financial accounting tools for business decision making solutions 7e chapter 13

Prepare the operating activities section of a statement of cash flows using the indirect method.. Prepare the operating activities section of a statement of cash flows using the direct

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CHAPTER 13

STATEMENT OF CASH FLOWS

LEARNING OBJECTIVES

1 Describe the content and format of the statement of cash flows

2 Prepare the operating activities section of a statement of cash flows using

the indirect method

3 Prepare the investing and financing activities sections and complete the

statement of cash flows

4 Use the statement of cash flows to evaluate a company

5 Prepare the operating activities section of a statement of cash flows using

the direct method (Appendix 13A)

SUMMARY OF QUESTIONS BY LEARNING

OBJECTIVES AND BLOOM’S TAXONOMY

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Legend: The following abbreviations will appear throughout the solutions manual file

Time: Estimated time to prepare in minutes

AACSB Association to Advance Collegiate Schools of Business

Reflec Thinking Reflective Thinking

CPA CM CPA Canada Competency

cpa-e001 Ethics Professional and Ethical Behaviour cpa-e002 PS and DM Problem-Solving and Decision-Making

cpa-e005 Team & Lead Teamwork and Leadership

cpa-t001 Reporting Financial Reporting

cpa-t002 Stat & Gov Strategy and Governance

cpa-t003 Mgt Accounting Management Accounting

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ANSWERS TO QUESTIONS

1 The statement of cash flows reports the cash receipts, cash

payments, and net change in cash resulting from the operating,

investing, and financing activities of a company during a period, in

a format that reconciles the beginning and ending cash balances

The statement of cash flows is useful to all readers because it allows

them to assess the following aspects of a company’s financial

position:

• the reasons for the difference between net income and cash

provided (used) by operating activities

• the cash generated by (used in) investing and financing

transactions during a period

• the company’s ability to generate future cash flows

Creditors in particular, are concerned about the borrower’s ability to

generate cash to repay loans and service debt The cash flow

statement helps creditors assess risk

LO 1 BT: C Difficulty: M Time: 5 min AACSB: None CPA: cpa-t001 CM: Reporting

2 Cash equivalents are short-term, highly liquid investments that are

readily convertible to known amounts of cash Generally, only debt

investments with original maturities of three months or less qualify

under this definition Bank overdrafts that are repayable on demand

are also included in (deducted from) cash equivalents

The statement of cash flows may be prepared using cash, or cash

and cash equivalents as its base If the latter, cash equivalents must

be clearly defined

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3 Operating activities include the cash flow activities arising from a

company’s principal revenue-producing activities and all other

activities that are not investing or financing activities

Investing activities are those arising from the acquisition and

disposal of non-current assets

Financing activities include those resulting in changes in the size

and composition of the equity and borrowings of a company

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4 Companies following ASPE classify interest paid, interest revenue,

and dividend revenue, as part of operating activities because they

are disclosed on the income statement as part of net income

Dividend payments are classified as financing activities This is the

most common practice for both publicly traded and private

companies Companies following IFRS may classify interest and

dividend revenue as either investing activities or operating activities,

and interest and dividend payments as either financing activities or

operating activities Companies select where these payments and

receipts will be presented and must apply the presentation

consistently

5 Examples of noncash transactions include the issue of shares or a

mortgage to purchase property, plant, and equipment In both

cases, cash is not involved Noncash transactions should be

reported in the notes to the financial statements and

cross-referenced to the statement of cash flows, but not reported as

investing and financing activities in the body of the statement of

cash flows

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6 Although the approaches and format are different, both the direct

and indirect methods will produce the same net cash provided by

operating activities

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7 (a) and (b)

(1) The adjusted trial balance is not required to prepare the

statement of cash flows because it does not provide necessary data

(2) A comparative statement of financial position is required to

obtain the changes in individual asset, liability, and equity balances Changes in the noncash working capital (current) accounts may affect the operating activities, changes in short-term investment and long-lived asset accounts may affect the investing activities, and changes in non-current liability and equity accounts may affect the financing activities reported in the statement of cash flows

