Samson, Alyssa Gabrielle M.

BSA 3A

Intermediate Accounting 3 part 1

Cash Flows

Objectives of Cash Flow Statement:

The objective is to present information about the historical changes in cash and cash
equivalents of an entity during the period classified by operating, investing financing
activities. This information is particularly useful to investors. creditors and other uses of
financial statements to assist in: (a) evaluating an entity’s ability to generate cash and cash
equivalents, and the timing and certainty of their generation, (b) evaluating an entity's
financial structure (including liquidity and solvency) and its ability to meet its obligations and
to pay dividends. (c) understanding the reasons for the difference between profit or loss
for a period and the net cash flow from operating activities (the reason for the differences are
often helpful in evaluating the quality of earnings of an entity), (d) comparing the operating
performance of different entities, because net operating cash flows reported in cash flow
statements are unaffected by different accounting choices and judgments under accrual
accounting used m determining the profit or loss of an entity, and (e) enabling its users to
develop models to assess and compare the preset value of the future cash flows of different
entities.

Classification of Cash Flows

A. Operating Activities:
Cash flows from operating activities are in general the cash effects of transactions and
other events relating to operating or trading activities. Net cash from operating activities
represents the net increase or decrease in cash resulting from the operations shown in the
income statement in arriving at operating profit. There are two methods of reporting net cash
flow from operating activities.
a. Direct Method – shows operating cash receipts and payments (including, in particular,
cash receipts from customers, cash payments to suppliers and cash payments to and on
behalf of employees). Aggregating to the net cash flow from operating activities.

b. Indirect method – starts with profit before tax and adjust it for non-cash charges and
credits to reconcile it to the net cash flow from operating activities.

Under the direct method, enterprises are encouraged to report major classes of cash
receipts and gross payments from operating activities. At a minimum, the following classes
of cash receipt and payments should be separately reported:
□ Cash receipts from sale of goods and rendering of services.
□ Cash receipts from interest and dividends.
□ Cash receipts from other operating activities, such as royalties, fees, commissions
and other revenues.
□ Cash payments to suppliers for goods and services.
□ Cash receipts and cash payments of an enterprise’s insurance premium and claims,
annuities and other policy benefits.
□ Cash payments or refunds of income taxes unless they can be identified with
financing and investing activities.
□ Cash payment for interest.
□ Cash payments and receipts from contracts held for dealing or trading purposes

The principal advantage of the direct method is that it shows operating cash receipts and
payments. Knowledge of the specific sources of cash receipts and purposes for which cash
payments were made in past periods may be useful in assessing future cash flows. The
International Accounting Standards encourages, bit does not require, the use of direct
method.
Samson, Alyssa Gabrielle M.
BSA 3A

The principal advantage of the indirect method is that it highlights the differences between
reported profit and net cash flow from operating activities. Many users of financial
statements believe that such reconciliation is essential to give an indication of the quality of
the reporting enterprise’s earnings. Some investors and creditors assess future cash flows
by estimating future income and then allowing for accruals adjustments, thus information
about past accruals adjustments may be useful to help estimate adjustments.

The specimen cash flow statement format using the indirect method starts with the
calculation of operating cash flow from the profit before tax. Alternatively, the
statement could start with the operating profit, or any other reported profit figure.

B. Investing Activities;
Cash flows from investing activities are the cash transactions involving acquisitions and
disposal of non-operating asset which include the following:

a) Cash payment to acquire property, plant and equipment – these payment include those
relating to capitalized development cost and self-constructed property, plant and
equipment.

b) Cash receipts from sale of property, plant and equipment, intangibles and other long-term
assets.

c) Cash payments to acquire equity or debt instruments of other enterprises and interest in
joint ventures (other than payments for those instruments considered to be cash
equivalent or those held for dealing or trading purposes)

d) Cash receipts from sale of equity or debt equity or debt instruments of other enterprises
and interest in joint ventures (other than receipts for those instruments considered to be
cash equivalent or those held for dealing or trading purposes).

e) Cash advances and loans made to other parties (other than advances and loan made by
a financial institution).

f) Cash receipts from the repayment of advances or loans made to other parties (other than
advances and loan made by a financial institution).

g) Cash payments for future contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes or the
payments are classified as financing activities.

h) Cash receipts from future contracts, forward contracts, option contracts and swap
contracts except when the contracts are held for dealing or trading purposes or the
receipts are classified as financing activities.

When a contract is accounted for as a hedge of an identifiable position, the cash flows of the
contract are classified in the manner as the cash flows of the position being hedged.

C. Financing Activities;
The separate disclosure of cash flows arising from financing activities is important because it
is useful in predicting claims on future cash flows by providers of capital to the enterprise.
Examples of cash flows arising from financing activities are:

a) Cash proceeds from issuing shares or other equity instruments.

b) Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other
short or long-term borrowings.
Samson, Alyssa Gabrielle M.
BSA 3A
c) Cash proceeds from issuing debentures, loans, notes bonds, mortgage and other short
or long-term borrowings.
d) Cash repayments of the amounts borrowed.
e) Cash payments by a lessee for the reduction of the outstanding liability relating to a
finance lease.

