Chapter 13 Statement of Cash Flows C ws BRIEF EXERCISE 13.1 Gash Flows from Operations (Direct), 7 BRIEF EXERCISE 13.2 Cash Flows from Operations (Indirect) us BRIEF EXERCISE 13.3 Gash Flows trom Operations (Direct) 7 BRIEF EXERCISE 13.4 Cash Flows from Operations (Indirect) ls BRIEF EXERCISE 13.5 Cash Flows from Investing ls BRIEF EXERCISE 13.6 Gash Flows trom Financing Activities ls BRIEF EXERCISE 13.7 Cash Payment for Merchandise Brief Exercises ® connec ‘Olympic, Inc, had the following positive and negative cash flows during the current year: Positive cash flows: Received from customers... 240,000, Interest and dividends 50,000 Sale of plant assets 330,000 Negative cash flows: Paid to suppliers and omployees ........cscsseseeesevsvsesesseeseveee $127,000 Purchase of investments 45,000 Purchase of treasury SIOSK eee eee vevseeeetetseseseseeeseeses 96,000 Determine the amount of cash provided by or used for operating activities by the direct method Garagiola Company had net income inthe current year of $430,000. Depreciation expense for the year totaled $67,000. During the year the company experienced an increase in accounts receivable {all from sales to customers) of $35,000 and an inerease in accounts payable (all to suppliers) of '$56,000, Compute the amount of cash provided by or used for operating activities hy the indirect ‘method. Georgia Products Co. had the following positive cash flows during the current year: received cash from customers of $750,000; received bank loans of $35,000; and received cash from the sale of common stock of $145,000. During the same year, cash was paid out to purchase inventory for '$335,000, co employees for $230,000, and for the purchase of plant assets of $190,000, Calculate the amount of cash provided by or used for operating activities by the direct method, Patterson Company reported net income for the current year of $666,000. During the year the company’s accounts receivable increased by $50,000, inventory decreased by $23,000, accounts payable decreased by $55,000, and accrued expenses payable increased by $14,000. Determine the amount of cash provided by or used for operating activities by the indirect method, (Old Alabama Company purchased investments for $45,000 and plant assets for $127,000 dur ing the current year, during which it also sold plant assets for $66,000, at a gain of $6,000. The company also purchased treasury stock for $78,000 and sold a new issue of common stock for '$523,000, Determine the amount of cash provided by or used for investing activites for the year ‘Texas, Inc., sold common stock for $560,000 and preferred stock for $36,000 during the cur- rent year. In addition, the company purchased treasury stock for $35,000 and paid dividends on common and preferred stock for $24,000, Determine the amount of cash provided by or used for financing activities dusing the yea Dane, Inc. reported cost of goods sold of $100,100 during the current year. Following are the ‘beginning and ending balances of merchandise inventory and accounts payable forthe year: Beginning Ending Merchandise inventory... Coccsssssrerisessersss $85,000 $43,000 Accounts payable. . . ce 23,000 30,000 Determine the amount of cash payments for purchases dusing the yeasExercises (2 BRIEF EXERCISE 13.8 Determining Beginning Cash Balance (08 BRIEF EXERCISE 13.9 Reconciling Net Income to Cash trom Operations. 2 BRIEF EXERCISE 13.10 Preparing Statement of Cash Flows 597 ‘Tyler, Inc’s cash balance at Devember 31, 2011, the end of its financial reporting year, was $155,000. During 2011, cash provided by operations was $145,000, cash used in investing activi ties was $67,000, and cash provided by financing activities was $10,000. Calculate the amount of ‘Tyler's beginning cash balance at January 1, 2011 Zephre Company reported net income forthe year of $56,000. Depreciation expense forthe year ‘was $12,000, During the year, accounts receivable increased by $4,000, inventory decreased by '$6,000, accounts payable increased by $3,000, and accrued expenses payable decreased by $2,000. Reconcile the amount of net income (o the amount of cash provided by or used for operating activites. ‘Watson, Inc. had a cash balance at the beginning of the year of $89,000. During the year, the following cash flows occurted From operating activites $136,000 From investing activities... cevecteeeee (66,000) From financing activities (4,000) Prepare an abbreviated statement of cash flows, including a reconciliation of the beginning and ending cash balances for the yeas, C toy EXERCISE 13.1 Using a Statement of Cash lows Wl EXERCISE 13.2 Using a Statement ton of Cash Flows Exercises connect’ Wallace Company's statement of cash flows for the current year is summarized as follows: ‘Cash provided by operating activi cos eeeetesseseeeeseeeeses $200,000 ‘Cash used in investing activities (120,000) ‘Cash provided by financing activities Inrease in cash during the year Cash balance, beginning ofthe year . Cash balance, end of the year ‘a. Briefly explain whet is inchuded in each of the first three categories listed (ie. the cash from ‘operating, investing, and financing activities categories). . On the basis ofthe limited information presented above. describe the company’s change in ceash position during the year and your interpretation of the strength ofthe company’s current (end-of-year) cash position, Auto Supply Company's 2011 statement of cash flows appears in Exhibit 13-8. Study the state- ‘ment and respond to the Following questions: ‘a. What was the company’s free cash flow in 20117 1b. What were the major sources and uses of cash from financing activities during 2011? Did the net effect of financing activities result in an increase or a decrease in cash during the year? What happened to the total amount of cash and cash equivalents during the year? Assuming 2011 was a typical year, is the firm in a position to continue its dividend payments in the future? Explain(0 EXERCISE 13.3, ‘Computing Cash Flows ls EXERCISE 13.4 Comparing Net Sales tog and Cash Reocints U3 EXERCISE 13.5 Computing Cash Paid tor Purchases. of Merchandise \03 EXERCISE 12.6 Reporting Lending tog Activities and Interest Revenue \2 EXERCISE 13.7 Format of a Statoment of Gash Flows Chapter 13 Statement of Cash Flows 4. Look at the reconciliation of net income to net cash provided by operating activities, and explain the following: 1. Net Joss (gain) from the sale of marketable securities, 2, Increase in accounts reveivable, ‘An analysis of the Masketable Securities control account of Prosper Products, Inc, shows the following entries during the year: Balance, Jan. too. .ce es ceceecseeesessseeessesesessssseseseeesssess $280,000 Debit entries........ . . seseees 128,000 Crodit ontios (140,000) Balance, Dec. 31 $275,000, In addition, the company's income statement includes 2 $35,000 loss on sales of marketable securities. None of the company’s masketable securities is considered a cash equivalent, ‘Compute the amounts that should appear in the statement of cash flows as: a, Purchases of marketable securities 1b. Proceeds from sales of marketable securities. During the current year, Tachnic, Inc., made cash sales of $285,000 and credit sales of $460,000. During the year, accounts receivable decreased by $32,000, ‘4. Compute for the current year the amounts o: A, Net sales reported as revenue in the income statement. 2. Cash received from collecting accounts receivable, 3. Cash received from customers. 1D. Write a brief statement explaining why cash received from customers differs from the amount of net sales, ‘The general ledger of MPX, Inc., provides the following information relating to purchases of merchandise: Endof Beginning Year of Year '$820,000 $780,000 430,000 500,000 inventory coe ‘Accounts payable to merchandise suppliers ‘The company’s cost of goods sold during the year was 2,975,000. Compute the amount of cash payments made during the year to suppliers of merchandise. During the current year, Maine Savings and Loan Association made new loans of $15 millon. In addition, the company collected $36 million from borrowers, of which $30 million was interest revenve. Explain how these cash flows will appear inthe company’s statement of cash flows, indi- cating the classification and the dollar amount of each cash flow. ‘The accounting staff of Wyoming Outfitters, Inc, has assembled the following information for the year ended December 31, 2011Exercises (08 EXERCISE 13.8 Effects of Business Strategies WS EXERCISE 13.9 An Analysis of tay Possoi Reconcling ‘Cash and cash equivalents, Jan. tee... cece eeeeeeceteseseceeeeseees $95,800 ‘Cash and cash equivalents, Dec. 31 74,800 ‘Cash paid to acquire plant assets 21,000 Proceeds trom shorterm borrowing 10,000 Loans made to borrowers o 5,000 Collections on loans (excluding interest) 4,000 Interest and dividends received . 27,000 ‘Cash received from customers. 795,000 Proceeds from sales of plant assets «2.2... .6seeeeeeseseeesceeseesesses 8,000 Dividends paid 155,000 ‘Cash paid to suppliers and employees 35,000 Interest paid : ses 19,000 Income taxes paid 71,000 Using this information, prepare a statement of cash flows. Include a proper heading for the finan- cial statement, and classify the given information into the categories of operating activites, nvest- ing activities, and financing activities, Determine net cash flows from operating activities by the direct method. Place brackets around the dollar amounts ofall cash disbursements. Indicate how you would expect the following strategies to affect the company’s net cash flows from operating activities (1) in the near future and (2) in later periods (after the strategy’s long- term effects have “taken hold”), Fully explain your reasoning, ‘a, A successful pharmaceutical company substantially reduces its expenditures for research and development 1. A restaurant that previously sold only for cash adopts a policy of accepting bank credit cards, ‘such as Visa and MasterCard. © A manufacturing company reduces by $0 percent the size ofits inventories of raw materials (assume no change in inventory storage costs) Through tax planning, a rapidly growing real estate developer is able to defer significant amounts of income