000
Investing activities
Purchase equipment
(110,000)
Financing activities
Long-term borrowings
Contributions from cash endowments
Purchase of investments
Cash provided from financing activities
Net decrease (increase) in cash
Cash, beginning of year
Cash, end of year
50,000
50,000
(20,000)
80,000
(10,000)
20,000
30,000
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Chapter 3 Statement of Cash Flows
CASES
CASE 1: AUSTIN INDUSTRIES INC.
Questions
Prepare the following statements:
1. The adjustments in non-cash working capital accounts statement for 2013
In $
Cash Inflows
Term deposits
Trade and other payables
Other current liabilities
Total cash inflows
Cash Outflows
Trade receivables
Inventories
Notes payable
Total cash outflows
11,000
3,000
8,000
22,000
(8,000)
(22,000)
(12,000)
(42,000)
Adjustments in non-cash working capital accounts
(20,000)
2. The statement of cash flows for 2013
In $
Operating activities
Profit for the year
Depreciation/amortization
Adjustments in non-cash working capital accounts
Total
Financing activities
Dividends
Share capital
Long-term borrowings
Total
Investing activities
Property, plant, and equipment
Decrease in cash
Cash at beginning of year
Cash at end of year
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38,000
15,000
(20,000)
33,000
(10,000)
26,000
18,000
34,000
(75,000)
8,000
15,000
7,000
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Chapter 3 Statement of Cash Flows 3-11
CASE
2: GRANT ELECTRONICS INC.
Questions
1. Use the above information to prepare
a. the adjustments in non-cash working capital accounts for the year 2012, and
Grant Electronics Inc.
Adjustments in Non-Cash Working Capital Accounts
For the year ended 2012
(in $000s)
Cash inflows
Trade and other payables
Short-term borrowings
Taxes payable
Total cash inflows
200
400
100
Cash outflows
Trade receivables
Inventories
Total cash outflows
(700)
(800)
Adjustments in non-cash
working capital accounts
700
(1,500)
(800)
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Chapter 3 Statement of Cash Flows
b. the statement of cash flows for the year 2012.
Grant Electronics Inc.
Statement of Cash Flows
For the year ended 2012
(in $000s)
Operating activities
Profit for the year
Depreciation/amortization
Adjustment in non-cash
working capital accounts
Net cash from operating activities
Financing activities
Long-term borrowings
Dividends
Share capital
Net cash from financing activities
4,182
1,300
(800)
4,682
1,200
( 600)
500
1,100
Investing activities
Property, plant, and equipment
Increase in cash
Cash at beginning of year
Cash at end of year
(5,600)
(182)
600
782
Note: The profit for the year in the amount of $4,182,000 is calculated by multiplying the
projected $102.0 million revenue by the projected return on revenue objective of 4.1%.
2. Can the company raise more than half the cash from internally generated funds (as
mentioned by the CEO) to finance the capital budget proposal?
The internally generated cash amounts to $4,682 thousand, which is substantially higher
than half of the capital budget proposal. Internally generated cash flows amount to 83.6%
of the total funding.
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