Chapter 12

Preparing and Using the

Statement of Cash Flows
Questions
1.

The statement of cash flows reports the reasons for the changes in
cash during the period. In the process, it shows the cash impact of
the entitys operating, investing, and financing activities.

2.

Four purposes of the statement of cash flows are to (a) predict future
cash flows, (b) evaluate management decisions, (c) determine the
companys ability to pay dividends to stockholders and interest to
creditors, and (d) show the relationship between net income and
changes in cash.

3.

a. Operating activities create revenues and expenses in the entitys

major line of business. Operating activities are related to the
transactions that make up net income.
b. Investing activities increase and decrease the long-term assets of
the business.
c. Financing activities obtain from investors and creditors the cash
needed to launch and sustain the business.

4.

The statement of cash flows is dated For the period ended XXX
because it reports the reasons for the changes in cash that occurred
during the period for example, For the Year Ended December
31, 19XX or For the Month Ended June 30, 19XX.

Chapter 12 Preparing and Using the Statement of Cash Flows

193

5.

The check figure for the statement of cash flows is the change in
cash during the period. This amount is obtained by subtracting the
beginning cash balance from the ending cash balance (taken from
the comparative balance sheet). The change in cash is compared to
the net change in cash shown at the bottom of the statement of cash
flows. The two amounts should be equal.

6.

The largest source of cash for most successful companies is

operations. Within this category, collections from customers are
most important.

7.

Cash may decrease during a year when income is high because the
entity may be using cash to invest in long-term assets. Cash may
increase in a bad year because the entity may be borrowing heavily.
The cash flow statement reports these activities to show where cash
came from and how it was spent.

8.

a.
b.
c.
d.
e.

9.

Depreciation, depletion, and amortization expenses are not reported

on a cash flow statement prepared by the direct method because
they do not affect cash. They are reported on a statement prepared
by the indirect method because the first item, net income, includes a
deduction for them. Because they do not affect cash, they must be
added back to net income to cancel the effect of their subtraction in
computing income.

194

Financing activities
Operating activities
Operating activities
Not reported because cash is unaffected
Operating activities

10. Net cash inflow from operations = $61,000 ($92,000 + $6,000

$24,000 $13,000). The dividend payments and the loan to another
company are excluded because the dividends are a financing
activity and the loan is an investing activity.
11. OPERATING ACTIVITIES:
Cash Receipts
Collections from customers
Receipts of interest and dividends
on investments
Other operating receipts
INVESTING ACTIVITIES:
Cash Receipts
Sale of plant assets
Sale of investments that
are not cash equivalents
Cash receipts on loans receivable
FINANCING ACTIVITIES:
Cash Receipts
Issuing stock
Selling treasury stock
Borrowing money

Cash Disbursements
Payments to suppliers
Payments of interest and taxes
Other operating disbursements

Cash Disbursements
Acquisition of plant assets
Acquisition of investments that
are not cash equivalents
Making loans
Cash Disbursements
Payment of dividends
Purchase of treasury stock
Paying principal amounts of
debts

12.
Payments to employees

Beginning balance
Salary expense
Ending balance

Chapter 12 Preparing and Using the Statement of Cash Flows

10,000
51,000
2,000

195

Payments to employees ($X) are $59,000, computed as follows:

$10,000 + $51,000

$X
$X
$X
$X

=
=
=
=

$2,000
$2,000 $10,000 $51,000
$59,000
$59,000

This amount is reported as a cash payment under operating activities.

13.
Beginning balance
Acquisitions
Ending balance

193,000 Depreciation expense

Book value of plant assets
X disposed of
176,000

37,000
9,000

Acquisitions of plant assets ($X) are $29,000 computed as follows:

$193,000 + $X $37,000 $9,000 = $176,000
$X = $176,000 $193,000 +
$37,000 + $9,000
$X = $29,000
This amount is reported as a cash payment under investing activities.
14. Issuance of a note payable to purchase land should be reported as a
noncash investing and financing activity. This category of transactions
can be included in a schedule that accompanies the statement of cash
flows. Three other transactions in this category are issuance of stock to
acquire a building, issuance of stock to pay long-term debt, and
issuance of a note payable to retire stock.
Note: Students may list other examples that are acceptable.

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12 Preparing and Using the Statement of Cash Flows

15. The direct method does a better job of showing the individual cash
flows from operating activities. The indirect method shows more
clearly the relationship between net income and operating cash flow.
16. Cash flows from operating activities:
Net income................................................................ $ XXX
Add (subtract) items that affect net income and cash
flow differently:
Gain on sale of investments.............................
(15,000)
Cash flows from investing activities:
Sale of investments................................................... $ 80,000
17. An increase in another current asset is a decrease in cash.
A decrease in another current asset is an increase in cash.
An increase in a current liability is an increase in cash.
A decrease in a current liability is a decrease in cash.
18. Net cash inflow from operations = $64,000 ($38,000 + $22,000 +
$13,000 $9,000).
19. There is no difference in the two methods of reporting investing
activities and financing activities. These methods affect only the
reporting of operating activities.
20. The direct method does not show the relationship between net income
and operating cash flows. However, the company can show this
relationship by including the reconciliation from net income to cash
flow from operations as a supplementary schedule to accompany the
cash flow statement.
21. Free cash flow is the amount of cash available from operations after
paying for planned investments in plant, equipment, and other longterm assets.

Chapter 12 Preparing and Using the Statement of Cash Flows

197

 Exercises
(10-15 min.)

E 12-1

The statement of cash flows is designed to help management predict the

future cash flows of a business. The statement of cash flows measures
historical cash flows, which are a good predictor of future cash flows.
Although net income is an important measure of management performance,
it still takes cash to pay the bills. Also, a managers performance should be
evaluated in part on the basis of how well he or she uses cash, information
given in the statement of cash flows.
In evaluating a borrowers ability to repay a loan, a creditor examines the
statement of cash flows to learn how the borrower has gained and spent
cash. As Prime Hotel Properties situation indicates, income may increase
while cash decreases, so the statement of cash flows should be used in
conjunction with the income statement (and the balance sheet) in evaluating
a company.
Instructional note: Student responses may vary considerably.