(3) The income statement is required to obtain the elements of

operating activities, which will be converted from the accrual basis to the cash basis The income statement is also required

to identify noncash revenues and expenses such as depreciation and amortization expenses and accounting gains and losses

(4) The statement of comprehensive income is needed to

reconcile certain fair-valued assets (e.g., revaluation of the fair value of land) and equity (e.g., accumulated other comprehensive income) accounts appearing in the statement

of financial position However, changes in comprehensive income do not affect cash and are not reported on the statement of cash flows

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7 (continued)

(5) The statement of changes in equity will provide details of the

changes in the share capital and retained earnings accounts

From these, the cash effects of financing transactions with shareholders, such as the issue or reacquisition of shares and/or payment of dividends, can be determined and reported

as financing activities on the statement of cash flows

8 The indirect method involves converting accrual-based net income

to net cash provided by operating activities This is done by starting

with accrual-based net income from the income statement and

adding or subtracting noncash items included in net income

Examples of adjustments include adding back noncash expenses,

such as depreciation, and removing any noncash gains or losses

from net income Then, changes in the balances of noncash current

asset and current liability accounts from one period to the next are

added or subtracted

9 A number of factors could have caused a positive amount of net

cash provided by operating activities in spite of the fact that

Clearwater reported a net loss These include (1) a high amount of

collection of unearned revenue; (2) large amounts of depreciation

or amortization; and (3) accounting losses or impairments The

increase in unearned revenue is added as an inflow under operating

activities Items (2) and (3) are non-cash items deducted in arriving

at net income (in this case a net loss) so they are now added back

to net loss when determining net cash flow provided by operating

activities, thereby making it positive

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10 Under the indirect method, depreciation and amortization expense

is added back to net income to reconcile net income to net cash

provided by operating activities because depreciation and

amortization are expenses that have reduced net income, but do not

result in the use of cash Adding them back cancels the expenses

reported in the income statement, as accrual net income is the

starting point under the indirect method

Less: Depreciation expense (1,000)

Add: Depreciation expense 1,000 Cash provided by operating activities $5,000

11 Under the indirect method, a gain on disposal of equipment is

deducted from net income to reconcile net income to net cash

provided by operating activities A gain is the difference between the

cash proceeds received when the asset is sold and the carrying

amount of the asset This gain is not a cash receipt or payment

Therefore, the noncash gain, which was included in net income,

must be deducted from net income on the statement of cash flows

to convert net income to net cash provided by operating activities

The total cash proceeds received when the asset is disposed of

would be reported in the statement of cash flows as an investing

activity

12 When a business invests money, it does so outside of its main

revenue-generating operations It might have excess cash, which it

wants to put to use in producing some interest or dividend revenue

Since the intention is to earn a return on its investment, the buying

and selling of investments is generally reported as investing activities

in the statement of cash flows The exception occurs when the

investments are held for trading purposes, in which case they are

treated similarly to inventory acquired for resale These types of

investments are reported as operating activities.

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13 The principal amount advanced by the bank and later repaid

involves borrowing and repayment transactions that need to be

reported under financing activities in the statement of cash flows

The timing of the loan principal repayments will lead to a portion of

the loan principal being classified as current liabilities This

classification does not change the nature of the cash activity with

the bank Both the current and non-current principal portions are

treated together for cash flow reporting purposes

14 Dividends declared reduce retained earnings once the declaration

is made by the board of directors For the cash flow statement, only

dividends paid are reported in the financing activities section of the

statement Similar to the adjustments made for the changes in

working capital accounts in the indirect format of the statement of

cash flows, any increase or decrease in the Dividends Payable

account will adjust dividends declared (accrual basis) to dividends

paid (cash basis) For this example, the amount of the increase of

$2,000 ($10,000 - $8,000) in dividends payable will be deducted

from the amount of dividends declared of $40,000 to arrive at cash

paid for dividends of $38,000

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15 The statement of cash flows is prepared from detailed information

