Chapter 12 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

ANSWERS TO QUESTIONS
1. The statement of cash flows explains how a company

obtained and used cash during some period of time.
Understanding the cash flows of a business is important
in assessing the company’s ability to pay its bills and
fund operations in the future.
2. The three categories of cash inflows and outflows are

operating activities, investing activities, and financing
activities.
Operating activities include cash inflows and outflows

that are generated by operating the business. Example:
Cash received from the sale of goods; cash paid for
salaries.
Investing activities include cash inflows and outflows that

are generated by the purchase and sale of long-term
operational assets, investments in other companies, and
lending activities. Example: Cash received from the sale
of equipment previously used by the business; cash paid
for the purchase of new equipment.
Financing activities include cash inflows and outflows

associated with a company's own equity transactions and
borrowing activities. Example: Cash received from the
sale of stock; cash paid for the repayment of a loan.
3. Noncash investing and financing activities are

transactions that do not require the receipt or payment
of cash. For example, a company may purchase an
operating asset with a small down payment and finance
the balance. If only cash transactions are included, then
significant transactions would be omitted from the
statement of cash flows. These transactions are shown in
a separate schedule included in the statement of cash
flows.
4. Since the ending balance of accounts receivable exceeded

the beginning balance by $2,000, more sales were made
12-1
22
than collected. The amount of cash collected would equal

$108,000, the amount of sales of $110,000 less the
increase in the accounts receivable balance of $2,000.
2
5. Since the ending balance of utilities payable exceeded
the beginning balance by $1,900, more utility cost was
used than paid for. The amount of cash paid was
$85,100, the amount of utility expense of $87,000 less
the increase in utilities payable of $1,900.
6. Since the ending balance of unearned revenue was

greater than the beginning balance by $1,400, more cash
was received in advance than was earned. The amount of
cash received was $17,000, the $15,600 revenue earned
plus the $1,400 increase in unearned revenue.
7. a. Payment of accounts payable - operating activity.

b. Payment of interest on bonds - operating activity.
c. Sale of common stock - financing activity.
d. Sale of preferred stock at a premium - financing
activity.
e. Payment of dividend on the stock - financing activity.
c, d, and e are financing activities.
8. Depreciation expense is an allocation of the cost of an

asset over its estimated useful life; thus, the allocation
does not affect cash flows. Cash flows are affected at the
purchase or sale of the asset.
9. Cost of Land $4,200

Gain on Sale 500
Sales Price $4,700
10. Cost of Office Equipment $7,500

Accumulated Depreciation (7,200)
Book Value 300
Loss on Sale (100)
Selling Price $ 200
11. a. operating activities
b. investing activities, or operating activities if trading
securities
c. investing activities
d. operating activities
e. financing activities
f. operating activities
g. financing activities
h. financing activities
i. investing activities
j. operating activities
12. When the direct method of preparing the statement of

cash flows is used, each transaction that affects cash is
analyzed. One method of doing this is called the T-
account approach. When this approach is used, each
balance sheet account is analyzed. This is the method
recommended by the FASB. When the indirect method is
used, net income as reported on the income statement is
the starting point. Adjustments are made to net income
to convert the accrual net income amount to a cash net
income amount. Cash flows from investing and financing
activities are determined in the same manner as under
the direct method, by analyzing each of the balance sheet
accounts except for the current assets and current
liabilities.
13. The direct method is more logical because it analyzes

each of the changes to the cash account.
14. The primary advantage of using the indirect method is

the fact that it is less time consuming to start with the
net income amount and simply make conversion
adjustments from the accrual basis to the cash basis of
accounting.
15. The primary advantage of using the direct method is that

it is more logical and presents the actual amount of cash
inflows and outflows from each operating activity. The
indirect method only shows net income and the related
increases and decreases in the current asset and liability
accounts.
16. a. Cash outflow of $46,000 as an investing activity.

b. Cash inflow of $8,700 as an investing activity.
17. Yes, it is possible for a company to have negative cash

flow and net income in the same period. As is illustrated
in Exhibit 14-9 for Toll Brothers, a company may use
operating and borrowed cash to support sales growth by
purchasing inventory, property, plant, and equipment.
Thus cash may be going out currently to help generate
future cash inflows.
18. NOTE: FASB’s reasons for precluding disclosure of cash

flow per share are not discussed in the text.
SFAS #95, Paragraph 33 states:

Neither cash flow nor any component of it is an
alternative to net income as an indicator of an
enterprise’s performance, as reporting per share
amounts might imply.
Students may logically reach this conclusion based on

their knowledge of the income statement and cash flows
statement.
SOLUTIONS TO EXERCISES – SERIES A – CHAPTER 12
EXERCISE 12-1A
a. Financing
Activity
b. Operating
Activity
c. Financing
Activity
d. Operating
Activity
e. Financing
Activity
f. Financing
Activity
g. Investing
Activity
h. Investing
Activity
i. Operating
Activity
j. Operating
Activity
k. Non-Cash Item
EXERCISE 12-2A
Transactions a, c, and f produce cash outflows from operating

activities. (Transactions b, d, and e affect cash flows as
follows.)
b. Cash outflow – investing
d. Cash inflow – investing
e. Cash outflow – financing
EXERCISE 12-3A
a.
Accounts Receivable Interest Receivable
1/1 23,000 1/1 5,000
Sales 646,000 Cash 648,000 Int. Earned Cash 22,000
24,000
12/31 21,000 12/31 7,000
Inflow from Operating Activities

From Sales $648,000
From Interest 22,000
Total $670,000
b.
Accounts Payable Salaries Payable
1/1 28,000 1/1 10,000
Cash 273,000 Op. Exp. Cash 171,000 Acc. Sal.
270,000 172,000
12/31 25,000 12/31 11,000
Outflow from Operating Activities