taxes. fe. Arapidly growing software company announces that it will stop paying cash dividends for the Toreseeable future and will instead distribute stock dividends, ‘An analysis ofthe annual financial statements of Conner Corporation reveals the following: ‘a, ‘The company had a $5 million extraordinary loss from insurance proceeds received duc to a tornado that destroyed a factory building, Depreciation forthe year amounted to $8 million. uring the year, $2 million in cash was transferred from the company’s checking account into ‘a money market fund, Accounts receivable from customers increased by $4 million over the year ‘Cash received from customers during the year amounted to $167 million, Prepaid expenses decreased by $1 million aver the year. Dividends declared during the year amounted to $7 million; dividends paid during the year amounted co $6 million, ‘Accounts payable (to suppliers of merchandise) increased by $2.5 million during the year. 4, The liability for accrued income taxes payable amounted to $5 million atthe beginning of the year and $3 million at year-end, In the computation of net cash flows from operating activities by the indirect method, explain whether each of the above items should be added to net income, deducted from net income, of ‘omitted from the computation. Briefly explain your reasons for each answer.\07 EXERCISE 13.10 ‘Computation of Net Cash Flows trom Operating Actvitios— Indirest Metnod (2 EXERCISE 13.11 Glassitying Cash Flows (2 EXERCISE 13.12 Glassitying Cash Flows Chapter 13 Statement of Cash Flows ‘The following data ae taken from the income statement and balance sheet of Keaner Machinery, In. Dec.31, Jan. 1, 2011 2011 income statement Net income .. $985,000, Depreciation Expense . 125,000 ‘Amortization of Intangible Assets 40,000 Gain on Sale of Plant Assets . 190,000 Loss on Salo of Investments 35,000 nce sheet: ‘Accounts Receivable. $835,000 $380,000 Inventory 503,000 575,000, Prepaid Expenses. . . . 22,000 10,000, ‘Accounts Payable (to merchandise suppliers) 379,000 410,000 ‘Accrued Expenses Payable .. 180,000 185,000 Using this information, prepare a partial statement of cash flows for the year ended December 31, 2011, showing the computation of net cash flows from aperating activities by the indirect method, Among the transactions of Beeler, Ine., were the following: ‘a, Made payments on accounts payable to merchandise suppliers Paid the principal amount of a note payable to Fist Bank PPaid interest charges relating to a note payable to First Bank, Issued bonds payable for cash; management plans to use this cash in the near future to expand ‘manufacturing and warehouse capabilities. Paid salaries to employees inthe finance department, Collected an account zeceivable from a customer, ‘Transferred cash from the general bank account into a money market fund. ‘Used the cash received in above, to purchase land and a building suitable for a manufactur ing facility Made a yearend adjusting entry to recognize depreciation expense At year-end, purchased for cash an insurance policy covering the next 12 months. Paid the quarterly dividend on preferred stock. Paid the semiannual interest on bonds payable. Received a quarterly dividend from an investment in the preferred stock of another corporation, Sold for eash an investment in the preferred stock of another corporation, Received cash upon the maturity of an investment in cash equivalents. (Ignore interest.) aoe rune erg tree Instructions ‘Most of the preceding cancactions should be included among the activities summarized ina statement ‘of cash flows, For each transaction that should be included in this statement, indicate whether the transaction should be classified as an operating activity, an investing activity, or a financing activity, Ifthe transaction should not be included inthe current year’s statement of cash flows, briefly explain ‘why not, (Assume that net cash flows from operating activities ate determined by the direct method.) ‘Among the transactions of Marvel Manufacturing were the following: 1L. Made payments on accounts payable to office suppliers. 2. Paid the principal amount of a mortgage to Seventh Bank. 3. Paid interest charges relating to a mortgage to Seventh Bank. 4 Issued preferred stock for cash; management plans to use this cash in the near future to pur- chase another company.Exercises 'S. Paid salaries to employees in the finance department. 6, Collected an account receivable from a customer. 7. Transferred cash from the general bank account into a money market fund, ‘8, Used the cash received in 4, above, to purchase Moran Manufacturing Co, 9. Made a yearend adjusting entry to recognize amortization expense, 10. At year-end, purchased for cash an advertising spot on a local radio station forthe next eight months, 11. Paid the annual dividend on preferred stock, 12. Paid the semiannual interest on bonds payable 43, Received a semiannual dividend from an investment inthe common stock of another corporation, 4M, Sold for cash an investment inthe common stock of another corporation. 