about the changes in account balances that occurred between two

periods of time, as shown on the other financial statements Unlike

the other financial statements, it is not prepared from an adjusted

trial balance In particular, the information to prepare the statement

of cash flows comes from a comparative statement of financial

position, the income statement, the statement of changes in equity,

and additional information concerning specific transactions such as

disposals of property, plant, and equipment

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16 (a) The corporate life cycle consists of four phases: introductory,

growth, maturity, and decline

(b) In the introductory and growth phases, we don’t usually expect

to see a company generate positive cash from its operating activities until part way through the growth phase Because the company is making significant investments in its long-lived assets, cash will be used by investing activities During the first two phases, cash generated by financing activities is usually positive as debt and equity are issued to pay for the investments and cover the operating activities shortfall These patterns reverse in the maturity and decline phases of the cycle In the decline phase, cash from operating activities decreases Cash from investing activities is positive as the company sells off its excess assets, before starting to decline

Cash is used for financing activities as the company continues

to pay off its debt

17 A company that just commenced its operations would be expected

to report low or negative cash flows from operating activities Later,

when the company is growing and healthy, the cash from operating

activities will become positive The company would also usually

show cash used in investing activities as it invests in its productive

capacity At this stage, the company will also usually show cash

inflows in financing activities to finance the purchase of productive

assets not covered from operating activities

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18 Creditors may be concerned about the company’s ability to repay its

obligations over the long-term The lack of cash flows from operating

activities may be of concern to investors for several reasons First,

the decrease in cash flows may have an adverse effect on the

company’s share price In addition, some investors may be

concerned that the company will not generate enough cash to pay

dividends in the future This concern is supported by the declining

free cash flow, which also indicates the company is generating less

cash from operating activities to pay future dividends and to expand

the business

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CM: Reporting and Finance

19 If net capital expenditures and dividends paid exceed cash provided

by operating activities, then free cash flow will be negative

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*20 Net cash provided by operating activities under the direct method is

the difference between cash revenues and cash expenses The

direct method adjusts the accrual-based revenues and expenses

directly to reflect the cash-based revenues and expenses, which

combine to equal "net cash provided by operating activities."

operating activities section under the direct method because they

are not cash flow items—they do not affect cash Recall the journal

entry to record depreciation: debit Depreciation Expense and credit

Accumulated Depreciation The entry to record amortization is

similar As you can see, there is no cash involved in this journal

entry This is different from the indirect method, which uses net

income as its starting point and must add back depreciation and

amortization as noncash items included in the determination of net

income

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*22 The gain on disposal of equipment and the loss on the sale of land

would not appear on the statement of cash flows prepared using the

direct method because these are not cash flow items However, the

gross proceeds received when the assets are sold would be

reported in the statement of cash flows, as investing activities

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SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13-2

(a) F

(b) O if reporting under ASPE but if reporting under IFRS a choice exists

between showing this as an operating or financing activity

(c) NC – an exchange of land (investing activity) for shares (financing activity)

that does not involve cash

(h) F if reporting under ASPE but if reporting under IFRS a choice exists

between showing this as a financing or operating activity

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(b) Linamar uses the indirect method as indicated by the change in noncash

operating working capital items and the depreciation expense

(k) + unless designated as a cash equivalent in which case it does not appear

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DUPIGNE CORPORATION Statement of Cash Flows (Partial)—Indirect Method

Year Ended March 31, 2018

Operating activities

Net income $275,000 Adjustments to reconcile net income to

net cash provided (used) by operating activities

Depreciation expense $60,000Loss on disposal of land 15,000 Accounts receivable increase (20,000) Inventory increase (5,000) Accounts payable decrease (5,000) 45,000 Net cash provided by operating activities $320,000

[Adjustments to net income include depreciation (+); loss (+); increase in noncash current

assets (–); and decrease in current liabilities (−)] Dividends pertain to financing activities

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Original cost of equipment sold $20,000

Less: Accumulated depreciation (5,500) Carrying amount of equipment sold 14,500

Less: Loss on disposal (1,500) Cash received from disposal of equipment $13,000

The following journal entry may be helpful in understanding this brief exercise:

Cash 13,000

Accumulated Depreciation—Equipment 5,500

Loss on Disposal 1,500

Equipment 20,000

(a) Cash provided by disposal of equipment = $13,000

(b) Investing activities for the proceeds; Operating activities for the loss as it

is shown on the income statement

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($ in thousands)

Investing activities

Purchase of long-term investments ($150 – $100) $ (50)

Disposal of equipment 60 *

Purchase of equipment [$500 – ($400 – $100)] (200 )

Net cash used by investing activities $(190)

Equipment 400 XXX 100 500 *Cost of equipment sold $100

*Accumulated depreciation ($100 – carrying amount of $50) 50

*Carrying amount 50

*Gain on disposal 10)

*Cash proceeds from disposal $ 60)

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($ in millions)

Beginning balance, retained earnings $4,075.1

Add: Net income 735.9

Less: Ending balance, retained earnings (4,172.0)

Dividends paid $ 639.0

Retained Earnings

4,075.1 735.9 639.0

4,172.0

The answer would change if the Dividends Payable account increased during the

year In this case, the $639.0 decrease in Retained Earnings would be reduced

by the increase in Dividends Payable to arrive at the amount of dividends paid

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($ in thousands)

Financing activities

Payment of cash dividends $(195 ) 1

Repayment of bank loan payable (200)2 Issue of common shares ($600 – $400) 200

Net cash used by financing activities $(195)

Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $500 by paying $200 cash and issuing a $300 bank loan payable 1 Beginning balance, retained earnings $500

Add: Net income 400

Less: Ending balance, retained earnings (700)

Dividends declared $200

Beginning balance, dividends payable $ 10

Add: Dividends declared (from above) 200

Less: Ending balance, dividends payable (15)

Dividends paid $195

2 Beginning balance, bank loan ($200 + $300) $500

Additional borrowings 300

800 Ending balance, bank loan ($200 + $400) (600)

Loan payments made $200

(Financing activity cash flows = Issuance/repayment of long-term debt,

issuance/repurchase of shares, and payment of cash dividends)

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(a) Free cash flow = $325,000 – $200,000 – $25,000 = $100,000

(b) Free cash flow provides better information than net cash provided by

operating activities because it includes the corporation’s ability to sustain

capital asset replacements and additions, and its ability to distribute

dividends to its shareholders

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(a) Based on the changes in cash flows from 2014 and 2015, Apple Inc is

likely in the growth stage of the corporate life cycle This is due to the

continued increases in cash used by investing activities and the decline in

cash used by financing activities

(b) Free cash flow in millions of US dollars:

2015: $81,266 – $11,831 – $11,561 = $57,874

2014: $59,713 – $9,571 – $11,126 = $39,016

(c) As a shareholder of Apple Inc., I would be pleased with the large increase

in the free cash flow generated in 2015 compared to 2014

(d) The amount of the dividends paid exceeds the amount of capital

expenditures because all necessary capital expenditures have been made

throughout the previous years, as needed and also because of the nature

of Apple’s business, which is not capital intensive

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– Increase in accounts receivable

Thus, cash receipts from customers must have equalled = $160,000 [$170,000

– ($24,000 – $14,000)]

*BRIEF EXERCISE 13-13

(in USD millions)

+ Increase in inventory + Decrease in accounts payable Cash payments to

suppliers

= Cost of goods sold – Decrease in inventory – Increase in accounts payable

Thus, the cash payments to suppliers must have equalled = $1,338,712

($1,252,680 + $88,987 – $2,955)

Cash payments for operating expenses

=

Operating expenses (excluding depreciation and amortization)

+ Increase in prepaid expenses – Decrease in prepaid expenses

and + Decrease in accrued expenses payable – Increase in accrued expenses payable

Thus, the cash payments for operating expenses must have equalled =

$184,000 ($200,000 – $30,000 – $5,000 + $1,000 + $13,200 + $4,800)

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(a)

Less: Increase in income tax payable (4,000)

(b)