Payment of Operating $273,00
Exp. 0
Payment of Salaries 171,000
Total $444,00
0
EXERCISE 12-4A
Unearned Revenue Prepaid Rent

Bal. 4,000 Bal. 2,200
Earned Cash 67,000 Cash 12,300 Exp. 12,000
65,000
Bal. 6,000 Bal. 2,500
Inflow from revenue: $67,000
Outflow for rent: $12,300
EXERCISE 12-5A
Land Marketable Securities

Cost of Land $24,000 Cost of Securities $49,000
Sold Sold
Less: Loss (3,000) Plus: Gain 2,500
Cash Inflow $21,000 Cash Inflow $51,500
Cash Flows From Investing Activities

Inflow from Sale of Land $ 21,000
Inflow from Sale of Marketable Securities 51,500
Outflow to Purchase Land (127,000)
Outflow to Purchase Marketable Securities (139,000)
Net Cash Outflow from Investing Activities $(193,500)
EXERCISE 12-6A
Cash Flows From Financing Activities

Inflow from Stock Issue ($200,000 + $60,000) $260,000
Outflow for Repayment of Bonds Payable (150,000)
Net Cash Inflow from Financing Activities $110,000
EXERCISE 12-7A
$383,000 cash paid for purchases, calculated as follows:
Since Gupta sold $376,000 of inventory, it must have

purchased $381,000 of inventory:
Inventory
Bal. 67,000
Pur. 381,000 Sold 376,000
Bal. 72,000
Inventory purchases affect Accounts Payable as shown

below. If Gupta purchased $381,000 of inventory on account,
then it must have paid $383,000 for inventory to have an
ending Accounts Payable balance of $47,000.
Accounts Payable
Bal. 49,000
Paid383,000 Pur. 381,000
Bal. 47,000
EXERCISE 12-8A
Net Cash Flow From Operating

Activities
Net Income $43,000
Add: Decrease in Accounts Receivable 1,400
Decrease in Interest Receivable 200
Increase in Salaries Payable 250
Increase in Unearned Revenue 450
Deduct: Increase in Prepaid Rent (300)
Decrease in Accounts Payable (1,350)
Net Cash Inflow from Operating $43,650
Activities
EXERCISE 12-9A
Assets Liabilities
Cash Accounts Payable

Bal. 65,000 2. 23,600 Bal. 33,000
1. 270,000 3. 164,000 3. 164,000 Exp. 168,000
4. 33,200
Bal. 114,200 Bal. 37,000
Accounts Receivable Utilities Payable

Bal. 75,000 Bal. 15,600
Rev. 272,000 1. 270,000 Exp. 36,400
4. 33,200
Bal. 77,000 Bal. 18,800
Prepaid Rent
Bal. 1,200
2. 23,600
Exp. 24,000
Bal. 800
a. Direct Method (see T-accounts above):

Cash Flow From Operating Activities
Inflow from Customers (1) $270,000
Outflow for Rent (2) (23,600)
Outflow for Operating Expenses (3) (164,000)
Outflow for Utilities (4) (33,200)
Net Cash Inflow from Operating $ 49,200
Activities
b. Indirect Method:
Cash Flow From Operating Activities
Net Income: $43,600
Add: Decrease in Prepaid Rent 400
Increase in Accounts Payable 4,000
Increase in Utilities Payable 3,200
Deduct: Increase in Accounts (2,000)
Receivable
Activities
EXERCISE 12-10A
Note: T-accounts are provided for the instructor’s use.
T-Accounts--Partial:
Cash Bonds Payable No-Par Common
Stock
2. 2,900 1. 23,400 3. 40,000 5. 64,900
3. 40,000 4. 50,000
Mortgage Payable Retained Earnings
Delivery Equipment 4. 130,000 2. 900
1. 23,400 2. 15,000
Accumulated Depr.
2. 13,000
Building
4.180,000
Machinery
5. 64,900
a.
Armstrong Corporation
Statement of Cash Flows
For the Year Ended December 31, 2004
Cash Flows From Investing Activities
Inflow from Sale of Delivery Equipment $ 2,900
Outflow to Purchase Delivery Equipment (23,400
)
Outflow to Purchase Building (50,000
)
Net Cash Flow from Investing Activities $
(70,500)
Cash Flows From Financing Activities
Inflow from Issue of Bonds Payable 40,000
Net Cash Flow from Financing Activities 40,000
Net Decrease in Cash $
(30,500)
Schedule of Noncash Investing and Financing
Activities
Issued Common Stock for Machinery $ 64,900
Purchased Building with Mortgage $130,000
b. If a company has cash on hand at the beginning of an
accounting period or if it produces positive cash flows
from operating activities, it will be able to spend more on
investing activities than it receives from financing
activities.
PROBLEM 12-11A
No. Type of Activity

