Professional Documents
Culture Documents
"How Well Am I Doing?" Statement of Cash Flows: Solutions To Questions
"How Well Am I Doing?" Statement of Cash Flows: Solutions To Questions
http://world-best-free.blogspot.com/
Chapter 15
“How Well Am I Doing?”
Statement of Cash Flows
Solutions to Questions
15-1 The statement of cash flows highlights inflow from investing activities, the gain must be
the major activities that have provided and used deducted from net income to avoid double
cash during a period and shows their effects on counting.
the overall cash balance.
15-6 Transactions involving accounts payable
15-2 Cash equivalents are short-term, highly are not considered to be financing activities
liquid investments such as Treasury bills, because such transactions relate to a company’s
commercial paper, and money market funds. day-to-day operating activities rather than to its
They are included with cash because financing activities.
investments of this type are made solely for the
purpose of generating a return on temporarily 15-7 The repayment of $300,000 and the
idle funds and they can be easily converted to borrowing of $500,000 must both be shown
cash. “gross” on the statement of cash flows. That is,
the company would show $500,000 of cash
15-3 (1) Operating activities: Transactions provided by financing activities and then show
that affect current assets, current liabilities, or $300,000 of cash used by financing activities.
net income.
(2) Investing activities: Transactions that 15-8 The direct method reconstructs the
involve the acquisition or disposition of income statement on a cash basis by restating
noncurrent assets. revenues and expenses in terms of cash inflows
(3) Financing activities: Transactions and outflows. The indirect method starts with net
(other than the payment of interest) involving income and adjusts it to a cash basis to
borrowing from creditors, and any transactions determine the cash provided by operating
(involving the owners of a company. activities.
Additional entries
None.....................................
Total...................................... –3 –3
2. Herald Company
Statement of Cash Flows
Operating activities:
Net cash provided by operating activities (see above)..... $ 90
Investing activities:
Proceeds from sale of long-term investments.................. $ 45
Proceeds from sale of land............................................... 70
Additions to long-term investments.................................. (20)
Additions to plant & equipment......................................... (150)
Net cash used for investing activities............................... (55)
Financing activities:
Decrease in bonds payable.............................................. (20)
Increase in common stock................................................ 40
Cash dividends................................................................. (35)
Net cash used by financing activities............................... (15)
Net increase in cash (net cash flow)................................ 20
Cash balance, beginning.................................................. 100
Cash balance, ending....................................................... $120
Cash Ad-
Source or Flow Ef- just-ment Adjusted Classi-fi-
Change Use? fect s Effect cation
Noncurrent liabilities:
Bonds payable.................. –20 Use –20 –20 Financing
Deferred income taxes...... +5 Source +5 +5 Operating
Stockholders’ equity:
Common stock.................. +40 Source +40 +40 Financing
Retained earnings:
Net income..................... +75 Source +75 +75 Operating
Dividends....................... –35 Use –35 –35 Financing
Additional entries
Proceeds from sale of in-
vestments......................... +45 +45 Investing
Loss on sale of investments +5 +5 Operating
Proceeds from sale of land. . +70 +70 Investing
Gain on sale of land............. –40 –40 Operating
Total..................................... +20 0 +20
Source, Reported in
Use, or Separate
Transaction Operating Investing Financing Neither Schedule?