15, Received cash upon the maturity ofan investment in cash equivalents, (Ignore interest.) Instructions, ‘Most of the preceding transactions should be included among the activities summarized ina statement ‘of cash flows. For each transaction that should be included inthis statement, indicate whether the ‘tansaction should be classified as an operating activity, an investing activity, or a financing activity. the transaction should not be included inthe current year’s statement of cash flows, briefly explain ‘why not, (Assume that net cash flows from operating activites are determined by the direct method.) WS EXERCISE 13.13 Wotford Company provides the following information related to its investing and financing activi Gash Flows trom ties for the current year: Investing Activities Cash receipts: ‘Sale of common stock : $250,000, Sale of equioment (at $34,000 loss) cette 186,000 ‘Salo of land (at $50,000 gain 160,000 ‘Cash payments: Purchase of equipment cise $178,000 Purchase of treasury stock cites 45,000 Retirement of debt coccetetetierersetiserensitesererssress 98,600 Dividends on preferred and comman stock 75,000 a. Calculate the net amount of cash provided by or used for investing activities forthe year, 'b, What impact, if any, do the folowing facts have on your calculation? (4) Equipment was sold ata loss, and (2) land was sold ata gain. © Briefly explain your decision to exclude any of the items listed above if they were not included in your calculation in pasta WS EXERCISE 13.14 Shepherd Industries had the following cash flows by major categories during the current year: Gash Flows trom Financing Activities ‘Cash provided by: Feceipts from customers $560,000 Sale of bonds... 400,000 Salo of treasury stock ........ 34,000, Interest and dividends received 56,000 Sale of equipment (at a $56,000 loss)... 236,000 Cash used fo Payments to mployees «....e.cesseresseseevsessserseeveresserseress $135,000 Payments to purchase inventory 180,000 Dividends on common stock... 60,000 Purchase of treasury S10cK vs... sessessssesesvsessevsesissessersesees 20,000 Interest expense - "78,000602 Wl EXERCISE 13.15, Home Depot, Inc. te Using a Statement ‘of Cash Flows Chapter 13 Statement of Cash Flows Calculate the net amount of eash provided by or use for financing activites for the yea. ’._Brietly jusity why you excluded any ofthe above items in your calculation in part a ‘© Briefly explain your treatment of interest expense in your calculation in par. ‘Statements of cash flow for Home Depot, Inc., for 2009, 2008, and 2007 are included in Appendix ‘Ao this text, ‘a, Focus on the information for 2009 (year ending January 31, 2010). How does net earnings ‘compare with net cash provided by or used in operations, and what accounts for the primary sifference between the two amounts? 1b. What are the major uses of cash, other than operations, and how have these varied over the three-year period presented? ‘Cash flows from both investing and financing activities have been mostly negative for all tree years presented, Considering Home Depot's overall cash flows, including its cash flows from operations, would you say that ths leads to a negative interpretation of Home Depot's ‘cash position a January 31, 2010 Why or why not? 4. Calculate the amount of fre cash flow for each of 2007, 2008, and 2009, and comment briefly ‘on your conclusion concerning this information. luz PROBLEM 13.14 Problem Set A connect, ‘The accounting staff of Harris Company has assembled the following information for the year Format of a Statement ended December 31, 2011: woth or Cash Flows. Lo (04 PROBLEM 13.20 Reporting Investing Activities Cash sales $800,000 Credit sales. cottttetteees oe 2,500,000, Collections on accounis receivable 2,200,000, ‘Cash transferred from the money market fund to the seer bank account. cess 250,000 Interest and dividends received... we 100,000 Purchases (all on account) a : sees 1,800,000 Payments on accounts payable to marchandse suppers 1,800,000, ‘Cash payments for operating expenses. 1,050,000, Interest paid . 180,000 Income taxes paid oes bese 98,000 Loans made to borrowers 500,000 Collections on loans (excluding receipts of intorest) 260,000 Cash paid to acquire plant assets 3,100,000, Book value of plant assets sold 860,000 Loss on sales of plant assets 180,000 Proceeds trom issuing bonds payable . 2,800,000, Dividends paid . 120,000 ‘Cash and cash equivalents, Jan. 1... 488,000 Instructions. Prepare a statement of cash flows in the format illustrated in Exhibit 13-1. Place brackets around amounts representing cash outflows. Use the direct method of reporting cash flows from operating activities ‘Some of the items above willbe listed in your statement without change, However, you will have {o combine certain given information to compute the amounts of (1) collections from customers, (2) cash paid to suppliers and employees, and (3) proceeds from sales of plant assets. (Hint: Nat every item listed is used in preparing a statement of cash flows.) ‘An analysis of the income statement and the balance shect accounts of Headrick, Inc, at December 31, 201, provides the following information: