Chapter 12
The Statement of Cash Flows
Ethics Check
(5-10 min.) EC 12-1
a. Integrity
b. Due care
c. Objectivity and independence
d. Integrity
Short Exercises
(10 min.) S 12-1
The statement of cash flows helps investors and creditors:
a. Predict future cash flows by reporting past cash receipts and
payments, which are reasonably good predictors of future cash
receipts and payments.
b. Evaluate management decisions by reporting on how managers got
cash and how they used cash to run the business.
(10-15 min.) S 12-2
DATE: _______________
TO: Managers of Sowell Enterprises, Inc.
FROM: Student Name
SUBJECT: Purposes of the statement of cash flows
The statement of cash flows is designed to help predict the future cash
flows of a business. The statement of cash flows measures past cash
flows, which are a reasonably good predictor of future cash flows. Net
(5-10 min) S 12-3
5. Loss on the sale of long-term assets
Students need to identify 3 items.
(15-30 min.) S 12-4
DATE: _______________
TO: Managers of Jolson Hotels, Inc.
FROM: Student Name
SUBJECT: Assessment of 2016 and Outlook for the Future
2016 was not a good year. Most of the increase in net income resulted
from the gain on the insurance proceeds from fire damage to a building,
which means that normal operations were not very profitable. This is
confirmed by the increase in receivables, which hints that collections
are lagging.
The cash-flow data paint a similar picture. Operating activities used
cash, which is bad news. Over the long run, operations should provide
the bulk of the cash if the business expects to succeed.
During 2016, the insurance recovery helped investing activities produce
(continued) S 12-4
(5-10 min.) S 12-5
Cash flows from operating activities:
Net income ............................................................................
$21,000
Adjustments to reconcile net income to
(10 min.) S 12-6
O+
a.
Increase in accounts
O−
h.
Decrease in accrued
payable
liabilities
O+
b.
Decrease in accounts
O+
i.
Net income
receivable
O+
j.
Decrease in prepaid
O−
c.
Gain on sale of
expense
(10 min.) S 12-7
Williams Corporation
Statement of Cash Flows (partial)
Year ended June 30, 2016
Cash flows from operating activities:
Net income ..........................................................
$70,000*
Adjustments to reconcile net income to
(15 min.) S 12-8
Williams Corporation
Statement of Cash Flows
Year ended June 30, 2016
Cash flows from operating activities:
Net income ...........................................................
$ 70,000*
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense .....................................
$5,000
Increase in current assets other than
cash .............................................................
(29,000)
Increase in current liabilities .........................
10,000
(14,000)
Net cash provided by operating activities .........
56,000
Cash flows from investing activities:
Purchase of equipment .......................................
$(42,000)
Proceeds from sale of land .................................
27,000
Net cash used for investing activities................
(15,000)
Cash flows from financing activities:
Proceeds from issuance of common stock .......
$ 18,000
Payment of note payable ....................................
(30,000)
Payment of dividends .........................................
(6,100)
Purchase of treasury stock ................................
(7,000)
Net cash used for financing activities ...............
(25,100)
Net increase in cash ................................................
$ 15,900
_____
*$225,000 − $116,000 − $34,000 − $5,000 = $70,000
(15 min.) S 12-10
a. New borrowing on long-term notes payable = $11,000 ($64,000 −
$53,000)
b. Issuance of common stock = $11,000 ($41,000 − $30,000)
c. Payment (and declaration) of dividends = $238,000, as follows:
Beginning
Net
income
Dividend
declarations
Ending
Retained
+
−
=
Retained
Earnings
Earnings
$239,000
+
$230,000
−
X
=
$231,000
X
=
$239,000 + $230,000 − $231,000
X
=
$238,000
Retained Earnings
Beg. bal.
239,000
Dividends declared
(paid)
238,000
Net income
230,000
End. bal.
231,000
(15 min.) S 12-11
a. Collections from customers = $759,000, as follows:
Collections
=
Service
−
Increase in Accounts Receivable
from customers
Revenue
=
$770,000
−
$11,000 ($56,000 − $45,000)
=
$759,000
Accounts Receivable
Beg. Bal.
45,000
Revenue
770,000
Collections
759,000
End. Bal.
56,000
b. Payments for inventory = $283,000, as follows:
(10-15 min.) S 12-12
(15 min.) S 12-13
Laughlin Horse Farms, Inc.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Collections from customers ............................
$ 570,000
Payments to suppliers and employees ..........
(410,000)
Net cash provided by operating activities .....
$160,000
(5 min.) S 12-14
Mulberry Golf Club, Inc.
Statement of Cash Flows (partial)
Year ended September 30, 2016
(15 min.) S 12-15
Mulberry Golf Club, Inc.