a. Investing Activity
b. Operating Activity
c. Financing Activity
d. Financing and Operating Activities
e. Noncash
f. Operating Activity
g. Noncash
h. Operating Activity
i. Noncash Financing and Investing
j. Noncash
k. Operating Activity
l. Investing Activity, or Operating Activities if
trading securities
m. Operating Activity
n. Operating Activity
o. Operating Activity
p. Operating Activity
q. Financing Activity
r. Noncash
s. Noncash
PROBLEM 12-12A
Effect on
Transactions Cash
Flow
1. Cash Received from Sales:
Sales of $250,000 − Increase in Accts. Rec. of = $242,000
$8,000
2. Salaries Paid:
Salaries Exp. $56,000 + Decrease in Sal. Pay. = (57,500)
$1,500
3. Other Operating Expenses Paid:
Other Operating Exp. $125,000 − Increase in
Operating Expense Payable $5,100 = (119,900
)
4. Non-Cash Item -0-
5. Purchased Equipment = (30,000)
6. Additional Borrowing = 100,000
7. Interest Paid:
Interest Exp. $6,000 + Decrease in Int. Pay. = (6,200)
$200
8. Inventory Paid:
Merchandise Sold $156,000 + Increase in Inv.
$18,000 = Merchandise Purchases $174,000;
$174,000 – Increase in Accts. Payable $2,000 = (172,000
)
9. Employee Loan = (7,500)
10. Issued Common Stock = 25,000
11. Sold Land = 14,700
12. Taxes Paid:
Taxes Exp. $7,700 + Decrease in Taxes Pay. $75 = (7,775)
13. Purchased Investments = (18,000)
Sold Investments = 9,000
Change in Cash =$
(28,175)
PROBLEM 12-12A (continued)
Store Company
For the Period Ended December 31, 2002
Cash Flows From Operating Activities:
Cash Receipts from:
Sales $242,000
Total Cash Inflows $242,000
Cash Payments for:

Inventory Purchased (172,000)
Salaries (57,500)
Other Operating Expenses (119,900)
Interest (6,200)
Taxes (7,775)
Total Cash Outflows (363,375)
Net Cash Flow from Operating (121,375)

Activities
Cash Flows From Investing Activities:

Inflow from Sale of Land 14,700
Inflow from Sale of Investments 9,000
Outflow to Purchase Investments (18,000)
Outflow to Purchase Equipment (30,000)
Outflow for Employee Loan (7,500)
Net Cash Flow from Investing Activities (31,800)
Cash Flows From Financing Activities:

Inflow from Stock Issue 25,000
Inflow from Borrowing 100,000
Net Cash Flow from Financing 125,000
Activities
Net Decrease in Cash (28,175)

Plus: Beginning Cash Balance 32,300
Ending Cash Balance $ 4,125
PROBLEM 12-13A
a.
Computation of Cash Flows from Operating
Activities
Sales $175,000 – $4,000 $171,000
Inventory Purchase $85,000 – $1,000 (84,000)
Insurance Paid $42,000 − $22,000 (20,000)
Salaries Paid $35,000 + $1,400 (36,400)
Other Operating Expense (26,000)
Net Cash Flow from Operating Activities $ 4,600
b.
Big Sky Company

Cash Flows From Operating
Activities:
Cash Receipts from:
Sales $171,000
0
Cash Payments for:

Insurance (20,000)
Salaries (36,400)
Other operating Expense (26,000)
Total Cash Outflows (166,400
)
Net Cash Flow from Operating $ 4,600

Activities
PROBLEM 12-14A
a.
Computation of Cash Flows from Investing
Activities
Sold Marketable Securities ($112,000 − $ 37,000
$75,000)
Sold Equipment 8,000
Purchased Land ($110,000 − $90,000) (20,000)
Purchased Equipment (110,000
)
Net Cash Flow from Investing Activities $(85,000
)
b.
Chico Company
Inflow from Sale of Marketable $37,000
Securities
Inflow from Sale of Equipment 8,000
Net Cash Flow from Investing Activities $(85,000)
PROBLEM 12-15A
a.
Computation of Cash Flows from Financing
Activities
Issued Stock ($50,000 + $50,000) $100,00
0
Repaid Debt (110,000
)
Paid Dividends (45,000)
Net Cash Flow from Financing Activities $(55,000
)
b.
Tiger Company
Inflow from the Issue of Capital Stock $100,000
Outflow for the Payment of Dividends (45,000)
Outflow for the Repayment of Debt (110,000)
Net Cash Flow from Financing Activities $(55,000)
PROBLEM 12-16A
Transactions Legend:
a1. Revenue, $35,700.
a2. Collection of Accounts Receivable: $1,200 + $35,700 −
$2,000=$34,900
b1. Cost of Goods Sold, $14,150.
b2. Inventory Purchased: $6,400 + $14,150 − $6,000 = $14,550
b3. Inventory Paid: $4,200 + $14,550 − $2,600 =$16,150
c1. Depreciation Expense, $3,600 (noncash).
d1. Sale of Equipment, $18,500; Cost of Equipment Sold, $30,000;
Accumulated Depreciation on Equipment Sold, $12,000.
d2. Purchase of Equipment, $7,000.
e1. Sale of Land, $3,950; Cost of Land Sold, $4,000.
f1. Purchased Land with Stock, $12,000.
g1. Paid Dividends, $9,200.
h1. Repaid long-term debt, $3,600.
Blue Mountain, Inc.
T-Accounts
Assets = Liabilities + Equity
Cash Accounts Payable Common Stock

Bal. 2,800 Bal.4,200 Bal.10,000
a2. 34,900 b3.16,150 b3.16,150 b2.14,550 f1. 12,000
d1. 18,500 d2. 7,000 Bal.2,600 Bal.22,000
e1. 3,950 g1. 9,200
h1. 3,600 Long-Term Debt Retained Earnings
Bal.24,200 Bal.6,400 Bal.24,400
h1. 3,600 b1.14,150 a1. 35,700
Accounts Receivable Bal.2,800 c1. 3,600 d1. 500
Bal. 1,200 e1. 50
a1. 35,700 a2.34,900 g1. 9,200
Bal. 2,000 Bal.33,600
Inventory
Bal. 6,000
b2. 14,550 b1.14,150
Bal. 6,400
Land
Bal.10,400
f1. 12,000 e1. 4,000
Bal.18,400
Equipment
Bal.42,000
d2. 7,000 d1.30,000
Bal.19,000
Accumulated
Depreciation
Bal.
17,400
d1. 12,000 c1. 3,600
Bal. 9,000
Pacific Company
Cash Receipts from:
Sales $34,900
Cash Payments for:

Net Cash Flow from Operating Activities 18,750

Net Cash Flow from Investing Activities 15,450

Outflow for Dividends (9,200)
Outflow for Repayment of Debt (3,600)
Net Cash Flow from Financing Activities (12,800)
Net Increase in Cash 21,400

Ending Cash Balance $24,200
Schedule of Noncash Investing and

Financing Activities:
Issued Common Stock for Land $ 12,000
PROBLEM 12-17A
a1. Revenue $580,000
a2. Collection of Accounts Receivable 589,000
b1. Cost of Goods Sold 288,000
b2. Inventory Purchased 300,000
b3. Inventory Paid 306,600
c1. Salaries Expense 184,000
c2. Salaries Paid 178,000
d1. Depreciation Expense (noncash) 17,740
e1. Utilities Expense 12,200
e2. Utilities Paid 12,800
f1. Interest Expense 3,000
f2. Interest Paid 4,800
g1. Collected Notes Receivable 30,000
h1. Sale of Equipment 22,200
h2. Cost of Equipment Sold 108,000
h3. Accumulated Depreciation on Equipment 84,000
Sold
h4. Loss on Equipment Sold 1,800
i1. Purchased Land 30,000
j1. Repaid Notes Payable 60,000
k1. Issued Stock 60,000
l1. Paid Dividends 13,600
Computations:
a2. $66,000 + $580,000 − $57,000 = $589,000
b2. $288,000 + $126,000 − $114,000 = $300,000
b3. $48,600 + $300,000 − $42,000 = $306,600
c2. $184,000 + $24,000 − $30,000 = $178,000
e2. $1,200 + $12,200 − $600 = $12,800
f2. $1,800 + $3,000 = $4,800
k1. $300,000 − $240,000 = $60,000
Grace Corp. T-Accounts
Bal. 28,200 Bal.48,600 Bal.240,000
a2.589,000 b3. b3.306,600 b2. k1. 60,000
306,600 300,000
g1. 30,000 c2.178,000 Bal.42,000 Bal.300,000
h1. 22,200 e2. 12,800
k1. 60,000 f2. 4,800 Utilities Payable Retained Earnings
i1. 30,000 Bal. 1,200 Bal.29,100
j1. 60,000 e2. 12,800 e1.12,200 b1. a1.580,000
288,000
l1. 13,600 Bal. 600 c1.
184,000
Bal. d1. 17,740
123,600
Salaries Payable e1. 12,200
Accounts Receivable Bal.24,000 f1. 3,000
Bal. 66,000 c2.178,000 c1. h4. 1,800
184,000
a1.580,000 a2. Bal.30,000 l1. 13,600
589,000
Bal. 57,000 Bal.88,760
Interest Payable
Inventory Bal. 1,800
Bal. f2. 4,800 f1. 3,000
114,000
b2.300,000 b1. Bal. -0-
288,000
Bal.
126,000
Notes Payable
Notes Receivable Bal.60,000
Bal. 30,000 j1. 60,000
g1. 30,000 Bal. -0-
Bal. -0-
Land
Bal. 52,500
i1. 30,000
Bal. 82,500
Equipment
Bal.
255,000
h2.
108,000
Bal.
147,000
Accumulated
Depreciation
Bal.
141,000
h3. 84,000 d1. 17,740
Bal.74,740
Raceway Sports
Cash Receipts from:
Sales $589,000
0
Cash Payments for:
Salaries (178,000)
Utilities (12,800)
Interest (4,800)
)
Inflow from Note Collection 30,000
Net Cash Flow from Financing Activities (13,600)
0
PROBLEM 12-18A
Redwood Corporation
Net Income $142,000
Plus: Decreases in Current Assets
and
Increases in Current Liabilities:
Decrease in Inventory 16,000
Decrease in Prepaid Rent 2,400
Increase in Salaries Payable 4,000
LessIncreases in Current Assets and
Decreases in Current Liabilities:
Increase in Accounts (8,000)
Receivable
Plus: Noncash Charges
Depreciation Expense 22,800
Net Cash Flow from Operating Activities $170,200
Net Cash Flow from Investing Activities (192,000
)
Net Decrease in Cash 28,200
EXERCISE 12-1B
a. Operating
Activity
b. Operating
Activity
c. Financing
Activity
d. Financing
Activity
e. Investing
Activity
f. Operating
Activity
g. Financing
Activity
h. Financing
Activity
i. Investing
Activity
j. Operating
Activity
EXERCISE 12-2B
Conditions in Requirements a, c, e, and f produce cash inflow

from operating activities. Further explanations on those that
don’t produce cash inflow from operating activities follow.
b. Cash outflow - investing
d. Cash outflow - financing
EXERCISE 12-3B
a.
Accounts Receivable Interest Receivable
2002 2002
1/1 40,000 1/1 5,000
Sales 275,000 Cash 269,000 Int. Earned Cash 27,000
25,000
12/31 46,000 12/31 3,000
Inflow from
Operations
From Sales $269,000
Interest 27,000
Total $296,000
b.
Accounts Payable Salaries Payable
2002 2002
1/1 30,000 1/1 12,000
Cash 193,000 Op. Exp. Sal. Paid 76,500 Acc. Sal.75,000
196,000
12/31 33,000 12/31 10,500
Outflow from
Operations
Payment of Oper. $193,000
Exp.
Payment of Salaries 76,500
Total $269,500
EXERCISE 12-4B
Unearned Revenue Prepaid Rent