a. Bonds were retired by paying the princi-
pal amount due..................................... X Use
b. Equipment was purchased by giving a
long-term note to the seller................... Neither Yes
c. Interest was paid on a note, decreasing
Interest Payable.................................... X Use
d. Accrued taxes were paid.......................... X Use
e. A long-term loan was made to a supplier. X Use
f. Interest was received on the long-term
loan in (e) above, reducing Interest Re-
ceivable................................................. X Source
g. Cash dividends were declared and paid. . X Use
h. A building was acquired in exchange for
shares of the company’s common
stock...................................................... Neither Yes
i. Common stock was sold for cash to in-
vestors................................................... X Source
j. Equipment was sold for cash................... X Source
k. Equipment was sold in exchange for a
long-term note....................................... Neither Yes
l. Convertible bonds were converted into
common stock....................................... Neither Yes
Ad-
Source or Cash Flow just-ment Adjusted Classi-fi-
Change Use? Effect s Effect cation
Noncurrent liabilities:
Bonds payable................. +25 Source +25 +25 Financing
Deferred income taxes..... +8 Source +8 +8 Operating
Stockholders’ equity:
Common stock................. –40 Use –40 –40 Financing
Retained earnings:
Net income.................... +56 Source +56 +56 Operating
Dividends...................... –16 Use –16 –16 Financing
Additional entries
Proceeds from sale of
equipment........................ +18 +18 Investing
Loss on sale of equipment.. +2 +2 Operating
Proceeds from sale of long-
term investments.............. +12 +12 Investing
Gain on sale of long-term
investments...................... –5 –5 Operating
Total.................................... –7 0 –7
http://world-best-free.blogspot.com/
Cash Ad-
Source or Flow Ef- just-ment Adjusted Classi-fi-
Change Use? fect s Effect cation
Noncurrent liabilities:
Bonds payable................... +100 Source +100 +100 Financing
Deferred income taxes....... +3 Source +3 +3 Operating
Stockholders’ equity:
Common stock................... –5 Use –5 –5 Financing
Retained earnings:
Net income...................... +70 Source +70 +70 Operating
Dividends........................ –28 Use –28 –28 Financing
Additional entries
Proceeds from sale of long-
term investments............... +50 +50 Investing
Gain from sale of invest-
ments................................. –20 –20 Operating
Proceeds from sale of equip-
ment................................... +44 +44 Investing
Loss on sale of equipment.... +6 +6 Operating
Total...................................... –18 0 –18
2. Alcorn Products
Statement of Cash Flows
For the Year Ended December 31, 2008
Operating activities:
Net income........................................................... $170,000
Adjustments to convert net income to cash basis:
Depreciation charges......................................... $ 95,000
Amortization of patents...................................... 6,000
Increase in accounts receivable........................ (180,000)
Decrease in inventory........................................ 12,000
Increase in prepaid expenses............................ (5,000)
Increase in accounts payable............................ 300,000
Decrease in accrued liabilities........................... (17,000)
Gain on sale of long-term investments.............. (60,000)
Loss on sale of equipment................................. 20,000
Increase in deferred income taxes.................... 15,000 186,000
Net cash provided by operating activities............. 356,000
Investing activities:
Proceeds from sale of long-term investments...... 110,000
Proceeds from sale of equipment......................... 70,000
Loans to subsidiaries........................................... (50,000)
Additions to plant and equipment......................... (700,000)
Net cash used for investing activities................... (570,000)
Explanation of entries:
(1)The entry to record the sale of equipment:
Cash............................................................. 35,000
Accumulated Depreciation........................... 145,000
Plant and Equipment.............................. 160,000
Gain on Sale of Equipment.................... 20,000
(2)The balancing entry to record the plant and equipment purchased during
the year ($500,000).
(3)The balancing entry to record the depreciation charges for the year
($210,000).
The company’s Retained Earnings account increased by $75,000 and cash
dividends totaled $10,000 for the year. Therefore, the net income for the
year must have been: $75,000 + $10,000 = $85,000.
Damocles Company
Statement of Cash Flows
For the Year
Operating activities:
Net income.............................................................. $ 85,000
Adjustments to convert net income to cash basis:
Depreciation charges........................................... $210,000
Increase in accounts receivable........................... (170,000)
Decrease in inventory........................................... 63,000
Increase in prepaid expenses............................... (4,000)
Increase in accounts payable............................... 48,000
Decrease in accrued liabilities.............................. (5,000)
Gain on sale of equipment................................... (20,000)
Add increase in deferred income taxes................ 9,000 131,000
Net cash provided by operating activities................ 216,000
Investing activities:
Decrease in long-term loan to subsidiary................ 80,000
Proceeds from sale of equipment........................... 35,000
Additions to long-term investments......................... (90,000)