Statement of Cash Flows
Year ended September 30, 2016
Cash flows from operating activities:
Collections from customers .................................
$ 202,000
Payments to suppliers ..........................................
(111,000)
Payments to employees .......................................
(74,000)
Payment of income tax .........................................
(15,000)
Net cash provided by operating activities ..........
$ 2,000
Cash flows from investing activities:
Purchase of equipment ........................................
$(43,000)
Proceeds from sale of land ..................................
62,000
Net cash provided by investing activities ...........
19,000
Cash flows from financing activities:
Proceeds from issuance of common stock ........
$ 17,000
Payment of note payable ......................................
(23,000)
Payment of dividends ...........................................
(7,500)
Purchase of treasury stock ..................................
(5,500)
Net cash used for financing activities .................
(19,000)
Net increase in cash ..................................................
$ 2,000
Exercises
(10-15 min.) E 12-16A
F–
a.
Payment of long-term
F+
k.
Issuance of long-term
debt
note payable to borrow
cash
O+
b.
Increase in salary payable
O–
l.
Increase in prepaid
I+
c.
Cash sale of land
expenses
I+
d.
Sale of long-term
O–
m.
Decrease in accrued
investment
liabilities
I–
e.
Acquisition of building by
O+
n.
Loss on sale of equipment
cash payment
O+
o.
Decrease in accounts
O+
f.
Net income
receivable
F+
g.
Issuance of common stock
O+
p.
Depreciation on equipment
for cash
O+
q.
Increase in accounts
F–
h.
Payment of cash dividend
payable
NIF
i.
Acquisition of equipment
O+
r.
Amortization of intangible
by issuance of note
assets
payable
F–
s.
Purchase of treasury stock
I–
j.
Purchase of long-term
investment with cash
(5-10 min.) E 12-17A
a.
Investing
h.
Financing
b.
Financing
i.
Financing
c.
Financing
j.
Investing
(10-15 min.) E 12-18A
(15-20 min.) E 12-19A
(20-30 min.) E 12-20A
Increase in prepaid expenses ........................
(900)
Increase in accounts payable ........................
13,000
Increase in accrued liabilities ........................
17,000
89,100
Net cash provided by operating activities ....
119,000
Cash flows from investing activities:
Acquisition of plant assets ..................................
$(90,000)
Proceeds from sale of land ..................................
34,000
Net cash used for investing activities ...........
(56,000)
Cash flows from financing activities:
Proceeds from issuance of common stock ........
$ 60,000
Payment of long-term note payable ....................
(14,000)
Payment of dividends ..........................................
(12,000)
Net cash provided by financing activities .....
34,000
Net increase in cash ................................................
$ 97,000
Cash balance, December 31, 2015 ..........................
68,000
Cash balance, December 31, 2016 ..........................
$165,000
Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable
$ 44,000
(continued) E 12-20A
Req. 2
Nyman’s cash flows look strong. Operations are the main source of
cash. The company is investing in new plant assets without having to
borrow. It was able to issue stock, pay dividends, and pay off a long-
term note payable — all financing transactions. All of these signs are
favorable.
(5-10 min.) E 12-21A
Case A — A combination of operations and issuing stock generated
most of the cash for acquisition of plant assets. The company
also sold plant assets for cash.
Case B — The sale of plant assets generated the cash needed to acquire
new plant assets. Operations provided a positive cash flow.
Case C — Issuing stock and the sale of plant assets generated the cash
to acquire plant assets. Operations did not provide a positive
cash flow.
Most healthy financially — Case A
Mid-range — Case B
Least healthy financially — Case C
(10-15 min.) E 12-22A
a. Cash proceeds of sale = Book value of asset sold, $7,000* –
Loss on sale, $5,000
= $2,000
_____
*$120,000 + $15,000 − $13,000 − Book value sold (X) = $115,000
Book value sold = $7,000
Plant Assets, Net
Beginning balance
120,000
Depreciation expense
13,000
Purchases
15,000
Book value sold*
7,000
Ending balance
115,000
b. Cash dividend declared = $28,000*
_____
*$44,000 + $59,000 − $6,000 − Cash dividends (X) = $69,000
Cash dividends = $28,000
(10-15 min.) E 12-23A
(5-10 min.) E 12-24A
(20-30 min.) E 12-25A
Net decrease in cash .................................................
$ ( 400)
Cash balance, June 30, 2015 ....................................
25,000
Cash balance, June 30, 2016 ....................................
$ 24,600
Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable
$ 100,000
(continued) E 12-25A
Req. 2
Value World’s cash flows look strong. Operations are the main source of
cash. The company invested in new plant assets without having to
borrow. Value World was able to issue stock, pay dividends, and pay off
a long-term note payable — all financing transactions. All of these signs
are favorable.