Add: Decrease in income tax payable 3,000

For operating expenses 212,0003

For income tax 10,0004 696,000*

Net cash provided by operating activities $134,000*

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SOLUTIONS TO EXERCISES

EXERCISE 13-1

(a) Cash Effect

(b) Classification

* Investing activity; Cash payment of $5,000

Also requires note disclosure of the $25,000 noncash transaction acquisition

of machine in exchange for long-term note payable

** No effect on cash flows; increase in inventory offset by increase in accounts

payable

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EXERCISE 13-2

1 An impairment loss on goodwill involves the recording of a loss and a

reduction of the asset account Goodwill This transaction does not involve

cash in any way This would not be reported on the statement of cash flows

when using the direct method but the impairment might be discussed in the

accompanying notes (The amount would be shown as an adjustment to

net income to reverse this loss in the operating activities section prepared

using the indirect method.)

2 Depreciation is a cost allocation technique The cash transaction occurred

with the purchase of the property, plant, and equipment Depreciation

charges the cost to expense as the assets are being consumed This

transaction does not involve cash This would not be reported on the

statement of cash flows or in the accompanying notes (The amount would

be shown as an adjustment to net income to reverse this expense in the

operating activities section prepared using the indirect method.)

3 The recording of the fair value adjustment through net income or loss for

an unrealized gain on a trading investment does not involve cash, but

increases net income for the gain that is accrued and the carrying amount

of the investment on the statement of financial position This would not be

reported on the statement of cash flows if the direct method was used or

shown in the accompanying notes (The amount would be shown as

reduction in net income in the operating activities section prepared using

the indirect method.)

4 The reduction of inventory to net realizable value is similar to the recording

of an impairment in item 1 above This transaction does not involve cash

in any way This would not be reported on the statement of cash flows when

using the direct method but the charge to cost of goods sold might be

discussed in the accompanying notes (The amount would be included in

the change in inventory amount that appears as an adjustment to net

income in the operating activities section prepared using the indirect

method.)

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EXERCISE 13-2 (CONTINUED)

5 A stock dividend results in the reduction of Retained Earnings and the

increase of the share capital account and does not involve cash This would

not be reported on the statement of cash flows or in the accompanying

notes concerning the statement of cash flows, but would be reported in the

statement of changes in equity

6 A stock split results in additional shares being issued and does not involve

cash in any way This would not be reported on the statement of cash flows,

but would be reported in the statement of changes in equity and the notes

to the financial statements

7 The conversion occurs as a result of non-payment of the outstanding

receivable and does not involve cash This would not be reported

separately on the statement of cash flows or in the accompanying notes

(The amount would be included in the change in accounts receivable and

the change in notes receivable that appear as adjustments to net income

in the operating activities section prepared using the indirect method.)

8 The equipment was purchased by paying with common shares rather than

cash Since this transaction does not involve cash directly, it is not reported

on the statement of cash flows This is, however, an example of a

significant noncash investing (acquisition of equipment) and financing

(issue of shares) activity and would be disclosed in the notes to the

financial statements

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EXERCISE 13-3

Cash Provided (Used)

by Operating Activities

1 Sold inventory for cash at a higher price than cost + +

2 Collected cash in advance from a customer for a

3 Purchased inventory on account in a perpetual

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EXERCISE 13-4

JUNO LTD

Statement of Cash Flows (Partial)—Indirect Method

Year Ended December 31, 2018

Net income $21,000 Adjustments to reconcile net income to net

cash provided (used) by operating activities

Depreciation expense $11,000 Loss on disposal of equipment 5,000 Decrease in accounts receivable 5,000 Increase in inventory (1,400) Increase in prepaid expenses (500) Increase in accounts payable 1,250 Increase in income tax payable 400 Increase in accrued liabilities 1,000 21,750 Net cash provided by operating activities $42,750 Note: The current portion of the bank loan payable was not included because

this bank loan was issued for borrowing purposes rather than trade

[Adjustments to net income include depreciation (+); loss (+); decrease in noncash

current assets (+); increase in noncash current assets (-); and increase in current

liabilities (+)]