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12 Preparing and Using the Statement of Cash Flows

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E 12-2

a. Payment of account payable

I k. Purchase of long-term
investment

b. Issuance of preferred stock

for cash

l. Payment of wages to
employees

c. Payment of cash dividend

m.Collection of cash
interest

I d. Sale of long-term investment

I n. Cash sale of land

e. Amortization of bond
discount

f. Collection of account
receivable

NIF

p. Acquisition of
equipment by issuance
of note payable

g. Issuance of long-term note

payable to borrow cash

q. Payment of long-term
debt

h. Depreciation of equipment

NIF

i. Purchase of treasury stock

j. Issuance of common stock

for cash

Chapter 12 Preparing and Using the Statement of Cash Flows

o. Distribution of stock
dividend

r. Acquisition of building
by issuance of common
stock
s. Accrual of salary
expense

199

(5-10 min.)
a. Operating activities

h. Noncash investing and

financing activities

b. Investing activities

i.Operating activities

c. Investing activities

j.Financing activities

d. Financing activities

k. Financing activities

e. Noncash investing and

financing activities

l. Not reported

f.

m. Operating activities

Operating activities

g. Financing activities

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Chapter

n. Investing activities

12 Preparing and Using the Statement of Cash Flows

E 12-3

(10-15 min.)
Cash flows from operating activities:
Receipts:
Collections from customers
($93,000 + $9,000)...........................
Dividends received on investments
in stock..............................................
Total cash receipts..................................
Payments:
To suppliers............................................
To employees..........................................
For interest..............................................
For income tax........................................
Total cash payments..........................
Net cash outflow from operating activities.

E 12-4

$ 102,000
7,000
109,000
$(48,000)
(34,000)
(16,000)
(13,000)

(111,000)
$ (2,000)

Evaluation: Operating cash flow is weak, as shown by the net cash outflow
from operating activities.

Chapter 12 Preparing and Using the Statement of Cash Flows

201

(5-10 min.)

E 12-5

Dividends Receivable Report cash receipts of dividends as an operating

cash flow.
Investment in Land Report acquisitions of investments and the proceeds
from sales of investments* as investing cash flows.
Long-Term Debt Report issuance and payments of long-term debt as
financing cash flows.
*Amount of sale proceeds is not determinable. We would need the gain or
loss to combine with the cost of investments sold.

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12 Preparing and Using the Statement of Cash Flows

(20-30 min.)

E 12-6

Req. 1
Cash flows from operating activities:
Receipts:
Collections from customers
($229,000 + $7,000)....................................
$ 236,000
Dividends received on investments in stock.....
8,000
Total cash receipts........................................
244,000
Payments:
To suppliers ($103,000 + $11,000 $9,000)
$(105,000)
To employees ($45,000 + $1,000)....................
(46,000)
For income tax...................................................
(9,000)
For interest........................................................
(2,000)
Total cash payments.....................................
(162,000)
Net cash inflow from operating activities.........
82,000
Cash flows from investing activities:
Acquisition of plant assets..................................... $(101,000)
Proceeds from sale of land.....................................
14,000
Net cash outflow from investing activities........

(87,000)

Cash flows from financing activities:

Proceeds from issuance of common stock............. $ 30,000
Payment of long-term note payable........................
(15,000)
Dividends paid.......................................................
(11,000)
Net cash inflow from financing activities.........
Net decrease in cash....................................................
$
Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable

Chapter 12 Preparing and Using the Statement of Cash Flows

4,000
(1,000)

15,000

203

(continued)

E 12-6

Req. 2
Evaluation: Nebraska Millings 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 and
pay off a long-term note payable. All of these signs are favorable.

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12 Preparing and Using the Statement of Cash Flows

(10-15 min.)
a.Cash payments= $82,000
for inventory

E 12-7

$4,000 decrease in
$3,000 decrease in Accounts

Inventory
+
Payable ($11,000 $8,000)
($25,000 $21,000)

= $81,000
b.Cash collections = $81,000

$4,000 increase in
Accounts Receivable
($26,000 $22,000)

= $77,000

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205

(15-20 min.)

E 12-8

a.
Beginning balance
Purchases

103,000 Depreciation
27,000 Book value sold

Ending balance

107,000

16,000
X

Cash proceeds of sale = Book value of asset sold, $7,000*

+ Gain on sale, $1,000
= $8,000
*$103,000 + $27,000 $16,000 Book value sold (X) = $107,000
Book value sold = $107,000 $103,000 $27,000 + $16,000
Book value sold = $7,000
Stock dividends
Cash dividends

22,000
X

Beginning balance
Net income

45,000
62,000

Ending balance

73,000

b. Cash dividend payments = $12,000

$45,000 + $62,000 $22,000 Cash dividends (X) = $73,000
Cash dividends = $73,000 $45,000 $62,000 + $22,000
Cash dividends = $12,000

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Chapter

12 Preparing and Using the Statement of Cash Flows

(10-15 min.)

E 12-9

Cash flows from operating activities:

Net income........................................................
$21,000
Add (subtract) items that affect net income
and cash flow differently:
Depreciation................................................. $ 12,000
Loss on sale of land......................................
5,000
Increase in current assets other than cash.... (17,000)
Decrease in current liabilities...................... (23,000) (23,000)
Net cash outflow from operating activities.......
$(2,000)

Evaluation: Operating cash flow is weak, as shown by the net cash outflow
from operating activities.

(10-15 min.)

E 12-10

1. Direct method:
a. Report the cash receipt of $59,000 as an investing activity.
b. Report the $130,000 cash payment as an investing activity.
Report issuance of the $160,000 note payable to acquire land as a
noncash investing and financing activity in a schedule to accompany
the statement of cash flows.
2. Indirect method:
a. Subtract the $7,000 gain from net income in the operating activities
section. Report cash receipt of $59,000 as an investing activity.
b. Same as answer to 1b.

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207

(20-30 min.)

E 12-11

Req. 1
Cash flows from operating activities:
Net income............................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation.....................................................
Decrease in accounts receivable......................
Increase in inventory........................................
Increase in prepaid expenses...........................
Increase in accounts payable............................
Increase in accrued liabilities...........................
Net cash inflow from operating activities........
Cash flows from investing activities:
Acquisition of plant assets....................................
Proceeds from sale of land....................................
Net cash outflow from investing activities......
Cash flows from financing activities:
Proceeds from issuance of common stock............
Payment of long-term note payable.......................
Dividends paid......................................................
Net cash inflow from financing activities........
Net decrease in cash...................................................
Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable

$ 38,000

$ 29,000
7,000*
(6,000)*
(1,000)*
13,000**
2,000**

44,000
82,000

$(101,000)
14,000
(87,000)

$ 30,000
(15,000)
(11,000)
4,000
$ (1,000)

$ 15,000

* These amounts can be combined into a single total and reported as

Change in current assets other than cash.............................................................
0.
** These amounts can be combined into a single total and reported as
Increase in current liabilities................................................................................ 15,000.

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12 Preparing and Using the Statement of Cash Flows

(continued)

E 12-11

Req. 2
Evaluation: Nebraska Millings 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 and
pay off a long-term note payable. All of these signs are favorable.

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209

(15-20 min.)
Cash flows from operating activities:
Net income..........................................................
Add (subtract items that affect
net income and cash flow differently:
Depreciation..................................................
Decrease in accounts receivable....................
Increase in inventory.....................................
Increase in accounts payable.........................
Decrease in accrued liabilities.......................
Net cash inflow from operating activities.

E 12-12

$19,000

$ 3,000
4,000
(2,000)
5,000
(3,000)

7,000
$26,000

Chen shows no sign of trouble collecting receivables or selling inventory.