(10-15 min.) E 12-26A
$6,000 increase in
a.
Cash collections
=
$141,000
−
Accounts Receivable
($53,000 − $47,000)
=
$135,000
Cash payments
for inventory
$4,000 decrease in
$3,000 increase in
b.
=
$76,000
−
Inventory
−
Accounts Payable
($39,000 − $35,000)
($32,000 − $29,000)
=
$69,000
(10-15 min.) E 12-27B
O+
a.
Increase in salary payable
O+
k.
Net income
O+
b.
Depreciation of equipment
O+
l.
Loss on sale of equipment
I+
c.
Sale of long-term
O+
m.
Decrease in accounts
investment
receivable
F+
d.
Issuance of common stock
NIF
n.
Acquisition of equipment
for cash
by issuance of note
payable
O–
e.
Decrease in accrued
liabilities
O+
o.
Increase in accounts
payable
O+
f.
Amortization of intangible
assets
F–
p.
Payment of cash dividend
I–
g.
Acquisition of building by
I–
q.
Purchase of long-term
cash payment
Investment with cash
F–
h.
Payment of long-term debt
I+
r.
Cash sale of land
F+
i.
Issuance of long-term note
O–
s.
Increase in prepaid
payable to borrow cash
expenses
F–
j.
Purchase of treasury stock
(5-10 min.) E 12-28B
a.
Financing
h.
Investing
(10-15 min.) E 12-29B
(15-20 min.) E 12-30B
(20-30 min.) E 12-31B
Increase in prepaid expenses ......................
(700)
Increase in accounts payable ......................
11,000
Decrease in accrued liabilities ....................
(25,000)
15,300
Net cash provided by operating activities .....
62,200
Cash flows from investing activities:
Acquisition of plant assets .................................
$(99,000)
Proceeds from sale of land .................................
25,000
Net cash used for investing activities ............
(74,000)
Cash flows from financing activities:
Proceeds from issuance of common stock .......
$ 47,000
Payment of long-term note payable ...................
(17,000)
Payment of dividends .........................................
(12,000)
Net cash provided by financing activities ......
18,000
Net increase in cash ................................................
$ 6,200
Cash balance, December 31, 2015 ..........................
83,800
Cash balance, December 31, 2016 ..........................
$ 90,000
Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable
$ 51,000
(continued) E 12-31B
Req. 2
Norman’s cash flows look strong. Operations are the main source of
cash. The company is investing in new plant assets without having to
borrow. It was able to issue stock, pay dividends, and pay off a long-
term note payable — all financing transactions. All of these signs are
favorable.
(5-10 min.) E 12-32B
Case A — A combination of operations and issuing stock generated
most of the cash for acquisition of plant assets. The
company also sold plant assets for cash. Operations
provided more cash than did cases B or C.
Case B — The sale of plant assets generated the cash needed to
acquire new plant assets. They could also have used cash
from the stock issue or cash from operations.
Case C — Issuing stock generated the cash to acquire plant assets.
Operations used cash while in cases A and B operations
provided cash. They also could have used cash from the
sale of plant assets.
Most healthy financially — Case A
Mid-range — Case B
Least healthy financially — Case C
(10-15 min.) E 12-33B
a. Cash proceeds of sale = Book value of asset sold, $18,000* –
Loss on sale, $8,000
= $10,000
_____
*$120,000 + $26,000 − $16,000 − Book value sold (X) = $112,000
Book value sold = $18,000
Plant Assets, Net
Beginning balance
120,000
Depreciation expense
16,000
Purchases
26,000
Book value sold*
18,000
Ending balance
112,000
b. Cash dividend declared = $30,000*
_____
*$48,000 + $61,000 − $6,000 − Cash dividends (X) = $73,000
Cash dividends = $30,000*
Retained Earnings
Stock dividends
6,000
Beginning balance
48,000
Cash dividends*
30,000
Net income
61,000
Ending balance
73,000
(10-15 min.) E 12-34B
Cash flows from operating activities:
Receipts:
Collections from customers
($125,000 + $34,000) ...........................
$ 159,000
Collection of dividend revenue ..............
8,000
Total cash receipts .............................
167,000
(5-10 min.) E 12-35B
(20-30 min.) E 12-36B
(continued) E 12-36B
(10-15 min.) E 12-37B
Quiz
Q12-57
a [$59,700 − ($4,000 − $3,000) = $58,700]
Problems
(40 min.) P 12-58A
Req. 1
Klaben Motors, Inc.
Income Statement
Year Ended December 31, 2016
Sales revenue ........................................................................