Bal. 18,000 Bal. 2,000
Recog. Cash 31,000 Cash 6,900 Exp. 8,000
41,000
Bal. 8,000 Bal. 900
Inflow from revenue: $31,000
Outflow for rent: $69,000
EXERCISE 12-5B
Land Marketable Securities

Cost of Land Sold $50,00 Cost of Securities $30,000
0 Sold
Plus: Gain 9,000 Less: Loss (1,200)
Cash Inflow $59,00 Cash Inflow 28,800
0

Cash Inflow from Sale of Land $ 59,000
Cash Inflow from Sale of Marketable 28,800
Securities
Cash Outflow to Purchase Land (100,000
)
Cash Outflow to Purchase Marketable (40,000)
Securities
Net Cash Outflow from Investing Activities $(52,200
)
EXERCISE 12-6B

Cash Inflow from Stock Issue $80,000
Cash Outflow for Repayment of Mortgage (62,000)
Net Cash Inflow from Financing Activities $18,000
EXERCISE 12-7B
$134,000 cash paid for purchases, calculated as follows:
If $120,000 of inventory was sold, then $144,000 of

inventory was purchased.
Inventory
Bal. 41,000
Pur. 144,000 Sold 120,000
Bal. 65,000
Assuming purchases are on account, the Accounts Payable

account would appear as shown below. If $144,000 of
inventory was purchased on account, then $134,000 was
paid for inventory in order to have an ending balance of
$52,000.
Accounts Payable
Bal. 42,000
Paid134,000 Pur. 144,000
Bal. 52,000
EXERCISE 12-8B
Net Cash Flow From Operating

Activities:
Net Income $45,000
Add: Decrease in Prepaid Rent 800
Decrease in Interest Receivable 400
Increase in Accounts Payable 500
Increase in Unearned Revenue 1,000
Receivable
Decrease in Salaries Payable (400)
Activities
EXERCISE 12-9B
Assets Liabilities
Cash Accounts Payable
Bal. 42,000 2. 12,600 Bal. 120,000
1. 210,200 3. 130,000 3. 130,000 Exp.135,000
4. 20,800
Bal. 88,800 Bal. 125,000
Accounts Receivable Utilities Payable
Bal. 158,000 Bal. 12,000
Rev. 212,000 1. 210,200 Exp. 17,200
4. 20,800
Bal. 159,800 Bal. 8,400
Prepaid Rent
Bal. 3,000
2. 12,600
Exp. 10,000
Bal. 5,600
b. Direct Method (see T-accounts above):

Cash Flow From Operating Activities:
Cash Inflow from Customers (1) $210,200
Cash Outflow for Rent (2) (12,600)
Cash Outflow for Operating (3) (130,000)
Expenses
Cash Outflow for Utilities (4) (20,800)
Net Cash Inflow from Operating $ 46,800
Activities
f. Indirect Method:
Cash Flow From Operating
Activities:
Net Income: $49,800
Add: Increase in Accounts Payable 5,000
Receivable
Increase in Prepaid Rent (2,600)
Decrease in Utilities Payable (3,600)
Activities
EXERCISE 12-10B
Note: The T-accounts are provided for the use of the instructor.
T-Accounts - Selected Information:
Cash Notes Payable, Bank No-Par Common
Stock
2. 2,000 1. 9,800 3. 20,000 5. 26,500
3. 20,000 4. 50,000
Notes Payable, Land Retained Earnings
Office Equipment 4. 75,000 2. 1,000
1. 9,800 2. 12,000
Accumulated Depr.
2. 11,000
Land
4.125,000
Automobile
5. 26,500
a.
Johnston Company
Inflow from Sale of Office Equipment $ 2,000
Outflow to Purchase Office (9,800)
Equipment
Outflow to Purchase Land (50,000
)
Net Cash Flow from Investing Activities $(57,800)
Inflow from Loan 20,000
Activities
Issued Common Stock for $ 26,500
Automobile
Purchased Land with Note $ 75,000
EXERCISE 12-10B (continued)
b. Including the noncash investing and financing activities

section provides a more complete picture of the business
activities. It provides information about the acquisition
or disposition of assets, liabilities, and equity items that
is not otherwise available from the statement of cash
flows. It provides information about activities that do
not directly affect cash.
If this section is omitted, the reader may not have an

accurate picture of certain investing and financing
activities. Even though the end results of all transactions
are reflected in the balance sheet amounts, offsetting
transactions may confuse the picture. For instance, if a
company acquired an asset by borrowing funds and paid
off another loan by giving an asset other than cash, the
reader would not be able to detect any significant
transaction from looking at the balance sheet. The
noncash investing and financing activities section of the
statement of cash flows plainly discloses any such
transactions.
PROBLEM 12-11B
No. Type of Activity