Dividends paid may be classified as a financing activity because this is a cost of obtaining
financial resources (benchmark treatment). Alternatively, dividends paid may also be
classified as a component of cash flows from operating activities in order to assist user to
determine the ability of the enterprise to pay its dividends out of operating cash flows.

Problem 35-1: (Operating Activities - Direct Method)

Charade Company uses the direct method to prepare its statement of cash flows. Charade
had the following cash flows during 2014:

Cash receipts from issuance of ordinary shares P800,000

Cash receipts from customers 400,000
Cash receipts from dividends on long term investments 60,000
Cash receipts from repayment of loan made
to another company 440,000
Cash payments for wages & other operating expenses 240,000
Cash payments for issuance 20,000
Cash payments for dividends 40,000
Cash payments for taxes 80,000
Cash payment to purchase land 160,000

What is the net cash provided (used) from operating activities?

a) (P40,000) c) P 80,000
b) P60,000 d) P120,000

Solution:
Cash receipts from customers 400,000
Cash receipts from dividends on long term investments 60,000 460000
Cash payments for wages & other operating expenses (240,000)
Cash payments for taxes (80,000)
Cash payments for issuance (20,000)
Net cash provided (used) from operating activities P120000

Problem 35-2: (Investing Activities – Direct Method)

Carnival Company uses the direct method to prepare its statement of cash flows. Carnival
had the following cash flows during 2014:

Cash receipts from sale of an old van P 160,000

Cash receipts from issuance of ordinary shares 2,000,000
Cash receipts from issuance of 10%, 10-year bonds 1,500,000
Cash receipts from customers 1,000,000
Cash receipts from repayment of loan made to other company 1,200,000
Cash receipts for dividends 150,000
Cash receipts as interest 150,000
Cash payments for operating expenses 650,000
Cash payments for taxes 300,000
Cash payments for equity securities bought 900,000
Cash payments for equipment purchased 300,000
Cash payments for land acquired 1,200,000
Samson, Alyssa Gabrielle M.
BSA 3A

What is the net cash provided (used) from investing activities?

a) (P1,040,000) c) P1,940,000
b) P1,640,000 d) (P2,240,000)

Solution:
Cash receipts from repayment of loan made to other company P1,200,000
Cash receipts from sale of an old van 160,000
Cash payments for equity securities bought (900,000)
Cash payments for equipment purchased (300,000)
Cash payments for land acquired (1,200,000)
Net cash provided (used) from investing activities (P1040000)

Problem 35-3: (Financing Activities – Direct Method)

Pale Company uses the direct method to prepare its statement of cash flows.
Pale had the following cash flows during 2014:

Cash receipts from issuance of bonds P 800,000

Cash receipts from issuance of ordinary shares 1,400,000
Cash receipts from customers 700,000
Cash receipts from dividends on long term investments 105,000
Cash receipts from repayment of loan made to
another company 660,000
Cash payments for wages & other operating expenses 420,000
Cash payments for reacquisition of treasury shares 250,000
Cash payments for dividends 70,000
Cash payments for taxes 140,000
Cash payments to purchase land 280,000

What is the net cash provided (used) from financing activities?

a) P1,530,000 c) P1,880,000
b) P1,670,000 d) P1,950,000

Solution:
Cash receipts from issuance of bonds P 800,000
Cash receipts from issuance of ordinary shares 1,400,000
Cash payments for reacquisition of treasury shares (250,000)
Cash payments for dividends (70,000)
Net cash provided (used) from financing activities P1880000

Problem 35-4: (Operating Activities – Indirect Method)

Darwin Company provided the following relevant information involving its operating activities
for the year ended December 31, 2014.

12.31.13 12.31.14
Accrued interest payable recognized P40,000 P50,000
Depreciation expense recognized 72,800 75,600
Prepaid expense recognized 3,100 4,940

For the year ended December 31, 2014, Darwin Company reported a net income after tax of
P648,000. What is the net cash flow from operating activities that would be shown in its cash
flow statement?
a) P637,040 c) P731,760
b) P637,080 d) P735,440
Samson, Alyssa Gabrielle M.
BSA 3A

Solution:
Net income after tax, 2014 P648,000
Adjustments:
Depreciation expense 75,600
Increase in Accrued interest payable 10,000
Increase in Prepaid expense (1,840)
Net cash flow from operating activities P731760

Problem 35-5: (Operating Activities – Indirect Method)

The net income for the year ended December 31, 2014 for Knot Corporation was
P3,520,000. Additional data follow:

Purchases of plant assets P2,800,000

Depreciation of plant assets 1,480,000
Dividends declared on plant assets 970,000
Net decrease in non-cash current 290,000
Loss on sale of equipment 130,000

What should be the cash provided from operating activities in Knot’s statement of cash flows
for the year ended December 31, 2014?
a) P5,130,000 c) P5,420,000
b) P5,290,000 d) P7,250,000

