Chapter 23 Statement of Cash Flows

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Chapter 23 Statement of Cash Flows

QUESTIONS

1. What is the purpose of the statement of cash flows? What information does it provide?
2.
Of what use is the statement of cash flows?
3.
Differentiate between investing activities, financing activities, and operating activities.
4.
What are the major sources of cash (inflows) in a statement of cash flows? What are the major uses (outflows) of cash?
5.
Identify and explain the major steps involved in preparing the statement of cash flows.
6.
Identify the following items as (1) operating, (2) investing, or (3) financing activities: purchase of land; payment of dividends; cash sales; and purchase of treasury stock.
7.
Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance. From what sources does the information to prepare this statement come, and what information does each source provide?
8.
Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows?
9.
Differentiate between the direct method and the indirect method by discussing each method.
10.
Broussard Company reported net income of $3.5 million in 2012. Depreciation for the year was $520,000; accounts receivable increased $500,000; and accounts payable increased $300,000. Compute net cash flow from operating activities using the indirect method.
11.
Collinsworth Co. reported sales on an accrual basis of $100,000. If accounts receivable increased $30,000, and the allowance for doubtful accounts increased $9,000 after a write-off of $2,000, compute cash sales.
12.
Your roommate is puzzled. During the last year, the company in which she is a stockholder reported a net loss of $675,000, yet its cash increased $321,000 during the same period of time. Explain to your roommate how this situation could occur.
13.
The board of directors of Gifford Corp. declared cash dividends of $260,000 during the current year. If dividends payable was $85,000 at the beginning of the year and $90,000 at the end of the year, how much cash was paid in dividends during the year?
14.
Explain how the amount of cash payments to suppliers is computed under the direct method.
15.
The net income for Letterman Company for 2012 was $320,000. During 2012, depreciation on plant assets was $124,000, amortization of patent was $40,000, and the company incurred a loss on sale of plant assets of $21,000. Compute net cash flow from operating activities.
16.
Each of the following items must be considered in preparing a statement of cash flows for Blackwell Inc. for the year ended December 31, 2012. State where each item is to be shown in the statement, if at all. (a) Plant assets that had cost $18,000 6? years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $4,000. (b) During the year, 10,000 shares of common stock with a stated value of $20 a share were issued for $41 a share. (c) Uncollectible accounts receivable in the amount of $22,000 were written off against Allowance for Doubtful Accounts. (d) The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of availablefor- sale securities for $38,000 cash.
17.
Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method. (a) Cash payments to employees. (b) Redemption of bonds payable. (c) Sale of building at book value. (d) Cash payments to suppliers. (e) Exchange of equipment for furniture. (f) Issuance of preferred stock. (g) Cash received from customers. (h) Purchase of treasury stock. (i) Issuance of bonds for land. (j) Payment of dividends. (k) Purchase of equipment. (l) Cash payments for operating expenses.
18.
Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of Bombeck Co. At the bottom of Bombeck’s statement of cash flows was a separate section entitled “Noncash investing and financing activities.” Give three examples of significant noncash transactions that would be reported in this section.
19.
During 2012, Simms Company redeemed $2,000,000 of bonds payable for $1,880,000 cash. Indicate how this transaction would be reported on a statement of cash flows, if at all.
20.
What are some of the arguments in favor of using the indirect (reconciliation) method as opposed to the direct method for reporting a statement of cash flows?
21.
Why is it desirable to use a worksheet when preparing a statement of cash flows? Is a worksheet required to prepare a statement of cash flows? BRI E F EXERCI S E S
BE23-1
Wainwright Corporation had the following activities in 2012. 1. Sale of land $180,000 4. Purchase of equipment $415,000 2. Purchase of inventory $845,000 5. Issuance of common stock $320,000 3. Purchase of treasury stock $72,000 6. Purchase of available-for-sale securities $59,000 Compute the amount Wainwright should report as net cash provided (used) by investing activities in its statement of cash flows.
BE23-2
Stansfield Corporation had the following activities in 2012. 1. Payment of accounts payable $770,000 4. Collection of note receivable $100,000 2. Issuance of common stock $250,000 5. Issuance of bonds payable $510,000 3. Payment of dividends $350,000 6. Purchase of treasury stock $46,000 Compute the amount Stansfield should report as net cash provided (used) by financing activities in its 2012 statement of cash flows.
BE23-3
Novak Corporation is preparing its 2012 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novak’s 2012 statement of cash flows. Code Letter Effect A Added to net income in the operating section D Deducted from net income in the operating section R-I Cash receipt in investing section P-I Cash payment in investing section R-F Cash receipt in financing section P-F Cash payment in financing section N Noncash investing and financing activity Items ____ (a) Purchase of land and building. ____ (j) Increase in accounts payable. ____ (b) Decrease in accounts receivable. ____ (k) Decrease in accounts payable. ____ (c) Issuance of stock. ____ (l) Loan from bank by signing note. ____ (d) Depreciation expense. ____ (m) Purchase of equipment using a note. ____ (e) Sale of land at book value. ____ (n) Increase in inventory. ____ (f) Sale of land at a gain. ____ (o) Issuance of bonds. ____ (g) Payment of dividends. ____ (p) Retirement of bonds payable. ____ (h) Increase in accounts receivable. ____ (q) Sale of equipment at a loss. ____ (i) Purchase of available-for-sale investment. ____ (r) Purchase of treasury stock.
BE23-4
Bloom Corporation had the following 2012 income statement. Sales $200,000 Cost of goods sold 120,000 Gross profi t 80,000 Operating expenses (includes depreciation of $21,000) 50,000 Net income $ 30,000 5 5 2 3 4 The following accounts increased during 2012: Accounts Receivable $12,000; Inventory $11,000; Accounts Payable $13,000. Prepare the cash flows from operating activities section of Bloom’s 2012 statement of cash flows using the direct method.
BE23-5
Use the information from
BE23-4 for Bloom Corporation. Prepare the cash flows from operating activities section of Bloom’s 2012 statement of cash flows using the indirect method.

BE23-6
At January 1, 2012, Eikenberry Inc. had accounts receivable of $72,000. At December 31, 2012, accounts receivable is $54,000. Sales for 2012 total $420,000. Compute Eikenberry’s 2012 cash receipts from customers.
BE23-7
Moxley Corporation had January 1 and December 31 balances as follows. 1/1/12 12/31/12 Inventory $95,000 $113,000 Accounts payable 61,000 69,000 For 2012, cost of goods sold was $500,000. Compute Moxley’s 2012 cash payments to suppliers.
BE23-8
In 2012, Elbert Corporation had net cash provided by operating activities of $531,000; net cash used by investing activities of $963,000; and net cash provided by financing activities of $585,000. At January 1, 2012, the cash balance was $333,000. Compute December 31, 2012, cash.
BE23-9
Loveless Corporation had the following 2012 income statement. Revenues $100,000 Expenses 60,000 $ 40,000 In 2012, Loveless had the following activity in selected accounts. Allowance for Accounts Receivable Doubtful Accounts 1/1/12 20,000 1,200 1/1/12 Revenues 100,000 1,000 Write-offs Write-offs 1,000 1,840 Bad debt expense 90,000 Collections 12/31/12 29,000 2,040 12/31/12 Prepare Loveless’s cash flows from operating activities section of the statement of cash flows using (a) the direct method and (b) the indirect method.
BE23-10
Hendrickson Corporation reported net income of $50,000 in 2012. Depreciation expense was $17,000. The following working capital accounts changed. Accounts receivable $11,000 increase Available-for-sale securities 16,000 increase Inventory 7,400 increase Nontrade note payable 15,000 decrease Accounts payable 12,300 increase Compute net cash provided by operating activities.
BE23-11
In 2012, Wild Corporation reported a net loss of $70,000. Wild’s only net income adjustments were depreciation expense $81,000, and increase in accounts receivable $8,100. Compute Wild’s net cash provided (used) by operating activities.
BE23-12
In 2012, Leppard Inc. issued 1,000 shares of $10 par value common stock for land worth $40,000. (a) Prepare Leppard’s journal entry to record the transaction. (b) Indicate the effect the transaction has on cash. (c) Indicate how the transaction is reported on the statement of cash flows.
BE23-13
Indicate in general journal form how the items below would be entered in a worksheet for the preparation of the statement of cash flows. (a) Net income is $317,000. (b) Cash dividends declared and paid totaled $120,000. (c) Equipment was purchased for $114,000. (d) Equipment that originally cost $40,000 and had accumulated depreciation of $32,000 was sold for $10,000.
E23-1 (Classification of Transactions)
Springsteen Co. had the following activity in its most recent year of operations. (a) Pension expense exceeds amount funded. (g) Amortization of intangible assets. (b) Redemption of bonds payable. (h) Purchase of treasury stock. (c) Sale of building at book value. (i) Issuance of bonds for land. (d) Depreciation. (j) Payment of dividends. (e) Exchange of equipment for furniture. (k) Increase in interest receivable on notes receivable. (f) Issuance of capital stock. (l) Purchase of equipment.
Instructions
Classify the items as (1) operating—add to net income; (2) operating—deduct from net income; (3) investing; (4) financing; or (5) significant noncash investing and financing activities. Use the indirect method.
E23-2 (Statement Presentation of Transactions—Indirect Method)
Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Granderson Inc. for the year ended December 31, 2012. (a) Plant assets that had cost $25,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold at the beginning of the year for $5,300. (b) During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $33 a share. (c) Uncollectible accounts receivable in the amount of $27,000 were written off against Allowance for Doubtful Accounts. (d) The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash. (e) A 3-month U.S. Treasury bill was purchased for $100,000. The company uses a cash and cashequivalent basis for its cash flow statement. (f) Patent amortization for the year was $20,000. (g) The company exchanged common stock for a 70% interest in Plumlee Co. for $900,000. (h) During the year, treasury stock costing $47,000 was purchased.
Instructions
State where each item is to be shown in the statement of cash flows, if at all.
E23-3 (Preparation of Operating Activities Section—Indirect Method, Periodic Inventory)
The income statement of Rodriquez Company is shown below. RODRIQUEZ COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2012 Sales $6,900,000 Cost of goods sold Beginning inventory $1,900,000 Purchases 4,400,000 Goods available for sale 6,300,000 Ending inventory 1,600,000 Cost of goods sold 4,700,000 Gross profi t 2,200,000 Operating expenses Selling expenses 450,000 Administrative expenses 700,000 1,150,000 Net income $1,050,000 Additional information: 1. Accounts receivable decreased $310,000 during the year. 2. Prepaid expenses increased $170,000 during the year. 3. Accounts payable to suppliers of merchandise decreased $275,000 during the year. 4. Accrued expenses payable decreased $120,000 during the year. 5. Administrative expenses include depreciation expense of $60,000. 2 2 3 3 4
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2012, for Rodriquez Company, using the indirect method.
E23-4 (Preparation of Operating Activities Section—Direct Method)
Data for the Rodriquez Company are presented in
E23-3.

Instructions
Prepare the operating activities section of the statement of cash flows using the direct method.
E23-5 (Preparation of Operating Activities Section—Direct Method)
Norman Company’s income statement for the year ended December 31, 2012, contained the following condensed information. Service revenue $840,000 Operating expenses (excluding depreciation) $624,000 Depreciation expense 60,000 Loss on sale of equipment 26,000 710,000 Income before income taxes 130,000 Income tax expense 40,000 Net income $ 90,000 Norman’s balance sheet contained the following comparative data at December 31. 2012 2011 Accounts receivable $37,000 $59,000 Accounts payable 46,000 31,000 Income taxes payable 4,000 8,500 (Accounts payable pertains to operating expenses.)
Instructions
Prepare the operating activities section of the statement of cash flows using the direct method.
E23-6 (Preparation of Operating Activities Section—Indirect Method)
Data for Norman Company are presented in
E23-5.

Instructions
Prepare the operating activities section of the statement of cash flows using the indirect method.
E23-7 (Computation of Operating Activities—Direct Method)
Presented below are two independent situations. Situation A: Chenowith Co. reports revenues of $200,000 and operating expenses of $110,000 in its first year of operations, 2012. Accounts receivable and accounts payable at year-end were $71,000 and $39,000, respectively. Assume that the accounts payable related to operating expenses. Ignore income taxes.
Instructions
Using the direct method, compute net cash provided (used) by operating activities. Situation B: The income statement for Edgebrook Company shows cost of goods sold $310,000 and operating expenses (exclusive of depreciation) $230,000. The comparative balance sheet for the year shows that inventory increased $21,000, prepaid expenses decreased $8,000, accounts payable (related to merchandise) decreased $17,000, and accrued expenses payable increased $11,000.
Instructions
Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.
E23-8 (Schedule of Net Cash Flow from Operating Activities—Indirect Method)
Messner Co. reported $145,000 of net income for 2012. The accountant, in preparing the statement of cash flows, noted several items occurring during 2012 that might affect cash flows from operating activities. These items are listed below and on page 1484. 1. Messner purchased 100 shares of treasury stock at a cost of $20 per share. These shares were then resold at $25 per share. 2. Messner sold 100 shares of IBM common at $200 per share. The acquisition cost of these shares was $165 per share. This investment was shown on Messner’s December 31, 2011, balance sheet as an available-for-sale security. 3 4 3. Messner revised its estimate for bad debts. Before 2012, Messner’s bad debt expense was 1% of its net sales. In 2012, this percentage was increased to 2%. Net sales for 2012 were $500,000, and net accounts receivable decreased by $12,000 during 2012. 4. Messner issued 500 shares of its $10 par common stock for a patent. The market price of the shares on the date of the transaction was $23 per share. 5. Depreciation expense is $39,000. 6. Messner Co. holds 30% of the Sanchez Company’s common stock as a long-term investment. Sanchez Company reported $27,000 of net income for 2012. 7. Sanchez Company paid a total of $2,000 of cash dividends to all investees in 2012. 8. Messner declared a 10% stock dividend. One thousand shares of $10 par common stock were distributed. The market price at date of issuance was $20 per share.
Instructions
Prepare a schedule that shows the net cash flow from operating activities using the indirect method. Assume no items other than those listed above affected the computation of 2012 net cash flow from operating activities.
E23-9 (SCF—Direct Method)
Waubansee Corp. uses the direct method to prepare its statement of cash flows. Relevant balances for Waubansee at December 31, 2012 and 2011, are as follows. December 31 2012 2011 Debits Cash $ 35,000 $ 32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant, & equipment 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General and administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 $756,700 $976,100 Credits Allowance for doubtful accounts $ 1,300 $ 1,100 Accumulated depreciation 16,500 13,500 Trade accounts payable 25,000 17,000 Income taxes payable 21,000 29,100 Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Paid-in capital in excess of par—common stock 9,100 7,500 Retained earnings 44,700 64,600 Sales revenue 538,800 778,700 $756,700 $976,100 Additional information: 1. Waubansee purchased $5,000 in equipment during 2012. 2. Waubansee allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses. 3. Bad debt expense for 2012 was $5,000, and write-offs of uncollectible accounts totaled $3,800.
Instructions
Determine what amounts Waubansee should report in its statement of cash flows for the year ended December 31, 2012, for the following items. (a) Cash collected from customers. (d) Cash paid for income taxes. (b) Cash paid to suppliers. (e) Cash paid for selling expenses. (c) Cash paid for interest.
E23-10 (Classification of Transactions)
Following are selected balance sheet accounts of Sander Bros. Corp. at December 31, 2012 and 2011, and the increases or decreases in each account from 2011 to 2012. Also presented is selected income statement information for the year ended December 31, 2012, and additional information. 6 2 8 Increase Selected balance sheet accounts 2012 2011 (Decrease) Assets Accounts receivable $ 34,000 $ 24,000 $ 10,000 Property, plant, and equipment 277,000 247,000 30,000 Accumulated depreciation (178,000) (167,000) (11,000) 2012 2011 Increase Liabilities and stockholders’ equity Bonds payable $ 49,000 $46,000 $ 3,000 Dividends payable 8,000 5,000 3,000 Common stock, $1 par 22,000 19,000 3,000 Paid-in capital in excess of par—common stock 9,000 3,000 6,000 Retained earnings 104,000 91,000 13,000 Selected income statement information for the year ended December 31, 2012 Sales revenue $155,000 Depreciation 38,000 Gain on sale of equipment 14,500 Net income 31,000 Additional information: 1. During 2012, equipment costing $45,000 was sold for cash. 2. Accounts receivable relate to sales of merchandise. 3. During 2012, $25,000 of bonds payable were issued in exchange for property, plant, and equipment. There was no amortization of bond discount or premium.
Instructions
Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items. (a) Payments for purchase of property, plant, and equipment. (b) Proceeds from the sale of equipment. (c) Cash dividends paid. (d) Redemption of bonds payable.
E23-11 (SCF—Indirect Method)
Condensed financial data of Fairchild Company for 2012 and 2011 are presented below and on page 1486. Exercises 1485 FAIRCHILD COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2012 AND 2011 2012 2011 Cash $1,800 $1,100 Receivables 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments (held-to-maturity) 1,300 1,470 $7,150 $6,300 Accounts payable $1,200 $ 800 Accrued liabilities 200 250 Bonds payable 1,400 1,650 Common stock 1,900 1,700 Retained earnings 2,450 1,900 $7,150 $6,300 FAIRCHILD COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2012 Sales $6,900 Cost of goods sold 4,700 Gross margin 2,200 Selling and administrative expenses 930 Income from operations 1,270 Other revenues and gains Gain on sale of investments 80 Income before tax 1,350 Income tax expense 540 Net income $ 810 Additional information: During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2012. Cash dividends were $260.