There is no large build-up in either account.

(5-10 min.)

E 12-13

Case A - The sale of plant assets generated the cash needed to acquire new
plant assets.
Case B - New borrowing generated the cash to acquire plant assets.
Case C - A combination of operations and new borrowing generated most of
the cash for acquisition of plant assets.

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12 Preparing and Using the Statement of Cash Flows

(15-20 min.)

E 12-14

1. Indirect method

Millions
19X2
19X1
19X0
2. Largest source of cashOperations Long-term Short-term
borrowing borrowing
$2,711.6
$2,799.6
$4,041.9
3. Accounts and notes receivable increased, as shown by the decrease in
cash. Accounts payable decreased, as shown by the decrease in cash.
4.

Cash......................................................
Loss on Sale of Plant Assets.................
Property, Plant, and Equipment............

Millions
89.0
15.3
104.3

5.

Millions
Long-term debt issued to borrow 19X0-19X2
($777.3 + $2,799.6 + $1,092.7)....................
$ 4,669.6
Long-term debt paid 19X0-19X2
($298.0 + $1,348.5 + $616.3).......................
(2,262.8)
Increase in long-term debt 19X0-19X2.........
$ 2,406.8
Short-term borrowings 19X0-19X2
($4,041.9 + $2,551.9 + $911.2 + $1,075.3).. $8,580.3
Short-term borrowings paid 19X0-19X2
($2,647.4 + $3,097.4 + $2,062.6
+ $1,480.7 + $467.1)..................................... (9,755.2) (1,174.9)
Excess of borrowing over debt payments
19X0 - 19X2..................................................
$ 1,231.9

Trend of income from continuing operations...........................

UP
Trend of cash provided by operations......................................
UP
Trend of cash used for investing activities...............................
UP
Overall, these data suggest that Pepsi Co. grew during 19X0-19X2.

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211

 Problems
Group A
(15-30 min.)

P 12-1A

19X7 was not a very good year. Most of the increase in net income resulted
from the extraordinary gain, 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 resulted in
net cash outflow, which is bad news. Over the long run, operations should
generate the bulk of net cash inflow if the business expects to succeed.
During 19X7, the insurance recovery helped investing activities produce a
net cash inflow. Ordinarily, investing activities should produce net cash
outflows as the business invests in new assets. Growth is usually indicated by
investments in new assets, but during 19X7 net cash flows from investing
activities was positive, which means that net investments were negative.
Although the net cash inflow resulting from investing activities may be
temporary, it does not reflect especially well on the company. It means that, in
part at least, the company is maintaining its cash position by liquidating fixed
assets. This is a bad sign.
Financing activities produced a net cash inflow, which is normal. However,
coupled with the net cash outflow from operations and the net cash inflow
from investing activities, the additional debt created in 19X7 may be hard to
pay back.
Overall, the outlook for the future is not bright.
Instructional note: Student responses may very considerably. The key
conclusion is that 19X7 was not a good year, and the outlook is not bright.

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12 Preparing and Using the Statement of Cash Flows

(35-45 min.)

P 12-2A

Req. 1
Cash flows from operating activities:
Receipts:
Collections from customers
($462,600 + $171,900).......................................
Interest received......................................................
Dividends received..................................................
Total cash receipts..............................................
Payments:
To suppliers.............................................................
To employees..........................................................
For interest..............................................................
For income tax.........................................................
Total cash payments...........................................
Net cash inflow from operating activities................
Cash flows from investing activities:
Acquisition of plant assets............................................
Proceeds from sale of plant assets................................
Collection of loans........................................................
Loan to another company.............................................
Proceeds from sale of investments................................
Net cash outflow from investing activities...............
Cash flows from financing activities:
Payments of long-term debt..........................................
Payment of dividends....................................................
Proceeds from issuance of short-term debt...................
Proceeds from issuance of common stock....................
Net cash outflow from financing activities..............
Net increase in cash...........................................................
Cash balance, April 30, 19X4............................................
Cash balance, April 30, 19X5............................................

$ 634,500
4,400
4,100
$ 643,000
$(368,500)
(93,600)
(13,300)
(37,900)
(513,300)
129,700

$ (59,400)
22,400
12,800
(12,500)
9,100
(27,600)

$ (50,000)
(48,400)
19,600
8,000
(70,800)
$ 31,300
39,300
$ 70,600
continued on next page

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213

(continued)
.
Noncash investing and financing transactions:
Payment of short-term note payable by
issuing long-term note payable...............................
Acquisition of equipment by issuing
short-term note payable..........................................
Total noncash investing and financing transactions.........

P 12-2A

$ 63,000
16,400
$ 79,400

Req. 2
Evaluation of 19X5: 19X5 was a strong year from a cash-flow standpoint.
Operations generated the bulk of the companys cash. The business acquired
additional plant assets to lay a foundation for future operations. The
corporation also reduced its debt position.
Instructional note: The model for this solution is the solution to the
Review Problem on page 594 of the text.

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12 Preparing and Using the Statement of Cash Flows

(30-40 min.)

P 12-3A

Req. 1
Cash flows from operating activities:
Cash receipts:
Collections from customers ($213,000 $1,700).......... $ 211,300
Receipts of interest ($8,600 $1,200)...........................
7,400
Total cash receipts....................................................
$218,700
Cash payments:
To suppliers:
Inventory ($70,600 $3,600 $2,600).................... $ (64,400)
Operating expenses ($10,500 + $600 + $2,300).......
(13,400)
To employees ($27,800 + $3,500).................................
(31,300)
For interest ($11,600 + $500)........................................
(12,100)
For income tax ($29,100 $1,200)................................
(27,900)
Total cash payments.................................................
(149,100)
Net cash inflow from operating activities......................
69,600
Cash flows from investing activities:
Acquisition of land..............................................................
Acquisition of equipment
($49,400 depreciation expense of $4,000 =
$45,400; $53,500 $45,400).........................................
Net cash outflow from investing activities.....................
Cash flows from financing activities:
Payments of dividends ($2,700 + $68,000 $41,500).......
Payment of note payable.....................................................
Issuance of common stock..................................................
Net cash outflow from financing activities.....................
Net increase in cash.................................................................

$ (29,000)
(8,100)
(37,100)
$ (29,200)
(25,000)
23,600
(30,600)
$ 1,900

Instructional note: The model for this solution is the solution to the
Review Problem on page 594 of the text.

Chapter 12 Preparing and Using the Statement of Cash Flows

215

(continued)

P 12-3A

Req. 2
This problem will help students learn how operating activities, investing
activities, and financing activities generate cash receipts and cash payments.
By preparing this problem, students will learn how companies prepare the
statement of cash flows. Students 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 a net cash inflow from operating activities conveys a more
positive signal about a company than a net cash outflow from operations.

216
Chapter

12 Preparing and Using the Statement of Cash Flows

(30-40 min.)