Solution:
Net income, 2014 P3,520,000
Depreciation of plant assets 1,480,000
Net decrease in non-cash current 290,000
Loss on sale of equipment 130,000
Cash provided from operating activities P5,420,000

Problem 35-6: (Operating Activities – Indirect Method)

Reality reported a net income of P1,250,000 for the year ended June 30, 2014.
The following data were gathered:

Impairment loss on available for sale P 2,500

Depreciation expense 30,500
Bad debt expense 12,500
Loss on sale of land 50,000
Gain on early extinguishments of debt 175,000
Purchase of long term investment 137,500
Increase in accounts receivable during 2014 20,000

How much was the cash provided by operating activities?

a) P1,150,000 c) P1,272,000
b) P1,190,000 d) P1,435,000

Solution:
Net income P1,250,000
Impairment loss on available for sale 2,500
Depreciation expense 30,500
Bad debt expense 12,500
Loss on sale of land 50,000
Gain on early extinguishments of debt (175,000)
Increase in accounts receivable during 2014 (20,000)
Samson, Alyssa Gabrielle M.
BSA 3A
Net cash provided by operating activities P1,150,500

Problem 35-7: (Operating Activities - Indirect Method)

The net income for the year ended December 31, 2014 for Dwarf Company was P1,800,000.
Additional information follows:

Depreciation on plant assets P900,000

Depreciation of leasehold improvements 510,000
Provision for doubtful account on short term receivables 180,000
Provision for doubtful account on long-term receivables 150,000
Interest paid on short-term borrowings 120,000
Interest paid on long-term borrowings 90,000

Based on the information given, what should be the net cash provided by operating activities
in the statement of cash flows for the year ended December 31, 2014?
a) P3,390,000 c) P3,540,000
b) P3,510,000 d) P3,750,000

Solution:
Net income, 2014 P1,800,000
Depreciation on plant assets 900,000
Depreciation of leasehold improvements 510,000
Provision for doubtful account on short term receivables 180,000
Provision for doubtful account on long-term receivables 150,000
Net cash provided by operating activities P3,540,000

Problem 35-8: (Operating Activities – Indirect Method)

Bargain Company reported net income of P3,000,000 for 2014. Changes occurred in several
balance sheet accounts during 2014 as follows:

Investment in associate, carried at equity 400,000 increase

Premium on bonds payable 50,000 decrease
Accumulated depreciation, caused by
major repair of equipment 200,000 decrease
Deferred tax liability 150,000 increase

In the 2014 statement of cash flows how much should be reported as net cash provided by
operating activities?
a) 2,600,000 c) P2,800,000
b) P2,700,000 d) P2,900,000

Solution:
Net income P3,000,000
Decrease in Premium on bonds payable (50,000)
Increase in Investment in associate, carried at equity (400,000)
Increase in Deferred tax liability 150,000
Net cash provided by operating activities P2,700,000

Problem 35-9: (Operating Activities – Direct Method)

Personality Company’s prepaid insurance was P100,000 at December 31. 2014 and
P50,000 at December 31, 2013. Insurance expense was P40,000 for 2014 and P30,000 for
Samson, Alyssa Gabrielle M.
BSA 3A
2013. What amount of cash disbursements for insurance would be reported in Personality’s
2014 net cash flows from operating activities presented on a direct basis?
a) P40,000 c) P 90,000
b) P60,000 d) P110,000

Solution:
Insurance expense, 2014 P40,000
Prepaid insurance, 2014 100,000
Prepaid insurance, 2013 (50,000)
Payment for insurance P 90,000

Problem 35-10: (Operating Activities – Indirect Method)

The net cash provided by operating activities in Brand Company’s statement of cash flows
for 2014 was P770,000. For 2014, depreciation of plant assets was P300,000, impairment of
goodwill was P50,000 and cash dividends paid on ordinary share was P360,000. Based on
the information given above, how much is Brand’s 2014 net income?
a) P 60,000 c) P770,000
b) P420,000 d) P780,000

Solution:
Operating activities cash flows P770,000
Depreciation (300,000)
Impairment of Goodwill (50,000)
Net income,2014 P420,000

Problem 35-11: (Operating Activities – Indirect Method)

During 2014, Search Company which uses the allowance method of accounting for doubtful
accounts, recorded a provision for doubtful accounts expense of P30,000 and in addition, it
wrote off as uncollectible accounts receivable of P12,000. As a result of these transaction,
net cash flow from operating activities would be calculated (indirect method) by adjusting
that income with a (an)
a) P12,000 c) P18,000
b) P18,000 d) P30,000

Problem 35-12: (Operating Activities – Direct Method)

Canary, Inc sells products to department stores in Metro Manila. The beginning and ending
balances of the company’s inventory and accounts payable during 2014 follow:

January 1, 2014 December 31, 2014

Inventory P150,000 P120,000
Accounts payable 102,000 78,000

Canary’s cost of sales was reported at P1,380,000 on its income statement and uses the
indirect method in preparing the statement of cash flows. How much was the cash payments
made to its suppliers?
a) P1,286,000 c) P1,626,000
b) P1,374,000 d) P1,680,000