Instructions
Prepare a statement of cash flows using the indirect method.
E23-12 (SCF—Direct Method)
Data for Fairchild Company are presented in
E23-11.

Instructions
Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)
E23-13 (SCF—Direct Method)
Andrews Inc., a greeting card company, had the following statements prepared as of December 31, 2012. ANDREWS INC. COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2012 AND 2011 12/31/12 12/31/11 Cash $ 6,000 $ 9,000 Accounts receivable 62,000 49,000 Short-term investments (available-for-sale) 35,000 18,000 Inventory 40,000 60,000 Prepaid rent 5,000 4,000 Equipment 154,000 130,000 Accumulated depr.—equipment (35,000) (25,000) Copyrights 46,000 50,000 Total assets $313,000 $295,000 Accounts payable $ 46,000 $ 42,000 Income taxes payable 4,000 6,000 Salaries and wages payable 8,000 4,000 Short-term loans payable 8,000 10,000 Long-term loans payable 60,000 67,000 Common stock, $10 par 100,000 100,000 Contributed capital, common stock 30,000 30,000 Retained earnings 57,000 36,000 Total liabilities & stockholders’ equity $313,000 $295,000 6 6 Exercises 1487 Additional information: 1. Dividends in the amount of $6,000 were declared and paid during 2012. 2. Depreciation expense and amortization expense are included in operating expenses. 3. No unrealized gains or losses have occurred on the investments during the year. 4. Equipment that had a cost of $30,000 and was 70% depreciated was sold during 2012.
Instructions
Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)
E23-14 (SCF—Indirect Method)
Data for Andrews Inc. are presented in
E23-13.

Instructions
Prepare a statement of cash flows using the indirect method.
E23-15 (SCF—Indirect Method)
Presented below are data taken from the records of Morganstern Company. December 31, December 31, 2012 2011 Cash $ 15,000 $ 10,000 Current assets other than cash 85,000 58,000 Long-term investments 10,000 53,000 Plant assets 335,000 215,000 $445,000 $336,000 Accumulated depreciation $ 20,000 $ 40,000 Current liabilities 40,000 22,000 Bonds payable 75,000 –0– Common stock 254,000 254,000 Retained earnings 56,000 20,000 $445,000 $336,000 Additional information: 1. Held-to-maturity securities carried at a cost of $43,000 on December 31, 2011, were sold in 2012 for $34,000. The loss (not extraordinary) was incorrectly charged directly to Retained Earnings. 2. Plant assets that cost $60,000 and were 80% depreciated were sold during 2012 for $8,000. The loss (not extraordinary) was incorrectly charged directly to Retained Earnings. 3. Net income as reported on the income statement for the year was $59,000. 4. Dividends paid amounted to $10,000. 5. Depreciation charged for the year was $28,000.
Instructions
Prepare a statement of cash flows for the year 2012 using the indirect method.
E23-16 (Cash Provided by Operating, Investing, and Financing Activities)
The balance sheet data of Wyeth Company at the end of 2012 and 2011 are shown on page 1488. ANDREWS INC. INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2012 Sales $338,150 Cost of goods sold 175,000 Gross margin 163,150 Operating expenses 120,000 Operating income 43,150 Interest expense $11,400 Gain on sale of equipment 2,000 (9,400) Income before tax 33,750 Income tax expense 6,750 Net income $ 27,000 2012 2011 Cash $ 30,000 $ 35,000 Accounts receivable (net) 55,000 45,000 Inventory 65,000 45,000 Prepaid expenses 15,000 25,000 Equipment 90,000 75,000 Accumulated depreciation—equipment (18,000) (8,000) Land 70,000 40,000 $307,000 $257,000 Accounts payable $ 65,000 $ 52,000 Accrued expenses 15,000 18,000 Notes payable—bank, long-term –0– 23,000 Bonds payable 30,000 –0– Common stock, $10 par 189,000 159,000 Retained earnings 8,000 5,000 $307,000 $257,000 Land was acquired for $30,000 in exchange for common stock, par $30,000, during the year; all equipment purchased was for cash. Equipment costing $13,000 was sold for $3,000; book value of the equipment was $6,000. Cash dividends of $9,000 were declared and paid during the year.
Instructions
Compute net cash provided (used) by: (a) Operating activities. (b) Investing activities. (c) Financing activities.
E23-17 (SCF—Indirect Method and Balance Sheet)
Ochoa Inc., had the following condensed balance sheet at the end of operations for 2011. OCHOA INC. BALANCE SHEET DECEMBER 31, 2011 Cash $ 8,500 Current liabilities $ 15,000 Current assets other than cash 29,000 Long-term notes payable 25,500 Investments 20,000 Bonds payable 25,000 Plant assets (net) 67,500 Common stock 75,000 Land 40,000 Retained earnings 24,500 $165,000 $165,000 During 2012, the following occurred. 1. A tract of land was purchased for $11,000. 2. Bonds payable in the amount of $20,000 were retired at par. 3. An additional $10,000 in common stock was issued at par. 4. Dividends totaling $9,375 were paid to stockholders. 5. Net income was $30,250 after deducting depreciation of $13,500. 6. Land was purchased through the issuance of $22,500 in bonds. 7. Ochoa Inc. sold part of its investment portfolio for $12,875. This transaction resulted in a gain of $2,000 for the company. The company classifies the investments as available-for-sale. 8. Both current assets (other than cash) and current liabilities remained at the same amount.
Instructions
(a) Prepare a statement of cash flows for 2012 using the indirect method. (b) Prepare the condensed balance sheet for Ochoa Inc. as it would appear at December 31, 2012.
E23-18 (Partial SCF—Indirect Method)
The following accounts appear in the ledger of Popovich Company. Retained Earnings Dr. Cr. Bal. Jan. 1, 2012 Credit Balance $ 42,000 Aug. 15 Dividends (cash) $15,000 27,000 Dec. 31 Net Income for 2012 $50,000 77,000 6 6 8 Machinery Dr. Cr. Bal. Jan. 1, 2012 Debit Balance $140,000 Aug. 3 Purchase of Machinery $62,000 202,000 Sept. 10 Cost of Machinery Constructed 48,000 250,000 Nov. 15 Machinery Sold $66,000 184,000 Accumulated Depreciation— Machinery Dr. Cr. Bal. Jan. 1, 2012 Credit Balance $ 84,000 Apr. 8 Extraordinary Repairs $21,000 63,000 Nov. 15 Accum. Depreciation on Machinery Sold 25,200 37,800 Dec. 31 Depreciation for 2012 $16,800 54,600
Instructions
From the postings in the accounts above, indicate how the information is reported on a statement of cash flows by preparing a partial statement of cash flows using the indirect method. The loss on sale of equipment (November 15) was $5,800.
E23-19 (Worksheet Analysis of Selected Accounts)
Data for Popovich Company are presented in
E23-18.

Instructions
Prepare entries in journal form for all adjustments that should be made on a worksheet for a statement of cash flows.
E23-20 (Worksheet Analysis of Selected Transactions)
The transactions below took place during the year 2012. 1. Convertible bonds payable with a par value of $300,000 were exchanged for unissued common stock with a par value of $300,000. The market price of both types of securities was par. 2. The net income for the year was $360,000. 3. Depreciation expense for the building was $90,000. 4. Some old office equipment was traded in on the purchase of some newer office equipment and the following entry was made. (The exchange has commercial substance.) Equipment 45,000 Accum. Depreciation—Equipment 30,000 Equipment 40,000 Cash 34,000 Gain on Disposal of Plant Assets 1,000 The Gain on Disposal of Plant Assets was credited to current operations as ordinary income. 5. Dividends in the amount of $123,000 were declared. They are payable in January of next year.
Instructions
Show by journal entries the adjustments that would be made on a worksheet for a statement of cash flows.
E23-21 (Worksheet Preparation)
Below is the comparative balance sheet for Lowenstein Corporation. Dec. 31, Dec. 31, 2012 2011 Cash $ 16,500 $ 24,000 Short-term investments 25,000 19,000 Accounts receivable 43,000 45,000 Allowance for doubtful accounts (1,800) (2,000) Prepaid expenses 4,200 2,500 Inventory 81,500 57,000 Land 50,000 50,000 Buildings 125,000 78,500 Accumulated depreciation—buildings (30,000) (23,000) Equipment 53,000 46,000 Accumulated depreciation—equipment (19,000) (15,500) Delivery equipment 39,000 39,000 Accumulated depreciation—delivery equipment (22,000) (20,500) Patents 15,000 –0– $379,400 $300,000 Accounts payable $ 26,000 $ 16,000 Short-term notes payable (trade) 4,000 6,000 Accrued payables 3,000 4,600 Mortgage payable 73,000 53,400 Bonds payable 50,000 62,500 Common stock 140,000 102,000 Paid-in capital in excess of par—common stock 10,000 4,000 Retained earnings 73,400 51,500 $379,400 $300,000 Dividends in the amount of $10,000 were declared and paid in 2012.