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EXERCISE 13-5

Transaction

Operating Activities

Investing Activities

Financing Activities

Noncash Activities

6 Recorded an unrealized loss on a

long-term equity investment carried at

fair value through profit or loss

8 Signed and received a mortgage

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Payment of cash dividends** nil

*Cost of equipment sold $39,000

Notes to the financial statements: Equipment of $53,000 was purchased by

paying $10,000 cash and issuing a bank loan payable for $43,000

** For this year, no dividends were paid We know this because the dividends

declared are equal to the increase in the Dividends Payable account The

amount of dividends paid is equal to dividends declared plus any decrease in

the Dividends Payable account or minus any increase in the Dividends

Payable account In this case, the dividends paid = $4,000 - $4,000 = $0

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net cash provided (used) by operating activities Gain on sale of long-term investments $ (5,000) Depreciation expense 34,000 Increase in accounts receivable

($80,000 – $76,000) (4,000 ) Decrease in inventory ($189,000 – $185,000) 4,000 Decrease in accounts payable ($47,000 – $39,000) (8,000 ) 21,000 Net cash provided by operating activities 136,000 Investing activities

Proceeds from sale of long-term investments $35,000*

Purchase of equipment (65,000) Net cash used by investing activities (30,000 )

Payment of cash dividends ($134,000 + $115,000 – $199,000) $(50,000) Repayment of bank loan (50,000 ) Issue of common shares 25,000 Net cash used by financing activities (75,000 ) Net increase in cash 31,000 )

Cash, January 1 22,000 )

Cash, December 31 $ 53,000 )

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EXERCISE 13-8

Statement of Cash Flows—Indirect Method Year Ended December 31, 2018

Net income $62,000 Adjustments to reconcile net income to

net cash provided (used) by operating activities Depreciation expense $21,000 Increase in accounts receivable

($50,000 – $42,000) (8,000 ) Increase in inventory ($168,000 – $143,000) (25,000) Increase in accounts payable ($45,000 – $35,000) 10,000 (2,000 ) Net cash provided by operating activities 60,000

Investing activities

Purchase of furniture ($163,000 – $80,000) $(83,000) Net cash used by investing activities (83,000 )

Increase in bank loans ($103,000 + $10,000 – $76,000) $37,000 Repayment of bank loan (10,000 ) Issue of common shares ($60,000 – $55,000) 5,000 Net cash provided by financing activities 32,000 Net increase in cash 9,000 )

Cash, January 1 9,000 )

Cash, December 31 $18,000 )(b) The company was able to generate a sufficient amount of operating cash

flows and to obtain bank financing and use both of these sources of cash

to purchase additional furniture The net cash from operating activities

seems sufficiently large enough to make any loan payments in the future

One needs to ask why the inventory rose as much as it did because it did

lower cash from operating activities

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net cash used by operating activities Gain on disposal of furniture $ (2,000) Depreciation expense 19,000 Increase in accounts receivable

($77,000 – $50,000) (27,000 ) Increase in inventory ($219,000 – $168,000) (51,000) Increase in accounts payable ($68,000 – $45,000) 23,000 (38,000 ) Net cash used by operating activities (6,000 ) Investing activities

Proceeds from disposal of furniture (see below) $6,000 Net cash provided by investing activities 6,000 Financing activities

Payment of cash dividends ($173,000 - $32,000 – $146,000) $(5,000) Repurchase of common shares (10,000) Repayment of bank loan ($103,000 – $90,000) (13,000) Net cash used by financing activities (28,000 )

Net decrease in cash (28,000) Cash, January 1 18,000 )

Bank overdraft, December 31 $(10,000))) The bank overdraft is considered a cash equivalent

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Dec 31, 2018 35,000 Cost of furniture sold (derived) $33,000

Accumulated depreciation (derived) 29,000

Net carrying amount (derived) 4,000

Add: Gain on disposal of furniture 2,000

Cash proceeds from disposal $ 6,000

Cash 6,000

Accumulated Depreciation—Furniture 29,000

Gain on Disposal 2,000

Furniture 33,000

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EXERCISE 13-9 (CONTINUED)

