CHAPTER 13

STATEMENT OF CASH FLOWS

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

*This topic is dealt with in an Appendix to the chapter.

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge

CPA: F = Financial Reporting

AACSB: AN = Analytic

*This topic is dealt with in an Appendix to the chapter.

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge

CPA: E = Professional and Ethical Behaviour F = Financial Reporting

AACSB: AN = Analytic E = Ethics

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

*This topic is dealt with in an Appendix to the chapter.

CHAPTER LEARNING OBJECTIVES

1. Describe the content and format of the statement of cash flows. The statement of cash flows provides information about the cash receipts and cash payments resulting from the operating, investing, and financing activities of a company during a specific period.

Operating activities include the cash effects of transactions that create revenues and expenses used in the determination of net income. Operating activities related to net income items adjusted for noncash items and changes in certain current asset and current liability accounts in the statement of financial position. Investing activities measure cash flows resulting from changes in non-current asset items. Financing activities relate to cash flows resulting from changes in non-current liabilities and shareholders’ equity items other than net income. These are general guidelines, to which there are a few exceptions.

The statement of cash flows begins with the operating activities section, which can be prepared using either the indirect or direct method. Both methods will determine the same net cash provided or used by operating activities but differ in the details presented. Investing and financing activities follow. The statement concludes by reporting the net change in cash for the period and reconciles it to the beginning and ending cash (or cash and cash equivalents) balances reported on the statement of financial position. Significant noncash transactions are reported in a note to the financial statements.

2. Prepare the operating activities section of a statement of cash flows using the indirect method. The first step in the preparation of a statement of cash flows is to determine the net cash provided (used) by operating activities. In the indirect method, net income is converted from an accrual basis to a cash basis. To do this, noncash expenses and losses, decreases in certain current asset accounts, and increases in certain current liability accounts are added back to net income. Noncash revenues and gains, increases in certain current asset accounts, and decreases in certain current liability accounts are deducted from net income.

3. Prepare the investing activities section of the statement of cash flows. The second step

in the preparation of a statement of cash flows is to analyze the changes in certain non-current

asset (and any relevant current asset) accounts and record them as investing activities, or disclose them as significant noncash transactions.

4. Prepare the financing activities section and complete the statement of cash flows. The third step is to analyze the changes in non-current liability and equity accounts not relating to net income and record them as financing activities, or disclose them as significant noncash transactions. With respect to liabilities, any related current portions of long-term debt and any other relevant current liability account should also be considered. With respect to equity, the Dividends Payable current liability account should be considered in determining the amount of dividends paid.

The fourth and final step in the preparation of a statement of cash flows is to determine the overall net cash flow for the year and add it to the opening amount of cash (and cash equivalents) to determine the ending amount. This result should agree to the cash (and cash equivalents) reported on the statement of financial position.

5. Use the statement of cash flows to evaluate a company. When using the statement of cash flows to assess how a company is making cash receipts and payments, we must understand what phase of its corporate life cycle a company is in. In the introductory and growth phases, a company needs to receive financing cash flows to offset the cash used in operating and investing activities. However, by the time a company enters the maturity phase, operating cash flows exceed cash used in investing activities and this excess can begin to pay down debt and be used for other financing activities. When the company is in the decline phase, this trend continues but, as cash from operating activities declines, so does the amount of cash used in investing and financing activities.

Free cash flow (net cash provided or used by operating activities minus net capital expenditures minus dividends paid) is a measure of solvency. It indicates the amount of cash a company generated during the period that is available for increases in the payment of dividends, expansion, or the reduction of debt.

6. Prepare the operating activities section of a statement of cash flows using the direct method (Appendix 13A). In the direct method of determining net cash provided or used by operating activities, each individual revenue and expense account is converted from an accrual basis to a cash basis. These cash-based revenues and expenses are then combined into the major classes of cash receipts and cash payments and reported in the operating activities section.

TRUE-FALSE STATEMENTS

1. Cash flow information is useful in assessing a company’s ability to generate future cash flows.

2. For external reporting, a company must prepare either an statement of income or a statement of cash flows, but not both.

3. Cash equivalents can include both short-term and long-term investments.

4. Operating activities include the cash effects of transactions that create revenues and expenses.

5. The activity from the statement of financial position to be presented in the financing activities section of the statement of cash flows is based on an analysis of shareholders’ equity only.

6. Noncash investing and financing activities must be reported in the body of a statement of cash flows.

7. Noncash investing and financing transactions, such as the exchange of common shares to purchase assets, represent significant investing and financing activities and are reported in a note to the financial statements.

8. The acquisition of a building by issuing a mortgage payable would be considered an investing and financing activity that did not affect cash and would be reported in the notes to the financial statements.

9. The statement of cash flows classifies cash receipts and payments as operating, non-operating, and financial activities.

10. The sale of land for cash would be classified as a cash receipt from an investing activity.

11. Cash flow provided (used) by investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected net income.

12. Under IFRS, the receipt of dividends from equity investments may be classified as a cash receipt provided (used) by investing activities.

13. Under ASPE, the payment of interest on a mortgage payable may be classified as a cash payment from financing activities.

14. The statement of cash flows is a required statement for both public and private corporations.

15. Like the other financial statements, the statement of cash flows is prepared from an adjusted trial balance.

16. For a company using the direct method, both the operating activities and investing activities will report the same net amounts provided or used as the indirect method, but the amount reported under financing activities will be different.

17. If a company has combined cash equivalents with cash, it must disclose the components of the cash equivalents, with a reconciliation of the amounts reported on the statement of cash flows with those reported on the statement of financial position.

18. Cash provided by operating activities is generally the same as the net income reported on the statement of income.

19 A disadvantage of the indirect method of reporting cash flows provided (used) by operating activities is that the difference between the net amount of cash flows from operating activities and net income is not emphasized.

20. Under the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operating activities.

21. Investing activities affect non-current asset accounts.

22. In the investing activities section of the statement of cash flows, all the cash payments for purchase of non-current assets should be totalled and reported as one number.

23. A loss on sale of equipment is included in the investing activities on the statement of cash flows.

24. Preparing the financing activities section of the statement of cash flows requires the analysis of non-current liability and equity accounts, as well as any short-term loans incurred for lending purposes rather than trade.

25. If accumulated other comprehensive income increases or decreases during the year, the change must be reported in the financing activities section.

26. On the statement of cash flows of a growing company, the reader should expect to see cash provided by its financing activities, not cash used.

*27. The direct method is considered to be more informative and easier to compare with the other financial statements.

*28. Cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers during a period.

*29. During the year, Income Tax Expense was $22,000 and Income Tax Payable increased by $3,000; therefore, the cash paid for income tax was $19,000.

Ex. 126

Selected transactions of Darwinder Inc., a private company reporting under ASPE, are listed below:

1. Common shares are sold for cash.

2. Bonds payable are purchased on the open market for cash at a premium.

3. Interest on a short-term note receivable is collected.

4. Merchandise is sold to customers for cash.

5. Inventory is purchased on account.

6. Equipment is purchased by signing a 3-year, 5% note payable.

7. Cash dividends on common shares are declared and paid.

8. One hundred Belton Inc. common shares are purchased for cash, as a trading investment.

9. Land is sold for cash at the carrying amount.

10. Recorded an increase in the fair value of a trading investment.

Instructions

Indicate in which section each of the above transactions would be reported (a) operating activity, (b) investing activity, (c) financing activity, or (d) in the notes as a noncash investing and financing activity. Would any of the above transactions be treated different under IFRS? If so, which ones and how?

Ex. 127

Selected transactions of Yang Corp., a public company reporting under IFRS, are listed below:

1. Collected an account receivable.

2. Declared and paid dividends on common shares.

3. Sold long-term investments for cash.

4. Issued common shares in exchange for new equipment.

5. Repaid a five-year note payable.

6. Paid employee salaries.

7. Converted bonds payable to common shares.

8. Acquired a long-term investment with cash.

9. Sold buildings and equipment for cash.

10. Sold merchandise to customers.

Instructions

Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.

Ex. 128

(a) Identify how significant noncash activities are presented in the financial statements.

(b) Give three examples of significant noncash transactions.

Ex. 129

Anvil Plumbing & Heating Corporation had the following cash transactions:

1. Collected cash for services provided.

2. Purchased land, paying down 60% in cash and signing a note for the remainder.

3. Sold equipment for cash realizing a gain on the sale.

4. Acquired equipment by issuing common shares.

5. Paid salaries to employees.

6. Paid a dividend to shareholders.

7. Customer paid their outstanding balance.

Instructions

Classify each of these transactions as either a(n) operating, investing, financing or non-cash activity.

Ex. 130

The statement of income of Packer Inc. for the year ended December 31, 2022, reported the following condensed information:

Revenue from fees $585,000

Operating expenses 340,000

Income from operations 245,000

Income tax expense 61,250

Net income $183,750

Packer's statement of financial position contained the following comparative data at December 31:

2022 2021

Accounts receivable $52,500 $45,000

Accounts payable 34,000 41,000

Income taxes payable 5,500 3,000

The corporation has no depreciable assets. Accounts payable pertain to operating expenses.

Instructions

Using the indirect method, prepare the operating activities of the statement of cash flows for the year ended December 31, 2022.

Ex. 131

Assume the indirect method is used to calculate the operating activities section of the statement of cash flows. For each item listed below, indicate the effect on net income in arriving at cash flows provided (used) by operating activities by choosing one of the following code letters:

Cash flows provided (used) by operating activities Code

Add to net income A

Deduct from net income D

1. Increase in accounts receivable ____

2. Increase in inventory ____

3. Decrease in prepaid expenses ____

4. Decrease in accounts payable ____

5. Decrease in accrued liabilities ____

6. Increase in income tax payable ____

7. Depreciation expense ____

8. Unrealized loss on trading investments ____

9. Gain on disposal of equipment ____

10. Patent amortization expense ____

Ex. 132

Using the indirect method, calculate the amount of cash flows provided (used) by operating activities from the following data:

Net income $784,000

Beginning accounts receivable 108,000

Ending accounts receivable 86,000

Beginning prepaid expenses 16,000

Ending prepaid expenses 4,000

Beginning accounts payable 54,000

Ending accounts payable 34,000

Depreciation expense 92,000

Ex. 133

Tabele Limited reported a net income of $545,000 for the year ended December 31, 2022. Depreciation expense recorded on buildings and equipment was $182,000 for the year. Balances of the current assets and current liabilities accounts at the beginning and end of the year are as follows:

End of Year Beginning of Year

Cash $120,000 $108,000

Accounts receivable 16,500 22,500

Inventory 42,000 47,000

Prepaid expenses 8,500 4,000

Accounts payable 26,000 30,000

Income tax payable 1,200 900

Instructions

Using the indirect method, prepare the operating activities section of the statement of cash flows.

Ex. 134

Downwind Limited prepared the following information for the operating activities section of the statement of cash flows using the indirect method for the year ended December 31, 2022:

Net income $250,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense, $40,000 ______

Increase in accounts receivable, $65,000 ______

Decrease in inventory, $12,500 ______

Share of net income from an investment in associate, $5,250 ______

Increase in accounts payable, $7,500 ______

Decrease in interest receivable, $3,500 ______

Increase in prepaid expenses, $5,000 ______

Decrease in income tax payable, $1,250 ______

Gain on sale of land, $4,000 ______

Net cash provided (used) by operating activities ______

Instructions

Fill in the missing blanks, indicating how each item should be reported in the operating activities section of the statement of cash flows.

Ex. 135

Presented below is Maginot Inc.’s operating activities section, prepared using the indirect method, its 2022 statement of cash flows, and a partial comparative statement financial of position for 2021 and 2022 showing the current assets and liabilities sections.. The company is using its overdraft facility at June 30, 2022.

MAGINOT INC.

Statement of Cash Flows (partial)

Year Ended June 30, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Operating activities

Net income $34,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense 8,500

Loss on sale of investments 4,200

Decrease in accounts receivable 8,500

Increase in inventory (4,750)

Decrease in prepaid expenses 600

Decrease in accounts payable (3,250)

Increase in accrued expenses 1,200

Net cash provided by operating activities $49,000

Assets

2022 2021

Cash $ $ 8,000

Accounts receivable 18,500

Inventory 41,500

Prepaid expenses 1,200

Total assets $69,200

Liabilities

Bank overdraft $ $ 0

Accounts payable 12,300

Accrued expenses payable 5,500

Total liabilities $17,800

Instructions

Complete the current assets and current liabilities sections of the 2022 statement of financial position.

Ex. 136

Condensed financial data of McKillop Corporation appear below:

MCKILLOP CORPORATION

Comparative Statements of Financial Position

December 31

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

2022 2021

Cash $ 74,700 $ 35,000

Accounts receivable 104,000 67,000

Inventory 100,000 112,000

Prepaid expenses 32,000 36,000

Long-term investments 81,000 66,000

Property, plant, and equipment 235,000 175,000

Accumulated depreciation (65,000) (60,000)

Total $561,700 $431,000

Liabilities and Shareholders' Equity

Accounts payable $ 93,000 $ 75,000

Accrued expenses payable 29,000 24,000

Bonds payable 135,000 160,000

Common shares 240,000 91,000

Retained earnings 64,700 81,000

Total $561,700 $431,000

MCKILLOP CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $500,000

Expenses

Cost of goods sold $295,000

Operating expenses 65,000

Depreciation expense 17,000

Interest expense 18,000

Loss on sale of equipment 3,000 398,000

Income before income tax 102,000

Income tax expense 15,300

Net income $ 86,700

Additional information regarding fiscal 2022:

1. New equipment costing $85,000 was purchased for cash.

2. Old equipment costing $25,000 was sold for $10,000 cash when the carrying amount was $13,000.

3. Bonds were originally issued at face value. Bonds with a face value of $25,000 were converted into $25,000 of common shares during the year.

4. Cash dividends were declared and paid during the year.

5. Accounts payable pertain to merchandise purchases.

Instructions

Using the indirect method, prepare a statement of cash flows for the year ended December 31, 2022.

Ex. 137

Assume the indirect method is used to calculate the operating activities section of the statement of cash flows. For each item listed below, indicate the reporting of the transactions and events by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear:

Code

Operating Activities OA

Add to net income +

Deduct from net income –

Investing Activities IA

Financing Activities FA

Category

1. Common shares are issued for cash.

2. Inventory increased during the period.

3. Depreciation expense is recorded for the period.

4. Building is purchased for cash.

5. Bonds payable are purchased and retired at their carrying value.

6. Accounts payable decreased during the period.

7. Prepaid expenses decreased during the period.

8. Common shares are reacquired for cash.

9. Land is sold for cash at an amount equal to carrying amount.

10. Cash dividends are paid.

Ex. 138

Comparative statements of financial position for Anderson Inc. appear below:

ANDERSON INC.

Comparative Statements of Financial Position

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

Dec. 31, 2022 Dec. 31, 2021

Cash $ 29,000 $10,000

Accounts receivable 28,000 19,000

Prepaid expenses 9,000 12,000

Inventory 37,000 54,000

Long-term investments 0 53,000

Equipment 110,000 48,000

Accumulated depreciation—equipment (26,000) (22,000)

Total assets $187,000 $174,000

Liabilities and Shareholders' Equity

Accounts payable $ 21,000 $ 9,000

Mortgage payable 37,000 45,000

Common shares 40,000 23,000

Retained earnings 89,000 97,000

Total liabilities and shareholders' equity $187,000 $174,000

Additional information regarding fiscal 2022:

1. Net income for the year was $27,000.

2. Cash dividends of $35,000 were declared and paid during the year.

3. Long-term investments with a carrying amount of $53,000 were sold for $48,000 cash.

Instructions

Using the indirect method, prepare a statement of cash flows for the year ended December 31, 2022.

Ex. 139

Comparative statements of financial position for Canford Corporation appear below:

CANFORD CORPORATION

Comparative Statements of Financial Position

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

Dec 31, 2022 Dec 31, 2021

Cash $ 78,000 $ 62,000

Accounts receivable 146,000 120,000

Prepaid insurance 38,000 34,000

Land 36,000 80,000

Equipment 140,000 120,000

Accumulated depreciation—equipment (40,000) (26,000)

Total assets $398,000 $390,000

Liabilities and Shareholders' Equity

Accounts payable $ 22,000 $ 12,000

Bonds payable 54,000 38,000

Common shares 280,000 230,000

Retained earnings 42,000 110,000

Total liabilities and shareholders' equity $398,000 $390,000

Additional information regarding fiscal 2022

1. A loss of $50,000 was reported for the year.

2. Cash dividends were declared and paid.

3. Land was sold for cash at a loss of $20,000. This was the only land transaction during the year.

4. Equipment with a cost of $30,000 and accumulated depreciation of $20,000 was sold for $10,000 cash.

5. The bonds were originally issued at face value. $24,000 worth of bonds were retired during the year at their carrying amount.

6. Equipment was exchanged for common shares. The fair value of the shares at the time of the exchange was $50,000.

Instructions

Using the indirect method, prepare a statement of cash flows for the year ended December 31, 2022.

Ex. 140

The following information is available for Bull’s Bay Corporation for the year ended December 31, 2022:

Collection of principal on a long-term loan to a supplier $50,000

Purchase of equipment for cash 24,000

Proceeds from the sale of long-term investment at carrying amount 56,000

Issue of common shares for cash 47,000

Depreciation expense 38,000

Redemption of bonds payable at their carrying amount 66,000

Payment of cash dividends 28,500

Net income 103,500

Purchase of land by issuing mortgage payable 70,000

In addition, the following information is available from the comparative statements of financial position for Bull’s Bay at the end of 2022 and 2021:

Dec 31,2022 Dec 31, 2021

Cash $ 191,800 $32,000

Accounts receivable 49,000 42,500

Prepaid insurance 27,000 18,000

Total current assets $267,800 $92,500

Accounts payable $72,500 $67,000

Salaries payable 10,200 16,400

Total current liabilities $82,700 $83,400

Instructions

Using the indirect method, prepare a statement of cash flows for the year ended December 31, 2022.

Ex. 141

Use the following information to perform the calculations below. Clearly label the amount of each answer as positive or negative and show all your calculations:

Instructions

(a) Calculate the amount of cash flows provided (used) by

operating activities, using the indirect method. ______________

(b) Calculate the amount of cash flows provided (used) by

investing activities. ______________

(c) Calculate the amount of cash flows provided (used) by

financing activities. ______________

(d) Calculate the net change in cash. ______________

(e) Identify any significant noncash investing or financing activities. ______________

Ex. 142

Condensed financial data of Primavera Corporation appear below. The company uses the indirect method to prepare the operating activities section of its statement of cash flows.

PRIMAVERA CORPORATION

Comparative Statements of Financial Position

December 31

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

2022 2021

Cash $ 34,000 $ 18,000

Accounts receivable A 32,000

Inventory B 70,000

Prepaid expenses 2,500 C

Long-term investments D 10,000

Property, plant, and equipment 224,000 200,000

Accumulated depreciation (50,000) (40,000)

Total assets $ E $292,000

Liabilities and Shareholders' Equity

Accounts payable $ F $ 34,000

Accrued expenses payable 10,000 12,000

Bonds payable 130,000 100,000

Common shares 50,000 75,000

Retained earnings 136,000 G

Total liabilities and shareholders’ equity $364,000 $292,000

PRIMAVERA CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $500,000

Expenses

Cost of goods sold $290,000

Operating expenses (excluding depreciation) H

Depreciation expense I

Interest expense 9,000

Loss on sale of property, plant, and equipment J 408,000

Income before income tax 92,000

Income tax expense 17,000

Net income K

PRIMAVERA CORPORATION

Statement of Cash Flows

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Operating activities

Net income $75,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense 15,000

Loss on sale of property, plant, and equipment L

Increase in accounts receivable (16,500)

Increase in inventory (20,000)

Increase in prepaid expenses (500)

Increase in accounts payable 4,000

Decrease in accrued expenses _____M

Net cash provided by operating activities _____N

Investing activities

Purchase of investments (5,000)

Purchase of property, plant, and equipment _____P

Net cash used by investing activities _____Q

Financing activities

Repurchase of common shares R

Issue of bonds S

Payment of cash dividends _____T

Net cash used by financing activities _____U

Net increase in cash 16,000

Cash, January 1 18,000

Cash, December 31 $ V

Additional information regarding fiscal 2022:

1. New property, plant, and equipment costing $33,000 was purchased for cash.

2. Old property, plant, and equipment costing $9,000 was scrapped when the carrying amount was $4,000.

3. A cash dividend of $10,000 was declared and paid during the year.

4. The bonds were originally issued at face value.

Instructions

Solve for the missing amounts (note the letter O is not used).

*Ex. 143

The comparative statements of financial position for Malcolm Heights Inc. are presented below:

MALCOLM HEIGHTS INC.

Comparative Statements of Financial Position

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

2022 2021

Cash $ 68,000 $ 36,000

Accounts receivable 97,000 64,000

Inventory 180,000 140,000

Prepaid expenses 5,000 4,000

Investments 30,000 20,000

Property, plant, and equipment 448,000 400,000

Accumulated depreciation (100,000) (80,000)

Total $728,000 $584,000

Liabilities and Shareholders' Equity

Accounts payable $ 76,000 $ 68,000

Accrued expenses payable 20,000 24,000

Bonds payable 260,000 200,000

Common shares 100,000 150,000

Retained earnings 272,000 142,000

Total $728,000 $584,000

MALCOLM HEIGHTS CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $1,000,000

Expenses

Cost of goods sold $580,000

Operating expenses (excluding depreciation) 180,000

Depreciation expense 30,000

Interest expense 18,000

Loss on sale of property, plant, and equipment 8,000 816,000

Income before income tax 184,000

Income tax expense 34,000

Net income $ 150,000

Additional information regarding fiscal 2022:

1. New property, plant, and equipment costing $66,000 was purchased for cash.

2. Old property, plant, and equipment costing $18,000 was scrapped when the carrying amount was $8,000.

3. A cash dividend of $20,000 was declared and paid during the year.

4. Accounts payable pertain to merchandise purchases.

5. Accrued expenses pertain to operating expenses.

6. The bonds were originally issued at face value.

Instructions

Prepare the operating activities section of the cash flow statement using the:

(a) indirect method

(b) direct method

Ex. 144

Georges Corporation reported the following selected financial information:

2022 2021

Equipment $270,000 $292,000

Accumulated Depreciation 124,000 94,000

During the year, Georges sold equipment with an original cost of $42,000 and a carrying amount of $10,000 for cash. There is a gain on the disposal of $2,000. The company also purchased equipment for cash and recorded depreciation expense on the equipment.

Instructions

1. How much were the proceeds from the sale of the equipment?

2. How much was the purchase of equipment?

*Ex. 145

Condensed financial data of Primavera Corporation appear below. The company uses the direct method to prepare the operating activities section of its statement of cash flows.

PRIMAVERA CORPORATION

Comparative Statements of Financial Position

December 31

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

2022 2021

Cash $ 34,000 $ 18,000

Accounts receivable A 32,000

Inventory B 70,000

Prepaid expenses 2,500 C

Investments D 10,000

Property, plant, and equipment 224,000 200,000

Accumulated depreciation (50,000) (40,000)

Total assets $ E $292,000

Liabilities and Shareholders' Equity

Accounts payable $ F $ 34,000

Accrued expenses payable 10,000 12,000

Bonds payable 130,000 100,000

Common shares 50,000 75,000

Retained earnings 136,000 71,000

Total $364,000 $292,000

PRIMAVERA CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $500,000

Expenses

Cost of goods sold $290,000

Operating expenses (excluding depreciation) G

Depreciation expense H

Interest expense 9,000

Loss on sale of property, plant, and equipment _______I 408,000

Income before income tax 92,000

Income tax expense 17,000

Net income $ J

PRIMAVERA CORPORATION

Statement of Cash Flows

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Operating activities

Cash receipts from customers $483,500

Cash payments

To suppliers $306,000

For operating expenses K

For income tax 17,000

For interest expense 9,000 L

Net cash provided by operating activities M

Investing activities

Purchase of long-term investments $(5,000)

Purchase of property, plant, and equipment (33,000)

Net cash used by investing activities (38,000)

Financing activities

Repurchase of common shares $(25,000)

Issue of bonds 30,000

Payment of cash dividends (10,000)

Net cash used by financing activities (5,000)

Net increase in cash 16,000

Cash, January 1 18,000

Cash, December 31 $34,000

Additional information regarding fiscal 2022:

1. New property, plant, and equipment costing $33,000 was purchased for cash.

2. Old property, plant, and equipment costing $9,000 was scrapped when the carrying amount was $4,000.

3. A cash dividend of $10,000 was declared and paid during the year.

4. Accounts payable pertain to merchandise purchases.

5. Accrued expenses pertain to operating expenses.

6. The bonds were originally issued at face value.

Instructions

Solve for the missing amounts (note the letter O is not used).

*Ex. 146

Presented below is the comparative trial balance and additional information for Hipsters Inc., which has a calendar year end. Credit balances are shown in brackets.

2022 2021

Cash $ 19,800 $ (10,000)

Accounts Receivable 48,200 40,000

Inventory 10,000 14,000

Prepaid Expenses 2,000 1,000

Equipment 84,000 70,000

Accumulated Depreciation (20,000) (14,000)

Accounts Payable (34,000) (20,000)

Salaries Payable (6,000) 0

Income Tax Payable (2,000) 0

Bank Loan Payable (20,000) (24,000)

Common Shares (10,000) (8,000)

Retained Earnings (49,000) (29,800)

Dividends 10,000 10,000

Revenue (354,000) (290,000)

Cost of Goods Sold 116,000 86,000

Salaries Expense 138,000 110,000

Operating Expenses 52,000 53,000

Depreciation Expense 10,000 5,000

Interest Expense 1,000 1,200

Income Tax Expense 6,000 5,600

Gain on Disposal of Equipment (2,000) 0

Additional information regarding fiscal 2022:

1. New equipment costing $20,000 was purchased for cash.

2. Old equipment costing $6,000 was sold for $4,000 cash when the carrying amount was $2,000.

3. A cash dividend of $10,000 was paid during the year.

4. Accounts payable pertain to merchandise purchases.

Instructions

Using the direct method, prepare a statement of cash flows for the year ended December 31, 2022.

*Ex. 147

The financial statements of Weighting Limited appear below:

WEIGHTING LIMITED

Comparative Statements of Financial Position

December 31

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

2022 2021

Cash $ 118,000 $ 46,000

Accounts receivable 62,000 68,000

Inventory 40,000 30,000

Property, plant, and equipment 100,000 156,000

Accumulated depreciation (40,000) (48,000)

Total $280,000 $252,000

Liabilities and Shareholders' Equity

Accounts payable $ 30,000 $ 46,000

Income tax payable 26,000 16,000

Mortgage payable 18,000 66,000

Common shares 78,000 48,000

Retained earnings 128,000 76,000

Total $280,000 $252,000

WEIGHTING LIMITED

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $760,000

Cost of goods sold 580,000

Gross profit 180,000

Operating expenses 72,000

Interest expense 8,000

Income before income tax 100,000

Income tax expense 20,000

Net income $ 80,000

Additional information regarding fiscal 2022:

1. Dividends declared and paid were $28,000.

2. During the year, equipment was sold for $24,000 cash. This equipment cost $56,000 originally and had a carrying amount of $24,000 at the time of sale.

3. Depreciation expense is included in operating expenses.

4. All sales and purchases are on account.

5. Accounts payable pertain to merchandise suppliers.

6. All operating expenses except for depreciation were paid in cash.

Instructions

Using the direct method, prepare a statement of cash flows for the year ended December 31, 2022.

*Ex. 148

Condensed financial data of McKillop Corporation appear below:

MCKILLOP CORPORATION

Comparative Statements of Financial Position

December 31

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Assets

2022 2021

Cash $ 74,700 $ 35,000

Accounts receivable 104,000 67,000

Inventory 100,000 112,000

Prepaid expenses 32,000 36,000

Long-term investments 81,000 66,000

Property, plant, and equipment 235,000 175,000

Accumulated depreciation (65,000) (60,000)

Total $561,700 $431,000

Liabilities and Shareholders' Equity

Accounts payable $ 93,000 $ 75,000

Accrued expenses payable 29,000 24,000

Bonds payable 135,000 160,000

Common shares 240,000 91,000

Retained earnings 64,700 81,000

Total $561,700 $431,000

MCKILLOP CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $500,000

Expenses

Cost of goods sold $295,000

Operating expenses 65,000

Depreciation expense 17,000

Interest expense 18,000

Loss on sale of equipment 3,000 398,000

Income before income tax 102,000

Income tax expense 15,300

Net income $ 86,700

Additional information regarding fiscal 2022:

1. New equipment costing $85,000 was purchased for cash.

2. Old equipment costing $25,000 was sold for $10,000 cash when the carrying amount was $13,000.

3. Bonds were originally issued at face value. Bonds with a face value of $25,000 were converted into $25,000 of common shares during the year.

4. Cash dividends were declared and paid during the year.

5. Accounts payable pertain to merchandise purchases.

Instructions

Using the direct method, prepare a statement of cash flows for the year ended December 31, 2022.

Ex. 149

Below is selected financial information for Moron Corporation:

2022 2021

Net Income $275,000 $162,000

Dividends Payable 40,000 75,000

Retained Earnings 472,000 242,000

Instructions

Determine the dividends declared and the dividends paid in 2022.

Ex. 150

Select data for the following two companies is identified below:

Wizards Corp. Blazer Inc.

Net Income $21,575 $10,200

Cash provided/(used) by operating activities (9,820) 6,490

Cash provided/(used) by investing activities* 14,385 (1,195)

Cash provided/(used) by financing activities (2,400) (6,058)

Dividends paid 0 2,500

*Assume cash provided/(used) by investing activities reflects net capital expenditures.

Instructions

(a) Calculate the free cash flow for each company.

(b) Which company is in a stronger financial position?

Ex. 151

Healthy Eater Inc. reported the following selected information:

Instructions

1. In each of the years shown above, what phase of the corporate life cycle do you think the company is in?
2. Calculate the company’s free cash flow for 2022 and 2021. Use net cash used by investing activities as a proxy for capital expenditures.

Ex. 152

Merlin Marketing Ltd. produces the following information from their latest financial statements:

Net income $ 21,000

Dividends paid 5,000

Average total assets 210,000

Current assets 150,000

Current liabilities 100,000

Cash provided by operating activities 19,000

Net capital expenditures 10,000

Sales 150,000

Total liabilities 105,000

Total assets 175,000

Cash used in investing activities 12,000

Instructions

(a) Calculate the free cash flow.

(b) Explain the importance of the free cash flow calculation.

Ex. 153

Select data for the following two companies is identified below:

Mantaza Corp. Philomena Inc.

Net Income $10,785 $20,400

Cash provided/(used) by operating activities (4,910) 12,980

Cash provided/(used) by investing activities* 7,195 (2,390)

Cash provided/(used) by financing activities (1,200) (12,115)

Dividends paid 0 5,000

*Assume cash provided/(used) by investing activities reflects net capital expenditures.

Instructions

(a) Calculate the free cash flow for each company.

(b) Which company is in a stronger financial position?

*Ex. 154

The statement of income of Rennie Corporation is shown below:

RENNIE CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $2,125,000

Cost of goods sold 1,300,000

Gross profit 825,000

Operating expenses $312,500

Depreciation expense 35,000 347,500

Net income $477,500

Additional information:

1. Accounts receivable increased $105,000 during the year.

2. Inventory increased $62,500 during the year.

3. Prepaid expenses increased $53,750 during the year.

4. Accounts payable to merchandise suppliers increased $72,500 during the year.

5. Accrued expenses payable increased $40,000 during the year.

Instructions

Using the direct method, prepare the operating activities section of the statement of cash flows for the year ended December 31, 2022.

*Ex. 155

Fanshawe Sales Inc. reported total operating expenses of $640,000 in 2022, which included depreciation expense of $150,000. Also, during 2022, prepaid expenses increased by $34,000 and accrued expenses decreased by $33,000.

Instructions

Using the direct method, calculate the amount of cash payments for operating expenses in 2022

*Ex. 156

For all instances below, assume the direct method of preparing the operating activities section of the statement of cash flows is used.

(a) Sales = $640,280; accounts receivable increased by $23,450. Calculate cash receipts from sales.

(b) Cost of goods sold = $1,640,000; inventory decreased by $52,000; accounts payable decreased by $28,500. Calculate cash payments for purchases.

(c) The statement of income shows $10,450 for income tax expense. The statement of financial position shows an increase in income tax payable of $2,525. Calculate the cash paid for income tax.

(d) Operating expenses total $102,500; depreciation expense = $37,200; prepaid expenses increased by $16,300; liabilities related to other operating expenses decreased by $4,900. Calculate cash payments for operating expenses.

*Ex. 157

For all instances below, assume the direct method of preparing the operating activities section of the statement of cash flows is used.

(a) Sales = $1,025,000; accounts receivable decreased by $162,000. Calculate cash receipts from sales.

(b) Cost of goods sold = $444,000; inventory increased by $12,000; accounts payable increased by $32,750. Calculate cash payments for purchases.

(c) The statement of income shows $32,900 for income tax expense. The statement of financial position shows a decrease in income tax payable of $2,250. Calculate the cash paid for income tax.

(d) Operating expenses total $272,000; depreciation expense = $41,200; prepaid expenses decreased by $15,750; liabilities related to other operating expenses increased by $6,000. Calculate cash payments for operating expenses.

*Ex. 158

The general ledger of Argyle Limited provides the following information:

End of Year Beginning of Year

Accounts Receivable $ 142,000 $ 206,000

Inventory 686,000 524,000

Accounts Payable 90,000 132,000

The company's sales for the year were $4,600,000 and cost of goods sold was $3,275,000.

Instructions

Assuming the company uses the direct method of preparing the operating activities section of its statement of cash flows, calculate the following:

(a) Cash receipts from customers.

(b) Cash payments to suppliers.

*Ex. 159

The statement of income of Packer Inc. for the year ended December 31, 2022, reported the following condensed information:

Revenue from fees $585,000

Operating expenses 340,000

Income from operations 245,000

Income tax expense 61,250

Net income $183,750

Packer's statement of financial position contained the following comparative data at December 31:

2022 2021

Accounts receivable $52,500 $45,000

Accounts payable 34,000 41,000

Income taxes payable 5,500 3,000

The corporation has no depreciable assets. Accounts payable pertain to operating expenses.

Instructions

Using the direct method, prepare the operating activities of the statement of cash flows for the year ended December 31, 2022.

*Ex. 160

The statement of income of Northumberland Corporation is shown below:

NORTHUMBERLAND CORPORATION

Statement of Income

Year Ended December 31, 2022

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Sales $8,500,000

Cost of goods sold 5,200,000

Gross profit 3,300,000

Operating expenses $1,250,000

Depreciation expense 140,000 1,390,000

Net income $1,910,000

Additional information:

1. Accounts receivable increased $420,000 during the year.

2. Inventory increased $250,000 during the year.

3. Prepaid expenses increased $215,000 during the year.

4. Accounts payable to merchandise suppliers increased $290,000 during the year.

5. Accrued expenses payable increased $160,000 during the year.

Instructions

Using the direct method, prepare the operating activities section of the statement of cash flows for the year ended December 31, 2022.

*Ex. 161

Below is select information from Houston Enterprise:

2022 2021

Dividends payable $36,000 $30,000

Retained earnings 391,500 171,000

Net Income 295,500

Instructions

(a) Calculate cash dividends declared.

(b) Calculate cash payments for dividends.