$649,000
Cost of goods sold [$243,000 + (2 × $39,000)] ....................
321,000
Salary expense ......................................................................
151,000
Depreciation expense ($220,000 / 5) ....................................
44,000
Rent expense.........................................................................
25,000
Income tax expense ..............................................................
22,000
Net income ............................................................................
$ 86,000
Req. 2
Klaben Motors, Inc.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Current:
Current:
Cash ........................................
$288,000*
Accounts payable
Accounts receivable
($117,000 − $70,200) .....
$ 46,800
($649,000 × .20) ....................
129,800
Salary payable ................
1,000
Inventory (1 × $39,000) ..........
39,000
Total current liabilities ...
47,800
Total current assets ..............
456,800
STOCKHOLDERS’ EQUITY
Property, plant, and equipment:
Common stock ...................
510,000
Equipment .............
$220,000
Retained earnings
Less:Accumulated
($86,000 − $11,000) ...........
75,000
depreciation .......
(44,000)
176,000
Total equity .....................
585,000
Total liabilities and
Total assets ................................
$632,800
stockholders' equity .........
$632,800
____
*$510,000 (stock) − $220,000 (equipment) − $243,000 (inventory) − $25,000 (rent) –
$70,200 (inventory) + $519,200 (sales) – $150,000 (salaries) – $22,000 (taxes) –
$11,000 (dividends) = $288,000
(continued) P 12-58A
Req. 3
Klaben Motors, Inc.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Net income ..........................................................
$ 86,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ...............................
$ 44,000
Increase in accounts receivable ..............
(129,800)
Increase in inventory ................................
(39,000)
Increase in accounts payable ...................
46,800
Increase in salary payable ........................
1,000
(77,000)
Net cash provided by operating activities ...
9,000
Cash flows from investing activities:
Purchase of equipment ......................................
$(220,000)
Net cash used for investing activities ..........
(220,000)
Cash flows from financing activities:
Issuance of common stock ...............................
$510,000
Payment of dividend ..........................................
(11,000)
Net cash provided by financing activities ....
499,000
Net increase in cash ...............................................
$ 288,000
Cash balance, January 1, 2016 ..............................
0
Cash balance, December 31, 2016 .........................
$ 288,000
(40 min.) P 12-59A
Req. 1
Klaben Motors, Inc.
Income Statement
Year Ended December 31, 2016
Sales revenue ........................................................................
$649,000
Cost of goods sold [$243,000 + (2 × $39,000)] ....................
321,000
Salary expense ......................................................................
151,000
Depreciation expense ($220,000 / 5) ....................................
44,000
Rent expense.........................................................................
25,000
Income tax expense ..............................................................
22,000
Net income ............................................................................
$ 86,000
Req. 2
Klaben Motors, Inc.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Current:
Current:
Cash ........................................
$288,000*
Accounts payable
Accounts receivable
($117,000 − $70,200) .....
$ 46,800
($649,000 × .20) ....................
129,800
Salary payable ................
1,000
Inventory (1 × $39,000) ..........
39,000
Total current liabilities ...
47,800
Total current assets ..............
456,800
STOCKHOLDERS’ EQUITY
Property, plant, and equipment:
Common stock ...................
510,000
Equipment .............
$220,000
Retained earnings
Less:Accumulated
($86,000 − $11,000) ...........
75,000
depreciation .......
(44,000)
176,000
Total equity .....................
585,000
Total liabilities and
(continued) P 12-59A
(35-45 min.) P 12-60A
(continued) P 12-60A
(35-45 min.) P 12-61A
Increase in prepaid expenses ......................
(900)
Increase in accounts payable .......................
1,700
Decrease in accrued liabilities .....................
(14,000)
Decrease in income tax payable ..................
(1,100)
11,000
Net cash provided by operating activities ......
65,000
Cash flows from investing activities:
Purchase of equipment ......................................
$(34,600)
Purchase of building ..........................................
(44,000)
Sale of long-term investment .............................
15,500
Net cash used for investing activities .............
(63,100)
Cash flows from financing activities:
Issuance of long-term note payable ..................
$ 47,000
Issuance of common stock ................................
10,000
Payment of cash dividend ..................................
(28,000)
Net cash provided by financing activities.......
29,000
Net increase in cash and cash equivalents ..........
$ 30,900
Cash and cash equivalents balance, June 30, 2015
14,500
Cash and cash equivalents balance, June 30, 2016
$ 45,400
Noncash investing and financing activities:
Acquisition of land by issuing note payable ....
$104,000
(continued) P 12-61A
Req. 2
Evaluation: Canton Movie Theater Company’s cash flows look strong.
