Chapter 13 “How Well Am I Doing?” Statement of Cash Flows Solutions to Questions 13-1 The statement of cash flows highlights the major activities that have provided and used cash dur
Trang 1Chapter 13
“How Well Am I Doing?”
Statement of Cash Flows
Solutions to Questions
13-1 The statement of cash flows highlights
the major activities that have provided and used
cash during a period and shows their effects on
the overall cash balance
13-2 Cash equivalents are short-term, highly
liquid investments such as Treasury bills,
com-mercial paper, and money market funds They
are included with cash because investments of
this type are made solely for the purpose of
ge-nerating a return on temporarily idle funds and
they can be easily converted to cash
13-3 (1) Operating activities: Transactions
that affect current assets, current liabilities, or
net income
(2) Investing activities: Transactions that
involve the acquisition or disposition of
noncur-rent assets
(3) Financing activities: Transactions
(other than the payment of interest) involving
borrowing from creditors, and any transactions
involving the owners of a company
13-4 Interest is included as an operating
ac-tivity since it is part of net income Financing
activities are narrowly defined to include only
the principal amount borrowed or repaid
13-5 Since the entire proceeds from a sale of
an asset (including any gain) appear as a cash
inflow from investing activities, the gain must be
deducted from net income to avoid double
counting
13-7 The repayment of $300,000 and the
borrowing of $500,000 must both be shown
―gross‖ on the statement of cash flows That is, the company would show $500,000 of cash pro- vided by financing activities and then show
$300,000 of cash used by financing activities
13-8 The direct method reconstructs the
in-come statement on a cash basis by restating revenues and expenses in terms of cash inflows and outflows The indirect method starts with net income and adjusts it to a cash basis to de- termine the cash provided by operating activi- ties
13-9 Depreciation is not really a source of
cash, even though it is listed as a ―source‖ on the statement of cash flows Adding back depre- ciation charges to net income to compute the amount of cash provided by operating activities creates the illusion that depreciation is a source
of cash It isn’t Charges to the accumulated depreciation account are added back to net in- come because they are equivalent to a decrease
in an asset account [See Exhibit 13-2.]
13-10 An increase in the Accounts Receivable
account must be deducted from net income der the indirect method because this is an in- crease in a noncash asset
un-13-11 A sale of equipment for cash would be
classified as an investing activity Any tion involving the acquisition or disposition of
Trang 2transac-Brief Exercise 13-1 (15 minutes)
Transaction Operating Investing Financing Reported Source Use
a Equipment was purchased X X
b Cash dividends declared and paid X X
c Accounts receivable decreased X X
d Short-term investments purchased X* X
e Equipment was sold X X
f Preferred stock was sold to investors X X
g A stock dividend was declared and
k Bonds were issued X X
l Rent was received from subleasing
office space, reducing rents
receiv-able X X
m Common stock was repurchased and
Trang 3Brief Exercise 13-2 (15 minutes)
Net income $35,000 Adjustments to convert net income to a cash basis:
Depreciation charges $20,000
Increase in accounts receivable (19,000)
Increase in inventory (33,000)
Decrease in prepaid expenses 1,000
Increase in accounts payable 15,000
Decrease in accrued liabilities (2,000)
Increase in deferred income taxes payable 4,000 (14,000) Net cash provided by operating activities $21,000
Trang 4Brief Exercise 13-3 (5 minutes)
Free cash flow computation:
Net cash provided by operating activities $34,000
Capital expenditures $110,000
Dividends 30,000 140,000
Free cash flow $(106,000)
Trang 5Exercise 13-4 (10 minutes)
Accounts Receivable $90,000 decrease X
Accrued Interest Receivable $4,000 increase X
Inventory $120,000 increase X
Prepaid Expenses $3,000 decrease X
Accounts Payable $65,000 decrease X
Accrued Liabilities $8,000 increase X
Deferred Income Taxes Payable $12,000 increase X
Sale of equipment $7,000 gain X
Sale of long-term investments $10,000 loss X
Trang 6Exercise 13-5 (30 minutes)
1
Carmono Company Statement of Cash Flows For the Year Ended December 31, 2009
Operating activities:
Net income $35
Adjustments to convert net income to a cash basis: Depreciation charges $15
Decrease in accounts receivable 2
Increase in inventory (10)
Increase in accounts payable 4 11
Net cash provided by operating activities 46
Investing activities: Increase in plant and equipment (40)
Net cash used for investing activities (40)
Financing activities: Increase in common stock 5
Cash dividends (14)
Net cash used in financing activities (9)
Net decrease in cash (3)
Cash, beginning of the year 6
Cash, end of the year $ 3
2 Free cash flow computation: Net cash provided by operating activities $ 46
Capital expenditures $40
Dividends 14 54
Free cash flow $(8)
Trang 7Current assets:
Accounts receivable –2 Source +2 +2 Operating Inventory +10 Use –10 –10 Operating Noncurrent assets:
Plant and equipment +40 Use –40 –40 Investing
Liabilities, Contra-assets, and Stockholders’ Equity
Trang 8Exercise 13-6 (30 minutes)
1 Net income $ 84
Adjustments to convert net income to a cash basis: Depreciation charges $ 60
Increase in accounts receivable (110)
Decrease in inventory 70
Increase in prepaid expenses (9)
Increase in accounts payable 35
Decrease in accrued liabilities (4)
Gain on sale of long-term investments (10)
Loss on sale of land 6
Increase in deferred income taxes 8 46
Net cash provided by operating activities $130
2 Pavolik Company Statement of Cash Flows Operating activities: Net cash provided by operating activities from part (1) above $130
Investing activities: Proceeds from sale of long-term investments $ 16
Proceeds from sale of land 9
Additions to plant and equipment (200)
Net cash used for investing activities (175)
Financing activities: Increase in bonds 150
Decrease in common stock (80)
Cash dividends (30)
Net cash provided by financing activities 40
Net decrease in cash (net cash flow) (5)
Cash balance, beginning of the year 90
Cash balance, end of the year $ 85
Trang 9Exercise 13-6 (continued)
Note to the instructor: Although it is not a requirement of the exercise, a worksheet may be helpful
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication Assets (except cash and cash equivalents)
Accounts receivable +110 Use –110 –110 Operating
Inventory –70 Source +70 +70 Operating
Prepaid expenses +9 Use –9 –9 Operating
Noncurrent assets:
Long-term investments –6 Source +6 –6 0 Investing
Plant and equipment +200 Use –200 –200 Investing
Land –15 Source +15 –15 0 Investing
Liabilities, Contra-assets, and Stockholders’ Equity
Accumulated depreciation +60 Source +60 +60 Operating
Current liabilities:
Accounts payable +35 Source +35 +35 Operating
Accrued liabilities –4 Use –4 –4 Operating
Noncurrent liabilities:
Bonds payable +150 Source +150 +150 Financing
Trang 10Exercise 13-6 (continued)
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication
Stockholders’ equity:
Common stock –80 Use –80 –80 Financing
Retained earnings:
Net income +84 Source +84 +84 Operating
Dividends –30 Use –30 –30 Financing
Additional entries
Proceeds from sale of
long-term investments +16 +16 Investing
Gain on sale of long-term
investments –10 –10 Operating
Proceeds from sale of land +9 +9 Investing
Loss on sale of land +6 +6 Operating
Total –5 –5
Trang 11Problem 13-7A (20 minutes)
Transaction Neither Operating Investing Financing Schedule Statement
a Common stock was sold for
cash Source X
b Interest was paid on a note
decreasing Interest Payable Use X
c Bonds were retired Use X
d A long-term loan was made to
a subsidiary Use X
e Interest was received on the
loan in (d) Source X
f A stock dividend was declared
and issued on common stock Neither X
g A building was acquired by
issuing shares of common
stock Neither X
h Equipment was sold for cash Source X
i Short-term investments were
sold Neither X
j Cash dividends were declared
and paid Use X
Trang 12Problem 13-7A (continued)
Transaction Neither Operating Investing Financing Schedule Statement
l Deferred Income Taxes, a
long-term liability, was
re-duced Use X
m Dividends were received on
stock of another company
held as an investment Source X
n Equipment was purchased by
giving a long-term note to
the seller Neither X
Trang 13Problem 13-8A (30 minutes)
1 and 2
Weaver Company Statement of Cash Flows For the Year Ended December 31, 2009
Operating activities:
Net income $ 63
Adjustments to convert net income to cash basis: Depreciation charges $ 24
Increase in accounts receivable (100)
Decrease in inventory 50
Increase in prepaid expenses (4)
Increase in accounts payable 80
Decrease in accrued liabilities (12)
Gain on sale of investments (7)
Loss on sale of equipment 4
Increase in deferred income taxes 6 41
Net cash provided by operating activities 104
Investing activities: Proceeds from sale of long-term investments 10
Proceeds from sale of equipment 20
Additions to plant and equipment (180)
Net cash used for investing activities (150)
Financing activities: Increase in bonds payable 110
Decrease in common stock (40)
Cash dividends (30)
Net cash provided by financing activities 40
Net decrease in cash (6)
Cash balance, beginning of the year 15
Cash balance, end of the year $ 9
Trang 14Problem 13-8A (continued)
Note to the instructor: Although it is not a requirement, a worksheet may be helpful
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication Assets (except cash and cash equivalents)
Current assets:
Accounts receivable +100 Use –100 –100 Operating Inventory –50 Source +50 +50 Operating Prepaid expenses +4 Use –4 –4 Operating Noncurrent assets:
Long-term investments –3 Source +3 –3 0 Investing Plant and equipment +140 Use –140 –40 –180 Investing
Trang 15Problem 13-8A (continued)
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication
Bonds payable +110 Source +110 +110 Financing Deferred income taxes +6 Source +6 +6 Operating Stockholders’ equity:
Common stock –40 Use –40 –40 Financing Retained earnings:
Net income +63 Source +63 +63 Operating Dividends –30 Use –30 –30 Financing
Additional entries
Proceeds from sale of
in-vestments +10 +10 Investing Gain on sale of investments –7 –7 Operating Proceeds from sale of
equipment +20 +20 Investing Loss on sale of equipment +4 +4 Operating Total –6 –6
Trang 16Problem 13-9A (45 minutes)
1 and 2
Joyner Company Statement of Cash Flows
For Year 2
Operating activities:
Net income $ 56,000 Adjustments to convert net income to cash basis:
Depreciation charges $42,000
Increase in accounts receivable (80,000)
Increase in inventory (50,000)
Decrease in prepaid expenses 7,000
Increase in accounts payable 60,000
Decrease in accrued liabilities (10,000)
Gain on sale of equipment (8,000)
Increase in deferred income taxes 3,000 (36,000) Net cash provided by operating activities 20,000
Investing activities:
Proceeds from the sale of equipment 18,000
Loan to Hymas Company (40,000)
Additions to plant and equipment (150,000)
Net cash used for investing activities (172,000)
Financing activities:
Increase in bonds payable 120,000
Increase in common stock 30,000
Cash dividends (15,000)
Net cash provided by financing activities 135,000 Net decrease in cash (17,000) Cash balance, beginning of year 21,000 Cash balance, end of year $ 4,000
Trang 17Problem 13-9A (continued)
3 Free cash flow computation:
Net cash provided by operating activities $ 20,000
Capital expenditures $150,000
Dividends 15,000 165,000
Free cash flow $(145,000)
4 A relatively small amount of cash was provided by operating activities during the year as a result of large increases in accounts receivable and inventory Most of the cash that was provided by operating activities was paid out in dividends The small amount that remained, combined with the cash provided by the issue of bonds and the issue of common stock, was insufficient to purchase a large amount of equipment and make a loan to another company As a result, the cash on hand declined sharply during the year
Trang 18Problem 13-9A (continued)
Note to the instructor: Although it is not a requirement, a worksheet may be helpful
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication Assets (except cash and cash equivalents)
Current assets:
Accounts receivable +80 Use –80 –80 Operating
Inventory +50 Use –50 –50 Operating
Prepaid expenses –7 Source +7 +7 Operating
Noncurrent assets:
Loan to Hymas Company +40 Use –40 –40 Investing
Plant and equipment +110 Use –110 –40 –150 Investing
Liabilities, Contra-assets, and Stockholders’ Equity
Contra-assets:
Accumulated depreciation +12 Source +12 +30 +42 Operating
Current liabilities:
Accounts payable +60 Source +60 +60 Operating
Accrued liabilities –10 Use –10 –10 Operating
Noncurrent liabilities:
Bonds payable +120 Source +120 +120 Financing
Trang 19Problem 13-9A (continued)
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication
Stockholders’ equity:
Common stock +30 Source +30 +30 Financing
Retained earnings:
Net income +56 Source +56 +56 Operating
Dividends –15 Use –15 –15 Financing
Trang 20Problem 13-10A (75 minutes)
1 See the worksheet at the end of this solution
Depreciation charges $ 95,000
Decrease in patents 6,000
Increase in accounts receivable (180,000)
Decrease in inventory 12,000
Increase in prepaid expenses (5,000)
Increase in accounts payable 300,000
Decrease in accrued liabilities (17,000)
Gain on sale of long-term investments (60,000)
Loss on sale of equipment 20,000
Increase in deferred income taxes 15,000 186,000 Net cash provided by operating activities 356,000
Investing activities:
Proceeds from sale of long-term investments 110,000
Proceeds from sale of equipment 70,000
Increase in loans to subsidiaries (50,000)
Additions to plant and equipment (700,000)
Net cash used for investing activities (570,000)
Trang 21Problem 13-10A (continued)
Financing activities:
Issue of long-term notes 600,000
Retire long-term notes (380,000)
Increase in common stock 90,000
Cash dividends (75,000)
Net cash provided by financing activities 235,000 Net increase in cash and cash equivalents 21,000 Cash balance, beginning of the year 40,000 Cash balance, end of the year $ 61,000
Trang 22Problem 13-10A (continued)
3 The large amount of cash provided by operating activities is traceable for the most part to the $300,000 increase in accounts payable If the accounts payable had remained basically unchanged, the same as inven-tory, then operating activities would have provided very little cash and the company might have experienced serious cash problems
Note particularly that the cash provided by operating activities was used
to purchase plant and equipment Thus, the company is using cash rived from a short-term source (buildup of accounts payable) to finance long-term asset acquisitions In short, although the company is generat-ing substantial cash from operating activities, the quality of this source
In the company’s financing activities, it appears that long-term debt sources, rather than equity sources, are being used to provide for expansion Although companies frequently use debt to finance expansion, the level of debt in this company is increasing rapidly (See Chapter 14 for
a discussion of the Debt-to-Equity ratio and other financial ratios.)
Trang 23Problem 13-10A (continued)
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication Assets (except cash and cash equivalents)
Current assets:
Accounts receivable +180 Use –180 –180 Operating Inventory –12 Source +12 +12 Operating Prepaid expenses +5 Use –5 –5 Operating Noncurrent assets:
Long-term investments –50 Source +50 –50 0 Investing Loans to subsidiaries +50 Use –50 –50 Investing Plant and equipment +570 Use –570 –130 –700 Investing Patents –6 Source +6 +6 Operating
Trang 24Problem 13-10A (continued)
Cash Source Flow Adjust- Adjusted Classi- Change or use? Effect ments Effect fication
Noncurrent liabilities:
Long-term notes +220 Source +220 +380 +600 Financing Deferred income taxes +15 Source +15 +15 Operating Stockholders’ equity:
Common stock +90 Source +90 +90 Financing Retained earnings:
Net income +170 Source +170 +170 Operating Dividends –75 Use –75 –75 Financing
Additional entries
Retire long-term notes –380 –380 Financing Proceeds from sale of
equipment +70 +70 Investing Loss on sale of equipment +20 +20 Operating Proceeds from sale of long-
term investments +110 +110 Investing Gain on sale of long-term
investments -60 –60 Operating