P 12-4A

Req. 1
Cash flows from operating activities:
Net income.......................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation................................................................
Increase in accounts receivable...................................
Increase in interest receivable.....................................
Decrease in inventories...............................................
Increase in prepaid expenses.......................................
Increase in accounts payable.......................................
Decrease in interest payable........................................
Decrease in salary payable..........................................
Decrease in other accrued liabilities............................
Increase in income tax payable....................................
Net cash inflow from operating activities...............
Cash flows from investing activities:
Acquisition of land...........................................................
Acquisition of equipment ($49,400 depreciation
expense of $4,000 = $45,400; $53,500 $45,400).....
Net cash outflow from investing activities.............

$ 68,000

$ 4,000
(1,700)*
(1,200)*
3,600*
(600)*
2,600**
(500)**
(3,500)**
(2,300)**
1,200**

1,600
69,600

$(29,000)
(8,100)

Cash flows from financing activities:

Payment of dividends ($2,700 + $68,000 $41,500)...... $(29,200)
Payment of note payable.................................................. (25,000)
Issuance of common stock................................................
23,600
Net cash outflow from financing activities.............
Net increase in cash...............................................................

(37,100)

(30,600)
$ 1,900

Instructional note: The model for this solution is the solution to the Review Problem on page 613 of the text.
These amounts can be combined into a single total and reported as
Decrease in current assets other than cash...............................................................................
100.
** These amounts can be combined into a single total and reported as
Decrease in current liabilities................................................................................................... (2,500).
*

Chapter 12 Preparing and Using the Statement of Cash Flows

217

(continued)

P 12-4A

Req. 2
This problem will help students learn how operating activities, investing
activities, and financing activities generate cash receipts and cash payments.
By preparing this problem, students will learn how companies prepare the
statement of cash flows. Students 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 a net cash inflow from operating activities conveys a more
positive signal about a company than a net cash outflow from operations.

218
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12 Preparing and Using the Statement of Cash Flows

(35-45 min.)
Cash flows from operating activities:
Net income.....................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation.............................................................
Amortization.............................................................
Loss on sale of equipment........................................
Increase in accounts receivable................................
Increase in inventories..............................................
Increase in prepaid expenses....................................
Increase in notes payable, short-term........................
Decrease in accounts payable...................................
Increase in income tax payable.................................
Decrease in accrued liabilities..................................
Net cash inflow from operating activities.................
Cash flows from investing activities:
Acquisition of building...................................................
Acquisition of long-term investment..............................
Sale of equipment..........................................................
Collection of loan...........................................................
Net cash outflow from investing activities................
Cash flows from financing activities:
Issuance of common stock.............................................
Issuance of long-term note payable................................
Payment of cash dividends.............................................
Purchase of treasury stock.............................................
Net cash inflow from financing activities..................
Net increase in cash ($55,700 $22,700)...........................

P 12-5A

$ 57,100

$ 26,800
5,300
11,700
(5,500)*
(5,600)*
(1,200)*
4,300**
(2,900)**
1,900**
(11,700)**

23,100
80,200

$(125,300)
(31,600)
58,000
8,700
(90,200)

$ 41,200
34,400
(18,300)
(14,300)
43,000
$ 33,000

continued on next page

Chapter 12 Preparing and Using the Statement of Cash Flows

219

(continued)
Noncash investing and financing activities:
Acquisition of land by issuing long-term note payable
Retirement of bonds payable by issuing common stock
Total noncash investing and financing activities..................

P 12-5A

$107,000
65,000
$172,000

* These amounts can be combined into a single total and reported as

Increase in current assets other than cash.................................................................. (12,300).
** These amounts can be combined into a single total and reported as
Decrease in current liabilities..................................................................................... (8,400).

Instructional note: The model for this solution is the solution to the
Review Problem on page 613 of the text.

220
Chapter

12 Preparing and Using the Statement of Cash Flows

(35-45 min.)

P 12-6A

Req. 1
Cash flows from operating activities:
Net income......................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation...............................................................
Amortization..............................................................
Decrease in accounts receivable................................
Increase in inventories...............................................
Increase in prepaid expenses......................................
Increase in accounts payable......................................
Decrease in accrued liabilities....................................
Increase in income tax payable..................................
Net cash inflow from operating activities...................

$ 70,000

$ 9,000
2,000
6,800*
(2,600)*
(200)*
2,700**
(400)**
3,300**

20,600
90,600

Cash flows from investing activities:

Acquisition of equipment................................................ $(78,700)
Acquisition of building.................................................... (47,000)
Sale of long-term investment...........................................
13,700
Net cash outflow from investing activities.................

(112,000)

Cash flows from financing activities:

Issuance of long-term note payable................................. $ 50,000
Issuance of common stock.............................................. 11,000
Payment of cash dividends..............................................
(30,000)
Net cash inflow from financing activities...................
Net increase in cash ($13,600 $4,000)..............................

31,000
$ 9,600

Noncash investing and financing activities:

Acquisition of land by issuing note payable....................

$ 76,000

Instructional note: The model for this solution is the solution to the Review Problem on page 613 of the text.
* These amounts can be combined into a single total and reported as
Decrease in current assets other than cash................................................................................................... 4,000.
** These amounts can be combined into a single total and reported as
Increase in current liabilities........................................................................................................................ 5,600.

Chapter 12 Preparing and Using the Statement of Cash Flows

221

(continued)

P 12-6A

Req. 2
Evaluation: Caterpillars cash flows look strong. Operations are the main
source of cash. The company is investing in new plant assets, and
borrowing appears reasonable. All of these signs are favorable.

222
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12 Preparing and Using the Statement of Cash Flows

(45-60 min.)

P 12-7A

Req. 1
Cash flows from operating activities:
Receipts:
Collections from customers......................................... $ 678,700
Interest received..........................................................
12,600
Dividends received......................................................
4,500
Total cash receipts.................................................
$ 695,800
Payments:
To suppliers ($399,100 + $34,300)............................. $(433,400)
To employees..............................................................
(143,800)
For interest..................................................................
(26,900)
For income tax.............................................................
(18,900)
Total cash payments...............................................
(623,000)
Net cash inflow from operating activities....................
72,800
Cash flows from investing activities:
Acquisition of equipment..................................................
Collection of loans............................................................
Sale of investments...........................................................
Net cash outflow from investing activities..................

$ (31,400)
13,000
8,200
(10,200)

Cash flows from financing activities:

Issuance of common stock................................................ $ 47,300
Payment of long-term debt...............................................
(41,300)
Payment of dividends.......................................................
(27,200)
Purchase of treasury stock................................................
(26,400)
Net cash outflow from financing activities..................
(47,600)
Net increase in cash ($68,600 $53,600).............................
$ 15,000
Noncash investing and financing activities:
Acquisition of land by issuing common stock..................
Retirement of long-term debt by issuing common stock
Total noncash investing and financing activities....................

$ 80,100
19,000
$ 99,100

Instructional note: The model for this solution is the solution to the Review Problem on page 594 of the text.