Instructions
From this information, prepare a worksheet for a statement of cash flows. Make reasonable assumptions as appropriate. The short-term investments are considered available-for-sale, and no unrealized gains or losses have occurred on these securities. See the book’s companion website, www.wiley.com/college/kieso, for a set of B Exercises. PROBLEMS
P23-1 (SCF—Indirect Method)
The following are Sullivan Corp.’s comparative balance sheet accounts at December 31, 2012 and 2011, with a column showing the increase (decrease) from 2011 to 2012. COMPARATIVE BALANCE SHEETS Increase 2012 2011 (Decrease) Cash $ 815,000 $ 700,000 $115,000 Accounts receivable 1,128,000 1,168,000 (40,000) Inventory 1,850,000 1,715,000 135,000 Property, plant, and equipment 3,307,000 2,967,000 340,000 Accumulated depreciation (1,165,000) (1,040,000) (125,000) Investment in Myers Co. 310,000 275,000 35,000 Loan receivable 250,000 — 250,000 Total assets $6,495,000 $5,785,000 $710,000 Accounts payable $1,015,000 $ 955,000 $ 60,000 Income taxes payable 30,000 50,000 (20,000) Dividends payable 80,000 100,000 (20,000) Capital lease obligation 400,000 — 400,000 Common stock, $1 par 500,000 500,000 — Paid-in capital in excess of par—common stock 1,500,000 1,500,000 — Retained earnings 2,970,000 2,680,000 290,000 Total liabilities and stockholders’ equity $6,495,000 $5,785,000 $710,000 Additional information: 1. On December 31, 2011, Sullivan acquired 25% of Myers Co.’s common stock for $275,000. On that date, the carrying value of Myers’s assets and liabilities, which approximated their fair values, was $1,100,000. Myers reported income of $140,000 for the year ended December 31, 2012. No dividend was paid on Myers’s common stock during the year. 2. During 2012, Sullivan loaned $300,000 to TLC Co., an unrelated company. TLC made the first semiannual principal repayment of $50,000, plus interest at 10%, on December 31, 2012. 3. On January 2, 2012, Sullivan sold equipment costing $60,000, with a carrying amount of $38,000, for $40,000 cash. 4. On December 31, 2012, Sullivan entered into a capital lease for an office building. The present value of the annual rental payments is $400,000, which equals the fair value of the building. Sullivan made the first rental payment of $60,000 when due on January 2, 2013. 5. Net income for 2012 was $370,000. 6. Sullivan declared and paid cash dividends for 2012 and 2011 as shown on the next page. 6 7 8 Dec. 31, Dec. 31, 2012 2011 2012 2011 Declared December 15, 2012 December 15, 2011 Paid February 28, 2013 February 28, 2012 Amount $80,000 $100,000
Instructions
Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2012, using the indirect method. (AICPA adapted)
P23-2 (SCF—Indirect Method)
The comparative balance sheets for Hinckley Corporation show the following information. December 31 2012 2011 Cash $ 33,500 $13,000 Accounts receivable 12,250 10,000 Inventory 12,000 9,000 Investments –0– 3,000 Buildings –0– 29,750 Equipment 45,000 20,000 Patents 5,000 6,250 $107,750 $91,000 Allowance for doubtful accounts $ 3,000 $ 4,500 Accumulated depreciation—equipment 2,000 4,500 Accumulated depreciation—building –0– 6,000 Accounts payable 5,000 3,000 Dividends payable –0– 5,000 Notes payable, short-term (nontrade) 3,000 4,000 Long-term notes payable 31,000 25,000 Common stock 43,000 33,000 Retained earnings 20,750 6,000 $107,750 $91,000 Additional data related to 2012 are as follows. 1. Equipment that had cost $11,000 and was 40% depreciated at time of disposal was sold for $2,500. 2. $10,000 of the long-term note payable was paid by issuing common stock. 3. Cash dividends paid were $5,000. 4. On January 1, 2012, the building was completely destroyed by a flood. Insurance proceeds on the building were $30,000 (net of $2,000 taxes). 5. Investments (available-for-sale) were sold at $1,700 above their cost. The company has made similar sales and investments in the past. 6. Cash was paid for the acquisition of equipment. 7. A long-term note for $16,000 was issued for the acquisition of equipment. 8. Interest of $2,000 and income taxes of $6,500 were paid in cash.
Instructions
Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country.
P23-3 (SCF—Direct Method)
Mortonson Company has not yet prepared a formal statement of cash flows for the 2012 fiscal year. Comparative balance sheets as of December 31, 2011 and 2012, and a statement of income and retained earnings for the year ended December 31, 2012, are presented below and on page 1492. MORTONSON COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2012 ($000 OMITTED) Sales $3,800 Expenses Cost of goods sold $1,200 Salaries and benefi ts 725 Heat, light, and power 75 Depreciation 80 Property taxes 19 Patent amortization 25 Miscellaneous expenses 10 Interest 30 2,164 MORTONSON COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2012 (CONTINUED) Income before income taxes 1,636 Income taxes 818 Net income 818 Retained earnings—Jan. 1, 2012 310 1,128 Stock dividend declared and issued 600 Retained earnings—Dec. 31, 2012 $ 528 MORTONSON COMPANY COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31 ($000 OMITTED) Assets 2012 2011 Current assets Cash $ 333 $ 100 U.S. Treasury notes (available-for-sale) 10 50 Accounts receivable 780 500 Inventory 720 560 Total current assets 1,843 1,210 Long-term assets Land 150 70 Buildings and equipment 910 600 Accumulated depreciation (200) (120) Patents (less amortization) 105 130 Total long-term assets 965 680 Total assets $2,808 $1,890 Liabilities and Stockholders’ Equity Current liabilities Accounts payable $ 420 $ 330 Income taxes payable 40 30 Notes payable 320 320 Total current liabilities 780 680 Long-term notes payable—due 2014 200 200 Total liabilities 980 880 Stockholders’ equity Common stock 1,300 700 Retained earnings 528 310 Total stockholders’ equity 1,828 1,010 Total liabilities and stockholders’ equity $2,808 $1,890
Instructions
Prepare a statement of cash flows using the direct method. Changes in accounts receivable and accounts payable relate to sales and cost of goods sold. Do not prepare a reconciliation schedule. (CMA adapted)
P23-4 (SCF—Direct Method)
Michaels Company had available at the end of 2012 the information shown below. MICHAELS COMPANY COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31, 2012 AND 2011 2012 2011 Cash $ 10,000 $ 4,000 Accounts receivable 20,500 12,950 Short-term investments 22,000 30,000 Inventory 42,000 35,000 Prepaid rent 3,000 12,000 Prepaid insurance 2,100 900 Supplies 1,000 750 Land 125,000 175,000 Buildings 350,000 350,000 Accumulated depreciation—buildings (105,000) (87,500) Equipment 525,000 400,000 Accumulated depreciation—equipment (130,000) (112,000) Patents 45,000 50,000 Total assets $910,600 $871,100 Accounts payable $ 22,000 $ 32,000 Income taxes payable 5,000 4,000 Salaries and wages payable 5,000 3,000 Short-term notes payable 10,000 10,000 Long-term notes payable 60,000 70,000 Bonds payable 400,000 400,000 Premium on bonds payable 20,303 25,853 Common stock 240,000 220,000 Paid-in capital in excess of par—common stock 25,000 17,500 Retained earnings 123,297 88,747 Total liabilities and stockholders’ equity $910,600 $871,100 MICHAEL S COMPANY INCOME STATEMENT AND DIVIDEND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2012 Sales revenue $1,160,000 Cost of goods sold 748,000 Gross margin 412,000 Operating expenses Selling expenses $ 79,200 Administrative expenses 156,700 Depreciation/Amortization expense 40,500 Total operating expenses 276,400 Income from operations 135,600 Other revenues/expenses Gain on sale of land 8,000 Gain on sale of short-term investment 4,000 Dividend revenue 2,400 Interest expense (51,750) (37,350) Income before taxes 98,250 Income tax expense 39,400 Net income 58,850 Dividends to common stockholders (24,300) To retained earnings $ 34,550
Instructions
Prepare a statement of cash flows for Michaels Company using the direct method accompanied by a reconciliation schedule. Assume the short-term investments are classified as available-for-sale.
P23-5 (SCF—Indirect Method)
You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2012. The balance sheet accounts at the beginning and end of the year are shown below. Increase Dec. 31, Dec. 31, or 2012 2011 (Decrease) Cash $ 277,900 $ 298,000 ($20,100) Accounts receivable 469,424 353,000 116,424 Inventory 741,700 610,000 131,700 Prepaid expenses 12,000 8,000 4,000 Investment in subsidiary 110,500 –0– 110,500 Cash surrender value of life insurance 2,304 1,800 504 Machinery 207,000 190,000 17,000 Buildings 535,200 407,900 127,300 Land 52,500 52,500 –0– Patents 69,000 64,000 5,000 Copyrights 40,000 50,000 (10,000) Bond discount and issue cost 4,502 –0– 4,502 $2,522,030 $2,035,200 $486,830 Accrued taxes payable $ 90,250 $ 79,600 $ 10,650 Accounts payable 299,280 280,000 19,280 Dividends payable 70,000 –0– 70,000 Bonds payable—8% 125,000 –0– 125,000 Bonds payable—12% –0– 100,000 (100,000) Allowance for doubtful accounts 35,300 40,000 (4,700) Accumulated depreciation—buildings 424,000 400,000 24,000 Accumulated depreciation—machinery 173,000 130,000 43,000 Premium on bonds payable –0– 2,400 (2,400) Common stock—no par 1,176,200 1,453,200 (277,000) Paid-in capital in excess of par—common stock 109,000 –0– 109,000 Retained earnings—unappropriated 20,000 (450,000) 470,000 $2,522,030 $2,035,200 $486,830 STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2012 January 1, 2012 Balance (deficit) $(450,000) March 31, 2012 Net income for fi rst quarter of 2012 25,000 April 1, 2012 Transfer from paid-in capital 425,000 Balance –0– December 31, 2012 Net income for last three quarters of 2012 90,000 Dividend declared—payable January 21, 2013 (70,000) Balance $ 20,000 Your working papers from the audit contain the following information: 1. On April 1, 2012, the existing deficit was written off against paid-in capital created by reducing the stated value of the no-par stock. 2. On November 1, 2012, 29,600 shares of no-par stock were sold for $257,000. The board of directors voted to regard $5 per share as stated capital. 3. A patent was purchased for $15,000. 4. During the year, machinery that had a cost basis of $16,400 and on which there was accumulated depreciation of $5,200 was sold for $9,000. No other plant assets were sold during the year. 5. The 12%, 20-year bonds were dated and issued on January 2, 2000. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were retired at 100.9 plus accrued interest on March 31, 2012. 6. The 8%, 40-year bonds were dated January 1, 2012, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was $839. 7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2012, for $100,000. The income statement of Crimson Company for 2012 shows a net income of $15,000. 8. Extraordinary repairs to buildings of $7,200 were charged to Accumulated Depreciation—Buildings. 9. Interest paid in 2012 was $10,500 and income taxes paid were $34,000. 6 7 8
Instructions
From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.
P23-6 (SCF—Indirect Method, and Net Cash Flow from Operating Activities, Direct Method)
Comparative balance sheet accounts of Marcus Inc. are presented below. MARCUS INC. COMPARATIVE BALANCE SHEET ACCOUNTS AS OF DECEMBER 31, 2012 AND 2011 December 31 Debit Accounts 2012 2011 Cash $ 42,000 $ 33,750 Accounts Receivable 70,500 60,000 Inventory 30,000 24,000 Investments (available-for-sale) 22,250 38,500 Machinery 30,000 18,750 Buildings 67,500 56,250 Land 7,500 7,500 $269,750 $238,750 Credit Accounts Allowance for Doubtful Accounts $ 2,250 $ 1,500 Accumulated Depreciation—Machinery 5,625 2,250 Accumulated Depreciation—Buildings 13,500 9,000 Accounts Payable 35,000 24,750 Accrued Payables 3,375 2,625 Long-Term Notes Payable 21,000 31,000 Common Stock, no-par 150,000 125,000 Retained Earnings 39,000 42,625 $269,750 $238,750 Additional data (ignoring taxes): 1. Net income for the year was $42,500. 2. Cash dividends declared and paid during the year were $21,125. 3. A 20% stock dividend was declared during the year. $25,000 of retained earnings was capitalized. 4. Investments that cost $25,000 were sold during the year for $28,750. 5. Machinery that cost $3,750, on which $750 of depreciation had accumulated, was sold for $2,200. Marcus’s 2012 income statement follows (ignoring taxes). Sales $540,000 Less: cost of goods sold 380,000 Gross margin 160,000 Less: Operating expenses (includes $8,625 depreciation and $5,400 bad debts) 120,450 Income from operations 39,550 Other: Gain on sale of investments $3,750 Loss on sale of machinery (800) 2,950 Net income $ 42,500
Instructions
(a) Compute net cash flow from operating activities using the direct method. (b) Prepare a statement of cash flows using the indirect method.
P23-7 (SCF—Direct and Indirect Methods from Comparative Financial Statements)
Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2012, are shown on the next page. The company is preparing its statement of cash flows. 3 4 CHAPMAN COMPANY COMPARATIVE BALANCE SHEET AS OF MAY 31 2012 2011 Current assets Cash $ 28,250 $ 20,000 Accounts receivable 75,000 58,000 Inventory 220,000 250,000 Prepaid expenses 9,000 7,000 Total current assets 332,250 335,000 Plant assets Plant assets 600,000 502,000 Less: Accumulated depreciation—plant assets 150,000 125,000 Net plant assets 450,000 377,000 Total assets $782,250 $712,000 Current liabilities Accounts payable $123,000 $115,000 Salaries and wages payable 47,250 72,000 Interest payable 27,000 25,000 Total current liabilities 197,250 212,000 Long-term debt Bonds payable 70,000 100,000 Total liabilities 267,250 312,000 Stockholders’ equity Common stock, $10 par 370,000 280,000 Retained earnings 145,000 120,000 Total stockholders’ equity 515,000 400,000 Total liabilities and stockholders’ equity $782,250 $712,000 CHAPMAN COMPANY INCOME STATEMENT FOR THE YEAR ENDED MAY 31, 2012 Sales $1,255,250 Cost of goods sold 722,000 Gross profi t 533,250 Expenses Salaries and wages expense 252,100 Interest expense 75,000 Depreciation expense 25,000 Other expenses 8,150 Total expenses 360,250 Operating income 173,000 Income tax expense 43,000 Net income $ 130,000 The following is additional information concerning Chapman’s transactions during the year ended May 31, 2012. 1. All sales during the year were made on account. 2. All merchandise was purchased on account, comprising the total accounts payable account. 3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock. 4. The “other expenses” are related to prepaid items. 5. All income taxes incurred during the year were paid during the year. 6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value. 7. Cash dividends of $105,000 were declared and paid at the end of the fiscal year. 6 7 8 Problems 1497
Instructions
(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities. (b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2012, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.) (c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2012.
P23-8 (SCF—Direct and Indirect Methods)
Comparative balance sheet accounts of Sharpe Company are presented below. SHARPE COMPANY COMPARATIVE BALANCE SHEET ACCOUNTS AS OF DECEMBER 31 Debit Balances 2012 2011 Cash $ 70,000 $ 51,000 Accounts Receivable 155,000 130,000 Inventory 75,000 61,000 Investments (Available-for-sale) 55,000 85,000 Equipment 70,000 48,000 Buildings 145,000 145,000 Land 40,000 25,000 Totals $610,000 $545,000 Credit Balances Allowance for Doubtful Accounts $ 10,000 $ 8,000 Accumulated Depreciation—Equipment 21,000 14,000 Accumulated Depreciation—Buildings 37,000 28,000 Accounts Payable 66,000 60,000 Income Taxes Payable 12,000 10,000 Long-Term Notes Payable 62,000 70,000 Common Stock 310,000 260,000 Retained Earnings 92,000 95,000 Totals $610,000 $545,000 Additional data: 1. Equipment that cost $10,000 and was 60% depreciated was sold in 2012. 2. Cash dividends were declared and paid during the year. 3. Common stock was issued in exchange for land. 4. Investments that cost $35,000 were sold during the year. 5. There were no write-offs of uncollectible accounts during the year. Sharpe’s 2012 income statement is as follows. Sales $950,000 Less: Cost of goods sold 600,000 Gross profi t 350,000 Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000 Income from operations 100,000 Other revenues and expenses Gain on sale of investments $15,000 Loss on sale of equipment (3,000) 12,000 Income before taxes 112,000 Income taxes 45,000 Net income $ 67,000
Instructions
(a) Compute net cash provided by operating activities under the direct method. (b) Prepare a statement of cash flows using the indirect method.
