Chapter 13  Statement of Cash Flows

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Oregon Company disclosed the following information for its recent calendar year. Exercise 13-15
Reporting and interpreting cash
flows from operations (indirect)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000
Expenses P2
   Salaries expense . . . . . . . . . . . . . . . . . . . . . 68,000
   Utilities expense . . . . . . . . . . . . . . . . . . . . 28,000
   Depreciation expense . . . . . . . . . . . . . . . . . 29,200
   Other expenses . . . . . . . . . . . . . . . . . . . . . 6,800
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ (32,000)

Accounts receivable decrease . . . . . . . . . . . . $  28,000

Purchased a machine . . . . . . . . . . . . . . . . . . . . 20,000
Salaries payable increase . . . . . . . . . . . . . . . . . 26,000
Other accrued liabilities decrease . . . . . . . . . 16,000

Required
1. Prepare the operating activities section of the statement of cash flows using the indirect method.
The company did not have any tax expense or paid tax for the year.
2. What were the major reasons that this company was able to report a net loss but positive cash flow
from operations?
3. Of the potential causes of differences between cash flow from operations and net income, which
are the most important to investors?

A company reported average total assets of $248,000 in 2010 and $302,000 in 2011. Its net operating Exercise 13-16
cash flow in 2010 was $20,575 and $27,750 in 2011. Calculate its cash flow on total assets ratio for both Analyses of cash flow on
years. Comment on the results and any change in performance. total assets
A1

problem set a

Kazaam Company, a merchandiser, recently completed its calendar-year 2011 operations. For the year, Problem 13-1A
(1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, Statement of cash flows
(3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for (indirect method)
inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The A1  P1  P2  P3
company’s statements of financial position and income statement follow.

KAZAAM Company
Comparative Statements of Financial Position
December 31, 2011 and 2010

2011 2010
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $  53,875 $  76,625
Accounts receivable . . . . . . . . . . . . . . . . . . . 65,000 49,625
Merchandise inventory . . . . . . . . . . . . . . . . 273,750 252,500
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 5,375 6,250
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,500 110,000
Accum. depreciation—Equipment . . . . . . . . . (34,625) (44,000)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $522,875 $451,000

Liabilities and Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . $  88,125 $116,625
Short-term notes payable . . . . . . . . . . . . . . 10,000 6,250
Long-term notes payable . . . . . . . . . . . . . . . 93,750 53,750
Share capital—Ordinary, $5 par value . . . . . 168,750 156,250
Share premium—Ordinary . . . . . . . . . . . . . . 32,500 0
Retained earnings . . . . . . . . . . . . . . . . . . . . . 129,750 118,125
Total liabilities and equity . . . . . . . . . . . . . . . $522,875 $451,000

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 552 Chapter 13  Statement of Cash Flows

KAZAAM Company
Income Statement
For Year Ended December 31, 2011

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $496,250
Cost of goods sold . . . . . . . . . . . . . . . . . . . 250,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 246,250
Operating expenses
   Depreciation expense . . . . . . . . . . . . . . . . $ 18,750
   Other expenses . . . . . . . . . . . . . . . . . . . . 136,500 155,250
Other gains (losses)
   Loss on sale of equipment . . . . . . . . . . . . 5,125
Income before taxes . . . . . . . . . . . . . . . . . . . 85,875
Income taxes expense . . . . . . . . . . . . . . . . . 12,125
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $  73,750

Additional Information on Year 2011 Transactions

a. The loss on the cash sale of equipment was $5,125 (details in b).
b. Sold equipment costing $46,875, with accumulated depreciation of $28,125, for $13,625 cash.
c. Purchased equipment costing $96,375 by paying $25,000 cash and signing a long-term note payable
for the balance.
. Borrowed $3,750 cash by signing a short-term note payable.
d
e. Paid $31,375 cash to reduce the long-term notes payable.
f. Issued 2,500 ordinary shares for $18 cash per share.
g. Declared and paid cash dividends of $62,125. The company’s management wants to classify pay-
ments for dividends as financing activities.

Required
Check   Cash from operating 1. Prepare a complete statement of cash flows; report its operating activities using the indirect method.
activities, $33,375 Disclose any noncash investing and financing activities in a note.

Analysis Component
2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the
wisdom of the cash dividend payment.

Problem 13-2AA Refer to Kazaam Company’s financial statements and related information in Problem 13-1A.
Statement of cash flows (direct
method) Required

P1   P3   P4 Prepare a complete statement of cash flows; report its operating activities according to the direct method.
Disclose any noncash investing and financing activities in a note.
Check   Cash used in financing 
activities, $(44,750)

Problem 13-3A Galley Corp., a merchandiser, recently completed its 2011 operations. For the year, (1) all sales are
Statement of cash flows credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases
(indirect method) of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory,
P1   P2   P3 (5) Other Expenses are all cash expenses, and (6) any change in Income Taxes Payable reflects the

x
accrual and cash payment of taxes. The company’s statements of financial position and income statement
e cel follow.

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