Chapter 12 Preparing and Using the Statement of Cash Flows

223

(continued)

P 12-7A

Req. 2
Cash flows from operating activities:
Net income.........................................................
$55,500
Add (subtract) items that affect net income
and cash flow differently:
Depreciation.................................................. $ 24,300
Loss on sale of investments.......................... 1,100
Increase in accounts receivable.................... (27,600)*
Decrease in inventories................................. 11,800*
Increase in prepaid expenses........................
(600)*
Decrease in accounts payable.......................
(8,300)**
Increase in interest payable...........................
1,900**
Increase in salary payable.............................
7,000**
Increase in other accrued liabilities..............
10,400**
Decrease in income tax payable...................
(2,700)** 17,300
Net cash inflow from operating activities....
$72,800
Instructional note: The model for this solution is the solution to the Review Problem on
page 613 of the text.
* These amounts can be combined into a single total and reported as
Increase in current assets other than cash........................................... (16,400).
** These amounts can be combined into a single total and reported as
Increase in current liabilities...............................................................
8,300.

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12 Preparing and Using the Statement of Cash Flows

(45-60 min.)

P 12-8A

Req. 1
Cash flows from operating activities:
Net income...................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation............................................................
Loss on sale of land.................................................
Decrease in accounts receivable..............................
Decrease in interest receivable................................
Increase in inventories.............................................
Increase in prepaid expenses...................................
Increase in accounts payable...................................
Decrease in income tax payable..............................
Decrease in accrued liabilities.................................
Increase in interest payable.....................................
Decrease in salary payable......................................
Net cash inflow from operating activities................
Cash flows from investing activities:
Sale of land...................................................................
Acquisition of long-term investment.............................
Net cash inflow from investing activities.................
Cash flows from financing activities:
Payment of long-term note payable..............................
Payment of cash dividends...........................................
Issuance of common stock............................................
Net cash outflow from financing activities..............
Net increase in cash...........................................................

$ 56,200

$ 5,400
6,700
2,400*
700*
(8,400)*
(900)*
2,100**
(700)**
(1,500)**
800**
(1,700)**

4,900
61,100

$ 46,900
(4,900)
42,000

$(61,000)
(38,100)
3,900
(95,200)
$ 7,900
continued on next page

These amounts can be combined into a single total and reported as

Increase in current assets other than cash..................................................................... (6,200).
** These amounts can be combined into a single total and reported as
Decrease in current liabilities........................................................................................ (1,000).
*

Chapter 12 Preparing and Using the Statement of Cash Flows

225

(continued)
Req. 1
Noncash investing and financing activities:
Acquisition of equipment by issuing
long-term note payable..............................................
Payment of short-term note payable by
issuing common stock..............................................
Total noncash investing and financing activities................

P 12-8A

$14,300
4,700
$19,000

Instructional note: The model for this solution is the solution to the
Review Problem on page 613 of the text.

226
Chapter

12 Preparing and Using the Statement of Cash Flows

(continued)

P 12-8A

Req. 2
Cash flows from operating activities:
Receipts:
Collections from customers
($237,300 + $2,400)................................ $ 239,700
Interest received ($10,600 + $700)...............
11,300
Total cash receipts...................................
$251,000
Payments:
To suppliers:
Inventory ($82,800 + $8,400 $2,100). . $ (89,100)
Operating expenses
($42,000 + $900 + $1,500)................
(44,400)
To employees ($38,800 + $1,700)................
(40,500)
For income tax ($9,900 + $700)..................
(10,600)
For interest ($6,100 $800).........................
(5,300)
Total cash payments................................
(189,900)
Net cash inflow from operating activities....
$ 61,100
Instructional note: The model for this solution is the solution to the
Review Problem on page 594 of the text.

Chapter 12 Preparing and Using the Statement of Cash Flows

227

 Problems
Group B
(15-30 min.)

P 12-1B

19X4 was a good year. Net income increased by 15% and would have been
even higher without the nonrecurring loss, which cannot be expected to
happen every year. Operations appear to be generating increasing amounts of
profit. The increases in plant assets are consistent with a growing, prospering
company. No unhealthy relationships are apparent among the assets or
liabilities.
The cash-flow data paint a similar picture. Operating activities produced the
bulk of the years increase in cash, which is healthy. Over the long run,
successful companies generate the bulk of their cash through operations.
The five-year expansion program is generating net cash outflows from
investing activities. LTV Broadcasting appears to be making the long-term
investments to lay the foundation for strong future operations. Financing
activities resulted in a net cash inflow of $70,000. This amount is
insignificant in relation to cash flows from operating and investing activities.
Overall, the cash-flow data reveal a healthy set of relationships.
On balance, there are no obvious danger signals, so the outlook is fair to
good.
Instructional note: Student responses may vary considerably. The key
conclusion is that 19X4 was a good year, and the outlook is not clouded by
any obvious difficulties.

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12 Preparing and Using the Statement of Cash Flows

(35-45 min.)

P 12-2B

Req. 1
Cash flows from operating activities:
Receipts:
Collections from customers ($673,100 + $146,000)
Interest received.........................................................
Dividends received.....................................................
Total cash receipts................................................
Payments:
To suppliers...............................................................
To employees.............................................................
For income tax...........................................................
For interest.................................................................
Total cash payments..............................................
Net cash outflow from operating activities.................
Cash flows from investing activities:
Acquisition of plant assets...............................................
Collection of loans..........................................................
Proceeds from sale of plant assets...................................
Loan to another company................................................
Proceeds from sale of investments..................................
Net cash outflow from investing activities.................
Cash flows from financing activities:
Proceeds from issuance of common stock.......................
Payments of long-term debt.............................................
Payment of dividends......................................................
Proceeds from issuance of short-term debt.....................
Net cash inflow from financing activities...................
Net increase in cash..............................................................
Cash balance, July 31, 19X8................................................
Cash balance, July 31, 19X9................................................

$ 819,100
11,700
2,700
$ 833,500
$(673,300)
(104,000)
(56,400)
(37,800)
(871,500)
(38,000)

$(181,000)
74,400
59,700
(35,000)
34,700
(47,200)

$ 116,900
(18,800)
(50,500)
44,100
91,700
$ 6,500
53,800
$ 60,300
continued on next page

Chapter 12 Preparing and Using the Statement of Cash Flows

229

(continued)
Noncash investing and financing activities:
Payment of long-term debt by issuing preferred stock
Acquisition of equipment by issuing
short-term note payable..........................................
Total noncash investing and financing activities........

P 12-2B

$107,300
35,500
$142,800

Req. 2
Evaluation of 19X9: 19X9 was a disappointing year from a cash-flow
standpoint. Operations generated a net cash outflow. On
the positive side, Outback was able to issue $116,900 of
new stock, which means the stockholders have faith in
the company. The business invested heavily in plant
assets, and cash increased by $6,500. But ultimately,
operations must generate a net cash inflow for the
company to remain in business.
Instructional note: The model for this solution is the solution to the
Review Problem on page 594 of the text.