Solution:
Cost of sales P1,380,000
Decrease in Inventory (30,000)
Decrease in Accounts payable 24,000
Samson, Alyssa Gabrielle M.
BSA 3A
Cash payments made to its suppliers P1,374,000

Problem 35-13: (Operating – Direct and Indirect)

The following information is available about the transaction of Mortal Company for the year
ended December 31, 2014:

Depreciation P 880,000
Cash paid for expenses 2,270,000
Increase in inventories 370,000
Cash paid to employees 2,820,000
Decrease in receivables 280,000
Cash paid to suppliers 4,940,000
Decrease in payables 390,000
Cash received from customers 12,800,000
Net profit before taxation 2,370,000

Mortal Company has no interest payable or investment income.

Question 1: What is the amount of net cash flows from operating activities using the indirect
approach?
a) P2,270,000 c) P3,250,000
b) P2,770,000 d) P3,730,000

Solution:
Net profit before taxation P 2,370,000
Depreciation 880,000
Operating profit before working capital changes P 3,250,000
Increase in inventories (370,000)
Decrease in receivables 280,000
Decrease in payables (390,000)
Net cash flows from operating activities (indirect approach) P2,770,000

Question 2: How much is the net cash flows from operating activities using the direct
approach?
a) P2,270,000 c) P2,775,000
b) P2,770,000 d) P3,730,000

Solution:
Cash received from customers P 12,800,000
Cash paid for expenses (2,270,000)
Cash paid to employees (2,820,000)
Cash paid to suppliers (4,940,000)
Net cash flows from operating activities (direct approach) P2,770,000

Problem 35-15: (Operating activity)

On January 2, 2014, Grateful Company , a property developer, purchase a land and
buildings which the company will redevelop and sell. The cost of buying and buildings was
P20,000,000. Additional cost incurred in relation to the acquisition of the assets totaled
P500,000. In the statement of cash flows. How should the acquisition be disclosed?
a) as an investing activity outflow of P20,500,000
b) as an operating activity outflow of P20,500,000
c) as a financing activity outflow of P20,500,000
d) as an investing activity outflow of P20,000,000 and operating activity outflow of P500,000
Samson, Alyssa Gabrielle M.
BSA 3A

Problem 35-16: (Operating Activity)

Dynasty Company (a property investor) purchased a land and building for P50,000,000 on
June 1, 2014. The land and the building were purchased for the purpose of earning rental
income from the properties.

In the statement of cash flows, how should Dynasty Company present the purchase of the
land and building?
a) an outflow of P50,000,000 in the investing activity.
b) an outflow of P50,000,000 in the financing activity.
c) an outflow of P50,000,000 in the operating activity
d) only a disclosure is required in the notes to financial statement

Problem 35-17: (Investing Activities)

Dimensional Company, a parent company pays P20,000,000 in cash and issued
P80,000,000 in shares to acquire subsidiary with a cash balance of P30,000,000 and other
net assets including goodwill of P70,000,000. In the statement of cash flows, how should
Dimensional Company present the acquisition of the subsidiary?
a) an outflow of P20,000,000 from investing activity
b) an inflow of P30,000,000 from investing activity
c) an outflow of P20,000,000 from operating activity
d) a net inflow of P10,000,000 from investing activity despite the transaction being an
acquisition

Problem 35-18: (Investing Activities)

Triumph Company acquired a subsidiary. As part of the purchased agreement the
subsidiary’s shareholders authorized a P5,000,000 dividend. pre-acquisition, that is payable
to the former shareholders (the vendor).The purchase consideration payable for the
acquisition was reduced by the amount of the dividend. The dividend was paid after the date
of acquisition. In the statement of cash flows, how should Triumph Company present the
payment of dividend?
a) an outflow of P5,000,000 in its investing activity
b) an outflow of P5,000,000 in its operating activity
c) an outflow of P5,000,000 in its investing activity
d) is not presented in any of the activity

Problem 35-19: (Investing Activity)

Triumph Company acquired a subsidiary. As part of the purchased agreement the
subsidiary’s shareholders authorized a P5,000,000 dividend. pre-acquisition, that is payable
to the former shareholders (the vendor). However, the dividend was not part of the
acquisition arrangement. The dividend was paid after the date of acquisition. In the
statement of cash flows, how should Triumph Company present the payment of dividend?
a) an outflow of P5,000,000 in its investing activity
b) an outflow of P5,000,000 in its operating activity
c) an outflow of P5,000,000 in its investing activity
d) is not presented in any of the activity

Problem 35-20: (Investing Activity)

Samson, Alyssa Gabrielle M.
BSA 3A
Victory Company sold its heavy equipment for P15,000,000 on December 31, 2014 but
immediately leased it back for a period of 5 years. The equipment has a carrying value of
P10,000,000 on December 31, 2014

Question 1: If the leaseback is treated as an operating lease, how should Victory Company
present the sale in its cash flow statement?
a) an inflow of P15,000,000 from investing activity
b) an inflow of P15,000,000 from financing activity
c) an inflow of P15,000,000 from investing and outflow of P5,000,000 operating
activity (indirect method)
d) an inflow of P15,000,000 from financing and outflow of P5,000,000 operating activity
(indirect method)

Question 2: If the leaseback is treated as finance lease, how should Victory Company
present the sale in its cash flow statement?
a) an inflow of P15,000,000 from investing activity
b) an inflow of P15,000,000 from financing activity
c) an inflow of P15,000,000 from investing and outflow of P5,000,000 operating activity
(indirect method)
d) an inflow of P15,000,000 from financing and outflow of P5,000,000 operating activity
(indirect method)

Problem 35-21: (Investing Activities)

In 2014, a typhoon completely destroyed a building belonging to Carpet Corporation. The
building cost P2,500,000 and had accumulated depreciation of P1,200,000 at the time of the
loss. Carpet received a cash settlement from the issuance company and reported a loss of
P525,000. In Carpet’s 2014 cash flow statement, how much would be the net changes that
would be reported in the cash flows from investing activities section?
a) P250,000 increase c) P775,000 increase
b) P525,000 increase d) P1,300,000 increase

Solution:
Building cost P2,500,000
Accumulated depreciation (1,200,000)
Amount of loss (525,000)
Cash received from issuance company (inflow-investing activity) P775,000

Problem 35-22: (Investing Activities)

A flood damaged a building and its contents. Floods are unusual and infrequent in this area.
The receipts from insurance companies totaled P200,000, which was P60,000 less than the
book values. The tax rate is 32%. How much should the receipts from insurance companied
be shown in the statement of cash?
a) Addition to net income of P136,000
b) Inflow from investing activities of P136,000
c) Inflow from investing activities of P200,000
d) Not to be shown

Problem 25-23: (Investing and Financing)

Groovy Corporation provided the following information on selected transactions during 2014:

Purchase of land by issuing bonds, P400,000; proceeds from issuing bonds. P800,000;
purchases of inventories, P1,520,000; purchases of treasury shares, P240,000; loans made
to affiliated corporations, P560,000; dividends paid to preference shareholders, P160,000;
proceeds from issuing preference share, P640,000; and proceeds from sale of equipment,
P80,000.
Samson, Alyssa Gabrielle M.
BSA 3A

Question 1: How much would be the net cash provided (used) by investing activities during
2014?
a) (P480,000) c) (P880,000)
b) P 80,000 d) (P2,000,000)

Solution:
Loans to affiliated corporations (P560,000)
Proceeds from sale of equipment 80,000
net cash used by investing activities (P480,000)

Question 2: How much would be the net cash provided by financing activities during 2014?
a) P 880,000 c) P1,280,000
b) P1,040,000 d) P1,440,000

Solution:
Proceeds from issuing bonds P800,000
Purchases of treasury shares (240,000)
Dividends paid to preference shareholders (160,000)
Proceeds from issuing preference share 640,000
Net cash provided by financing activities P1,040,000

Problem 25-24: (Investing and Financing)

In preparing its cash flow statement for the year 2014, Fish Company gathered the following
data:

Gain on sale of equipment 60,000

Proceeds from sale of equipment 100,000
Purchase of bonds, par P2,000,000 1,800,000
Amortization of bond discount 20,000
Dividends declared 450,000
Dividends paid 380,000
Proceeds from sale of treasury share (carrying amount, P650,000) 750,000

Question 1: In its 2014 statement of cash flows, how much would Fish Company report as
net cash used in investing activities?
a) P1,700,000 c) P1,880,000
b) P1,760,000 d) P1,940,000

Solution:
Proceeds from sale of equipment P 100,000
Purchase of bonds (1,800,000)
Net cash used in investing activities P1,700,000

Question 2: In its 2014 statement of cash flows, how much should Fish Company report as
net cash provided by financing activities?
a) P1,700,000 c) P1,880,000
b) P1,760,000 d) P1,940,000

Solution:
Dividends paid (P380,000)
Proceeds from sale of treasury share 750,000
Samson, Alyssa Gabrielle M.
BSA 3A
Net cash provided by financing activities P370,000

Problem 35-25: (Investing Activities)

Goldfish Corporation had the following activities during 2014:

□ Acquired 2,000 shares of stock in Starfish, Inc. for P260,000.

□ Sold an investment in Water for P350,000 when the carrying value was P330,000
□ Acquired a P500,000, 4-year certificate of deposit from a bank (during the year, interest
of P37,500 was paid to Goldfish).
□ Collected dividends of P12,000 on available for sale investment.

