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Edition by Anthony
CHAPTER 11
THE STATEMENT OF CASH FLOWS
Since students were introduced to the difference between cash flows and accrual accounting’s revenues
and expenses way back in Chapter 3, this should be reinforcement at this point, but it usually seems to be
a new revelation to at least a subset of the class. For those who never succeed in fully understanding the
rationale for the adjustments, Illustration 11-4 now gives them a rote approach to which they can revert.
Cases
Medieval Adventures Company is an armchair case intended to dramatize the difference between
operating cash flow and income.
Amerbran Company (A) illustrates preparation of the cash flow statement from the other two statements
and supplemental information.
Problems
Problem 11-1
2010 sales ............................................................................................................................................................................
$8,337,000
Less: Change in accounts receivable ...................................................................................................................................
(130,000)
Cash generated from sales during 2003...............................................................................................................................
$8,207,000
Problem 11-2
a. Use of $2 million cash to purchase equipment is an investment use of cash.
b. Cash proceeds from the issuance of common stock is a financing source of cash. The use of cash to
retire mortgage bonds is a financing use of cash.
c. No cash effect.
d. No cash effect.
e. Cash proceeds from the sale of machinery is an investment source of cash.
The above responses assume the direct method is used to present its cash flow of statement.
11-1
Problem 11-3
Kids’n Caboodle
Statement of Cash Flows
Cash received from customers ..........................................................................................................................
$155,000
Cash used in operations .....................................................................................................................................
(146,900)
Cash from operations .....................................................................................................................................
$8,100
Equipment .........................................................................................................................................................
(10,500)
Cash used for investments..............................................................................................................................
(10,500)
Loan...................................................................................................................................................................
21,000
Cash from financing .......................................................................................................................................
21,000
Increase in cash ..............................................................................................................................................
$ 18,600
Problem 11-4
Net loss ................................................................................................................................................................
$(11,000)
Depreciation ........................................................................................................................................................
26,400
15,400
Accounts receivable (reduced) ............................................................................................................................
17,600
Accounts payable (increased) ..............................................................................................................................
8,800
Accrued salaries (increased) ................................................................................................................................
3,300
Other accruals (increased) ...................................................................................................................................
2,200
Cash flow from operations ..................................................................................................................................
47,300
Investments ..........................................................................................................................................................
0
Long-term debt (reduced) ....................................................................................................................................
(29,700)
Change in cash .................................................................................................................................................
17,600
Beginning cash .................................................................................................................................................
4,400
Ending cash ......................................................................................................................................................
$22,000
Problem 11-5
Operating Activities
Cash received from customers .........................................................................................................................
$62,100
Interest received ...............................................................................................................................................
345
Operating cash payments .................................................................................................................................
(54,165)
Interest payment ...............................................................................................................................................
(1,035)
Net cash provided by operations ......................................................................................................................
7,245
Investing Activities
Sale of old machine ..........................................................................................................................................
3,105
Down payment on new truck............................................................................................................................
(3,450)
Net cash used in investing activities.................................................................................................................
(345)
Financing Activities
11-2
Chapter 11 The Statement of Cash Flows
Payment of debt...................................................................................................................................
(3,450)
Net cash used in financing activities ...................................................................................................
(3,450)
Increase in cash ...................................................................................................................................
3,450
Beginning cash ....................................................................................................................................
3,450
Ending cash .........................................................................................................................................
$ 6,900
Cases
Approach
This (obviously) is an armchair case, intended to show dramatically the difference between profit and
cash flow from operations. The case has mechanistic patterns built into it to help students see what is
going on: relatively rapid growth is causing cash to be tied up in receivables and inventories faster than it
is regenerated from collections. Although the case may seem trivial (at least after the calculations have
been made) because of these mechanistic patterns, in fact many businesses have had severe (sometimes
fatal) financial crises because management did not anticipate the basic phenomenon that this case
develops. The graph included herein can be used in class to help illustrate this phenomenon.
600,000
500,000
Sales
400,000
Net Income
Net Operating Cash Flow
300,000
Cash Balance w/o Loan
Accounts Receivable
200,000
100,000
-100,000
Jan Feb March April May June July Aug Sep Oct
*This teaching note was prepared by Robert N. Anthony. Copyright © Robert N. Anthony.
11-3
Chapter 11 The Statement of Cash Flows
Question 1
The required monthly statements are shown on the following pages. The peak need comes by the end of
July, when a $40,000 loan would be needed to maintain a zero cash balance. In August, cash generated by
operations finally turns positive, enabling partial repayments of the loan. October’s $27,500 cash
generated by operations enables making the final $15,000 loan repayment and ending the month with a
$12,500 cash balance.
Question 2
This question is the key one in terms of student insight from this case. The company has been paying its
costs currently, but allowing customers two months to pay. This, coupled with constant growth, causes
large net operating outflows for several months, which collectively eat up the firm’s initial capital. It is
important for students to understand why it is that this situation eventually turns around: the unit margin
is $20 and the monthly nonproduction costs are fixed at $10,000; thus, the continued unit sales growth
eventually (in August) causes the current inflows (from sales two months ago) to exceed the current
outflows (production costs for next month’s sales plus $10,000). In other words, as the income statement
shows, the firm is profitable, and eventually those profits get realized in cash.