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Chapter

12 Preparing and Using the Statement of Cash Flows

(30-40 min.)

P 12-3B

Req. 1
Cash flows from operating activities:
Cash receipts:
Collections from customers ($438,000 + $1,600)....... $ 439,600
Receipts of interest ($11,700 + $300).........................
12,000
Total cash receipts.................................................
$ 451,600
Cash payments:
To suppliers:
Inventory ($205,200 + $4,400 + $1,500)............... $ (211,100)
Operating expenses ($49,700 $500 + $600).......
(49,800)
To employees ($76,400 $700)..................................
(75,700)
For interest ($24,600 + $400).....................................
(25,000)
For income tax ($16,900 $2,500).............................
(14,400)
Total cash payments...............................................
(376,000)
Net cash inflow from operating activities....................
75,600
Cash flows from investing activities:
Acquisition of land...........................................................
Acquisition of equipment
($93,700 depreciation expense of $15,300 =
$78,400; $100,900 $78,400).........................................
Net cash outflow from investing activities..................
Cash flows from financing activities:
Payment of dividends ($19,600 + $61,600 $52,500)
Payment of note payable..................................................
Issuance of common stock................................................
Net cash outflow from financing activities..................
Net decrease in cash..............................................................

$ (25,100)
(22,500)
(47,600)
$ (28,700)
(10,000)
8,800
(29,900)
$ (1,900)

Instructional note: The model for this solution is the solution to the Review Problem on
page 594 of the text.

Chapter 12 Preparing and Using the Statement of Cash Flows

231

(continued)

P 12-3B

Req. 2
This problem will help students learn how operating activities, investing
activities, and financing activities generate cash receipts and cash payments.
By preparing this problem, students will learn how companies prepare the
statement of cash flows. Students 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 a net cash inflow from operating activities conveys a more
positive signal about a company than a net cash outflow from operations.

232
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12 Preparing and Using the Statement of Cash Flows

(30-40 min.)

P 12-4B

Req. 1
Cash flows from operating activities:
Net income.....................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation.............................................................
Decrease in accounts receivable...............................
Decrease in interest receivable.................................
Increase in inventories..............................................
Decrease in prepaid expenses...................................
Decrease in accounts payable...................................
Decrease in interest payable.....................................
Increase in salary payable.........................................
Decrease in other accrued liabilities.........................
Increase in income tax payable.................................
Net cash inflow from operating activities............
Cash flows from investing activities:
Acquisition of land.........................................................
Acquisition of equipment ($93,700
depreciation expense of $15,300 = $78,400;
$100,900 $78,400).................................................
Net cash outflow from investing activities...........
Cash flows from financing activities:
Payment of dividends ($19,600 + $61,600 $52,500)
Payment of note payable................................................
Issuance of common stock.............................................
Net cash outflow from financing activities................
Net decrease in cash...........................................................

$ 61,600

$ 15,300
1,600*
300*
(4,400)*
500*
(1,500)**
(400)**
700**
(600)**
2,500**

14,000
75,600

$ (25,100)

(22,500)
(47,600)

$ (28,700)
(10,000)
8,800
(29,900)
$ (1,900)

Instructional note: The model for this solution is the solution to the Review Problem on page 613 of the text.
* These amounts can be combined into a single total and reported as
Increase in current assets other than cash................................................................................................ (2,000).
** These amounts can be combined into a single total and reported as
Increase in current liabilities.....................................................................................................................
700.

(continued)

P 12-4B

Req. 2
Chapter 12 Preparing and Using the Statement of Cash Flows

233

This problem will help students learn how operating activities, investing
activities, and financing activities generate cash receipts and cash payments.
By preparing this problem, students will learn how companies prepare the
statement of cash flows. Students 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 a net cash inflow from operating activities conveys a more
positive signal about a company than a net cash outflow from operations.

234
Chapter

12 Preparing and Using the Statement of Cash Flows

(35-45 min.)
Cash flows from operating activities:
Net income.......................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation................................................................
Amortization................................................................
Gain on sale of investment..........................................
Decrease in accounts receivable..................................
Decrease in inventories...............................................
Increase in prepaid expenses.......................................
Decrease in notes payable, short-term.........................
Increase in accounts payable.......................................
Decrease in income tax payable..................................
Increase in accrued liabilities......................................
Net cash inflow from operating activities....................

P 12-5B

$50,500

$ 19,200
1,100
(3,500)
3,600*
5,900*
(1,100)*
(500)**
4,600**
(900)**
5,100** 33,500
84,000

Cash flows from investing activities:

Acquisition of equipment.................................................. $(69,000)
Acquisition of long-term investment................................. (44,800)
Sale of long-term investment............................................ 12,200
Collection of loan.............................................................
10,300
Net cash outflow from investing activities..................

(91,300)

Cash flows from financing activities:

Issuance of long-term debt............................................... $ 71,000
Payment of cash dividends............................................... (48,300)
Payment of long-term debt............................................... (47,800)
Issuance of preferred stock...............................................
36,200
Net cash inflow from financing activities....................

11,100

Net increase in cash ($38,600 $34,800).............................

$ 3,800
continued on next page

Chapter 12 Preparing and Using the Statement of Cash Flows

235

(continued)
Noncash investing and financing activities:
Acquisition of building by issuing long-term note payable
Payment of long-term debt by issuing common stock.........
Total noncash investing and financing activities......................

P 12-5B

$118,000
89,400
$207,400

* These amounts can be combined into a single total and reported as

Decrease in current assets other than cash..................................................................... 8,400.
** These amounts can be combined into a single total and reported as
Increase in current liabilities........................................................................................... 8,300.

Instructional note: The model for this solution is the solution to the
Review Problem on page 613 of the text.

236
Chapter

12 Preparing and Using the Statement of Cash Flows

(35-45 min.)

P 12-6B

Req. 1
Cash flows from operating activities:
Net income.....................................................................
$ 31,600
Add (subtract) items that affect net income
and cash flow differently:
Depreciation............................................................. $ 15,000
Amortization............................................................. 5,000
Decrease in accounts receivable...............................
700*
Decrease in inventories.............................................
1,400*
Increase in prepaid expenses....................................
(500)*
Increase in notes payable, short-term........................
9,200**
Decrease in accounts payable...................................
(6,100)**
Decrease in accrued liabilities..................................
(2,500)**
Decrease in income tax payable................................
(3,300)**
18,900
Net cash inflow from operating activities.................
50,500
Cash flows from investing activities:
Acquisition of building................................................... $(124,000)
Acquisition of equipment............................................... (55,000)
Sale of long-term investment.........................................
6,000
Net cash outflow from investing activities................