In Goldfish Corporation’s 2014 statement of cash flows, how much should be the net cash
used in investing activities?
a) P372,500 c) P398,000
b) P380,500 d) P410,000

Solution:
Acquired 2,000 shares of stock in Starfish, Inc. (P260,000)
Sale of investment in Water 350,000
Acquisition of 4-year certificate of deposit (500,000)
Net cash used in investing activities P410,000
Problem 35-26: (Financing Activities)
The balance in Accumulated Profits and Losses at December 31, 2013 was P720,000 and at
December 31, 2014 was P582,000. Net income for 2014 was P500,000. A share dividend
was declared and distributed which increased ordinary share by P200,000 and share
premium by P110,000. A cash dividends was declared and paid. What is the amount of cash
dividends being declared and paid?
a) P248,000 c) P442,000
b) P328,000 d) P638,000

Solution:
Accumulated Profits and Losses at December 31, 2013 P720,000
Net income for 2014 500,000
Accumulated Profits and Losses at December 31, 2014 (582000)
Share dividends-market value (310000)
Cash dividends P328,000

Problem 35-27: (Financing Activities)

During 2014, Brownies Company had the following activities related to its financial
operations:

Payment for the early retirement of long term

bonds payable (carrying value. P1,110,000) P1,125,000
Distribution in 2014 of cash dividends declared in 2010 to
preference shareholders 93,000
Carrying value of convertible preference share converted
into ordinary share 180,000
Proceeds from sale of treasury share (carrying value
at cost, (129,000) 142,000

In Brownies Company’s 2014 statement of cash flows, how much net cash used in financing
activities should be shown?
a) P803,500 c) P1,074,000
Samson, Alyssa Gabrielle M.
BSA 3A
b) P895,500 d) (P1,075,500)

Solution:
Payment for the early retirement of long-term bonds payable (P1,125,000)
Cash dividends declared (93 000)
Proceeds from sale of treasury share 142,000
Net cash used in financing activities P1,074,000

Problem 35-28: (Operating, Investing & Financing)

The net changes in the balance sheet accounts of Bonbon Corporation for the year 2014 are
shown below:

Accounts Debit Credit

Cash P 82,000
Available for sale securities P121,000
Accounts receivable 83,000
Allowance for doubtful accounts 13,300
Inventory 74,200
Prepaid Expenses 17,800
Investment in wholly owned subsidiary
at equity 20,000
Plant and equipment 210,000
Accumulated depreciation 130,000
Accounts payable 80,700
Accrued liabilities 21,500
Deferred tax liability 15,500
8% serial bonds 80,000
Ordinary share capital, P10 par 90,000
Share premium 160,000
Accumulated Profits-Appropriation for
bonded indebtedness 60,000
Accumulated Profits-Unappropriated 38,000 _______
P643,600
P643,000

An analysis of the Accumulated Profits-Unappropriated account follows:

Accumulated profits – unappropriated, 12/31/13 327,000

Add: Net income for 2013 60,000
Transfer from appropriation for bonded indebtedness P1,687,000
Total
Deduct: Cash dividends P185,000
Share dividend 240,000 425,000
Accumulated Profits-unappropriated, 12/31/14 P1,262,000

□ On January 2, 2014, marketable securities (classified as available-for-sale) costing

P121,000 were sold for P155,000
□ The company paid a cash dividend on February 1, 2014
□ Accounts receivable of P16,200 and P19,400 were considered uncollectible and
written off in 2014 and 2013, respectively.
□ Major repairs of P33,000 to the equipment were debited to the Accumulated
Depreciation account during the year. No assets were retired during 2014
Samson, Alyssa Gabrielle M.
BSA 3A
□ The wholly owned subsidiary reported a net loss for the year of P20,000. The parent
recorded the loss.
□ At January 1, 2014, the cash balance was P166,000

Question 1: How much should be the amount of net cash flows from operating activities?
a) (P275,000) c) (P296,500)
b) P275,000 d) P296,500

Solution:
Net income P327 000
Depreciation (P130 000 + 33 000) 163 000
Increase in net accounts receivable (P83000 – 13300) (69700)
Increase in inventory (74200)
Decrease in prepaid expense 17800
Decrease in deferred tax liability (15500)
Decrease in accounts payable (80700)
Increase in accrued liabilities 21500
Gain on sale of available for sale securities(121,000-155000) (34000)
Loss reported by a wholly owned subsidiary 20000
Net cash flows from operating activities P275200

Question 2: How much should be the amount of net cash flows from investing activities?
a) (P88,000) c) (P121,000)
b) P88,000 d) P121,000

Solution:
Proceeds from sale of available of marketable securities P155000
Payment for major repairs (33000)
Acquisition of plants and equipment (210000)
Net cash flows from investing activities (P88,000)
Question 3: How much should be the amount of net cash flows from financing activities?
a) (P105,000) c) (P185,000)
b) P105,000 d) P185,000

Solution:
Cash inflow from issuance of bonds P80000
Cash used from payment of dividends (185000)
Net cash flows from financing activities (P105000)

Problem 35-29: (Operating, Investing &Financing)

The balance sheet data of Sweet Corn Company at the end of 2013 and 2014 follow:

2014 2013
Cash 250,000 350,000
Accounts receivable, net 600,000 450,000
Merchandise inventory 700,000 450,000
Prepaid expenses 100,000 250,000
Building and equipment 900,000 750,000
Accumulated depreciation (180,000) ( 80,000)
Land 900,000 400,000
TOTALS P3,270,000 P2,570,000

2014 2013
Accounts payable 680,000 550,000
Accrued expenses 120,000 180,000
Samson, Alyssa Gabrielle M.
BSA 3A
Notes payable, bank (long term) 400,000
Mortgage payable 300,000
Ordinary share capital, P10 par 2,090,000 1,590,000
Accumulated Profits/Losses (deficit) 80,000 ( 150,000)
TOTALS P3,270,000 P2,570,000

Land was acquired for P500,000 in exchange for ordinary share, par P500,000 during the
year. All equipment purchased was for cash. Equipment costing P50,000 was sold for
P20,000, with book value of P40,000. Cash dividends of P100,000 were changed to
Accumulated Profits and Losses and was the only entry in this account.

In the December 31, 2014, statement of cash flows of the company, how much would be the
net cash provided (used) by –

Question 1: Operating activities?

a) P240,000 c) P280,000
b) P260,000 d) P330,000

Solution:
Schedule 1
Accumulated Profits/Losses (deficit) P 80,000
Cash dividends 100,000
Deficit, 2013 (150000)
Net income P330000

Schedule 2
Accumulated depreciation 2014 180000
Accumulated depreciation – sold
Cost 50000
Book value (40000) 10000
Total P190000
Accumulated depreciation, 2013 80000
Depreciation P110000

Net income 330000

Depreciation 110000
Increase in Accounts receivable (150000)
Increase inventory (250000)
Decrease Prepaid expenses 150000
Increase Accounts payable 130000
Decrease Accrued expenses (60000)
Loss on sale of equipment 20000
Net cash provided by Operating activities P280000

Question 2: Investing activities?

a) P130,000 c) (P200,000)
b) (P180,000) d) (P680,000)

Solution:
Scheduled 3
Building and equipment, 2014 P900,000
Cost of equipment sold 50000
Building and equipment, 2013 (750,000)
Acquisition of equipment P200000
Samson, Alyssa Gabrielle M.
BSA 3A

Proceed from sale of equipment P20000

Cash paid from purchased equipment (200000)
Net cash used by investing activities (P180,000)

Question 3: Financing activities?

a) None c) (P200,000)
b) (P100,000) d) P300,000

Solution:
Cash inflow from mortgage payable P300000
Payment of notes payable (400000)
Payment of dividends (100000)
Net cash used by investing activities (P200,000)
Problem 35-30: (Operating, Investing & Financing)
The following financial statements of Stone Corporation were made available:
Balance Sheet
12/31/14 12/31/13
Cash P 313,600 P 160,000
Accounts receivable 300,000 180,000
Merchandise inventory 320,000 400,000
Property, plant & equipment P510,000 P800,000
Accumulated depreciation (270,000) 240,000 (250,000) 550,000
P1,177,600 P1,290,000

Accounts payable P 150,000 P 80,000

Income taxes payable 290,000 330,000
Bonds payable 300,000 500,000
Ordinary share capital 180,000 180,000
Accum. Profits 257,000 200,000
P1,177,600 P1,290,000
Income Statement
For the year ended, December 31, 2014

Sales P7,000,000
Cost of sales 5,960,000
Gross profit P1,040,000
Selling expenses P500,000
Administrative expenses 160,000 660,000
Income from operations P 380,000
Interest expense 60,000
Income before taxes P 320,000
Income taxes 102,400
Net income P 217,600

The following additional data were provided:

 Dividends for the year 2014 were P160,000
 During the year, equipment was sold for P200,000. This equipment originally cost
P290,000 and had a book value of 240,000 at the time of sale. The loss on sale was
incorrectly charged to cost of sales.
 All depreciation expenses were in the selling expenses category.
In the December 31, 2014 statement of the cash flows (direct method) of Stone Company,
how much should be reported as:
Question 1: Net cash provided by operating activities?
Samson, Alyssa Gabrielle M.
BSA 3A
a) P170,000 c) P240,000
b) P200,000 d) P317,600

Solution:
Schedule 1
Accounts receivable, 2013 P180000
Sales 7000000
Accounts receivable, 2014 (300000)
Total collections P6,880,000

Schedule A
Cost of sales P5920000
Merchandise inventory, 2014 320000
Merchandise inventory, 2013 (400000)
Purchase on account P5840000
Schedule B
Cost of sales P5,960,000
Loss on equipment (200000 – 240000) (40000)
Correct cost of sale P5,920,000

Schedule C
Accumulated depreciation, 2014 P270000
Depreciation on equipment sold cost 290000
Depreciation on equipment sold book value (240000)
Accumulated depreciation, 2013 (250000)
Depreciation P70000

Schedule 2
Accounts payable, 2013 P80000
Purchase on account 5840000
Accounts payable, 2014 (150000)
Payments of accounts payable P5770000

Schedule 3
Income tax payable, 2013 P330000
Income tax expense 102400
Income tax payable, 2014 (290000)
Payment of income taxes P142400

Schedule 4
Selling expense P500000
Depreciation (70000)
Payment of selling expense P430000

