Chapter 4

Statement of Cash Flows

Solutions to Classwork and Homework

Make sure you understand the logic behind

each step.
Slides 2-16: Journal Entries for the Comprehensive Review Exercise (Direct Method)
Slides 17-25: Solutions to the brief exercises

4-1
 Skills required to prepare a Statement of
Cash Flows—Direct Method
1. Have a thorough understanding of the debit and credit system of
accounting (we had a fairly long discussion about it in class)

2. Familiarize yourself with all the accounts used in the company

financial statements

3. Setup ‘summary journal entries’ or T-accounts that capture the

changes that happened to the company during the year

4. Plug in the information from Profit & Loss Statement, Financial

Position Statements, and additional disclosures into your ‘summary
journal entries’ or T-accounts to pin down the exact amount of cash
flow related to a particular activity.

4-2
Comprehensive Review Exercise (Textbook page 214)
2023 2022

Continued to next page 

4-3
Comprehensive Review Exercise (Textbook page 214)

4-4
 Comprehensive Review Exercise (Let’s Solve in class)

Notice that certain items in Income Statements are purely accrual (non-cash)
expenses (for example, depreciation expense).
Losses and Gains from Long term assets are excluded (The entire transaction is
reflected in Investing Activities) . We don’t want double counting.

Income Statement Items Operating Cash Flow Items

(w1)
(w2)
(w3)

(w4)
(w5)
(w6)
(w7)
(w8)
4-5
Comprehensive Review Exercise: w1

We know that Sales Revenue = 200

Company receives Cash for some part (cash Sale), and the company
records Accounts Receivable (A/R) for the remaining part (Credit Sale).

For all journal entries, the credits must equal debits. We will first journalize
the changes in the non-cash accounts. The related ‘cash inflow/outflow’
will be the plug amount that equalizes debits and credits.

Journal Entries for all changes in all the items Debit Credit
related to Sales Revenue & A/R
↑Cash (the plug amount) 202
↓A/R 2
(change in A/R from Yr 2022 to Yr 2023)
Sales Revenue 200
(from stmt. of profit & loss)

Debit cash --- increase or gain in Cash

Credit cash --- decrease or reduction in Cash 4-6
Comprehensive Review Exercise: w1. T-Account

Alternatively, you can first analyze the impact of A/R using a T-Account for
A/R. That will also reveal the cash that must have been collected from
Sales.
For this exercise, you have to first assume that entire portion of the Sale
was credit sale. Essentially, a Cash sale is a credit sale where the
company could transfer their A/R to cash instantly.

(w1) Accounts Receivable

Begin Bal. 96
Credit Sale 200
Collect Cash 202

End Bal. 94

4-7
 Comprehensive Review Exercise: w2

Point (a). Revenue from Investment includes $ 3M of net income of

another firm (Beneficial Drill company owns a significant portion of that
other firm). But $3M was not received as cash dividend. The Long Term
Investment Account was debited instead.
-Let’s write out the accounts that are related to Investment Revenue.
-Then we will write summary journal entries to capture their change during
the year.
-We will then be able to pin down the cash from Investment Revenue.

Journal Entries (w2) Debit Credit

Cash↑ 2
Investment Revenue Receivable↑ 1
Long Term Investments↑ 3
Investment Revenue (stmt. of prfit & loss) 6

4-8
 Comprehensive Review Exercise: w3
Point (b). Cash increased by $1M from Treasury Bill Investments.
Notice that Treasury Bill is a cash equivalent, and does not have a separate account in
the Statement of Financial Position. It is classified as just Cash.
Notice that we do not know the exact amount of Treasury bills.

Journal Entries (w3) Debit Credit

Cash {free cash/ checking account cash} X+1
Treasury Bills {Cash Equivalent} X
Gain 1

Net change in ‘Cash & Cash Equivalents’ = (X+1) – X = 1.

‘Cash & Cash Equivalents’ increased (inflow) by $1M

We can also condense the cash portion of the journal entry. This shorter version
is easier to write, and is perfectly acceptable in the assignments and exams.
Journal Entries (w3__Alternative version) Debit Credit
Cash 1
Gain 1

4-9
 Comprehensive Review Exercise: w4.T-Account Method
How much cash did we pay to our suppliers for all the inventories we
purchased? Which T-Account(s) will answer this question?
(w4a) Inventory…..T-Account
Begin Bal. 110
Purchase 115
Effect of Inventory due to 110
COGS
Ending Bal. 115

We are not done yet. Need to construct another T-Account. Need to

assume that all the inventory purchase was ‘credit purchase’, and proceed:
(w4b) Accounts Payable…..T-Account
Begin Bal. 30
Inventory Purchase (from w4a) 115
Cash payment 122

Ending Bal. 23
As you can see, T-Account method calculations can become complicated.
4-10
Let’s look at the journal entry method solution for this exercise. ’
Comp. Review Exercise: w4. Journal Entry Method
How much cash did we pay to our suppliers for all the inventories we
purchased?

We need to start out by listing all the accounts related to inventory. What
actions (changes in which accounts) increase or decrease inventory?

Journal Entries (w4) Debit Credit

COGS 110
Inventory 5
Accounts Payable 7
Cash 122

I think the summary journal entry method is better/ easier/ faster

4-11
Comprehensive Review Exercise. w5
Cash paid to employees

Journal Entries (w5) Debit Credit

Salaries Expense 30
Salaries Payable 3
Cash 33

4-12
Comprehensive Review Exercise. w6
Cash paid to insurance company

Journal Entries (w6) Debit Credit

Insurance Expense 3
Prepaid Insurance 1
Cash 2

4-13
 Comprehensive Review Exercise. w7

Bond is sold at discount if the cash payment of interests (Coupon payments) is

smaller than the interest expense.
Cash 600
Suppose you sell bond with a face value of Discount on Bond 400
$1000. But the market price of your bond Bonds Payable 1000
is only $600

Discount on Bond is a contra liability account (it behaves like an asset)

On the contrary, bonds paying a higher coupon rate than its interest expense are
sold at a premium. Bond Premium is a liability account

Journal Entries (w7) Debit Credit

Bond Interest Expense 14
Bond Interest Payable 2
Discount on Bond 1
Cash 11

4-14
Comprehensive Review Exercise. w8
Deferred Tax Liability is created when company has IFRS income, but
some portion of that income is not recognized for tax purpose in the current
year.

At this point, you just need to know that “Deferred Tax Liability” is a liability
account. When calculating cash paid for taxes, we will have to treat it in
the same way as we treat “Income Tax Payable”.

Journal Entries (w8) Debit Credit

Income Tax Expense 7
Income Tax Payable 2
Deferred Income Tax Liability 1
Cash 8

4-15
Journalizing information from item (i)
Item (i) of additional information does not have any cash impact. But a
good accountant should know how to journalize this information. This skill
is useful when solving difficult questions (when cash dividend amount is
missing and you have to calculate it).

Item (i) states that 1 million ordinary shares where given out as stock
dividends (bonus issue). Par value is $10 per share, and market price is
$14 per share. So, share premium is $4 (=14 –10) per share. The
company needs to take the stock dividend out of Retained Earnings.

Notice that this is not a cash dividend. Net equity remains the same. This
is just a reclassification of one type of equity to another type of equity.
Journal Entries (item i)….no cash impact Debit Credit
Retained Earnings 14
Ordinary Share Capital 10
Share Premium 4

You should now check if you can complete the T-account for ‘Retained
Earnings’. 4-16
Brief Exercise 1—SCF Solution
Tiger Enterprises
Statement of Profit & Loss
For the Year Ended December 31, 2023

4-17
 Brief Exercise 1—SCF Solution
Tiger Enterprises
Statement of Financial Position
($ in thousands) Dec 31, 2023 Dec 31, 2022
Change

(80)
Identify which items are 40
current assets 30

(60)
(100)
50
Identify which items are
current liabilities

4-18
Brief Exercise 1—SCF Solution

4-19
 In-Class Exercise: Construct a Statement of Cash Flows
(Use Indirect Method for Cash Flows from Operating Activities)

---based
Basic Information: The company on athe
sustained netfollowing
loss for theinformation
year of $50,000;
The Total Change in Cash is $295,000

(a): Plant assets that had cost $25,000 six years ago and were being
depreciated on a straight-line basis over 10 years with no estimated scrap
value were sold for $5,300.

(b): During the year, 10,000 shares of common stock with a stated value of
$10 a share were issued for $33 a share.

(c): Total depreciation expense amounted to $22,000 for the year.

(d): A gain of $9,000 was realized on the sale of land for $39,000 cash.

(e): During the year, treasury stock costing $47,000 was purchased.
4-20
In-Class Exercise: Construct a Statement of Cash Flows
---based on the following information
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 4,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (32,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000
Net Change in Cash $ 295,000
4-21
In-Class Exercise: Construct a Statement of Cash Flows
---based on the following information

(a): Plant assets that had cost $25,000 six years before and
were being depreciated on a straight-line basis over 10 years
with no estimated scrap value were sold for $5,300.
Investing Activities

Accumulated depreciation ([$25,000 / 10] x 6) 15,000

Book value at date of sale 10,000
Sale proceeds (5,300)
Loss on sale $ 4,700

Operating Activities

4-22
In-Class Exercise: Construct a Statement of Cash Flows
Solution

(b): During the year, 10,000 shares of common stock

with a stated value of $10 a share were issued for $33 a
share. The company had a cash inflow of $330,000.

Shares sold 10,000

Market value per share $ 33
Value of shares $ 330,000

(c): Total depreciation amounted to $22,000 for the

year.
4-23
In-Class Exercise: Construct a Statement of Cash Flows
Solution
(d): A gain of $9,000 was realized on the sale of land for
$39,000 cash…. Notice that this sentence contains
information for both operating and investing activities

(e): During the year, treasury stock costing $47,000 was

purchased.

4-24
In-Class Exercise: Construct a Statement of Cash Flows
Solution
Statement of Cash Flows
Cash flow from operating activities
Net income (loss) $ (50,000)
Adjustment to reconcile net income to cash:
O Loss on sale 4,700
Depreciation expense 22,000
Gain on sale (9,000)
Cash from operations (32,300)
Cash flow from investing activities
I Sale of plant assets 5,300
Sale of land 39,000
Cash from investing activities 44,300
Cash flow from financing activities
F Sale of common stock 330,000
Purchase of company stock (47,000)
Cash from financing activities 283,000
Net Change in Cash $ 295,000
4-25