a. Operating Activity
b. Noncash
c. Noncash
d. Financing Activity
e. Noncash
f. Noncash Financing and
Investing
g. Investing Activity
h. Financing Activity
i. Financing Activity
j. Operating Activity
k. Noncash
l. Operating Activity
m. Noncash
n. Financing Activity
o. Investing Activity
p. Operating Activity
q. Investing and the loss is
noncash item
r. Noncash
s. Operating Activity
PROBLEM 12-12B
Effect on
Transactions Cash Flow
1. Cash Received from Sales:
Sales of $548,000 + Decrease in Accts. Rec. of = $ 586,000
$38,000
2. Salaries Paid:
Salaries Exp. $232,000 + Decrease in Sal. Pay. = (240,000)
$8,000
3. Other Operating Expenses Paid:
Other Operating Exp. $236,000 + Decrease in
Operating Expense Payable $6,000 = (242,000)
4. Non-Cash Item -0-
6. Repayment of Debt = (8,000)
7. Interest Paid:
Interest Exp. $4,600 + Decrease in Int. Pay. $900 = (5,500)
8. Inventory Paid:
$7,400 =
Merchandise Pur. $91,000 = (92,600)
$91,000 + Decrease in Accts. Payable $1,600
9. Collected Note = 40,000
11. Sold Land = 6,000
12. Taxes Paid:
Taxes Exp. $6,600 + Decrease in Taxes Pay. $200 = (6,800)
13. Purchased Investments = (50,000)
Sold Investments = 22,000
Change in Cash = $ 37,100
PROBLEM 12-12B (continued)
Greenstein Company
Cash Receipts from:
Sales $586,000
Cash Payments for:
Salaries (240,000)
Other Operating Expenses (242,000)
Interest (5,500)
Taxes (6,800)
)
Net Cash Flow from Operating (900)
Activities
Inflow from Sale of Investments 22,000
Inflow from Note Receivable 40,000
Outflow to Purchase Investments (50,000)
Outflow to Repay Debt (8,000)
Activities
PROBLEM 12-13B
a.
Computation of Cash Flows from Operating
Activities
Sales $248,000 − $3,200 $244,80
0
Inventory Purchase $186,000 − $800 (185,200
)
Insurance Paid $8,000 − $400 (7,600)
Salaries Expense $42,600 + $600 (43,200)
Other Operating Expense (27,400)
Net Cash Flow from Operating Activities $(18,600
)
b.
Gables Auto Supplies
Cash Receipts from:
Sales $244,800
Cash Payments for:
Insurance (7,600)
Salaries (43,200)
Other operating Expense (27,400)
Net Cash Flow from Operating $
Activities (18,600)
PROBLEM 12-14B
a.
Computation of Cash Flows from Investing
Activities
Sold Marketable Securities ($66,000 − $ 14,800
$51,200)
Sold Trucks 11,000
Sold Land 10,000
Purchased Machinery (40,000)
Net Cash Flow from Investing Activities $
(4,200)
b.
Tony’s Flea Markets, Inc.
Inflow from Sale of Marketable $14,800
Securities
Inflow from Sale of Machinery 11,000
Outflow to Purchase Machinery (40,000)
Net Cash Flow from Investing $(4,200)
Activities
PROBLEM 12-15B
a.
Computation of Cash Flows from Financing
Activities
Issued Stock ($70,000 + $32,000) $102,000
Borrowed Funds 40,000
Repaid Debt ($170,000 + $40,000 − (30,000)
$180,000)
Paid Dividends (28,000)
Net Cash Flow from Financing Activities $84,000
b.
Engineered Components
Inflow from the Issue of Capital $102,000
Stock
Inflow from New Debt 40,000
Outflow for the Payment of (28,000)
Dividends
Outflow for the Repayment of Debt (30,000)
Net Cash Flow from Financing $84,000
Activities
PROBLEM 12-16B
a1. Revenue on Account, $17,480.

a2. Collection of Accounts Receivable, $17,080 ($17,480 −
$400).
b2. Inventory Purchased, $5,600 ($6,200 − $600).
b3. Payment on Account, $4,400 ($5,600 − $1,200).
c1. Depreciation Expense, $1,750 (noncash).
d1. Sale of Equipment, $6,800.
d2. Purchase of Equipment, $5,000.
e1. Sale of Land, $1,400.
e2. Exchange of Common Stock for Land, $7,000.
f1. Repaid Long-Term Debt, $800.
g1. Paid Dividends, $900.
Healthy Products Co.
T-Accounts

Bal. 1,940 Bal.2,400 Bal.
10,000
a2. 17,080 b3. 4,400 b3. 4,400 b2. 5,600 e2. 7,000
d1. 6,800 d2. 5,000 Bal.3,600 Bal.
17,000
e1. 1,400 f1. 800
g1. 900 Long-Term Debt Retained Earnings
Bal. Bal.4,000 Bal. 2,290
16,120
f1. 800 b1. 6,200 a1.17,480
Accounts Receivable Bal.3,200 c1. 1,750 d1. 1,800
Bal. 2,000 e1. 600
a1. 17,480 a2.17,080 g1. 900
Bal. 2,400 Bal.
12,120
Inventory
Bal. 2,600
b2. 5,600 b1. 6,200
Bal. 2,000
Land
Bal. 8,000
e2. 7,000 e1. 2,000
Bal.
13,000
Equipment
Bal.
17,100
d2. 5,000 d1. 8,400
Bal.
13,700
Accumulated
Depreciation
Bal.
12,950
d1. 3,400 c1. 1,750
Bal.
11,300
Healthy Products Co.