Cash inflow
Collections of accounts receivable P6880000
Payments of accounts payable (5770000)
Payment of income taxes (142400)
Payment of selling expense (430000)
Administrative expenses (160,000)
Interest expense (60,000)
Net cash provided by operating activities P317600

Question 2: Net cash provided (used) by investing activities?

a) P 40,000 c) (P240,000)
Samson, Alyssa Gabrielle M.
BSA 3A
b) P200,000 d) (P290,000)

Solutions:
Proceed from sale of equipment P200000

Question 3: Cash received from customers?

a) P6,880,000 c) P7,030,000
b) P7,000,000 d) P7,120,000

Solutions:
Schedule 1
Accounts receivable, 2013 P180000
Sales 7000000
Accounts receivable, 2014 (300000)
Total collections P6,880,000

Question 4: Total taxes paid?

a) P40,000 c) P80,000
b) P50,000 d) P142,400

Solutions:
Schedule 3
Income tax payable, 2013 P330000
Income tax expense 102400
Income tax payable, 2014 (290000)
Payment of income taxes P142400

Problem 35-31: (Operating, Investing & Financing)

Presented below are the balance sheet accounts of Corn, In, as of December 31, 2014 and
2013 and their net charges:
2014 2013 Net Change
Cash 471,000 307,000 164,000
Accounts receivable, net 550,000 515,000 35,000
Inventories 810,000 890,000 (80,000)
Available for sale securities 150,000 250,000 (100,000)
Fair value adjustment, credit (10,000) (25,000) 15,000
Investment in Associate 420,000 390,000 30,000
Property, plant and equipment 1,145,000 1,070,000 75,000
Accumulated depreciation (345,000) (280,000) (65,000)
Patent 109,000 118,000 (9,000)
Total assets 3,300,00 3,235,000 65,000

Liabilities and Shareholders’ Equity

Accounts payable & Accrued Expenses 845,000 960,000 (115,000)
Notes payable, long-term 600,000 900,000 (300,000)
Deferred income taxes 190,000 190,000
Ordinary shares capital, par P10 850,000 650,000 200,000
Share premium 230,000 170,000 60,000
Unrealized loss on available for sale (10,000) (25,000) 15,000
Accumulated profits and losses 595,000 390,000 205,000
Total 3,300,000 3,235,000 65,000
Samson, Alyssa Gabrielle M.
BSA 3A
Additional Information:
□ On January 2, 2014, Corn sold equipment costing P45,000, with a carrying amount of
P28,000, for P18,000 cash
□ On March 31, 2014, Corn sold one of its available for sale holdings for P119,000 cash.
There were no other transactions involving its equity securities.
□ On April 15, 2014, Corn issued shares of its ordinary share for cash at P13 per share.
□ On July 1, 2014, Corn purchased equipment for P120,000 cash
□ Corn’s net income for 2014 is P290,000. Corn paid a cash dividend of P85,000 on
October 26, 2014
□ Corn acquired a 20% interest in Chips Corporation’s ordinary during 2010. There was
no goodwill attributable to the investment, which is appropriately accounted for by the
equity method. Chips reported net income of P150,000 for the year ended December
31, 2014. No dividend was paid on Chips’ ordinary shares during 2014.

Question 1: What is the amount of net cash provided (used) from operating activities?
a) P272,000 c) P302,000
b) P287,000 d) P336,000

Schedule 1
Accumulated depreciation, 2014 P345000
Accumulated depreciation on equipment sold cost 45000
Accumulated depreciation on equipment sold carrying value (28000)
Accumulated depreciation, 2013 (280000)
Depreciation, 2014 P82000

Schedule 2
Patent, 2013 P118000
Patent, 2014 (109000)
Patent amortization P9000
Schedule 3
Selling price of equipment P18000
Carrying value (28000)
Loss on sale (P10000)

Schedule 4
Selling price available for sale securities P119000
Cost available for sale securities sold cost, 2013 (250000)
Cost available for sale securities sold cost, 2014 (150000) 100000
Gain on sale P19000

Net income P290000

Depreciation 82000
Patent amortization 9000
Increase Accounts receivable (35,000)
Decrease Inventories 80,000
Accounts payable & Accrued Expenses (115,000)
Loss on sale 10000
Gain on sale of available for sale (19000)
Equity in Chips Corporation (P150000 * 20%) (30000)
net cash provided from operating activities P272000

Question 2: What is the c?

a) (P17,000) c) (P102,000)
b) P17,000 d) P137,000
Samson, Alyssa Gabrielle M.
BSA 3A

Solutions:
Proceeds from sale of available for sale securities P119000
Proceed from sale of equipment 18000
Cash flow from purchase of equipment (120000)
net cash provided from operating activities P17000

Question 3: What is the net cash provided (used) from financing activities?
a) (P 40,000) c) P125,000
b) (P125,000) d) P175,000

Solutions:
Cash provided from issuance of share capital (20000*13) P260000
Cash used for the payment of notes payable (300000)
Cash used for the payment of cash dividends (85000)
net cash used from financing activities P125000