Additions to plant and equipment............................ (500,000)
Net cash used for investing activities...................... (475,000)
Financing activities:
Increase in bonds payable...................................... 200,000
Increase in common stock...................................... 300,000
Decrease in preferred stock.................................... (180,000)
Cash dividends........................................................ (10,000)
Net cash provided by financing activities................ 310,000
Net increase in cash................................................ 51,000
Cash balance, beginning......................................... 109,000
Cash balance, ending............................................. $160,000
Cash
Source or Flow Ef- Ad- Adjusted Classi-fi-
Change Use? fect just-ments Effect cation
Noncurrent liabilities:
Bonds payable.................. +200 Source +200 +200 Financing
Deferred income taxes...... +9 Source +9 +9 Operating
Stockholders’ equity:
Preferred stock.................. –180 Use –180 –180 Financing
Common stock.................. +300 Source +300 +300 Financing
Retained earnings:
Net income..................... +85 Source +85 +85 Operating
Dividends........................ –10 Use –10 –10 Financing
Additional entries
Proceeds from sale of
equipment......................... +35 +35 Investing
Gain on sale of equipment... –20 –20 Operating
Total..................................... +51 0 +51
• Risk: Studios will alter their filmed entertainment release date practices
in a manner that threatens Netflix’s sales. Page 10 of the 10-K says
“DVDs currently enjoy a significant competitive advantage over other
distribution channels, such as pay-per-view and VOD, because of the
early distribution window for DVDs…. Currently, studios distribute their
filmed entertainment content approximately three to six months after the-
atrical release to the home video market, seven to nine months after the-
atrical release to pay-per-view and VOD, one year after theatrical re-
lease to satellite and cable, and two to three years after theatrical re-
lease to basic cable and syndicated networks.” If movie studios choose
to shrink or close the window of time that companies such as Netflix can
rent new DVD releases without competition from competing mediums
(such as pay-per-view and VOD), it will lower retailers’ DVD rental rev-
enues. Netflix does not have a readily available control activity to reduce
this risk.
• Risk: Computer viruses could disrupt Netflix’s website. In addition, com-
puter hackers could obtain unauthorized accessed to customers’ credit
card numbers. Either event would damage the company’s reputation
and sales growth goals. Control activities: Invest generously in firewalls
and encryption technology to keep website and sensitive customer infor-
mation secure.
• Risk: Inaccurate forecasts may lead to excessive inventory of some
movie titles and stockouts of other titles. Control activities: Create soft-
ware that allows users to rate movies that they have viewed. The cus-
tomer feedback helps predict what movie titles will thrive or dive.
Netflix, Inc.
Comparative Balance Sheet
(in thousands)
Beginning Ending Source
Balance Balance Change Or Use?
Assets
Current assets:
Cash and cash equivalents...................... $174,461 $212,256 +37,795
Prepaid expenses.................................... 2,741 7,848 +5,107 Use
Prepaid revenue sharing expenses.......... 4,695 5,252 +557 Use
Deferred tax assets.................................. 0 13,666 +13,666 Use
Other current assets................................. 5,449 4,669 −780 Source
Total current assets.................................... 187,346 243,691
DVD library, net.......................................... 42,158 57,032 +14,874 Use
Intangible assets, net................................. 961 457 −504 Source
Property and equipment, net...................... 18,728 40,213 +21,485 Use
Deposits..................................................... 1,600 1,249 −351 Source
Deferred tax assets.................................... 0 21,239 +21,239 Use
Other assets............................................... 1,000 800 −200 Source
Total assets................................................ $251,793 $364,681
Stockholders’ Equity:
Common stock......................................... 53 55 +2 Source
Additional paid-in capital.......................... 292,843 317,194 +24,351 Source
Deferred stock-based compensation....... (4,693) (1,326) +3,367 Source
Accumulated other comp. income............ (222) 0 +222 Source
Accumulated deficit.................................. (131,698) ( 89,671) +42,027 Source
Total stockholders’ equity........................... 156,283 226,252
Total liabilities and stockholders’ equity..... $251,793 $364,681
5. Using the approach mentioned in the In Business box, Netflix’s free cash
flows is calculated as follows (amounts are in thousands):
Net operating income.................................... $ 2,989
Add Depreciation and amortization:
Property and equipment............................. $ 9,134
DVD library................................................. 96,883
Intangible assets......................................... 985 107,002
Deduct capital expenditures and dividends:
Purchases of property and equipment........ (30,619)
Acquisition of intangible asset.................... (481)
Acquisition of DVD library........................... (113,950) ( 145,050)
Free cash flow............................................... ($ 35,059)
* Netflix did not pay any dividends
Netflix is not generating enough free cash flow to sustain its operations.
Unless Netflix can reverse this trend, the company will need to attempt
to obtain additional cash from creditors or investors to sustain its on-
going investments in important assets such as the DVD library.