Cash Receipts from:
Sales $17,080
0
Cash Payments for:
Net Cash Flow from Operating 12,680
Activities:
Net Cash Flow from Investing 3,200
Activities
Outflow for Dividends (900)
Outflow to Repay Debt (800)
Net Cash Flow from Financing (1,700)
Activities
Net Increase in Cash $14,18
0
0
Issue of Common Stock for Land $7,000
PROBLEM 12-17B
a1. Revenue, $300,000.

a2. Collection of Accounts Receivable: $300,000 + $4,000=
$304,000
b2. Inventory Purchased: $144,000 + $8,000 = $152,000
b3. Inventory Paid: $152,000 + $2,400 = $154,400
c1. Salaries Expense, $88,000.
c2. Salaries Paid: $88,000 − $5,000 = $83,000
d1. Depreciation Expense: $9,800 (noncash).
e1. Utilities Expense: $6,400.
e2. Utilities Paid: $6,400 + $600 = $7,000
f1. Interest Expense, $2,400.
f2. Interest Paid: $2,400 + $1,000 = $3,400
g1. Sold Equipment, $15,200
Cost of Equipment, $72,000
Accumulated Depreciation, $56,000.
h1. Collected Notes Receivable, $16,000.
i1. Purchased Land, $16,000.
j1. Paid Notes Payable, $24,000.
k1. Issued Stock, $40,000.
l1. Distribution, $7,200.
Norton Materials, Inc. T-Accounts
Bal. 14,100 Bal.26,400 Bal.
110,000
a2.304,000 b3. b3. b2. k1. 40,000
154,400 154,400 152,000
g1. 15,200 c2. 83,000 Bal.24,000 Bal.
150,000
h1. 16,000 e2. 7,000
k1. 40,000 f2. 3,400 Utilities Payable Retained Earnings
i1. 16,000 Bal. 1,400 Bal.67,300
j1. 24,000 e2. 7,000 e1. 6,400 b1. a1.
144,000 300,000
l1. 7,200 Bal. 800 c1. 88,000
Bal. 94,300 d1. 9,800
Salaries Payable e1. 6,400
Accounts Receivable Bal.10,000 f1. 2,400
Bal. 40,000 c2. 83,000 c1. 88,000 g1. 800
a1.300,000 a2. Bal.15,000 l1. 7,200
304,000
Bal. 36,000 Bal.
108,700
Interest Payable
Inventory Bal. 1,000
Bal. 64,000 f2. 3,400 f1. 2,400
b2.152,000 b1. Bal. -0-
144,000
Bal. 72,000
Notes Payable
Notes Receivable Bal.24,000
Bal. 16,000 j1. 24,000
h1. 16,000 Bal. -0-
Bal. -0-
Land
Bal. 30,000
i1. 16,000
Bal. 46,000
Equipment
Bal.
170,000
g1.
72,000
Bal. 98,000
Accumulated
Depreciation
Bal.94,000
g1. 56,000 d1. 9,800
Bal.47,800
Norton Materials, Inc.

Cash Receipts from:
Sales $304,000
Cash Payments for:
Salaries (83,000)
Utilities (7,000)
Interest (3,400)
Net Cash Flow from Operating 56,200
Activities
Inflow from Note Collection 16,000
Net Cash Flow from Investing 15,200
Activities
Activities
PROBLEM 12-18B
Lind Beauty Products, Inc.

Net Income $26,400

Plus: Decreases in Current Assets
and
Increases in Current Liabilities:
Decrease in Inventory 10,800
Decrease in Prepaid Rent 1,440
Increase in Salaries Payable 1,600
Less: Increases in Current Assets
and
Decreases in Current Liabilities:
Increase in Accounts (2,940)
Receivable
Plus: Noncash Charges
Depreciation Expense 11,400
Net Cash Flow from Operating $45,900
Activities
Net Cash Flow from Investing (118,000
Activities )
Activities
ATC 12-1
Thinking About the Numbers -- Following the Cash
a. During 1998, Panera received about $13 million cash

from the sale of assets. (See the Investing Activities
section of its statement of cash flows.) Hence, the sale
of the frozen dough facility was a cash transaction.
Panera spent about $22 million to acquire new property

and equipment and about $84 million to repay long-term
debt. The proceeds from the sale of the frozen dough
facility was just one of several sources of cash Panera
acquired during 1998. The other sources of cash
included $20 million from operations and $75 million
from the issuance of additional long-term debt.
b. During 1999, Panera received about $72 million cash

from the sale of assets. (See the Investing Activities
section of its statement of cash flows.) Hence, the sale
of the ABP Division was a cash transaction.
Panera spent about $15 million to acquire new property

and equipment and about $106 million to repay long-
term debt. The proceeds from the sale of the ABP
Division was just one of several sources of cash Panera
acquired during 1999. The other sources of cash
included about $7 million from operations and about $42
million from the issuance of additional long-term debt.
c. Panera spent approximately $22 million, $15 million, and

$20 million in 1998, 1999, and 2000 respectively to
expand its operations. (See the Investing Activities
section of its statement of cash flows.) In 1998, The
company’s sources of cash to fund the expansion were
mainly operations and the sale of the frozen dough
facility. In 1999, its main source of cash was the sale of
the ABP Division. In 2000, Panera’s main source of cash
was from its operations.
ATC 12-2
Effect on
Transactions Cash Flow
Cash Received from Sales:
Sales of $1,050,000 − Increase in Accts. Rec. of = $1,031,800
$18,200
$14,600= Merchandise Purchases $781,100
$781,100 + Decrease in Accts. Payable $29,800 = (810,900)
Other Operating Expenses Paid = (112,400)
Interest Paid = (16,000)
1. Sold Land = 44,000
2. Sold Equipment = 18,000
4. Sold Marketable Securities = 70,000
5. Purchased Marketable Securities = (104,000)
6. Paid Loan = (20,000)
7. Paid off Bond Issue = (100,000)
Issue New Bonds = 200,000
8. Sold Treasury Stock = 10,000
10. Issued Preferred Stock = 17,600
11. Paid Dividends = (38,500)
Change in Cash =$ 39,600
ATC 12-2 (continued)
a.
Blythe Industries, Inc.
Cash Receipts from:
Sales $1,031,800
Total Cash Inflows $1,031,800
Cash Payments for:
Operating Expenses (112,400)
Interest (16,000)
Inflow from Sale of Marketable 70,000
Securities
Outflow to Purchase Marketable (104,000)
Securities
Net Cash Flow from Investing Activities (162,000)
Inflow from Common Stock Issue 40,000
Inflow from Preferred Stock Issue 17,600
Inflow from Sale of Treasury Stock 10,000
Inflow from the Issuance of Bonds 200,000
Outflow for Payment of Loan (20,000)
Outflow for Payment of Bonds (100,000)
Outflow for Payment of Dividends (38,500)
ATC 12-2 (continued)
a. Cost per share of the treasury stock was $100 ($10,000 ÷