(b) In 2018, Dagenais suffered a significant decline in cash This decline was

principally caused by the repurchase of common shares and the

mismanagement of accounts receivable and inventory The increase in

accounts receivable is most likely attributable to difficulty in collecting these

receivables and the increase in inventory has probably occurred because

of slowing inventory turnover Under the circumstances, management

could have postponed the payment of dividends This year the negative

cash from operations may have led to the disposal of furniture in an attempt

to generate cash to finance day to day operations When a company

cannot generate positive cash flows from its operating activities and drains

its cash balances, bankruptcy will follow without the support of creditors

like a bank or the support of shareholders who are willing to provide more

equity to the company

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EXERCISE 13-10

(a) Company A and Company C both show a source of increase in their cash

from operating activities of $25,000 when compared to net income or loss Since the amount of depreciation is assumed to be the same, both

companies show an equal ability in managing non-cash working capital,

which is better than Company B

(b) When a company has cash provided by investing activities, it arises from

an excess of cash proceeds received from the sale of non-current assets

such as long-term investments or property, plant, and equipment over

amounts paid to purchase these assets This can occur for a number of

reasons, including the timing of these cash flows For example, if a

company sells such assets first but then replaces them later in a

subsequent year, cash provided from investment activities will be shown

Another reason why this may occur is because the company is not

generating sufficient cash flows from operations and must sell off

non-current assets in order to obtain funds

(c) Company A is the most likely to have sufficient cash flows to pay down debt

or pay out dividends because it is the only company of the three that has

provided positive cash flows from operations

(d) Company A is the most capable of growing the size of its business

operations as its operations have generated the most cash and this made

it able to spend $50,000 on investing activities, to pay out cash for financing

activities, and still increase its cash position by the end of the year

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EXERCISE 13-11

Category of Cash Flow Affected

Impact on Cash Flow (Increase or Decrease) Collect accounts receivable more quickly and

use the cash received to buy equipment

Operating and Investing

Increase and Decrease Pay accounts payable more slowly and use

the cash saved to pay dividends

Operating and Financing

Increase and Decrease Issue common shares and use the proceeds to

pay down bank loans

Financing and Financing

Increase and Decrease Sell non-current bond investments and use the

proceeds to pay a larger bonus to employees

to improve retention rates

Investing and Operating

Increase and Decrease

LO 4 BT: AN Difficulty: M Time: 10 min AACSB: None CPA: cpa-t001 CM: Reporting

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*EXERCISE 13-12

Income Statement

Account

Change in Current Asset / Current Liability Account

Part (a) Add to (+) or Deduct from (–) Income Statement Account

Part (b) Related Cash Receipt or

– Cash receipts from

dividends

3 Interest

revenue

Decrease in interest receivable

+ Cash receipts from

operating expenses

8 Salaries

expense

Decrease in salaries payable

interest

10 Income tax

expense

Decrease in income tax payable

income tax

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*EXERCISE 13-13

Add: Decrease in accounts receivable 2,000

Add: Increase in unearned revenue 3,000

Less: Increase in accounts payable (3,200)

Less: Increase in salaries payable (1,175)

Add: Decrease in accrued expenses payable 300

Less: Decrease in prepaid expenses (450)

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*EXERCISE 13-14

JUNO LTD

Statement of Cash Flows (Partial)—Direct Method

Year Ended December 31, 2018

this bank loan was issued for lending purposes rather than trade

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Sale of long-term investments*** $35,000 Purchase of equipment (65,000 ) Net cash used by investing activities (30,000 ) Financing activities

Payment of cash dividends ($134,000 + $115,000 – $199,000) $(50,000 ) Repayment of bank loan (50,000 ) Issue of common shares 25,000 Net cash used by financing activities (75,000 ) Net increase in cash 31,000)

Cash, January 1 22,000 Cash, December 31 $ 53,000)

Calculations:

* Cash receipts = sales – increase in accounts receivable = $978,000 – $4,000

= $974,000

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