Operations are the main source of cash. The company is
investing in new plant assets and therefore had a negative
cash flow from investing activities. Canton generated a
positive cash flow from financing activities. These
financing activities indicate that Canton is considered
credit-worthy to issue long-term notes. We also see that
the company has sufficient funds to pay cash dividends.
(30-40 min.) P 12-62A
Req. 1
King Supply Corp.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Net income ...............................................................
$61,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ........................................
$ 15,000
Increase in accounts receivable .......................
(1,000)
Increase in inventories ......................................
(14,400)
Decrease in prepaid expenses ..........................
2,100
Increase in accounts payable ............................
8,500
Increase in salary payable………………………..
8,000
Decrease in other accrued liabilities ................
(2,100)
16,100
Net cash provided by operating activities ..........
77,100
Cash flows from investing activities:
Purchase of land ......................................................
$(43,600)
Purchase of equipment ($49,900 − depreciation
expense of $15,000 = $34,900; $53,100 −
$34,900) ...............................................................
(18,200)
Net cash used for investing activities .................
(61,800)
Cash flows from financing activities:
Payment of dividends ($27,000 + $61,000 − $39,800)..
$(48,200)
Issuance of note payable ........................................
24,000
Issuance of common stock .....................................
22,200
Net cash used for financing activities ................
(2,000)
Net increase in cash and cash equivalents ................
$ 13,300
Cash and cash equivalents balance, December 31, 2015
4,000
Cash and cash equivalents balance, December 31, 2016
$ 17,300
(continued) P 12-62A
Req. 2
This problem will help students learn how operating activities, investing
activities, and financing activities generate cash receipts and cash
payments. By solving this problem, students will learn how companies
prepare the statement of cash flows and will thus be able to understand
the meaning of cash flows from the three basic categories of business
activities. This knowledge will aid their analysis of investments. For
example, students should know that net cash provided by operating
activities conveys a more positive signal about a company than net cash
used for operations.
Student responses will vary.
(30-40 min.) P 12-63A
Req. 1
King Supply Corp.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Receipts:
Collections from customers
($442,000 – $1,000) .........................................
$441,000
Total cash receipts ........................................
441,000
Payments:
To suppliers ($186,500 + $14,400 – $8,500 +
$50,300 – $2,100 + $2,100) .............................
$242,700
To employees ($76,000 – $8,000)......................
68,000
For interest ........................................................
24,200
For income tax ...................................................
29,000
Total cash payments ......................................
(363,900)
Net cash provided by operating activities .......
77,100
Cash flows from investing activities:
Purchase of land ......................................................
$(43,600)
Purchase of equipment ($49,900 − depreciation
expense of $15,000 = $34,900; $53,100 −
$34,900) ...............................................................
(18,200)
Net cash used for investing activities .................
(61,800)
Cash flows from financing activities:
Payment of dividends ($27,000 + $61,000 − $39,800)
$(48,200)
Issuance of note payable ........................................
24,000
Issuance of common stock .....................................
22,200
Net cash used for financing activities ................
(2,000)
Net increase in cash and cash equivalents ................
$ 13,300
Cash and cash equivalents balance, December 31, 2015
4,000
Cash and cash equivalents balance, December 31, 2016
$ 17,300
(continued) P 12-63A
Req. 2
This problem will help students learn how operating activities, investing
activities, and financing activities generate cash receipts and cash
payments. By solving this problem, students will learn how companies
prepare the statement of cash flows and will thus be able to understand
the meaning of cash flows from the three basic categories of business
activities. This knowledge will aid their analysis of investments. For
example, students should know that net cash provided by operating
activities conveys a more positive signal about a company than net cash
used for operations.
Student responses will vary.
(35-45 min.) P 12-64A
Req. 1
Crutchfield Furniture Gallery, Inc.
Statement of Cash Flows
Year Ended October 31, 2017
Cash flows from operating activities:
Receipts:
Collections from customers
($406,000 + $182,700) .................................
$588,700
Interest received ............................................
4,500
Dividends received ........................................
4,700
Total cash receipts .....................................
$597,900
Payments:
To suppliers ...................................................
$(368,000)
To employees ................................................
(93,700)
For interest .....................................................
(13,400)
For income tax ...............................................
(38,300)
Total cash payments ..................................
(513,400)
Net cash provided by operating activities ...
84,500
Cash flows from investing activities:
Purchase of plant assets ..................................
$ (44,400)
Sale of plant assets ..........................................
22,300
Collection of loans ............................................
11,200
Loan to another company ................................
(12,800)
Sale of investments ..........................................
9,500
Net cash used for investing activities ..........
(14,200)
Cash flows from financing activities:
Payments of long-term notes payable .............
$ (71,000)
Payment of dividends .......................................
(48,700)
Issuance of note payable .................................
20,200
Issuance of common stock ..............................
7,000
Net cash used for financing activities ..........
(92,500)
Net (decrease) in cash .........................................
$ (22,200)
Cash balance, October 31, 2016 ..........................
40,200
Cash balance, October 31, 2017 ..........................
$ 18,000
(continued) P 12-64A
Noncash investing and financing transactions:
Payment of short-term note payable by
issuing long-term note payable ..................................
$41,000
Acquisition of equipment by issuing
short-term note payable ..............................................
16,300
Total noncash investing and financing transactions .........
$57,300
Req. 2
Year 2017 was a strong year from a cash-flow standpoint. Operations
provided the bulk of the company’s cash and the company was able to
issue new stock and debt. This means stockholders and creditors have
faith in the company. The business acquired additional plant assets,
reduced their debt, and paid dividends which generally bodes well for
the future.
(45-60 min.) P 12-65A
Req. 1
Percy Electric Company
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Receipts:
Collections from customers ..................................
$661,500
Dividends received .................................................
16,900
Total cash receipts .............................................
$678,400
Payments:
To suppliers ($446,000 + $34,100) ........................
$(480,100)
To employees ..........................................................
(139,200)
For interest ..............................................................
(25,500)
For income tax ........................................................
(19,100)
Total cash payments ..........................................
(663,900)
Net cash provided by operating activities ...........
14,500
Cash flows from investing activities:
Purchase of equipment .............................................
$ (31,700)
Sale of long-term investments ..................................
21,300
Net cash used for investing activities ..................
(10,400)
Cash flows from financing activities:
Issuance of common stock .......................................
$ 47,600
Payment of long-term note payable .........................
(41,100)
Payment of dividends ................................................
(27,900)
Purchase of treasury stock .......................................
(25,700)
Net cash used for financing activities ..................
(47,100)
Net decrease in cash .....................................................
$ (43,000)
Cash balance, December 31, 2015 ...............................
71,500
Cash balance, December 31, 2016 ...............................
$ 28,500
Noncash investing and financing activities:
Acquisition of land by issuing common stock
$ 80,300
Retirement of note payable by issuing common stock
20,000
Total noncash investing and financing activities
$100,300
(continued) P 12-65A
Req. 2
Percy Electric Company
Cash Flows from Operating Activities
Year Ended December 31, 2016
Cash flows from operating activities:
Net income .............................................................
$12,200
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense .....................................
$ 19,900
Loss on sale of investments ..........................
1,100
Increase in accounts receivable ....................
(27,700)
Decrease in inventories .................................
9,000
Decrease in prepaid expenses ......................
5,000
Decrease in accounts payable .......................
(7,800)
Increase in interest payable ...........................
2,300
Decrease in salary payable ............................
(7,800)
Increase in other accrued liabilities ..............
10,300
Decrease in income tax payable ....................
(2,000)
2,300
Net cash provided by operating activities ...........
$14,500
(45-60 min.) P 12-66A
Req. 1
Donna Dunn Design Studio, Inc.
Statement of Cash Flows
Year Ended June 30, 2016
Cash flows from operating activities:
Net income ............................................................
$ 70,600
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ....................................
$ 13,500
Loss on sale of land .......................................
7,200
Increase in accounts receivable ...................
(26,500)
Increase in inventories ..................................
(35,300)
Decrease in prepaid expenses ......................
1,300
Decrease in accounts payable ......................
(11,000)
Decrease in income tax payable ...................
(1,000)
Increase in accrued liabilities ........................
8,600
Increase in interest payable ..........................
800
Increase in salary payable .............................
300
(42,100)
Net cash provided by operating activities .......
28,500
Cash flows from investing activities:
Sale of land ............................................................
$ 58,200
Purchase of long-term investment ......................
(13,400)
Net cash provided by investing activities ........
44,800
Cash flows from financing activities:
Payment of long-term note payable .....................
$(61,500)
Payment of cash dividends ..................................
(7,500)
Issuance of common stock ..................................
16,000
Net cash used for financing activities ..............
(53,000)
Net increase in cash .................................................
$ 20,300
Cash balance, June 30, 2015 ...................................
8,100
Cash balance, June 30, 2016 ...................................
$ 28,400
(continued) P 12-66A
Req. 1
Noncash investing and financing activities:
Acquisition of equipment by issuing
long-term note payable ................................................
$14,400
Payment of short-term note payable by
issuing common stock .................................................
5,600
Total noncash investing and financing activities ................
$20,000
Req. 2
Donna Dunn Design Studio, Inc.
