Chapter 13
Statement of Cash Flows
ANSWERS TO QUESTIONS
1.
The income statement reports revenues earned and expenses incurred during a
period of time. It is prepared on an accrual basis. The balance sheet reports the
assets, liabilities, and equity of a business at a point in time. The statement of cash
flows reports cash receipts and cash payments of a business, from three broad
categories of business activities: operating, investing, and financing.
2.
The statement of cash flows reports cash receipts and cash payments from three
broad categories of business activities: operating, investing, and financing. While
the income statement reports operating activities, it reports them on the accrual
basis: revenues when earned, and expenses when incurred, regardless of the
timing of the cash received or paid. The statement of cash flows reports the cash
flows arising from operating activities. The balance sheet reports assets, liabilities,
and equity at a point in time. The statement of cash flows and related schedules
indirectly report changes in the balance sheet by reporting operating, investing, and
financing activities during a period of time, which caused changes in the balance
sheet from one period to the next. In this way, the statement of cash flows reports
information to link together the financial statements from one period to the next, by
explaining the changes in cash and other balance sheet accounts, while
summarizing the information into operating, investing, and financing activities.
4.
The major categories of business activities reported on the statement of cash flows
are operating, investing, and financing activities. Operating activities of a business
arise from the production and sale of goods and/or services. Investing activities
arise from acquiring and disposing of property, plant, and equipment and
investments. Financing activities arise from transactions with investors and
creditors.
5.
Cash inflows from operating activities include cash sales, collections on accounts,
and notes receivable arising from sales, dividends on investments, and interest on
loans to others and investments. Cash outflows from operating activities include
payments to suppliers and employees, and payments for operating expenses,
taxes, and interest.
6.
Depreciation expense is added to net income to adjust for the effects of a noncash
expense that was deducted in determining net income. It does not involve an inflow
of cash.
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10. Cash inflows from investing activities include cash received from sale of
operational assets, sale of investments, maturity value of bond investments, and
principal collections on notes receivable. Cash outflows from investing activities
include cash payments to purchase property, plant, and equipment and
investments, and to make loans.
11. Cash inflows from financing activities include cash received from issuing stock, the
sale of treasury stock, and borrowings. Cash outflows from financing activities
include cash payments for dividends, the purchase of treasury stock, and principal
payments on borrowing.
EXERCISES
E13–6.
Cash flows from operating activities—indirect method
Net income ..............................................................................................
Depreciation expense ..............................................................................
Accounts receivable increase ($12,500 – $10,000) ................................
Inventory decrease ($8,000 – $15,000) ..................................................
Salaries payable increase ($1,750 – $800) ............................................
Net cash provided by operating activities ...........................................
$7,625
8,500
(2,500)
7,000
950
$21,575
E13–8.
Req. 1
Cash flows from operating activities—indirect method
Net loss ...................................................................................................
Depreciation and amortization ................................................................
Increase in receivables ...........................................................................
Decrease in accrued interest ..................................................................
Increase in accounts payable .................................................................
Decrease in accrued payroll and benefits ...............................................
Increase in other liabilities ......................................................................
Cash flows from operating activities ..................................................
($98,819)
259,380
(18,161)
(18,207)
571
(3,236)
53,030
$174,558
Note: The increase in long-term debt and additions to equipment do not affect cash
flows from operating activities.
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Solutions Manual
E13-8. (continued)
Req. 2
The primary reason for the net loss was the depreciation and amortization expense.
These represent non-cash expenses. Large depreciation and amortization expense,
offset partially by increased working capital requirements, turned Time Warner’s net
loss into positive operating cash flow. The reasons for the difference between net
income and cash flow from operations are important because they help the financial
analyst to determine if the trends are sustainable or whether they represent one-time
events.
E13–15.
DIVE IN COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2008
Cash flows from operating activities:
Net income .....................................................................
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable ....................................
Increase in prepaids .....................................................
Decrease in wages payable ...........................................
Net cash provided by (used for) operating activities ..
Cash flows from Investing activities:
Cash paid for equipment
Net cash provided by (used for) investing activities ..
Cash flows from financing activities:
Cash proceeds from issuing stock ..................................
Net cash provided by financing activities ....................
Net increase (decrease) in cash during the year...................
Cash balance, January 1, 2008 ............................................
Cash balance, December 31, 2008.......................................
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Financial Accounting, 6/e
$ 300
(200)
(50)
(750)
(700)
(300)
(300)
200
200
(800)
4,000
$3,200
© The McGraw-Hill Companies, Inc., 2009
13-3
PROBLEMS
P13–1.