P23-9 (Indirect SCF)
Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information. December 31 2012 2011 Cash $ 38,500 $13,000 Accounts receivable 12,250 10,000 Inventory 12,000 10,000 Investments –0– 3,000 Buildings –0– 29,750 Equipment 40,000 20,000 Copyrights 5,000 5,250 Totals $107,750 $91,000 Allowance for doubtful accounts $ 3,000 $ 4,500 Accumulated depreciation—equipment 2,000 4,500 Accumulated depreciation—buildings –0– 6,000 Accounts payable 5,000 4,000 Dividends payable –0– 5,000 Notes payable, short-term (nontrade) 3,000 4,000 Long-term notes payable 36,000 25,000 Common stock 38,000 33,000 Retained earnings 20,750 5,000 $107,750 $91,000 Additional data related to 2012 are as follows. 1. Equipment that had cost $11,000 and was 30% depreciated at time of disposal was sold for $2,500. 2. $5,000 of the long-term note payable was paid by issuing common stock. 3. Cash dividends paid were $5,000. 4. On January 1, 2012, the building was completely destroyed by a flood. Insurance proceeds on the building were $33,000 (net of $4,000 taxes). 5. Investments (available-for-sale) were sold at $1,500 above their cost. The company has made similar sales and investments in the past. 6. Cash and long-term note for $16,000 were given for the acquisition of equipment. 7. Interest of $2,000 and income taxes of $5,000 were paid in cash.
Instructions
(a) Use the indirect method to analyze the above information and prepare a statement of cash flows for Dingel. Flood damage is unusual and infrequent in that part of the country. (b) What would you expect to observe in the operating, investing, and financing sections of a statement of cash flows of: (1) A severely financially troubled firm? (2) A recently formed firm that is experiencing rapid growth? 6 7 8 CONCEPTS FOR ANALYS I S
CA23-1 (Analysis of Improper SCF)
The following statement was prepared by Maloney Corporation’s accountant. MALONEY CORPORATION STATEMENT OF SOURCES AND APPLICATION OF CASH FOR THE YEAR ENDED SEPTEMBER 30, 2012 Sources of cash Net income $111,000 Depreciation and depletion 70,000 Increase in long-term debt 179,000 Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt) 14,000 $374,000 Application of cash Cash dividends $ 60,000 Expenditure for property, plant, and equipment 214,000 Investments and other uses 20,000 Change in cash 80,000 $374,000 The following additional information relating to Maloney Corporation is available for the year ended September 30, 2012. 1. Wage and salary expense attributable to stock option plans was $25,000 for the year. 2. Expenditures for property, plant, and equipment $250,000 Proceeds from retirements of property, plant, and equipment 36,000 Net expenditures $214,000 3. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2012, when the per share market price was $7 and par value was $1. 4. On July 1, 2012, when its market price was $6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock. 5. Depreciation expense $ 65,000 Depletion expense 5,000 $ 70,000 6. Increase in long-term debt $620,000 Retirement of debt 441,000 Net increase $179,000
Instructions
(a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain. (b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.) (c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable. (AICPA adapted)
CA23-2 (SCF Theory and Analysis of Improper SCF)
Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations. PACIFIC CLOTHING STORE STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JANUARY 31, 2012 Sources of cash From sales of merchandise $ 382,000 From sale of capital stock 380,000 From sale of investment 120,000 From depreciation 80,000 From issuance of note for truck 30,000 From interest on investments 8,000 Total sources of cash 1,000,000 Uses of cash For purchase of fi xtures and equipment 330,000 For merchandise purchased for resale 253,000 For operating expenses (including depreciation) 170,000 For purchase of investment 95,000 For purchase of truck by issuance of note 30,000 For purchase of treasury stock 10,000 For interest on note 3,000 Total uses of cash 891,000 Net increase in cash $ 109,000 Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and $109,000 is not the actual increase in cash.
Instructions
(a) With whom do you agree, Teresa or Lenny? Explain your position. (b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).
CA23-3 (SCF Theory and Analysis of Transactions)
Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2012, you have obtained the following information concerning certain events and transactions of Ashley. 1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for an extraordinary loss of $110,000 (see item 5 below). 2. Depreciation expense of $315,000 was included in the income statement. 3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts. 4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale. 5. On April 1, 2012, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This extraordinary loss was included in determining income as indicated in item 1 above. 6. On July 3, 2012, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 market price of its unissued common stock, and signed a $425,000 mortgage note payable. 7. On August 3, 2012, $800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.
Instructions
Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2012. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2012.
CA23-4 (Analysis of Transactions’ Effect on SCF)
Each of the following items must be considered in preparing a statement of cash flows for Cruz Fashions Inc. for the year ended December 31, 2012. 1. Fixed assets that had cost $20,000 612 years before and were being depreciated on a 10-year basis, with no estimated scrap value, were sold for $4,750. 2. During the year, goodwill of $15,000 was considered impaired and was completely written off to expense. 3. During the year, 500 shares of common stock with a stated value of $25 a share were issued for $32 a share. 4. The company sustained a net loss for the year of $2,100. Depreciation amounted to $2,000 and patent amortization was $400. 5. Uncollectible accounts receivable in the amount of $2,000 were written off against Allowance for Doubtful Accounts. 6. Investments (available-for-sale) that cost $12,000 when purchased 4 years earlier were sold for $10,600. The loss was considered ordinary. 7. Bonds payable with a par value of $24,000 on which there was an unamortized bond premium of $2,000 were redeemed at 101. The gain was credited to ordinary income.
Instructions
For each item, state where it is to be shown in the statement and then how you would present the necessary information, including the amount. Consider each item to be independent of the others. Assume that correct entries were made for all transactions as they took place.
CA23-5 (Purpose and Elements of SCF)
GAAP requires the statement of cash flows be presented when financial statements are prepared.
Instructions
(a) Explain the purposes of the statement of cash flows. (b) List and describe the three categories of activities that must be reported in the statement of cash flows. (c) Identify and describe the two methods that are allowed for reporting cash flows from operations. (d) Describe the financial statement presentation of noncash investing and financing transactions. Include in your description an example of a noncash investing and financing transaction.
CA23-6 (Cash Flow Reporting)
Brockman Guitar Company is in the business of manufacturing top-quality, steel-string folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company’s poor performance in recent years. In particular, the company’s lead bank, First Financial, is especially concerned about Brockman’s inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.” Thinking about the banker’s comment, Barbara came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell Barbara what you think of her plan.
Instructions
Answer the following questions. (a) What are the ethical issues related to Barbara Brockman’s idea? (b) What would you tell Barbara Brockman? USING YOUR JUDGMENT
FINANCIAL REPORTING
Financial Reporting Problem The Procter & Gamble Company (P&G) The financial statements of P&G are presented in Appendix 5B or can be accessed at the book’s companion website, www.wiley.com/college/kieso.
Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) Which method of computing net cash provided by operating activities does P&G use? What were the amounts of net cash provided by operating activities for the years 2007, 2008, and 2009? Which two items were most responsible for the increase in net cash provided by operating activities in 2009? (b) What was the most significant item in the cash flows used for investing activities section in 2009? What was the most significant item in the cash flows used for financing activities section in 2009? (c) Where is “deferred income taxes” reported in P&G’s statement of cash flows? Why does it appear in that section of the statement of cash flows? (d) Where is depreciation reported in P&G’s statement of cash flows? Why is depreciation added to net income in the statement of cash flows?
Comparative Analysis Case The Coca-Cola Company and PepsiCo, Inc.
Instructions
Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) What method of computing net cash provided by operating activities does Coca-Cola use? What method does PepsiCo use? What were the amounts of cash provided by operating activities reported by Coca-Cola and PepsiCo in 2009? Using Your Judgment 1501 (b) What was the most significant item reported by Coca-Cola and PepsiCo in 2009 in their investing activities sections? What is the most significant item reported by Coca-Cola and PepsiCo in 2009 in their financing activities sections? (c) What were these two companies’ trends in net cash provided by operating activities over the period 2007 to 2009? (d) Where is “depreciation and amortization” reported by Coca-Cola and PepsiCo in their statements of cash flows? What is the amount and why does it appear in that section of the statement of cash flows? (e) Based on the information contained in Coca-Cola’s and PepsiCo’s financial statements, compute the following 2009 ratios for each company. These ratios require the use of statement of cash flows data. (These ratios were covered in Chapter 5.) (1) Current cash debt coverage ratio. (2) Cash debt coverage ratio. (f) What conclusions concerning the management of cash can be drawn from the ratios computed in (e)?
Financial Statement Analysis Case Vermont Teddy Bear Co. Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures Americanmade teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company. Current Year Prior Year Cash flows from operating activities: Net income $ 17,523 $ 838,955 Adjustments to reconcile net income to net cash provided by operating activities Deferred income taxes (69,524) (146,590) Depreciation and amortization 316,416 181,348 Changes in assets and liabilities: Accounts receivable, trade (38,267) (25,947) Inventories (1,599,014) (1,289,293) Prepaid and other current assets (444,794) (113,205) Deposits and other assets (24,240) (83,044) Accounts payable 2,017,059 (284,567) Accrued expenses 61,321 170,755 Accrued interest payable, debentures — (58,219) Other — (8,960) Income taxes payable — 117,810 Net cash provided by (used for) operating activities 236,480 (700,957) Net cash used for investing activities (2,102,892) (4,422,953) Net cash (used for) provided by financing activities (315,353) 9,685,435 Net change in cash and cash equivalents (2,181,765) 4,561,525 Other information: Current liabilities $ 4,055,465 $ 1,995,600 Total liabilities 4,620,085 2,184,386 Net sales 20,560,566 17,025,856
Instructions
(a) Note that net income in the current year was only $17,523 compared to prior-year income of $838,955, but cash flow from operations was $236,480 in the current year and a negative $700,957 in the prior year. Explain the causes of this apparent paradox. (b) Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-based ratios.