Statement of Cash Flows
Year Ended June 30, 2016
Cash flows from operating activities:
Receipts:
Collections from customers .........................
$ 239,000
Interest received ............................................
1,500
Total cash receipts ....................................
$ 240,500
Payments:
To suppliers ...................................................
$(146,900)
To employees .................................................
(48,100)
For income tax ...............................................
(12,000)
For interest .....................................................
( 5,000)
Total cash payments .................................
(212,000)
Net cash provided by operating activities ........
$ 28,500
(40 min.) P 12-67B
Req. 1
Pruitt Motors, Inc.
Income Statement
Year Ended December 31, 2016
Sales revenue ..............................................................
$488,000
Cost of goods sold [$203,000 + (1 × $40,000)] ...........
243,000
Salary expense ............................................................
125,000
Rent expense ...............................................................
17,000
Depreciation expense ($180,000 / 5) ...........................
36,000
Income tax expense .....................................................
12,600
Net income ...................................................................
$ 54,400
Req. 2
Pruitt Motors, Inc.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Current:
Current:
Cash ........................................
$252,800*
Accounts payable
Accounts receivable
($80,000 − $24,000) .....
$ 56,000
($488,000 × .20) ..................
97,600
Salary payable ................
3,000
Inventory (1 × $40,000) ..........
40,000
Total current liabilities ...
59,000
Total current assets ...........
390,400
STOCKHOLDERS’ EQUITY
Property, plant, and equipment:
Common stock ...................
440,000
Equipment .............
$180,000
Retained earnings
Less:Accumulated
($54,400 − $19,000) .........
35,400
depreciation .......
(36,000)
144,000
Total equity .....................
475,400
Total liabilities and
Total assets ................................
$534,400
stockholders' equity ......
$534,400
____
*$440,000 (stock) − $180,000 (equipment) − $203,000 (inventory) − $17,000 (rent) −
$24,000 (inventory) + $390,400 (sales) − $122,000 (salaries) − $12,600 (taxes) –
$19,000 (dividends) = $252,800
(continued) P 12-67B
Req. 3
Pruitt Motors, Inc.
Statement of Cash Flows
Year Ended December 31, 2016
Cash flows from operating activities:
Net income ...............................................................
$ 54,400
(40 min.) P 12-68B
(continued) P 12-68B
(35-45 min.) P 12-69B
(continued) P 12-69B
(35-45 min.) P 12-70B
(continued) P 12-70B
(30-40 min.) P 12-71B
(continued) P 12-71B
(30-40 min.) P 12-72B
(continued) P 12-72B
(35-45 min.) P 12-73B
(continued) P 12-73B
(45-60 min.) P 12-74B
(continued) P 12-74B
(45-60 min.) P 12-75B
Decrease in salary payable ..........................
(600)
11,500
Net cash provided by operating activities ......
82,100
Cash flows from investing activities:
Sale of land ..........................................................
$ 39,900
Purchase of long-term investments ...................
(14,600)
Net cash provided by investing activities .......
25,300
Cash flows from financing activities:
Payment of cash dividends .................................
$(37,700)
Issuance of common stock .................................
6,900
Payment of long-term note payable ...................
(59,000)
Net cash used for financing activities ............
(89,800)
Net increase in cash .................................................
$ 17,600
Cash balance, June 30, 2015 ...................................
10,800
Cash balance, June 30, 2016 ...................................
$ 28,400
(continued) P 12-75B
Req. 1
Noncash investing and financing activities:
Acquisition of equipment by issuing
long-term note payable ...................................
$13,600
Paid off short-term note payable by issuing
common stock .................................................
7,000
Total noncash investing and financing activities ...
$20,600
Req. 2
Sally Fagan Design Studio, Inc.
Statement of Cash Flows
Year Ended June 30, 2016
Cash flows from operating activities:
Receipts:
Collections from customers ..........................
$ 231,600
Interest received .............................................
1,200
Total cash receipts .....................................
$ 232,800
Payments:
To suppliers ....................................................
$(95,100)
To employees ..................................................
(39,100)
For income tax ................................................
(12,100)
For interest ......................................................
(4,400)
Total cash payments ..................................
(150,700)
Net cash provided by operating activities .........
$ 82,100
Challenge Exercises and Problem
(20-30 min.) E 12-76
(All amounts in thousands)
Decrease in
Sales
+
Accounts Receivable
a.