Req.1
Related Cash
Flow Section
Δ in Cash
O
O
I
O
Balance sheet at December 31
2011
Cash
$68,250
Accounts receivable
15,250
Merchandise inventory
22,250
Property and equipment
209,250
Less: Accumulated
(59,000)
depreciation
$256,000
2010
$65,500
22,250
18,000
150,000
Change
+2,750
-7,000
+4,250
+59,250
(45,750)
-13,250
2
10
3
4
7
Accounts payable
$9,000
$19,000
-10,000
5
O
Wages payable
Note payable, long-term
Contributed capital
4,000
59,500
98,500
1,200
71,000
65,900
+2,800
-11,500
+32,600
6
Retained earnings
85,000
52,900
+32,100
1
$256,000
$210,000
O,F
Add to NI because depreciation expense does not
affect cash
$210,000
O
F
F
Net increase in cash
Add to net income the decrease in A/R
Subtract from net income the increase in Inventory
Payment in cash for equipment
8
9
Subtract from net income the decrease in Accounts
Payable
Add to net income the increase in Wages payable
Cash used for repayment of note principal
Issuance of stock for cash
Increased for net income amount of $46,750
Decreased for dividends declared & paid $14,650
Income statement for 2011
Sales
$195,000
Cost of goods sold
92,000
Depreciation expense
13,250
Other expenses
43,000
Net Income
$46,750
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© The McGraw-Hill Companies, Inc., 2009
Solutions Manual
P13-1 (continued)
MetroVideo Inc.
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense
$13,250
Decrease in accounts receivable
Increase in merchandise inventory
Decrease in accounts payable
Increase in wages payable
7,000
(4,250)
(10,000)
2,800
$46,750
2
3
4
5
6
Net cash provided by operating activities
Cash flows from investing activities:
Cash payments to purchase fixed assets
Cash flows from financing activities:
Cash payments on long-term note
Cash payments for dividends
Cash receipts from issuing stock
Net cash provided by financing activities
Net increase in cash during the year
Cash balance, January 1, 2011
Cash balance, December 31, 2011
1
8,800
55,550
(59,250)
(11,500)
(14,650)
8
32,600
9
7
1
6,450
2,750 10
65,500
$68,250
Req. 2
An overall increase in cash of $2,750 came from inflows of $55,550 from operating
activities and a stock issuance of $32,600. A large percentage of the cash inflows were
invested in equipment ($59,250), with $11,500 used to pay down long-term financing
and $14,650 for dividends.
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P13–3.
Req.1
O
Balance sheet at December 31
2011
Cash
$68,250
Accounts receivable
15,250
Merchandise inventory
22,250
Property and equipment
209,250
Less: Accumulated
(59,000)
depreciation
$256,000
Accounts payable
$9,000
O
Wages payable
F
F
Note payable, long-term
Contributed capital
59,500
98,500
71,000
65,900
-11,500
+32,600
8
Retained earnings
85,000
52,900
+32,100
1
$256,000
$210,000
Related Cash
Flow Section
Δ in Cash
O
O
I
O
O,F
2010
$65,500
22,250
18,000
150,000
Change
+2,750
-7,000
+4,250
+59,250
(45,750)
-13,250
2
Depreciation expense does not affect cash
$210,000
$19,000
-10,000
5
4,000
1,200
+2,800
6
Add to CGS to compute payments to suppliers
Subtract from Other expenses to compute Payments
for wages
Cash used for repayment of note principal
Issuance of stock for cash
Increased for net income amount of $46,750
Decreased for dividends declared & paid $14,650
10
3
4
7
9
Net increase in cash
Add to sales to compute collections from customers
Add to CGS to compute payments to suppliers
Payment in cash for equipment
Income statement for 2011
Sales
$195,000
Cost of goods sold
92,000
Depreciation expense
13,250
Other expenses
43,000
Net Income
$46,750
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Solutions Manual
P13-3 (continued)
MetroVideo Inc.
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash flows from operating activities:
Collections from customers ($195,000 +
$7,000)
Payments to suppliers ($92,000 + $4,250
+ $10,000)
Payments for wages ($43,000 – $2,800)
$202,000
3
(106,250)
4, 5
(40,200)
6
Net cash provided by operating activities
Cash flows from investing activities:
Cash payments to purchase fixed assets
Cash flows from financing activities:
Cash payments on long-term note
Cash payments for dividends
Cash receipts from issuing stock
Net cash provided by financing activities
Net increase in cash during the year
Cash balance, January 1, 2011
Cash balance, December 31, 2011
55,550
(59,250)
(11,500)
(14,650)
32,600
7
8
1
9
6,450
2,75010
65,500
$68,250
Req. 2
An overall increase in cash of $2,750 came from a positive inflow of $55,550 from
operating activities and a stock issuance of $32,600. A large percentage of the cash
inflow was invested in equipment ($59,250), with $11,500 used to pay down long-term
financing and $14,650 for dividends.
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Financial Accounting, 6/e
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13-7