EXERCISE 22.

a. STRONG HOUSE INC.

Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2020

Cash flows from operating activities

Net income $42,000
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation expense (a) $13,550
Gain on disposal of investment in bonds (b) (500) 13,050
Net cash provided by operating activities 55,050

Cash flows from investing activities

Purchase of land (c) (5,500)
Proceeds on sale of investment in bonds (d) 15,500
Net cash provided by investing activities 10,000

Cash flows from financing activities

Dividends paid (e) (19,000)
Payments to retire bonds payable (f) (10,000)
Proceeds from issuance of common
shares (g) 20,000
Net cash used by financing activities (9,000)

Net increase in cash 56,050

Cash balance, January 1, 2020 10,000
Cash balance, December 31, 2020 $66,050

Non-cash investing and financing activities

Issuance of bonds for equipment $32,000

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest $4,150
Income taxes 19,500
EXERCISE 22.1 (CONTINUED)
b. Dear Mr. Brauer:

Enclosed is your statement of cash flows for the year ended

December 31, 2020. I would like to take this opportunity to explain
the changes that occurred in your business as a result of cash
activities during 2020. (Please refer to the attached statement of
cash flows.)

The first category shows the net cash flow that resulted from all
of your operating activities. Operating activities are those engaged
in for the routine conduct of business, involving most of the
transactions used to determine net income. The cash inflow from
operations that affects this category is net income. However, this
figure must be adjusted, first for depreciation (item a)—because
this expense did not involve a cash outlay in 2020—and second
for the $500 gain on the disposal of your bond investment (item b).
The gain must be subtracted from this section because it was
included in net income, but it is not the result of an operating
activity—it is an investing activity.

The second category, cash flows from investing activities, results

from the acquisition/disposal of plant assets and investments
including the purchase of another entity’s debt such as bonds or
loans and notes. Your purchase of land (item c) as well as the sale
of your investment in bonds (item d) represents your investment
activities during 2020, the purchase being a $5,500 outflow and the
sale being a $15,500 inflow.

Cash flows arising from the issuance and retirement of debt and
equity are properly classified as “Cash flows from financing activi-
ties.” These inflows and outflows generally include the long-term
liability and equity items on the SFP. Examples of your financing
activities resulting in cash flows are the payment of dividends
(item e), the retirement of your bonds payable (item f), and your
issuance of common shares (item g).
EXERCISE 22.1 (CONTINUED)

b. (continued)

Note that, although $32,000 worth of bonds were issued for the
purchase of equipment, the transaction has no effect on the
change in cash from January 1, 2020 to December 31, 2020 and so
it does not appear on the face of the statement of cash flows but
in the notes to your financial statements.

I hope this information helps you to better understand the

enclosed statement of cash flows. If I can further assist you, please
let me know.

Sincerely,

c.
STRONG HOUSE INC.
Statement of Financial Position (condensed)
December 31, 2020
Assets
Cash $66,050
Current assets other than cash 34,000
Bond investment at amortized cost 25,000 (1)
Plant assets (net) 75,950 (2)
Land 44,000 (3)
$245,000
Liabilities and Equity
Current liabilities $14,500
Long-term notes payable 30,000
Bonds payable 54,000 (4)
Common shares 100,000 (5)
Retained earnings 46,500 (6)
$245,000
(1) $40,000 – $15,500 + $500
(2) $57,500 – $13,550 + $32,000
(3) $38,500 + $5,500
(4) $32,000 + $32,000 – $10,000
(5) $80,000 + $20,000
(6) $23,500 + $42,000 – $19,000
EXERCISE 22.1 (CONTINUED)

d. The statement of cash flows used to be called the statement of

changes in financial position because it used to report the
sources of increases and decreases in working capital. It also
included all transactions affecting the entity’s assets and capital
structure, regardless of whether or not the transactions involved
cash flows.

The former statement did not focus on cash, but on working

capital. The improvements that were achieved in the changes to
the current statement of cash flow have proven useful to users
and involve communicating more relevant information in the
assessment of performance. Relevance has been enhanced by
providing information to assess the liquidity and solvency as well
as the company’s earnings quality. In addition, the statement
helps users predict future cash flows and assess management’s
ability to generate cash from operating activities, instead of using
net income as the main measure of performance. The statement of
cash flows is less susceptible to earnings management than the
statement of comprehensive income, which has more subjective
accruals and deferrals.
EXERCISE 22.12

a.
Malouin Corp.
Partial Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2020
Cash flows from operating activities
Cash received from customers $797,000 (a)
Cash paid
To suppliers $486,000 (b)
For income taxes 60,500 (c) 546,500
Net cash provided by
operating activities $250,500
(a) Computation of cash received from customers:
Service revenue $778,000
Add: Decrease in accounts receivable
Add: ($54,000 – $35,000) 19,000
Cash received from customers $797,000

(b) Computation of cash paid to suppliers:

Operating expenses per income statement $499,000
Deduct: Increase in accounts payable
Deduct: ($44,000 – $31,000) (13,000)
Cash paid to suppliers $486,000

(c) Computation of cash paid for taxes:

Income tax expense per income statement $58,000
Add: Decrease in income tax payable
Add: ($8,500 – $6,000) 2,500
Cash paid for income taxes $60,500
EXERCISE 22.12 (CONTINUED)

b. Current cash debt coverage ratio in 2020

Current cash debt coverage ratio

= Net cash provided by operating activities / Average current
liabilities
= $250,500 / [($31,000 + $8,500) + ($44,000 + $6,000)] / 2
= 5.6

Current cash debt coverage ratio is a measure of the company’s

ability to pay off its current liabilities in a specific year from its
operations. An increase in the company’s current cash debt
coverage ratio from 4.5 to 5.6 is an improvement and a sign of
better liquidity in 2020. A creditor is interested in analyzing the
company’s liquidity (short-term ability to repay maturing
obligations) and current cash debt coverage ratio to help
determine the level of credit risk associated with lending to the
company. A creditor may interpret the increase in current cash
debt coverage ratio as an indication that it is less likely that the
company will experience difficulty in meeting its current liabilities
as they come due, and that the credit risk associated with lending
to the company in the short-term has decreased.
EXERCISE 22.14

a.
Tuit Inc.
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2020
Cash flows from operating activities
Cash received from customers (1) $331,150
Cash paid to suppliers for goods (2) $139,000
Cash paid for other operating
expenses (3) 28,000
Cash paid to and on behalf of
employees (4) 65,000
Cash paid for interest 11,400
Cash paid for taxes (5) 6,125 249,525
Net cash provided by operating activities 81,625a

Cash flows from investing activities

Proceeds on sale of equipment (6) 8,000
Purchase of equipment (7) (44,000)
Net cash used by investing activities (36,000)

Cash flows from financing activities

Principal payments on short-term loans (2,000)
Principal payments on long-term loans (9,000)
Dividends paid (6,000)
Net cash used by financing activities (17,000)

Net increase in cash 28,625

Cash, January 1, 2020 25,000
Cash, December 31, 2020 $ 53,625
EXERCISE 22.14 (CONTINUED)

a. (continued)

Computations:
(1) Cash received from customers
Sales revenue $338,150
Less: Increase in accounts receivable (7,000)
Cash received from customers $331,150

(2) Cash paid to suppliers for goods

Cost of goods sold $165,000
Less: Decrease in inventory (20,000)
Purchases 145,000
Less: Increase in accounts payable (6,000)
Cash paid to suppliers for goods $139,000

(3) Cash paid for other operating expenses

Operating expenses $120,000
Less: Salaries and wages expense (69,000)
Depreciation expense (7) (24,000)
Add: Increase in prepaid rent 1,000
Cash paid for other operating expenses $28,000

(4) Cash paid to and on behalf of employees

Salaries and wages expense $69,000
Increase in salaries and wages payable (4,000)
Cash paid to and on behalf of employees $65,000

(5) Income taxes paid

Income tax expense $4,125
Decrease in income tax payable 2,000
Income taxes paid $6,125
EXERCISE 22.14 (CONTINUED)

a. (continued)

(6) Calculation of proceeds from sale of equipment:

Cost of equipment sold $ 20,000
Accumulated depreciation of equipment sold (70%) (14,000)
Carrying amount of equipment sold 6,000
Gain on disposal of equipment 2,000
Proceeds on sale of equipment $ 8,000

(7) Calculation of cost of new equipment purchased:

Equipment Jan. 1, 2020 $ 130,000
Equipment Dec. 31, 2020 154,000
Net increase in equipment 24,000
Cost of equipment sold 20,000
Cost of equipment purchased during year $ 44,000

(8) Calculation of depreciation expense:

Accumulated depreciation Jan. 1, 2020 $ (25,000)
Accumulated depreciation of equipment sold 14,000
Accumulated depreciation Dec. 31, 2020 35,000
Depreciation expense for the year $ 24,000
EXERCISE 22.14 (CONTINUED)

b.
Tuit Inc.
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2020
Cash flows from operating activities
Net income $9,625
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense $24,000
Impairment loss, goodwill 30,000
Gain on disposal of equipment (2,000)
Increase in accounts receivable (7,000)
Decrease in inventory 20,000
Increase in prepaid rent (1,000)
Increase in accounts payable 6,000
Increase in salaries and wages payable 4,000
Decrease in income tax payable (2,000)
Total adjustments 72,000
Net cash provided by operating activities 81,625

Cash flows from investing activities

Proceeds on sale of equipment 8,000
Purchase of equipment (44,000)
Net cash used by investing activities (36,000)

Cash flows from financing activities

Principal payments on short-term loans (2,000)
Principal payments on long-term loans (9,000)
Dividends paid (6,000)
Net cash used by financing activities (17,000)

Net increase in cash 28,625

Cash, January 1, 2020 25,000
Cash, December 31, 2020 $53,625
EXERCISE 22.14 (CONTINUED)

b. (continued)

Supplemental disclosures of cash flow information:

Cash paid during the year for:

Interest $11,400
Income taxes $6,125

c. Because Tuit Inc. follows ASPE, there are no choices on how to

classify interest and dividend payments in the statement of cash
flows.
Companies that adopt IFRS do have some choices. Under IFRS,
interest paid and received and dividends paid and received can be
recognized as operating cash flows. Alternatively, interest paid
can be recognized as a financing outflow while interest and
dividends received can be recognized as investing inflows. A
choice is permitted for dividends paid: a financing outflow as a
return to equity holders, or an operating outflow as a measure of
the ability of operations to cover returns to shareholders.
EXERCISE 22.14 (CONTINUED)

d. Tuit Inc.’s operating activities generate significant positive cash

flow, which supports the company’s investing and financing
activities. The company is using the significant cash generated
from its operations to expand by purchasing equipment and to
repay creditors and pay dividends to shareholders, which is a sign
of a mature, successful company. The company is expanding by
purchasing equipment, likely due to high forecasted demand for
the company’s product(s). The only item of concern is the $20,000
decrease in inventory, a substantial amount as revealed in the
statement prepared using the indirect format. The company repaid
creditors and paid dividends to shareholders, and still generated
a significant increase in net cash and cash equivalents in 2020. An
investor who is interested in investing in mature, successful
companies may view Tuit Inc. favourably, and decide to invest in
the company.
PROBLEM 22.3

a. Preliminary calculations and reconciliations:

A. Reconciliation of long-term investment in associate at

equity:
Opening balance $400,000
Equity in earnings of associate 62,000
Dividends received (derived) (44,000)
Ending balance $418,000

B. Reconciliation of investment income:

Total investment income on income statement $90,000
Less: Equity in earnings of associate (62,000)
Interest income on investments $28,000

C. Reconciliation of equipment:
Opening balance $640,000
Original cost of equipment sold (46,000)
Ending balance (632,000)
Purchases of equipment (derived) $(38,000)

D. Reconciliation of accumulated depreciation equipment:

Opening balance $(135,000)
Accumulated depreciation of equipment sold 32,000
Ending balance 160,000
Derive depreciation for year $57,000

E. Carrying amount of equipment sold $(14,000)

Proceeds on sale of equipment (derived) 3,000
Loss on disposal $(11,000)

F. Reconciliation of common shares:

Opening balance $666,000
Preferred shares converted to common shares 18,000
Shares issued during year (derived) 62,000
Ending balance $746,000
PROBLEM 22.3 (CONTINUED)
a. (continued)

G. Reconciliation of retained earnings:

Opening balance $294,000
Add net income 195,000
Cash dividends declared (derived) (51,000)
Ending balance $438,000

