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CHAPTER 23
Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Format, objectives purpose, and source of statement.
- Classifying investing, financing, and operating activities.
- Direct vs. indirect methods of preparing operating activities.
- Statement of cash flows— direct method.
- Statement of cash flows— indirect method.
- Preparing schedule of noncash investing and financing activities.
- Worksheet adjustments. 21 13 19, 20, 21
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives Questions
Brief Exercises Exercises Problems
Concepts for Analysis
- Describe the usefulness and format of the statement of cash flows.
- Prepare a statement of cash flows.
- Contrast the direct and indirect methods of calculating net cash flow from operating activities.
- Discuss special problems in preparing a statement of cash flows.
- Explain the use of a worksheet in preparing a statement of cash flows.
ANSWERS TO QUESTIONS
- The main purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments in a period. The statement of cash flows provides information about a company’s operating, financing, and investing activities. It reports cash receipts, cash payments, and net change in cash from operating, investing, and financing activities.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Some uses of this statement are: Assessing future cash flows: Income data when augmented with current cash flow data provide a better basis for assessing future cash flows. Assessing reasons for differences between income and net cash flow from operations: Some believe that cash flow information is more reliable than income information because income involves a number of assumptions, estimates and valuations. Assessing operating capability: Whether a company is able to maintain its operating capability, provide for future growth, and distribute dividends to the owners depends on whether adequate cash is being or will be generated. Assessing financial flexibility and liquidity: Cash flow data indicate whether a company should be able to survive adverse operating problems and whether a company might have difficulty in meeting obligations as they become due, paying dividends, or meeting other recurring costs. Providing information on cash and non-cash investing and financing activities: Cash flows are classified by their effect on balance sheet items; investing activities affect long-term assets while financing activities affect liabilities and stockholders’ equity.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Investing activities generally involve long-term assets and include (1) lending money and collecting on those loans and (2) acquiring and disposing of investments and productive long-lived assets. Financing activities, on the other hand, involve liability and stockholders’ equity items and include (1) obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining capital from owners and providing them with a return on their investment. Operating activities include all transactions and events that are not investing and financing activities. Operating activities involve the cash effects of transactions that enter into the determination of net income.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Examples of sources of cash in a statement of cash flows include cash from operating activities, issuance of debt, issuance of equity securities, sale of investments, and the sale of property, plant, and equipment. Examples of uses of cash include cash used in operating activities, payment of cash dividends, redemption of debt, purchase of investments, redemption of equity securities, and the purchase of property, plant, and equipment.
LO: 1, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Preparing the statement of cash flows involves three major steps: (1) Determine the change in cash. This is simply the difference between the beginning and ending cash balances. (2) Determine the net cash flow from operating activities. This involves analyzing the current year’s income statement, comparative balance sheets and selected transaction data. (3) Determine cash flows from investing and financing activities. All other changes in balance sheet accounts are analyzed to determine their effect on cash.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
Questions Chapter 23 (Continued)
- Purchase of land—investing; Payment of dividends—financing; Cash sales—operating; Purchase of treasury stock—financing.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows. Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided from operating activities. Certain transactions provide additional detailed information needed to determine whether cash was provided or used during the period.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- It is necessary to convert accrual-basis net income to a cash basis because net income includes items that do not provide or use cash. An example would be an increase in accounts receivable. If accounts receivable increased during the period, revenues reported on the accrual basis would be higher than the actual cash revenues received. Thus, accrual basis net income must be adjusted to reflect the net cash flow from operating activities.
LO: 2, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Net cash flow from operating activities under the direct method is the difference between cash revenues and cash expenses. The direct method adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to “net cash flow from operating activities.” The indirect method involves adjusting accrual-based net income. This is done by starting with accrual net income and adding or subtracting noncash items included in net income. Examples of adjustments include depreciation and other noncash expenses and changes in the balances of current asset and current liability accounts from one period to the next.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Net cash flow from operating activities is $3,820,000. Using the indirect method, the solution is: Net income ................................................................................ $3,500, Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense .......................................................... $ 520, Increase in accounts receivable ........................................... (500,000) Increase in accounts payable ............................................... 300,000 320, Net cash provided by operating activities ................................... $3,820,
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- Accrual basis sales ............................................................. $100, Less: Increase in accounts receivable ............................... 30, 70, Less: Write-off of accounts receivable ............................... 2, Cash sales.......................................................................... $ 68,
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- A number of factors could have caused an increase in cash despite the net loss. These are: (1) high cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3) sales of investments, and (4) issuance of debt or equity securities.
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
Questions Chapter 23 (Continued)
- (a) Cash flows from operating activities Net income .............................................................................. XXXX Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of plant assets [($18,000 ÷ 10) x 3^1 / 2 ] – $4,000 .................................... $ 2, Cash flows from investing activities Sale of plant assets ................................................................. $ 4,
(b) Cash flows from financing activities Issuance of common stock ...................................................... $410,
(c) No effect on cash; not shown in the statement of cash flows or in any related schedules or notes. Note to instructor: The change in net accounts receivable is an adjustment to net income under the indirect method.
(d) Cash flows from operating activities Net loss ................................................................................... $(50,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation expense ............................................................. $22, Gain on sale of available-for-sale securities ............................ (9,000) Cash flows from investing activities Sale of available-for-sale securities ......................................... $ 38,
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 5-10, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- (a) Operating activity. (g) Operating activity. (b) Financing activity. (h) Financing activity. (c) Investing activity. (i) Significant noncash investing (d) Operating activity. and financing activities. (e) Significant noncash investing (j) Financing activity. and financing activities. (k) Investing activity. (f) Financing activity. (l) Operating activity.
LO: 4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
- Examples of noncash transactions are: (1) issuance of stock for noncash assets, (2) issuance of stock to liquidate debt, (3) issuance of bonds or notes for noncash assets, and (4) noncash exchanges of property, plant, and equipment.
LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- Cash flows from operating activities Net income ..................................................................................... XXXX Adjustments to reconcile net income to net cash provided by operating activities: Gain on redemption of bonds payable ..................................... $ (120,000) Cash flows from financing activities Redemption of bonds payable ........................................................ $(1,880,000)
LO: 4, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
Questions Chapter 23 (Continued)
- Arguments for the indirect or reconciliation method are:
(a) By providing a reconciliation between net income and net cash provided by operating activities, the differences are highlighted.
(b) The direct method is nothing more than a cash basis income statement which will confuse and create uncertainty for financial statement users who are familiar with the accrual-based income statements.
(c) There is some question as to whether the direct method is cost/benefit-justified as this method would probably lead to additional preparation cost because the financial records are not maintained on a cash basis.
LO: 3, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
- A worksheet is desirable because it allows the orderly accumulation and classification of data that will appear on the statement of cash flows. It is an optional but efficient device that aids in the preparation of the statement of cash flows.
LO: 5, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
BRIEF EXERCISE 23-
Cash flows from operating activities
Cash received from customers
Cash payments:
To suppliers
For operating expenses
Net cash provided by operating activities ........ $ 41,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 23-
Cash flows from operating activities
Net income ........................................................... $30,
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ................................. $21,
Increase in accounts payable ..................... 13,
Increase in accounts receivable ................. (12,000)
Increase in inventory................................... (11,000) 11,
Net cash provided by operating activities ......... $41,
LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 23-
Sales revenue ............................................................... $420,
Add: Decrease in accounts receivable
Cash receipts from customers .................................... $438,
LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 23-
Cost of goods sold ....................................................... $500,
Add: Increase in inventory ($113,000 – $95,000)....... 18,
Purchases ..................................................................... 518,
Deduct: Increase in accounts payable
Cash payments to suppliers........................................ $510,
LO: 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 23-
Net cash provided by operating activities ................... $531,
Net cash used by investing activities .......................... (963,000)
Net cash provided by financing activities ................... 585,
Net increase in cash...................................................... 153,
Cash, 1/1/17 ................................................................... 333,
Cash, 12/31/17 ............................................................... $486,
LO: 2, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
BRIEF EXERCISE 23-
(a) Cash flows from operating activities
Cash received from customers ....................... $90,
Cash payments for expenses
Net cash provided by operating
activities .............................................. $31,
(b) Cash flows from operating activities
Net income........................................................ $40,
Increase in net accounts receivable
($26,960 a^ – $18,800b^ ) .................................... (8,160)
Net cash provided by operating
activities .............................................. $31,
a ($29,000 – $2,040) b ($20,000 – $1,200)
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 3-5, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
Operating—Gain on Sale of Equipment ...... 2,000*
*$10,000 – ($40,000 – $32,000)
- BRIEF EXERCISE 23-
- (a) Operating—Net Income 317, - Retained Earnings......................................... 317,
- (b) Retained Earnings 120, - Financing—Cash Dividends 120,
- (c) Equipment 114, - Investing—Purchase of Equipment 114,
- (d) Investing—Sale of Equipment 10,
- Accumulated Depreciation—Equipment 32,
SOLUTIONS TO EXERCISES
EXERCISE 23-1 (10–15 minutes)
(a) Investing activity.
(b) Financing activity.
(c) Investing activity.
(d) Operating—add to net income.
(e) Significant noncash investing and financing activity.
(f) Financing activity.
(g) Operating—add to net income.
(h) Financing activity.
(i) Significant noncash investing and financing activity.
(j) Financing activity.
(k) Operating—deduct from net income.
(l) Operating—add to net income.
LO: 1, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 23-2 (20–30 minutes)
(a) Plant assets (cost) $20,000)
Accumulated depreciation ([$20,000 ÷ 10] X 6) 12,000)
Book value at date of sale 8,000)
Sale proceeds (5,300)
Loss on sale $ 2,700)
The loss on sale of plant assets is reported in the operating activities
section of the statement of cash flows. It is added to net income to
arrive at net cash provided by operating activities.
The sale proceeds of $5,300 are reported in the investing activities
section of the statement of cash flows as follows:
Sale of plant assets $5,
(b) Shown in the financing activities section of a statement of cash
flows as follows:
Sale of common stock $430,
EXERCISE 23-2 (Continued)
(g) The exchange of common stock for an investment in Tabasco is
reported as a “noncash investing and financing activity.” It is shown
as follows:
Noncash investing and financing activities
Purchase of investment by issuance
of common stock $900,
(h) The purchase of treasury stock is reported as a cash payment in the
financing activities section of the statement of cash flows.
LO: 1, 2, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, Communication, AICPA BB: None, Measurement, Reporting, AICPA PC: Communication
EXERCISE 23-3 (15–25 minutes)
VINCE GILL COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income $1,050,
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense $ 60,
Decrease in accounts receivable 360,
Decrease in inventory 300,
Increase in prepaid expenses (170,000)
Decrease in accounts payable (275,000)
Decrease in accrued expenses payable (100,000) 175,
Net cash provided by operating activities $1,225,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 15-25, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 23-4 (20–30 minutes)
VINCE GILL COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Cash receipts from customers $7,260,000 (a)
Cash payments:
To suppliers $4,675,000 (b)
For operating expenses 1,360,000 (c) 6,035,
Net cash provided by operating
activities $1,225,
Computations:
(a) Cash receipts from customers
Sales revenue $6,900,
Add: Decrease in accounts
Add: receivable 360,
Cash receipts from customers $7,260,
(b) Cash payments to suppliers
Cost of goods sold $4,700,
Deduct: Decrease in inventories 300,
Purchases 4,400,
Add: Decrease in accounts
Add: payable 275,
Cash payments to suppliers $4,675,
(c) Cash payments for operating
expenses
Operating expenses, exclusive
of depreciation $1,090,000*
Add: Increase in prepaid
Add: expenses $170,
Add: Decrease in accrued
Add: expenses payable 100,000 270,
Cash payments for operating
expenses $1,360,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 20-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 23-6 (15–20 minutes)
KRAUSS COMPANY
Partial Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income $90,
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation expense $60,
Loss on sale of equipment 26,
Decrease in accounts receivable 17,
Increase in accounts payable 10,
Decrease in income taxes payable (4,500) 108,
Net cash provided by operating activities $198,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 23-7 (15–20 minutes)
Situation A: Cash flows from operating activities
Cash receipts from customers
Cash payments for operating expenses
Net cash provided by operating activities $ 48,
Situation B: (a) Computation of cash payments to suppliers
Cost of goods sold $310,
Plus: Increase in inventory 26,
Decrease in accounts payable 17,
Cash payments to suppliers $353,
(b) Computation of cash payments for
operating expenses
Operating expenses $230,
Deduct: Decrease in prepaid expenses 8,
Increase in accrued expenses
payable 11,
Cash payments for operating expenses $211,
LO: 2, 3, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 23-8 (20–30 minutes)
Cash flows from operating activities $145,
Net income
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense $39,
Gain on sale of investment
[($200 – $145) X 100]
Decrease in accounts receivable 12,
Income from equity method investment
($27,000 X 0.40)
Dividends from equity method investment
($2,000 X 0.40)
Net cash provided by operating activities $180,
Other comments:
No. 1 is shown as a cash inflow from the issuance of treasury stock and
cash outflow for the purchase of treasury stock, both financing activities.
No. 2 is shown as a cash inflow from investing activities of $20,000 and
the gain of $5,500 is deducted from net income in the operating activities
section.
No. 3 is a noncash expense (bad debt expense) in the income statement.
Bad debt expense is not handled separately when using the indirect
method. It is part of the change in net accounts receivable.
No. 4 is a significant noncash investing and financing activity.
No. 7 (dividends received) is added to net income. Another alternative is
to net the company’s pro-rata share of the dividend against the income
from equity method investment amount reported in the cash flows from
operating activities.
No. 8 is not shown on a statement of cash flows.
LO: 2, 3, Bloom: AP, Difficulty: Moderate, Time: 20-30, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