This need could have been avoided by projecting the cash flow figures that the students have developed
after the fact. Then the company could have arranged the necessary line of credit. Banks are happy to
provide such funds for companies that anticipate the need because that anticipation reflects good financial
management. On the other hand, banks are hesitant to lend to a firm that has been taken by surprise by a
cash shortage. Of course, a no-cost method to avoid the problem was also probably feasible. The
company could have arranged credit with vendors to help finance the inventory, and could have been
more aggressive in collecting from its customers in accord with the stated 30-day terms. If the company
delayed its payments by 30 days and accelerated receivable collections from 60 to 30 days (thus
shortening its “cash cycle” by 60 days), the operating cash flow would have turned positive in March and
no cash crisis would have occurred.
Question 3
The purpose of this question is to give students practice in deriving a cash flow statement from the
income statement and balance sheets. Because of the work done in question 1, where cash flows were
dealt with directly, students can gain some confidence in these derivation procedures before they apply
the procedures in more complex and realistic cases. The statements are as follows (in somewhat
simplified format, befitting this introductory problem):
11-4
Chapter 11 The Statement of Cash Flows
Cash Outflows:
Costs & expenses ........................................................................................................................................................................................................
$ 62,500 $ 80,000 $ 97,500 $115,000 $132,500 $150,000 $167,500 $185,000 $202,500 $220,000
Loan payback ..........................................................................................................................................................................................................
--- --- --- --- --- --- --- 7,500 17,500 15,000
Cash balance ........................................................................................................................................................................................................
$111,250 $ 72,500 $ 30,000 $0 $0 $0 $0 $0 $0 $ 12,500
Memo:
Net operating cash flow ..............................................................................................................................................................................................
$(35,000) $(38,750) $(42,500) $(32,500) $(22,500) $(12,500) $(2,500) $ 7,500 $ 17,500 $ 27,500
Cash balance w/o loan ................................................................................................................................................................................................
$111,250 $ 72,500 $ 30,000 $ (2,500) $(25,000) $(37,500) $(40,000) $(32,500) $(15,000) $ 12,500
11-5
Chapter 11 The Statement of Cash Flows
BALANCE SHEET
Dec. Jan. Feb. Mar Apr. May June July Aug. Sept. 0ct.
31st 31st 28th 31st 30th 31st 30th 31st 31st 30th 31st
Assets:
Cash .........................................................................................................................................................................................................................
$146,250 $111,250 $ 72,500 $ 30,000 $0 $0 $0 $0 $0 $0 $ 12,500
Accounts Receivable ...............................................................................................................................................................................................
68,750 96,250 137,500 192,500 247,500 302,500 357,500 412,500 467,500 522,500 577,500
Inventory .................................................................................................................................................................................................................
35,000 52,500 70,000 87,500 105,000 122,500 140,000 157,500 175,000 192,500 210,000
Total .....................................................................................................................................................................................................................
$250,000 $260,000 $280,000 $310,000 $352,500 $425,000 $497,500 $570,000 $642,500 $715,000 $800,000
11-6
Chapter 11 The Statement of Cash Flows
Approach
This case is based on actual financial statements of American Brands, Inc. Although the numbers have
been changed from those reported, the magnitudes and relationships have been preserved. This case
provides additional practice in preparing a statement of cash flows. Since specific information is not given
on cash collections and operating disbursements, it is expected that students will use the indirect approach
in developing the cash generated by operations amount. The statements in Exhibit I also provide the raw
data for the (B) case, which is a ratio analysis case that appears in Chapter 13.
Answer to Question
The required cash flow statement appears below. The explanatory notes to the statement are as follows:
Note 2. The two components of this acquisition, as given in the case, could be shown separately.
Note 3. The decrease in long-term debt is less than the decrease in long-term liabilities because the latter
also includes deferred taxes.
Note 4. Lacking specific information to the contrary, it is assumed that reissuance of treasury stock for
bonuses generated no cash. The stock dividend was, in effect, a 2-for-1 stock split. The only
difference is that if it were a stock split, the total shown for common stock at par would have
remained $161,417 rather than doubling to $322,834.
Note 5. The three major categories of cash flows generated a net of $11,785 of cash. Since the increase to
be explained is only $4,960, “miscellaneous activities” must have used $6,825 of cash. Some
students may include this line in operating activities, rather than as a fourth category; if they do,
the net cash flow from operations becomes $567,303.
AMERBRAN COMPANY
Statement of Cash Flows
For the year ended December 31, 20x1
(in thousands)
Net cash flow from operating activities:
Net income .......................................................................................................................................................................
$328,773
Noncash items included in income:
Depreciation and amortization ......................................................................................................................................
115,974
*This teaching note was prepared by Robert N. Anthony. Copyright © Robert N. Anthony.
11-7
Solution Manual for Accounting Text and Cases 13th Edition by Anthony
11-8