Collections
=
$23,996
=
$23,984
+
($609 − $597)
(20 min.) E 12-77
P 12-78
Assets:
December
31, 2015
December
31, 2016
Cash and cash
equivalents
$14,000
$153,500
Given
Accounts receivable
(net)
95,000
28,700
($95,000 – $66,300)
Inventory
60,500
78,400
($60,500 + $17,900)
Dividends payable
-0-
6,000
($9,000 – $3,000)
Income taxes payable
6,000
1,300
($6,000 – $4,700)
Long-term debt
84,100
69,100
($84,100 – $15,000)
Total liabilities
139,400
141,700
Stockholders’ equity:
Common stock, no par
47,300
69,300
($47,300 + $22,000)
Retained earnings
158,800
165,400
($158,800 + $15,600 –
$9,000)
Total stockholders’ equity
206,100
234,700
Total liabilities and
Decision Cases
Net cash used for financing activities ......................
(37)
Net (decrease) in cash ......................................................
$ (46)
Cash balance, December 31, 2015 ...................................
63
Cash balance, December 31, 2016 ...................................
$ 17
(continued) Decision Case 1
Req. 2
The cash balance at the end of 2016 is low because:
• The camp paid $110,000 to buy new property, plant, and
equipment.
• The camp paid off $85,000 of notes payable.
(15-25 min.) Decision Case 2
4. Four-Star is raising more cash by selling stock than Applied is. This
gives Four-Star more cash to invest in research and development of
new products and other innovations to enhance the company’s
competitiveness. Applied, on the other hand, is paying off debt. That
is not necessarily bad for Applied, but Four-Star appears to be a step
ahead in terms of financing its operations with stockholders’ equity
and investing the cash in income-producing assets.
Ethical Issue
Req. 1
Cash flows from operating
activities:
Without
Reclassification
With
Reclassification
Net income ...........................
$ 37,000
$37,000
Increase in accounts
receivable .............................
(80,000)
—
Net cash (used for) provided
by operating activities ..............
$(43,000)
$37,000
Columbia looks better with the reclassification because net
cash flow from operations is positive.
Req. 2
The issue is whether or not it is ethical to reclassify accounts receivable
from current assets to long-term assets.
Req. 3 and Req. 4
The stakeholders are Columbia, its officers, directors and employees, as
well as their present and future creditors and stockholders.
Economic analysis: The plan to reclassify accounts receivable would
have an immediate positive impact on Columbia and its employees
because it might enable Columbia to obtain the loan it desperately
needs. However, this might be to the detriment of present and future
creditors, because if Columbia can’t collect the receivables, it may not
be able to pay off its loans to creditors.
(continued) Ethical case
Legal analysis: To reclassify receivables when, in fact, they are not truly
collectible, even in the long run, might leave the company open later to a
lawsuit for damages suffered by creditors who loan Columbia money
based on false information.
Ethical analysis: To reclassify receivables when, in fact, they are not
truly collectible in the long run, deprives the banks of accurate
information they need to make sound financial decisions.
Reclassification would be unethical if Columbia expects to collect within
the current period. In that case, the reclassification would appear to be
Focus on Financials: Apple Inc.
(continued) Apple Inc.
$86)
927
($182,795 x .005)
914
End. Bal.
86
(continued) Apple Inc.
b. Using the format provided in Exhibit 12-15: (Amounts in millions)
Payments for
=
Cost of
+
Increase in
−
Increase in
inventory
sales
Inventory
Accounts Payable
$104,776
=
$112,258
+
$347
−
$7,829
($2,111 − $1,764)
($30,196 - $22,367)
Payments
for other
=
Other
operating
+
Increase in
−
Increase in
operating
expenses
expenses
Prepaid Assets
Accrued Liabilities
$16,361
=
$18,034
+
$2,924
−
$4,597
($9,806 − $6,882)
($18,453 - $13,856)
Other operating expenses include Depreciation and Amortization
Expense of $7,946 million, so these expenses should be deducted.
Payments for other operating expenses = $16,361 million – $7,946 million
= $8,415 million.
Total
payments
to Suppliers
Payments for
inventory
+
Payments for
other operating
expenses
$113,191
=
$104,776
+
$8,415
(continued) Apple Inc.
Focus on Analysis: Under Armour, Inc.
3. An addition to net income for depreciation and amortization, $72
million, indicates cash flow provided by operations was greater
than net income. Depreciation reduces income but not cash and is
added back to net income.
(continued) Under Armour, Inc.
Req. 3
In 2014, Under Armour’s additions to property, plant, and equipment
were more than previous years’ additions. This is evident in the
investing section of the statement of cash flows where capital spending
in 2014 ($140 million) was more than in 2013 ($88 million) and 2012 ($51
million). The company does not report the sale of fixed assets.
Req. 4
The largest item in Under Armour’ financing section of their
consolidated statement of cash flows is the proceeds from its term loan.
This reveals that the company strategy is to expand through additional
Group Projects