Accounting, Analysis, and Principles The income statement for the year ended December 31, 2012, for Laskowski Manufacturing Company contains the following condensed information. Using Your Judgment 1503 LASKOWSKI CO. INCOME STATEMENT Revenues $6,583,000 Operating expenses (excluding depreciation) $4,920,000 Depreciation expense 880,000 5,800,000 Income before income tax 783,000 Income tax expense 353,000 Net income $ 430,000 Included in operating expenses is a $24,000 loss resulting from the sale of machinery for $270,000 cash. The company purchased machinery at a cost of $750,000. Laskowski reports the following balances on its comparative balance sheets at December 31. LASKOWSKI CO. COMPARATIVE BALANCE SHEETS (PARTIAL) 2012 2011 Cash $672,000 $130,000 Accounts receivable 775,000 610,000 Inventory 834,000 867,000 Accounts payable 521,000 501,000 Income tax expense of $353,000 represents the amount paid in 2012. Dividends declared and paid in 2012 totaled $200,000. Accounting Prepare the statement of cash flows using the indirect method. Analysis Laskowski has an aggressive growth plan, which will require significant investments in plant and equipment over the next several years. Preliminary plans call for an investment of over $500,000 in the next year. Compute Laskowski’s free cash flow (from Chapter 5) and use it to evaluate the investment plans with the use of only internally generated funds. Principles How does the statement of cash flows contribute to achieving the objective of financial reporting?
BRIDGE TO THE PROFESSION
Professional Research: FASB Codification As part of the year-end accounting process for your company, you are preparing the statement of cash flows according to GAAP. One of your team, a finance major, believes the statement should be prepared to report the change in working capital, because analysts many times use working capital in ratio analysis. Your supervisor would like research conducted to verify the basis for preparing the statement of cash flows.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) What is the primary objective for the statement of cash flows? Is working capital the basis for meeting this objective? (b) What information is provided in a statement of cash flows? (c) List some of the typical cash inflows and outflows from operations.
Professional Simulation The professional simulation for this chapter asks you to address questions related to the accounting for the statement of cash flows. Ellwood House, Inc. had the following condensed balance sheet at the end of 2012. Cash $ 10,000 Current liabilities $ 14,500 Current assets (non-cash) 34,000 Long-term notes payable 30,000 Investments 40,000 Bonds payable 32,000 Plant assets 57,500 Common stock 80,000 Land 38,500 Retained earnings 23,500 $180,000 $180,000 During 2013, the following occurred. 1. Ellwood House, Inc., sold part of its investment portfolio, which was classified as available-for-sale, for $15,500, resulting in a gain of $500 for the firm. 2. Dividends totaling $19,000 were paid to stockholders. 3. A parcel of land was purchased for $5,500. 4. $20,000 of common stock were issued at par. 5. $10,000 of bonds payable were retired at par. 6. Heavy equipment was purchased through the issuance of $32,000 of bonds. 7. Net income for 2013 was $42,000 after deducting depreciation of $13,550. 8. Both current assets (other than cash) and current liabilities remained at the same amount. ELLWOOD HOUSE, INC. Balance Sheet December 31, 2012 Prepare a statement of cash flows for 2013, using the indirect method. Draft a one-page letter to Gerald Brauer, president of Ellwood House, Inc., briefly explaining the changes within each major cash flow category. Refer to your cash flow statement whenever necessary. Directions Situation Financial Statements Explanation Resources Directions Situation Financial Statements Explanation Resources Directions Situation Financial Statements Explanation Resources + KWW_Professional_Simulation Statement of Cash Flows Time Remaining 1 hour 00 minutes Unsplit Split Horiz Split Vertical Spreadsheet Calculator Exit IFRS
Insights IFRS Insights 1505 As in GAAP, the statement of cash flows is a required statement for IFRS. In addition, the content and presentation of a U.S. statement of cash flows is similar to one used for IFRS. However, the disclosure requirements related to the statement of cash flows are more extensive under GAAP. IAS 7 (“Cash Flow Statements”) provides the overall IFRS requirements for cash flow information.
RELEVANT FACTS • Companies preparing financial statements under IFRS must prepare a statement of cash flows as an integral part of the financial statements. • Both IFRS and GAAP require that the statement of cash flows should have three major sections—operating, investing, and financing—along with changes in cash and cash equivalents. • Similar to GAAP, the cash flow statement can be prepared using either the indirect or direct method under IFRS. For both IFRS and GAAP, most companies use the indirect method for reporting net cash flow from operating activities. • The definition of cash equivalents used in IFRS is similar to that used in GAAP. A major difference is that in certain situations, bank overdrafts are considered part of cash and cash equivalents under IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts are classified as financing activities. • IFRS requires that non-cash investing and financing activities be excluded from the statement of cash flows. Instead, these non-cash activities should be reported elsewhere. This requirement is interpreted to mean that non-cash investing and financing activities should be disclosed in the notes to the financial statements instead of in the financial statements. Under GAAP, companies may present this information in the cash flow statement. • One area where there can be substantive differences between IFRS and GAAP relates to the classification of interest, dividends, and taxes. IFRS provides more alternatives for disclosing these items, while GAAP requires that except for dividends paid (which are classified as a financing activity), these items are all reported as operating activities.
ABOUT THE NUMBERS
Significant Non-Cash Transactions Because the statement of cash flows reports only the effects of operating, investing, and financing activities in terms of cash flows, it omits some Significant non-cash transactions and other events that are investing or financing activities. Among the more common of these non-cash transactions that a company should report or disclose in some manner are the following. 1. Acquisition of assets by assuming liabilities (including finance lease obligations) or by issuing equity securities. 2. Exchanges of non-monetary assets. 3. Refinancing of long-term debt. 4. Conversion of debt or preference shares to ordinary shares. 5. Issuance of equity securities to retire debt. Investing and financing transactions that do not require the use of cash are excluded from the statement of cash flows. If material in amount, these disclosures may be either narrative or summarized in a separate schedule. This schedule may appear in a separate note or supplementary schedule to the financial statements. Illustration
IFRS23-1 shows the presentation of these Significant non-cash transactions or other events in a separate schedule in the notes to the financial statements. Companies do not generally report certain other Significant non-cash transactions or other events in conjunction with the statement of cash flows. Examples of these types of transactions are
share dividends, share splits, and restrictions on retained earnings. Companies generally report these items, neither financing nor investing activities, in conjunction with the statement of changes in equity or schedules and notes pertaining to changes in equity accounts.
Special Disclosures IAS 7 indicates that cash flows related to interest received and paid, and dividends received and paid, should be separately disclosed in the statement of cash flows. Each item should be classified in a consistent manner from period to period as operating, investing, or financing cash flows. For homework purposes, classify interest received and paid and dividends received as part of cash flows from operating activities and dividends paid as cash flows from financing activities. The justification for reporting the fi rst three items in cash flows from operating activities is that each item affects net income. Dividends paid, however, do not affect net income and are often considered a cost of financing. Companies should also disclose income taxes paid separately in the cash flows from operating activities unless they can be separately identified as part of investing or financing activities. While tax expense may be readily identifi able with investing or financing activities, the related tax cash flows are often impracticable to identify and may arise in a different period from the cash flows of the underlying transaction. Therefore, taxes paid are usually classified as cash flows from operating activities. IFRS requires that the cash paid for taxes, as well as cash flows from interest and dividends received and paid, be disclosed. The category (operating, investing, or financing) that each item was included in must be disclosed as well. An example of such a disclosure from the notes to Daimler’s financial statements is provided in Illustration
IFRS23-2.
Note G: Significant non-cash transactions. During the year, the company engaged in the following significant non-cash investing and financing transactions: Issued 250,000 ordinary shares to purchase land and building $1,750,000 Exchanged land in Steadfast, New York, for land in Bedford, Pennsylvania $2,000,000 Converted 12% bonds to 50,000 ordinary shares $ 500,000 ILLUSTRATION
IFRS23-1
Note Presentation of Non-Cash Investing and Financing Activities ILLUSTRATION
IFRS23-2
Note Disclosure of Interest, Taxes, and Dividends Daimler Cash provided by operating activities includes the following cash flows: (in millions of ) 2009 2008 2007 Interest paid (894) (651) (1,541) Interest received 471 765 977 Income taxes paid, net (358) (898) (1,020) Dividends received 109 67 69 Other companies choose to report these items directly in the statement of cash flows. In many cases, companies start with income before income taxes and then show income taxes paid as a separate item. In addition, they often add back interest expense on an accrual basis and then subtract interest paid. Reporting these items in the operating activities section is shown for Mermel Company in Illustration
IFRS23-3.
IFRS Insights 1507 Companies often provide a separate section to identify interest and income taxes paid.
ON THE HORIZON Presently, the IASB and the FASB are involved in a joint project on the presentation and organization of information in the financial statements. With respect to the cash flow statement specifically, the notion of cash equivalents will probably not be retained. The definition of cash in the existing literature would be retained, and the statement of cash flows would present information on changes in cash only. In addition, the IASB and FASB favor presentation of operating cash flows using the direct method only. This approach is generally opposed by the preparer community.
IFRS SELF-TEST QUESTIONS 1. Which of the following is true regarding the statement of cash flows under IFRS? (a) The statement of cash flows has two major sections—operating and nonoperating. (b) The statement of cash flows has two major sections—financing and investing. (c) The statement of cash flows has three major sections—operating, investing, and financing. (d) The statement of cash flows has three major sections—operating, non-operating, and financing. 2. In the case of a bank overdraft: (a) GAAP typically includes the amount in cash and cash equivalents. (b) IFRS typically includes the amount in cash equivalents but not in cash. (c) GAAP typically treats the overdraft as a liability, and reports the amount in the financing section of the statement of cash flows. (d) IFRS typically treats the overdraft as a liability, and reports the amount in the investing section of the statement of cash flows. 3. Under IFRS, Significant non-cash transactions: (a) are classified as operating, if they are related to income items. (b) are excluded from the statement of cash flows and disclosed in a narrative form or summarized in a separate schedule. MERMEL COMPANY STATEMENT OF CASH FLOWS ($000,000) (OPERATING ACTIVITIES SECTION ONLY) Income before income tax $ 4,000 Adjustments to reconcile income before income tax to net cash provided by operating activities: Depreciation expense $1,000 Interest expense 500 Investment revenue (dividends) (650) Decrease in inventories 1,050 Increase in trade receivables (310) 1,590 Cash generated from operations 5,590 Interest paid (300) Income taxes paid (760) (1,060) Net cash provided by operating activities $ 4,530 ILLUSTRATION
IFRS23-3
Reporting of Interest, Taxes, and Dividends in the Operating Section (c) are classified as an investing or financing activity. (d) are classified as an operating activity, unless they can be specifically identified with financing or investing activities. 4. For purposes of the statement of cash flows, under IFRS interest paid is treated as: (a) an operating activity in all cases. (b) an investing or operating activity, depending on use of the borrowed funds. (c) either a financing or investing activity. (d) either an operating or financing activity, but treated consistently from period to period. 5. For purposes of the statement of cash flows, under IFRS income taxes paid are treated as: (a) cash flows from operating activities unless they can be separately identified as part of investing or financing activities. (b) an operating activity in all cases. (c) an investing or operating activity, depending on whether a refund is received. (d) either operating, financing, or investing activity, but treated consistently to other companies in the same industry.
IFRS CONCEPTS AND APPLICATION
IFRS23-1
Where can authoritative IFRS related to the statement of cash flows be found?
IFRS23-2
Briefl y describe some of the similarities and differences between GAAP and IFRS with respect to cash flow reporting.
IFRS23-3
What are some of the key obstacles for the FASB and IASB within its accounting guidance in the area of cash flow reporting? Explain.
IFRS23-4
Stan Conner and Mark Stein were discussing the statement of cash flows of Bombeck Co. In the notes to the statement of cash flows was a schedule entitled “Noncash investing and financing activities.” Give three examples of Significant non-cash transactions that would be reported in this schedule.
IFRS23-5
Springsteen Co. had the following activity in its most recent year of operations. (a) Pension expense exceeds amount funded. (g) Amortization of intangible assets. (b) Redemption of bonds payable. (h) Purchase of treasury shares. (c) Sale of building at book value. (i) Issuance of bonds for land. (d) Depreciation. (j) Payment of dividends. (e) Exchange of equipment for (k) Increase in interest receivable on furniture. notes receivable. (f) Issuance of ordinary shares. (l) Purchase of equipment.
Instructions
Classify the items as (1) operating—add to net income; (2) operating—deduct from net income; (3) investing; (4) financing; or (5) Significant non-cash investing and financing activities. Use the indirect method.
IFRS23-6
Following are selected statement of financial position accounts of Sander Bros. Corp. at December 31, 2012 and 2011, and the increases or decreases in each account from 2011 to 2012. Also presented is selected income statement information for the year ended December 31, 2012, and additional information. Increase Selected statement of financial position accounts 2012 2011 (Decrease) Assets Property, plant, and equipment $277,000 $247,000 $30,000 Accumulated depreciation (178,000) (167,000) (11,000) Accounts receivable 34,000 24,000 10,000 Equity and liabilities Share capital—ordinary, $1 par $ 22,000 $19,000 $ 3,000 Share premium—ordinary 9,000 3,000 6,000 Retained earnings 104,000 91,000 13,000 Bonds payable 49,000 46,000 3,000 Dividends payable 8,000 5,000 3,000 Selected income statement information for the year ended December 31, 2012 Sales revenue $155,000 Depreciation 38,000 Gain on sale of equipment 14,500 Net income 31,000 Additional information: 1. During 2012, equipment costing $45,000 was sold for cash. 2. Accounts receivable relate to sales of merchandise. 3. During 2012, $25,000 of bonds payable were issued in exchange for property, plant, and equipment. There was no amortization of bond discount or premium.
Instructions
Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items. (a) Payments for purchase of property, plant, and equipment. (b) Proceeds from the sale of equipment. (c) Cash dividends paid. (d) Redemption of bonds payable.
IFRS23-7
Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information. December 31 2012 2011 Buildings $ –0– $29,750 Equipment 45,000 20,000 Patents 5,000 6,250 Investments –0– 3,000 Inventory 12,000 9,000 Accounts receivable 12,250 10,000 Cash 33,500 13,000 $107,750 $91,000 Share capital—ordinary $ 43,000 $33,000 Retained earnings 20,750 6,000 Allowance for doubtful accounts 3,000 4,500 Accumulated depreciation on equipment 2,000 4,500 Accumulated depreciation on buildings –0– 6,000 Accounts payable 5,000 3,000 Dividends payable –0– 5,000 Long-term notes payable 31,000 25,000 Notes payable, short-term (non-trade) 3,000 4,000 $107,750 $91,000 Additional data related to 2012 are as follows. 1. Equipment that had cost $11,000 and was 40% depreciated at time of disposal was sold for $2,500. 2. $10,000 of the long-term notes payable was paid by issuing ordinary shares. 3. Cash dividends paid were $5,000. 4. On January 1, 2012, the building was completely destroyed by a flood. Insurance proceeds on the building were $32,000. Increase Selected statement of financial position accounts 2012 2011 (Decrease) 5. Equity investments (non-trading) were sold at $1,700 above their cost. 6. Cash was paid for the acquisition of equipment. 7. A long-term note for $16,000 was issued for the acquisition of equipment. 8. Interest of $2,000 and income taxes of $6,500 were paid in cash.
Instructions
Prepare a statement of cash flows using the indirect method.
Professional Research
IFRS23-8
As part of the year-end accounting process for your company, you are preparing the statement of cash flows according to IFRS. One of your team, a finance major, believes the statement should be prepared to report the change in working capital because analysts many times use working capital in ratio analysis. Your supervisor would like research conducted to verify the basis for preparing the statement of cash flows.
Instructions
Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.) (a) What is the primary objective for the statement of cash flows? Is working capital the basis for meeting this objective? (b) What information is provided in a statement of cash flows? (c) List some of the typical cash inflows and outflows from operations. International Financial Reporting Problem:
Marks and Spencer plc
IFRS23-9
The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://corporate.marksandspencer. com/documents/publications/2010/Annual_Report_2010.
Instructions Refer to M&S’s financial statements and the accompanying notes to answer the following questions. (a) Which method of computing net cash provided by operating activities does M&S use? What were the amounts of net cash provided by operating activities for the years 2009 and 2010? Which two items were most responsible for the increase in net cash provided by operating activities in 2010? (b) What was the most Significant item in the cash flows used for investing activities section in 2010? What was the most Significant item in the cash flows used for financing activities section in 2010? (c) Where is “deferred income taxes” reported in M&S’s statement of cash flows? Why does it appear in that section of the statement of cash flows? (d) Where is depreciation reported in M&S’s statement of cash flows? Why is depreciation added to net income in the statement of cash flows? ANSWERS TO IFRS SELF-TEST QUESTIONS 1. c 2. c 3. b 4. d 5. a  




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