H. Reconciliation of dividends payable

Opening balance $50,000
Add dividends declared (G) 51,000
Cash dividends paid (derived) (81,000)
Ending balance $20,000

Laflamme Inc.
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2020
Cash Flows from Operating Activities
Net income $195,000
Dividends received from associate (A) 44,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss on disposal of equipment $11,000
Depreciation expense – buildings 40,000
Depreciation expense – equipment (D) 57,000
Amortization expense – patent 5,000
Amortization of bond discount 4,000
Equity in earnings of associate (62,000)
Increase in accounts receivable (77,000)
Decrease in prepaid insurance 19,000
Increase in inventory (48,000)
Decrease in supplies 4,000
Increase in accounts payable 15,000
Decrease in income tax payable (9,000)
Increase in accrued liabilities 16,000 (25,000)
Net cash provided by operating activities 214,000
PROBLEM 22.3 (CONTINUED)
a. (continued)

Cash Flows from Investing Activities

Purchase of land $(40,000)
Purchase of building (30,000)
Purchase of equipment (C) (38,000)
Proceeds from sale of equipment 3,000
Net cash used in investing activities (105,000)
Cash Flows from Financing Activities
Proceeds from issuance of
preferred shares1 24,000
Proceeds from issuance of
common shares (F) 62,000
Repayment of long-term notes principal (40,000)
Dividends paid (H) (81,000)
Net cash used in financing activities (35,000)

Increase in cash and cash equivalents 74,000

Cash and cash equivalents balance Dec. 31, 2019 8,000
Cash and cash equivalents balance Dec. 31, 2020 $82,000

Cash and Cash Equivalents: 2020 2019

Cash $46,000 $56,000
Cash equivalents 36,000 45,000
Temporary bank overdrafts 0 (93,000)
$82,000 $8,000

Note X: During the year the Laflamme Inc. obtained land having a
fair value of $100,000 in exchange for its preferred shares.
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $91,000
Income taxes $105,000
1
(Increase of $106,000 less Note X non-cash financing—investing
above of $100,000 + $18,000 converted = $24,000)
PROBLEM 22.3 (CONTINUED)
b.
Laflamme Inc.
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2020
Cash Flows from Operating Activities
Cash received from customers (1) $922,000
Cash received from interest – short term (B) 28,000
Cash received from dividends – long term (A) 44,000
Payments to suppliers for goods for resale (2) (347,000)
Payment for other operating expenses (3) (25,000)
Payments to and on behalf of employees (4) (212,000)
Interest paid (5) (91,000)
Income taxes paid (6) (105,000)
Net cash provided by operating activities $214,000

1. Cash collected from customers:

Sales revenue $999,000
Increase in accounts receivable (77,000)
$922,000

2. Payments to suppliers for goods for resale:

Cost of goods sold $314,000
Increase in inventory 48,000
Increase in accounts payable (15,000)
$347,000
3. Payment for other operating expenses
Operating expenses $166,000
Less:
Depreciation expense – buildings (40,000)
Depreciation expense – equipment (57,000)
Amortization expense – patent (5,000)
Decrease in prepaid insurance (19,000)
Increase in accrued liabilities (16,000)
Decrease in supplies (4,000)
$25,000
PROBLEM 22.3 (CONTINUED)
b. (continued)
4. Payments to and on behalf of employees:
Sales commission expense $108,000
Salaries and wages expense 104,000
$212,000

5. Interest paid:
Interest expense $95,000
Amortization of bond discount (4,000)
$91,000
6. Income taxes paid:
Income tax expense $96,000
Decrease in income tax payable 9,000
$105,000

c. Laflamme does have choices because it follows IFRS. Under IFRS,

interest paid and received and dividends paid and received can be
recognized as operating flows. Alternatively, interest paid can be
recognized as a financing outflow while interest and dividends received
can be recognized as investing inflows. A choice is permitted for
dividends paid: a financing outflow as a return to equity holders, or an
operating outflow as a measure of the ability of operations to cover
returns to shareholders.

d. Had the cash equivalents not been included in cash and cash
equivalents, transactions of purchases and maturities of principal of
these investments would have been treated as investing activities on
the statement of cash flows.

Had the temporary bank overdrafts not been included in cash and cash
equivalents, transactions of loans and cash advances by the bank and
repayments of these loans would be treated as financing activities on
the statement of cash flows.