100 shares).
c. Issue price of the preferred stock was $88.
$10,000 ÷ $50 par = 200 shares

$17,600 ÷ 200 shares = $88 per share
c. Book value of equipment sold was $10,000 ($30,000 −

$20,000).
ATC 12-3
This is a writing assignment that will help the students to

understand the FASB position on the use of the direct
method for the Statement of Cash Flows.
ATC 12-4
Some of the points the student should note are:
Inventory has more than doubled and must be paid for.

However, it is difficult to tell whether sales have increased
proportionately to the increase in inventory. If sales have
not increased enough, the company may be carrying too
much inventory.
Accounts receivable has more than doubled. If the increase

is proportionate to an increase in sales, then this may not be
the main problem.
The other item worth noting is the fact that the company has
purchased almost $400,000 worth of equipment. This may or
may not have been a necessary purchase. More information
is needed to make this determination.
If the expansion of inventory and equipment is necessary

because of permanent growth, then the company may need
to seek long-term financing through a bond or stock issue.
ATC 12-5
a. Statement of Cash Flows:

Operating Activities:
Inflow from Rent Revenue $576,000
Outflow for Interest
(178,000)
Outflow for Operating Expenses (90,000)
Outflow for Management Fees (56,000)
Net Inflow from Operating Act. $252,000
Investing Activities:
Outflow to Purchase Computer (24,000)
Outflow for Loan Payment (150,000)
Outflow for Distribution (20,000)
Net Outflow from Financing Act. (170,000)
Net Change in Cash $ 58,000
b. Clearly, the apartment complex is generating a positive

cash flow. If Ms. Crocket keeps the apartments, she will
have more, not less, money to spend. Also, Ms. Crocket
should consider quitting her own job thereby having time
to manage the apartments. Notice that the fees paid to
manage the apartments are $16,000 greater than Ms.
Crocket’s salary (i.e., $56,000 − $40,000).
c. As previously indicated an auditor certifies only that the

statements are prepared in accordance with GAAP. It is
the responsibility of the users of financial statements to
educate themselves so that they are able to appropri-
ately apply the information contained in the reports to
the decision making process. Obviously, Ms. Crocket
could benefit from the study of accounting.
ATC 14-6
Screen capture of cell values

ATC 14-6 Screen capture of cell formulas
ATC 14-6 Screen capture of cell formulas (continued)

ATC 14-7 Screen capture of cell values
ATC 14-7 Screen capture of cell formulas
ATC 14-7 Screen capture of cell formulas (continued)

Chapter 12 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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Chapter 12 Solution of Fundamental of Financial Accouting by EDMONDS (4th Edition)

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ANSWERS TO QUESTIONS

1. The statement of cash flows explains how a company

2. The three categories of cash inflows and outflows are

Operating activities include cash inflows and outflows

Investing activities include cash inflows and outflows that

Financing activities include cash inflows and outflows

3. Noncash investing and financing activities are

4. Since the ending balance of accounts receivable exceeded

than collected. The amount of cash collected would equal

6. Since the ending balance of unearned revenue was

7. a. Payment of accounts payable - operating activity.

c, d, and e are financing activities.

8. Depreciation expense is an allocation of the cost of an

9. Cost of Land $4,200

10. Cost of Office Equipment $7,500

12. When the direct method of preparing the statement of

13. The direct method is more logical because it analyzes

14. The primary advantage of using the indirect method is

15. The primary advantage of using the direct method is that

16. a. Cash outflow of $46,000 as an investing activity.

17. Yes, it is possible for a company to have negative cash

18. NOTE: FASB’s reasons for precluding disclosure of cash

SFAS #95, Paragraph 33 states:

Students may logically reach this conclusion based on

Transactions a, c, and f produce cash outflows from operating

Inflow from Operating Activities

Outflow from Operating Activities

Unearned Revenue Prepaid Rent

Inflow from revenue: $67,000

Outflow for rent: $12,300

Land Marketable Securities

Cash Flows From Investing Activities

Cash Flows From Financing Activities

$383,000 cash paid for purchases, calculated as follows:

Since Gupta sold $376,000 of inventory, it must have

Inventory purchases affect Accounts Payable as shown

Net Cash Flow From Operating

Cash Accounts Payable

Accounts Receivable Utilities Payable

a. Direct Method (see T-accounts above):

No. Type of Activity

Cash Payments for:

Net Cash Flow from Operating (121,375)

Cash Flows From Investing Activities:

Cash Flows From Financing Activities:

Net Decrease in Cash (28,175)

Big Sky Company

Cash Payments for:

Net Cash Flow from Operating $ 4,600

Cash Accounts Payable Common Stock

Cash Payments for:

Cash Flows From Investing Activities:

Cash Flows From Financing Activities:

Net Increase in Cash 21,400

Schedule of Noncash Investing and

Conditions in Requirements a, c, e, and f produce cash inflow

Unearned Revenue Prepaid Rent

Inflow from revenue: $31,000

Outflow for rent: $69,000

Land Marketable Securities

Cash Flows From Investing Activities:

Cash Flows From Financing Activities: