CHAPTER 13

STATEMENT OF CASH FLOWS

CHAPTER LEARNING OBJECTIVES

1. Discuss the usefulness and format of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period.

Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items.

2. Prepare a statement of cash flows using the indirect method. The preparation of a statement of cash flows involves three major steps (1) Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. (2) Analyze changes in noncurrent asset and liability accounts and stockholder’s equity accounts and report as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the balance sheet to make sure the amounts agree.

3. Analyze the statement of cash flows. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of additional dividends or for expansion.

^a4. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps (1) Determine net cash provided/used by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. (2) Analyze changes in noncurrent asset and liability accounts and stockholders’ equity accounts and record as investing and financing activities, or disclose as noncash transactions. (3) Compare the net change in cash on the statement of cash flows with the change in the Cash account reported on the balance sheet to make sure the amounts agree.

^a5. Use a worksheet to prepare the statement of cash flows using the indirect method. When there are numerous adjustments, a worksheet can be a helpful tool in preparing the statement of cash flows. Key guidelines for using a worksheet are as follows. (1) List accounts with debit balances separately from those with credit balances. (2) In the reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and cash outflows as credits. (3) Do not enter reconciling items in any journal or account, but use them only to help prepare the statement of cash flows.

The steps in preparing the worksheet are as follows. (1) Enter beginning and ending balances of balance sheet accounts. (2) Enter debits and credits in reconciling columns. (3) Enter the increase or decrease in cash in two places as a balancing amount.

6. Use the T-account approach to prepare a statement of cash flows. To use T-accounts to prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for operating, investing, and financing activities; (2) prepare smaller T-accounts for all other noncash accounts; (3) insert beginning and ending balances for all balance sheet accounts; and (4) follow the steps in Illustration 13C-1 entering debit and credit amount as needed.

TRUE-FALSE STATEMENTS

1. The statement of cash flows is a required financial statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

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

3. A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

4. A statement of cash flows indicates the sources and uses of cash during a period.

5. A statement of cash flows helps investors and creditors assess the entity’s ability to generate future income.

6. The information in a statement of cash flows helps investors and creditors assess the company’s ability to pay dividends and meet obligations.

7. Financial statement users can determine future investing and financing transactions by examining a company’s statement of cash flows.

8. In preparing a statement of cash flows, both cash and noncash activities are reported on the statement.

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

10. The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and unusual activities.

11. The sale of land in exchange for cash would be classified as a cash inflow from an investing activity.

12. Cash flow from 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.

13. The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

14. The payment of interest expense on bonds payable is classified as a cash outflow from operating activities.

15. Any item that appears on the income statement is considered either a cash inflow or a cash outflow from operating activities.

16. The acquisition of a building by issuing bonds payable is an investing and financing activity that does not affect cash.

17. All major financing and investing activities affect cash.

18. Cash provided by operating activities is generally equal to operating income.

19. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operating activities.

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

21. A loss on the sale of equipment is added to net income in determining cash provided by operating activities under the indirect method.

22. In preparing a statement of cash flows, increases in the Common Stock and Treasury Stock accounts during a period would be investing activities.

23. Cash provided by operating activities fails to take into account that a company must invest in new fixed assets just to maintain its current level of operations.

24. Free cash flow equals cash provided by operating activities less capital expenditures and cash dividends.

^a25. Operating expenses plus an increase in prepaid expenses minus a decrease in accrued expenses payable equals cash payments for operating expenses.

^a26. During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable increased by $4,000; therefore, the cash paid for income taxes was $26,000.

($26,000 = $30,000 - $4,000)

(Cash paid for income taxes = Income Tax Expense – Increase in Income Taxes Payable)

^a27. In calculating net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

^a28. Using the direct method, major classes of investing and financing activities are listed in the operating activities section.

^a29. During a period, cost of goods sold plus an increase in inventory plus an increase in accounts payable equals cash paid to suppliers.

^a30. Analysis of the changes in all of the noncash balance sheet accounts explains the change in the cash account.

^a31. The change in cash is equal to the change in liabilities less the change in equity plus the change in noncash assets.

32. Financing activities include the obtaining of cash from issuing debt and repaying the amounts borrowed.

33. The adjusted trial balance is the only item needed to prepare the Statement of Cash Flows.

34. Under the indirect method, retained earnings is adjusted for items that affected reported net income but did not affect cash.

35. The statement of cash flows classifies cash receipts and cash payments into two categories: operating activities and nonoperating activities.

^a36. Under the direct method, the equation for computing cash collections from customers is sales revenues plus the increase in accounts receivable or minus the decrease in accounts receivable.

MULTIPLE CHOICE QUESTIONS

37. The statement of cash flows helps investors and creditors assess each of the following except the

a. entity's ability to generate future income.

b. entity's ability to pay dividends.

c. reasons for the difference between net income and net cash provided by operating activities.

d. cash investing and financing transactions during the period

38. The statement of cash flows

a. must be prepared on a daily basis.

b. summarizes the operating, financing, and investing activities of an entity.

c. is another name for the income statement.

d. is a special section of the income statement.

39. Which of the following items is not generally used in preparing a statement of cash flows?

a. Adjusted trial balance

b. Comparative balance sheets

c. Current income statement

d. Additional information

40. The primary purpose of the statement of cash flows is to

a. provide information about the investing and financing activities during a period.

b. prove that revenues exceed expenses if there is a net income.

c. provide information about the cash receipts and cash payments during a period.

d. facilitate banking relationships.

41. If a company reports a net loss, it

a. can still have a net increase in cash.

b. will not be able to pay cash dividends.

c. will not be able to get a loan.

d. will not be able to make capital expenditures.

42. The first section to be prepared on the statement of cash flows is the

a. sources and used section.

b. operating activities section.

c. change in cash section.

d. investing and financing section.

43. The statement of cash flows will not report the

a. amount of checks outstanding at the end of the period.

b. sources of cash in the current period.

c. uses of cash in the current period.

d. change in the cash balance for the current period.

44. The statement of cash flows reports each of the following except

a. cash receipts from operating activities.

b. cash payments from investing activities.

c. the net change in cash.

d. cash sales.

45. Purchasing and selling property, plant and equipment for use in operations are

a. operating activities.

b. financing activities.

c. capital activities.

d. investing activities.

46. Lending money and collecting the loans are

a. operating activities.

b. investing activities.

c. financing activities.

d. non-cash investing and financing activities.

47. The cash effects of transactions that create revenues and expenses are

a. financing activities.

b. investing activities.

c. operating activities.

d. processing activities.

48. The acquisition of land by issuing common stock is

a. a noncash transaction that is not reported in the body of a statement of cash flows.

b. a cash transaction that is reported in the body of a statement of cash flows.

c. a noncash transaction that is reported in the body of a statement of cash flows.

d. only reported if the statement of cash flows is prepared using the direct method.

49. The order of presentation of activities in the statement of cash flows is

a. operating, investing, and financing.

b. operating, financing, and investing.

c. financing, operating, and investing.

d. financing, investing, and operating.

50. Financing activities include

a. lending money.

b. acquiring investments.

c. issuing debt.

d. acquiring long-lived assets.

51. Investing activities include

a. collecting cash on loans made.

b. obtaining cash from creditors.

c. obtaining capital from owners.

d. repaying money previously borrowed.

52. Generally, the category on the statement of cash flows in which financial statement users are most interested is cash flows from

a. operating activities.

b. investing activities.

c. financing activities.

d. significant noncash activities.

53. The category that is generally considered to be the best measure of a company's ability to continue as a going concern is

a. cash flows from operating activities.

b. cash flows from investing activities.

c. cash flows from financing activities.

d. usually different from year to year.

54. Cash receipts from interest and dividend revenue are classified as

a. financing activities.

b. investing activities.

c. operating activities.

d. either financing or investing activities.

55. Each of the following is an example of a significant noncash activity except

a. conversion of bonds into common stock.

b. exchanges of plant assets.

c. issuance of debt to purchase assets.

d. stock dividends.

56. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the

a. two cash effects can be netted and presented as one item in the investing activities section.

b. cash inflow and cash outflow should be reported separately in the investing activities section.

c. two cash effects can be netted and presented as one item in the financing activities section.

d. cash inflow and cash outflow should be reported separately in the financing activities section.

57. Of the items below, the one that appears first on the statement of cash flows is

a. noncash investing and financing activities.

b. net increase (decrease) in cash.

c. cash at the end of the period.

d. cash at the beginning of the period.

58. Which of the following transactions does not affect cash during a period?

a. Write-off of an uncollectible account

b. Collection of an accounts receivable

c. Sale of treasury stock

d. Exercise of the call option on bonds payable

59. Significant noncash transactions would not include

a. conversion of bonds into common stock.

b. asset acquisition through bond issuance.

c. treasury stock acquisition.

d. exchange of plant assets.

60. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported in

a. the financing section.

b. the "extraordinary" section.

c. a separate schedule or note to the financial statements.

d. the stockholders' equity section.

61. Indicate where the payment of income taxes would appear, if at all, on a statement of cash flows prepared using the direct method.

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

62. Where is the issuance of common stock issued for cash reported, if at all, when the indirect method is used to prepare the operating activities sections of the statement of cash flows?

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

63. Where is the purchase of land for cash reported, if at all, when the indirect method is used to prepare the operating activities section of the statement of cash flows?

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

64. Where is the purchase of land and a building in exchange for a mortgage reported, if at all, when the indirect method is used to prepare the operating activities sections of the statement of cash flows?

a. Operating activities section

b. Investing activities section

c. Financing activities section

d. Does not represent a cash flow

65. Jean’s Organic Product Market had the following transactions during 2022:

1. Issued $50,000 of common stock at par value for cash.

2. Repaid a 6 year note payable in the amount of $22,000.

3. Acquired land by issuing common stock at par for $50,000.

4. Declared and paid a cash dividend of $7,000.

5. Sold a long-term investment (cost $3,000) for cash of $6,000.

6. Acquired an investment in IBM stock for cash of $10,000.

What is the net cash provided by financing activities?

a. $21,000

b. $67,000

c. $29,000

d. $0

Ex. 161

Classify each of the following as a(n):

A. Operating Activity

B. Investing Activity

C. Financing Activity

_____ 1 Issuance of bonds.

_____ 2. Sale of equipment.

_____ 3. Amortization expense.

_____ 4. Purchase of treasury stock.

_____ 5. Receipt of dividends on investment.

_____ 6. Purchase of land.

Ex. 162

Selected transactions of Alton Company are listed below.

1. Common stock is sold for cash above par value.

2. Bonds payable are issued for cash at a discount.

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

4. Land is sold for cash at book value.

5. Accounts payable are paid in cash.

6. Equipment is purchased by signing a 3-year, 10% note payable.

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

8. 100 shares of XYZ common stock are purchased for cash.

9. Merchandise is sold to customers for cash.

10. Bonds payable are converted into common stock.

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. 163

(a) Identify several alternatives for presenting significant noncash activities in financial statements.

(b) Give three examples of significant noncash transactions.

Ex. 164

The following information is available for Redcands Company:

Receipts from customers $215,000

Dividends from stock investments 3,000

Proceeds from sale of equipment 18,000

Proceeds from issuance of stock 90,000

Payments for inventory 100,000

Payments for operating expenses 78,000

Interest paid 6,000

Taxes paid 4,000

Dividends paid 20,000

Instructions

Based on the preceding information, compute the net cash provided by operating activities.

Ex. 165

Plough Company reported net income of $180,000 for the current year. Depreciation recorded on buildings and equipment amounted to $80,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year Beginning of Year

Cash $20,000 $15,000

Accounts receivable 24,000 32,000

Inventories 50,000 65,000

Prepaid expenses 9,500 5,000

Accounts payable 12,000 18,000

Income taxes payable 1,600 1,200

Instructions

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

Ex. 166

Plexis Company reported net income of $148,000. For 2022, depreciation was $45,000, and the company reported a gain on sale of investments of $12,000. Accounts receivable increased $25,000 and accounts payable decreased $23,000.

Instructions

Compute net cash provided by operating activities using the indirect method.

Ex. 167

Assuming a statement of cash flows is prepared using the indirect approach, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows.

Code

Cash Flows From Operating Activities

Add to Net Income A

Deduct from Net Income D

Cash Flows From Investing Activities IA

Cash Flows From Financing Activities FA

Category

1. Common stock is issued for cash at an amount above par value.

2. Inventory increased during the period.

3. Depreciation expense was recorded for the period.

4. Building was purchased for cash.

5. Bonds payable were acquired and retired at their carrying value.

6. Accounts payable decreased during the period.

7. Prepaid expenses decreased during the period.

8. Treasury stock was acquired for cash.

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

10. Patent amortization expense was recorded for the period.

Ex. 168

A comparative balance sheet for Rocker Company appears below:

ROCKER COMPANY

Comparative Balance Sheet

Dec. 31, 2022 Dec. 31, 2021

Assets

Cash $ 34,000 $11,000

Accounts receivable 18,000 13,000

Inventory 25,000 17,000

Prepaid expenses 6,000 9,000

Long-term investments -0- 17,000

Equipment 60,000 33,000

Accumulated depreciation—equipment (20,000) (15,000)

Total assets $123,000 $85,000

Liabilities and Stockholders' Equity

Accounts payable $ 17,000 $ 7,000

Bonds payable 36,000 45,000

Common stock 40,000 23,000

Retained earnings 30,000 10,000

Total liabilities and stockholders' equity $123,000 $85,000

Additional information:

1. Net income for the year ending December 31, 2022 was $35,000.

2. Cash dividends of $15,000 were declared and paid during the year.

3. Long-term investments that had a cost of $17,000 were sold for $14,000.

4. Sales for 2022 were $120,000.

5. No equipment was sold during the year.

Instructions

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

Ex. 169

A comparative balance sheet for Halpern Corporation is presented below:

HALPERN CORPORATION

Comparative Balance Sheet

2022 2021

Assets

Cash $ 36,000 $ 31,000

Accounts receivable (net) 70,000 60,000

Prepaid insurance 25,000 17,000

Land 18,000 40,000

Equipment 70,000 60,000

Accumulated depreciation (20,000) (13,000)

Total Assets $199,000 $195,000

Liabilities and Stockholders' Equity

Accounts payable $ 11,000 $ 6,000

Bonds payable 27,000 19,000

Common stock 140,000 115,000

Retained earnings 21,000 55,000

Total liabilities and stockholders' equity $199,000 $195,000

Additional information:

1. Net loss for 2022 is $20,000.

2. Cash dividends of $14,000 were declared and paid in 2022.

3. Land was sold for cash at a loss of $4,000. This was the only land transaction during the year.

4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash.

5. $22,000 of bonds were retired during the year at carrying (book) value.

6. Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000.

Instructions

Prepare a statement of cash flows for the year ended 2022 using the indirect method.

Ex. 170

The following information is available for Sally Corporation for the year ended December 31, 2022:

Collection of principal on long-term loan to a supplier $15,000

Acquisition of equipment for cash 10,000

Proceeds from the sale of long-term investment at book value 20,000

Issuance of common stock for cash 27,000

Depreciation expense 28,000

Redemption of bonds payable at carrying (book) value 35,000

Payment of cash dividends 15,000

Net income 25,000

Purchase of land by issuing bonds payable 45,000

In addition, the following information is available from the comparative balance sheet for Sally at the end of 2021 and 2022:

2022 2021

Cash $ 66,000 $14,000

Accounts receivable (net) 20,000 16,000

Prepaid insurance 18,000 13,000

Total current assets $104,000 $43,000

Accounts payable $ 30,000 $20,000

Salaries payable 3,000 7,000

Total current liabilities $ 33,000 $27,000

Instructions

Prepare Sally's statement of cash flows for the year ended December 31, 2022 using the indirect method.

Ex. 171

Towson Company prepared the tabulation below at December 31, 2022.

Net Income $340,000

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

Depreciation expense, $43,000

Increase in accounts receivable, $50,000

Decrease in inventory, $13,000

Amortization of patent, $4,000

Increase in accounts payable, $5,600

Decrease in interest receivable, $7,000

Increase in prepaid expenses, $6,000

Decrease in income taxes payable, $1,500

Gain on sale of land, $5,000

Net cash provided (used) by operating activities

Instructions

Show how each item should be reported in the operating activities section of the statement of cash flows if the indirect method is used. Use parentheses for deductions.

Ex. 172

The current sections of Donny Inc.'s balance sheets at December 31, 2021 and 2022 are presented here.

2022 2021

Current assets:

Cash $115,000 $ 99,000

Accounts receivable 105,000 89,000

Inventory 154,000 172,000

Prepaid expense 27,000 21,000

Total current assets $401,000 $381,000

Current liabilities:

Accrued expenses payable $ 15,000 $ 5,000

Accounts payable 85,000 93,000

Total current liabilities $100,000 $ 98,000

Additional information: Donny's net income for 2022 was $203,000. Depreciation expense was $25,000.

Instructions

Prepare the net cash provided by operating activities section of the company's statement of cash flows for the year ended December 31, 2022 using the indirect method.

Ex. 173

Wayne Company reported net income of $265,000 for 2022. Wayne also reported depreciation expense of $45,000 and a loss of $8,000 on the sale of equipment. The comparative balance sheet shows a decrease in accounts receivable of $15,000 for the year, a $17,000 increase in accounts payable, and a $6,000 decrease in prepaid expenses.

Instructions

Prepare the operating activities section of the statement of cash flows for 2022. Use the indirect method.

Ex. 174

The three accounts shown below appear in the general ledger of Larson Corp. during 2022.

Equipment

Date Debit Credit Balance

Jan. 1 Balance 160,000

July 31 Purchase of equipment 75,000 235,000

Sept. 2 Cost of equipment constructed 56,000 291,000

Nov. 10 Cost of equipment sold 45,000 246,000

Accumulated Depreciation—Equipment

Date Debit Credit Balance

Jan. 1 Balance 71,000

Nov. 10 Accumulated depreciation on

equipment sold 30,000 41,000

Dec. 31 Depreciation for year 20,000 61,000

Ex. 174 (Cont.)

Retained Earnings

Date Debit Credit Balance

Jan. 1 Balance 105,000

Aug. 23 Dividends (cash) 15,000 90,000

Dec. 31 Net income 50,000 140,000

Instructions

From the postings in the accounts, indicate how the information is reported on a statement of cash flows using the indirect method. The loss on sale of equipment was $7,000. (Hint: Cost of equipment constructed is reported in the investing activities section as a decrease in cash of $56,000.)

Ex. 175

Planner Corporation's comparative balance sheets are presented below.

PLANNER CORPORATION

Comparative Balance Sheets

December 31

2022 2021

Cash $ 21,570 $ 10,700

Accounts receivable 18,200 23,400

Land 18,000 26,000

Building 70,000 70,000

Accumulated depreciation (15,000) (10,000)

Total $112,770 $120,100

Accounts payable $ 12,370 $31,100

Common stock 75,000 69,000

Retained earnings 25,400 20,000

Total $112,770 $120,100

Additional information:

1. Net income was $27,900. Dividends declared and paid were $22,500.

2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for $5,900.

Instruction

(a) Prepare a statement of cash flows for 2022 using the indirect method.

(b) Compute free cash flow.

Ex. 176

Miroz Corporation's comparative balance sheets are presented below.

MIROZ CORPORATION

Comparative Balance Sheets

December 31

2022 2021

Cash $ 18,700 $ 22,700

Accounts receivable 24,700 22,300

Investments 25,000 16,000

Equipment 59,000 70,000

Accumulated depreciation (14,500) (10,000)

Total $112,900 $121,000

Accounts payable $ 13,600 $11,100

Bonds payable 6,000 30,000

Common stock 50,000 45,000

Retained earnings 43,300 34,900

Total $112,900 $121,000

Additional information:

1. Net income was $17,700. Dividends declared and paid were $9,300.

2. Equipment which cost $11,000 and had accumulated depreciation of $2,000 was sold for $4,000.

3. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation.

Instruction

(a) Prepare a statement of cash flows for 2022 using the indirect method.

(b) Compute free cash flow.

Ex. 177

The following information is available for Young Corporation:

Capital expenditures $115,000

Cash dividends 75,000

Cash provided by operating activities 220,000

Net income 130,000

Sales 600,000

Instructions

Compute Young Corporation's free cash flow.