(173,000)

Cash flows from financing activities:

Issuance of common stock............................................. $ 105,600
Issuance of long-term note payable................................ 32,000
Payment of cash dividends.............................................
(17,000)
Net cash inflow from financing activities..................
Net decrease in cash ($10,600 $12,500)..........................

120,600
$ (1,900)

Noncash investing and financing activities:

Retirement of bonds payable by issuing common stock

$ 55,000

Instructional note: The model for this solution is the solution to the Review Problem on page 613 of the text.
* These amounts can be combined into a single total and reported as
Decrease in current assets other than cash................................................................................................
1,600.
** These amounts can be combined into a single total and reported as
Decrease in current liabilities.................................................................................................................... (2,700).

Chapter 12 Preparing and Using the Statement of Cash Flows

237

(continued)

P 12-6B

Req. 2
Evaluation: Sumters cash flows look strong. Operations are the main source
of cash. The company is investing heavily in new plant assets
and is financing the investments more by issuing stock than by
borrowing. All of these signs are favorable.

238
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12 Preparing and Using the Statement of Cash Flows

(45-60 min.)

P 12-7B

Req. 1
Cash flows from operating activities:
Receipts:
Collections from customers......................... $ 298,100
Interest received...........................................
12,200
Dividends received......................................
1,900
Total cash receipts
$312,200
Payments:
To suppliers ($101,600 + $46,100)............. $(147,700)
To employees...............................................
(67,500)
For interest...................................................
(21,800)
For income tax.............................................
(8,000)
Total cash payments...............................
(245,000)
Net cash inflow from operating activities
67,200
Cash flows from investing activities:
Acquisition of equipment.................................
Collection of loan.............................................
Sale of investments...........................................
Net cash outflow from investing activities..
Cash flows from financing activities:
Payment of long-term debt...............................
Issuance of common stock................................
Sale of treasury stock........................................
Purchase of treasury stock................................
Payment of dividends.......................................
Net cash outflow from financing activities.
Net decrease in cash ($72,500 $87,100)............

$ (79,900)
18,500
9,900
(51,500)

$ (78,900)
34,600
26,200
(10,400)
(1,800)
(30,300)
$ (14,600)
continued on next page

Chapter 12 Preparing and Using the Statement of Cash Flows

239

(continued)

P 12-7B

Req. 1
Noncash investing and financing activities:
Acquisition of land by issuing common stock..................... $ 62,100
Retirement of long-term debt by issuing common stock......
21,100
Total noncash investing and financing activities...................... $ 83,200

240
Chapter

12 Preparing and Using the Statement of Cash Flows

(continued)
Req. 2
Cash flows from operating activities:
Net income.........................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation..................................................
Gain on sale of investments..........................
Decrease in accounts receivable...................
Increase in inventories..................................
Decrease in prepaid expenses.......................
Increase in accounts payable........................
Increase in interest payable...........................
Decrease in salary payable............................
Decrease in other accrued liabilities.............
Decrease in income tax payable...................
Net cash inflow from operating activities....

P 12-7B

$43,900

$10,900
(700)
16,300*
(5,700)*
1,900*
7,700**
2,300**
(700)**
(3,300)**
(5,400)** 23,300
$67,200

Instructional note: The model for this solution is the solution to the Review Problem on
page 613 of the text.
* These amounts can be combined into a single total and reported as
Decrease in current assets other than cash.................................................12,500.
** These amounts can be combined into a single total and reported as
Increase in current liabilities....................................................................... 600.

Chapter 12 Preparing and Using the Statement of Cash Flows

241

(45-60 min.)

P 12-8B

Req. 1
Cash flows from operating activities:
Net income...................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation............................................................
Gain on sale of land.................................................
Decrease in accounts receivable..............................
Increase in interest receivable.................................
Increase in inventories.............................................
Decrease in prepaid expenses..................................
Decrease in accounts payable..................................
Decrease in income tax payable..............................
Decrease in accrued liabilities.................................
Increase in interest payable.....................................
Increase in salary payable........................................
Net cash inflow from operating activities................
Cash flows from investing activities:
Sale of land...................................................................
Acquisition of long-term investments...........................
Net cash inflow from investing activities.................
Cash flows from financing activities:
Payment of cash dividends...........................................
Issuance of common stock............................................
Payment of long-term note payable..............................
Net cash outflow from financing activities..............
Net increase in cash...........................................................

$ 93,900

$ 8,500
(10,900)
2,100*
(1,300)*
(4,800)*
700 *
(8,500)**
(2,800)**
(11,200)**
1,300**
400** (26,500)
67,400

$ 38,100
(37,300)
800

$(64,300)
51,900
(24,700)
(37,100)
$31,100
continued on next page

These amounts can be combined into a single total and reported as

Increase in current assets other than cash.................................................................
** These amounts can be combined into a single total and reported as
Decrease in current liabilities....................................................................................
*

242
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12 Preparing and Using the Statement of Cash Flows

(3,300).
(20,800).

(continued)
Req. 1
Noncash investing and financing activities:
Acquisition of equipment by issuing
long-term note payable...................................................
Acquisition of equipment by issuing
short-term note payable.................................................
Total noncash investing and financing activities.....................

P 12-8B

$ 26,300
22,000
$ 48,300

Instructional note: The model for this solution is the solution to the
Review Problem on page 613 of the text.

Chapter 12 Preparing and Using the Statement of Cash Flows

243

(continued)

P 12-8B

Req. 2
Cash flows from operating activities:
Receipts:
Collections from customers
($370,600 + $2,100)................................ $ 372,700
Interest received ($7,300 $1,300)..............
6,000
Total cash receipts...................................
$378,700
Payments:
To suppliers:
Inventory ($161,500 + $4,800 + $8,500) $(174,800)
Operating expenses
($29,600 $700 + $11,200)..............
(40,100)
To employees ($63,400 $400)...................
(63,000)
For income tax ($18,400 + $2,800).............
(21,200)
For interest ($13,500 $1,300)....................
(12,200)
Total cash payments................................
(311,300)
Net cash inflow from operating activities....
$ 67,400
Instructional note: The model for this solution is the solution to the
Review Problem on page 594 of the text.

244
Chapter

12 Preparing and Using the Statement of Cash Flows

 Decision Cases
(45-60 min.) Decision Case 1
Req. 1 (indirect method for operating activities)
Cash flows from operating activities:
(Thousand
Net income............................................................................
Add (subtract) items that affect net income
and cash flow differently:
Depreciation....................................................................
$ 46
Amortization of patents...................................................
11
Increase in accounts receivable ($72 $61)...................
(11)*
Increase in inventories ($194 $181).............................
(13)*
Increase in accounts payable ($63 $56).......................
7**
Decrease in accrued liabilities ($17 $12).....................
(5)**
Net cash inflow from operating activities........................
Cash flows from investing activities:
Acquisition of property, plant, and
equipment ($361 $259)................................................
Acquisition of long-term investments ($31 $0)...................
Net cash outflow from investing activities......................
Cash flows from financing activities:
Issuance of common stock ($149 $61)...............................
Payment of short-term note payable ($101 $32).................
Payment of cash dividends ($156 + $105 $221).................
Payment of long-term note payable ($163 $147)................
Net cash outflow from financing activities............................
Net decrease in cash ($33 $63)................................................

$105

35
140

$(102)
(31)
(133)
$ 88
(69)
(40)
(16)
(37)
$ (30)

Instructional note: The model for this solution is the solution to the Review Problem on page 613 of
the text.
* These amounts can be combined into a single total and reported as
Increase in current assets other than cash........................................................................ ($24).
** These amounts can be combined into a single total and reported as
Increase in current liabilities.............................................................................................
$2.

Chapter 12 Preparing and Using the Statement of Cash Flows

245

(continued) Decision Case 1

Req. 2
During 19X5, the company sold equipment for $33,000 and land for $61,000.
These two transactions, indicated by the gain and the loss on the 19X5
income statement, increased 19X5 cash by $94,000. During 19X6, the
company generated no cash by selling plant assets. The two largest
disbursements during 19X6 were the purchases of property, plant, and
equipment ($102,000) and the payment of short-term notes payable
($69,000), which came to a $171,000 outlay. Thus, compared to the 19X5
cash balance, the 19X6 amount looks low.

Req. 3
Overall, 19X6 was a good year. Net income was up from $50,000 to
$105,000, and operations were the largest source of cash. On this basis,
business appears to have been successful. Also, the company increased its
property, plant, and equipment by $102,000. Navasota should be able to use
these plant assets to earn profits in future years. The business eliminated debt
by $85,000 ($69,000 short-term and $16,000 long-term). Reducing debt
decreases future interest expense. Tell the board members that the future
looks bright for Navasota, Inc. The cash has been spent wisely.

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12 Preparing and Using the Statement of Cash Flows

(15-25 min.) Decision Case 2

Magna Corp. looks like the better investment because:
1.

Operations generate far more cash for Magna than for Altex. Operations
should be the main source of cash for a healthy company.

2.

Magna is investing more in long-term plant assets than Altex is. Magna
is laying a more solid foundation in revenue-producing assets than Altex
is.

3.

Altexs main source of cash is the sale of plant assets. This trend cannot
continue for long without hurting the companys ability to produce
revenue.

4.

Magna is raising more cash by selling stock than Altex. This gives
Magna more cash to invest in research and development of new
products and other innovations to enhance the companys
competitiveness. Altex, on the other hand, is paying off debt. That is not
bad for Altex, but Magna appears to be a step ahead in terms of
financing its operations with owners equity and investing the cash in
income-producing assets.

Chapter 12 Preparing and Using the Statement of Cash Flows

247

 Ethical Issue
Req. 1
Cash flows from operating activities:
Net income....................................
Increase in accounts receivable.....
Net cash inflow from
operating activities......................

Without
With
Reclassification Reclassification
$ 65,000
$65,000
(30,000)
$ 35,000

$65,000

Jarvis looks better with the reclassification

because net cash inflow from operations
is higher.
Req. 2
Cash flows from investing activities:
Reclassification of (or long-term
investment in) receivables...........
Increase in cash from all activities

(30,000)

$35,000

$35,000

Morris is correct that reclassifying the receivables will increase the reported
amount of cash inflow from operations. This will make Jarvis look better. But
reclassifying a receivable has no effect on overall cash from all activities, as
shown in the final result above.
Req. 3
The reclassification would be ethical if Jarvis expects to collect the
receivables beyond the current operating cycle, or one year if longer.
Reclassification would be unethical if Jarvis expects to collect within the
current period. In that case, the reclassification would appear to be designed
to create a false picture of cash flow from operations.

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Chapter

12 Preparing and Using the Statement of Cash Flows

 Financial Statement Cases

(40-50 min.) Financial Statement Case 1
Req. 1
Indirect method. The statement of cash flows begins with net income for the
year. Also, Lands End does not report collections from customers, payments
to suppliers, and so on, which are reported under the direct method.
Req. 2
a.

Collections
from
customers
$1,027,943
Beg. bal.
Net sales
End. bal.

= Sales Revenue

+ Decrease in Receivables
or
Increase in Receivables

Thousands
= $1,031,548
($8,064 $4,459)
4,459
1,031,548 Collections

1,027,943

8,064

Chapter 12 Preparing and Using the Statement of Cash Flows

249

(continued) Financial Statement Case 1

b.

Payments
Expense
into
= under
employees
retirement
profit-sharing
plan
plan
$3,396

+ Decrease in Accrued
Profit Sharing
or
Increase in Accrued
Profit Sharing

Thousands
= $3,200
+ ($1,679 $1,483)
Beg. bal.
3,396 Expenses for the year
End. bal.

Payments

c. Payments for
Cost of + Increase in +
inventory
= goods sold Inventory
or
and
Decrease in
Inventory

1,679
3,200
1,483

Decrease in
Accounts Payable
or
Increases in
Accounts Payable

Thousands
$574,563 = $588,017 ($168,652 $164,816) ($62,380 $52,762)
Beg. inventory
Purchases
Cost of goods sold

168,652 End. inventory

584,181
588,017

Payments for inventory

250
Chapter

Beg. bal.
574,563 Purchases
End. bal.

12 Preparing and Using the Statement of Cash Flows

164,816

52,762
584,181
62,380

(continued) Financial Statement Case 1

Req. 3
Net income decreased from $36.1 million to $30.6 million after falling during
the preceding year. Assets increased from $297.6 million to $323.5 million,
and shareholders investment (stockholders equity) increased from $189.1
million to $201.2 million. Liabilities were very low in relation to assets. Net
cash flows from operating activities were up from $34.5 million to $41.4
million. The only blemish is the downturn in net income for the second year
in a row. The downward trend of net income casts a negative shadow on the
year ended February 2, 1996.

(30-50 min.) Financial Statement Case 2

Because the students will be using the annual reports of real companies, the
answers to this problem will vary widely.

Chapter 12 Preparing and Using the Statement of Cash Flows

251

Solutions to Internet Exercises

Netscape
a. Netscape describes itself as a leading provider of open client/server
software, commercial applications, and development tools that link people
and information over networks.
b. Netscape is much more than its browser software. While most people are
familiar with its Navigator browser to surf the Internet, Netscape derives
most of its revenue from (1) license fees for its software products and (2)
fees for maintenance and support services, training, consulting, and
advertising space.
c. Netscape has yet to earn a profit, but it has positive cash flows from
operations. This is an unusual situation. Most young but fast-growing
firms earn a profit prior to having positive operating cash flows. Netscape
had significant expenditures in research and development and marketing
during 1995 that may not have been paid as of year-end.
d. Netscape defines cash and cash equivalents as cash on deposit with banks
and money market instruments with original maturities of 90 days or less.
e. The largest cash outflow for 1995 was the purchase of investments with
proceeds from the sale of stock.

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