Albrecht CH 13 SM Final

CHAPTER 13
DISCUSSION QUESTIONS
1. The main purpose of a statement of cash bonds, dividend payments to stockholders,

flows is to provide information about the or cash used to repurchase an entity’s own
cash receipts and cash payments of an en- stock (treasury stock).
tity during a period of time. The statement
4. Significant noncash investing and financing
of cash flows also explains the changes in
transactions are to be reported separately
the balance sheet accounts and the cash
in a schedule below the statement of cash
effects of the accrual-basis amounts repor-
flows or in the notes to the financial state-
ted in the income statement. In addition to
ments. Because they do not involve cash,
operating activities, it also provides inform -
they should not be reported in the body of
ation about an entity’s investing and finan -
the statement itself.
cing activities. This information should as-
sist investors and creditors in assessing an 5. The process of converting from accrual rev-
entity’s ability to generate positive future enues to cash receipts involves adjusting
cash flows. the beginning and ending receivable bal-
ances. We use Sales Revenue and
2. Cash equivalents are short-term, highly li-
Accounts Receivable to illustrate the pro-
quid investments that can be converted
cess.
easily and quickly to cash. Examples in-
clude U.S. Treasury bills, money market Sales revenue................................ $100,000
funds, and commercial paper. Cash equi- + Beginning accounts receivable.. 50,000
valents are to be included as cash (i.e., ad- – Ending accounts receivable....... (40,000 )
ded to cash) on a statement of cash flows. = Cash received from customers.. $110,000
3. Cash flows from operating activities include Alternatively, the decrease in the accounts
those items that enter into the determina- receivable balance could be added to sales
tion of net income. Examples are cash re- revenue to derive the $110,000 cash
ceipts from the sale of goods or services received from customers.
and from interest, and cash payments for
inventory, wages, taxes, interest, etc. 6. By analyzing the income statement and
comparative balance sheets, the following
Cash flows from investing activities result six-step process can be used to prepare a
from transactions and events involving the statement of cash flows.
purchase or sale of securities (other than
trading securities), property, plant, and 1. Compute the change in cash and cash-
equipment, and other assets not generally equivalent accounts for the period of
held for resale, and the making and collect- the statement (month, year, etc.). This
ing of loans. Examples include the pro- is the amount that will reconcile the be-
ceeds from the sale of equipment, the pur- ginning and ending cash balances.
chase of a building, the sale of a business 2. Convert the income statement from an
segment, the collection of the principal accrual-basis to a cash-basis summary
amount on a loan to another entity, and the of operations by (a) eliminating any
purchase of another entity’s equity securit- expenses that do not involve cash
ies (not held as trading securities). (e.g., depreciation), (b) eliminating the
effects of nonoperating activity items
Cash flows from financing activities result (e.g., gains or losses from the sale of
from transactions and events whereby long-term assets not held for resale),
resources are obtained from or paid to and (c) analyzing all noncash current
owners (equity financing) and creditors operating accounts to report revenues
(debt financing). Examples include cash re- and
ceived from the sale (issuance) of stock, expenses on a cash basis.
cash
received from a bank loan or by issuing
245
246 Chapter 13
3. Analyze long-term assets to identify the

cash flow effects from investing activit-
ies.
Chapter 13 247
4. Analyze long-term debt and stockhold- cash flows. The indirect method starts with net
ers’ equity accounts to determine the income. Because these items have been in-
cash flow effects from financing activit- cluded in net income, they must be added
ies. to or subtracted from net income. With the
5. Prepare a formal statement of cash direct method, they are simply ignored.
flows by classifying all cash inflows and
9. Any significant noncash transactions (e.g.,
outflows according to operating, invest-
the purchase of a building or the retirement
ing, and financing activities. The net
of long-term debt by issuing stock) should
cash flows for the period should be
be reported in a narrative in the notes to
equal to the amount computed in step
the financial statements or in a separate
1. The net cash flows for the period are
schedule below the statement of cash
added to the beginning cash balance to
flows. Also, if the direct method is used to
equal the ending cash balance.
report cash flows from operations, a note
6. Report any significant noncash invest- or schedule must be included that recon-
ing or financial transactions in a narrat- ciles net income to net cash flows from op-
ive explanation or in a separate sched- erations. If the indirect method is used, dis-
ule to the statement of cash flows. closure must be made of the amounts of
7. The net cash flows provided by (used in) cash paid for interest and income taxes.
operating activities can be calculated by 10. Investors and creditors might use a state-
either the direct or the indirect method. The ment of cash flows to better assess the
direct method reports all operating cash amounts, timing, and uncertainties of future
receipts and payments. The difference is cash flows. This knowledge can help them
the net cash flows from operations. The in- to notice a company’s shifts in operating,
direct method reconciles net income, as re- investing, and financing policies. It
ported on the income statement, with net provides answers to specific questions,
cash flows from operations, as calculated such as: Why weren’t dividend payments
on the cash flows statement. Thus, with the larger? How was a new building financed?
indirect method, accrual net income is con- Why is the company short on cash when
verted to a cash basis on the statement it- earnings have
self. increased?
8. Depreciation and similar noncash items
should not be reported on a statement of
248 Chapter 13
PRACTICE EXERCISES
PE 13–1 (LO2) Categories of Cash Inflows and Outflows
The correct answer is A. Answers B, C, and D are the main categories of the state-
ment of cash flows. Those activities that might be classified as “earning activit-
ies” are presented mainly in the operating activities section of the statement of
cash flows.
PE 13–2 (LO2) Identifying Operating Activities
The correct answer is B.
a. This is an example of a financing activity.

b. This is an example of an operating activity.
c. This is an example of an investing activity.
d. This is an example of a financing activity.
PE 13–3 (LO2) Identifying Investing Activities
The correct answer is D.
a. This is an example of an operating activity.

b. This is an example of a financing activity.
c. This is an example of an operating activity.
d. This is an example of an investing activity.
PE 13–4 (LO2) Identifying Financing Activities
The correct answer is B.
a. This is an example of an investing activity.

b. This is an example of a financing activity.
c. This is an example of an operating activity.
d. This is an example of an investing activity.
Chapter 13 249
PE 13–5 (LO3) Computing Net Change in Cash for the Period
The ending cash balance is $243, as shown below:

Cash provided by (used in):
Operating activities........................................................................... $ 3,460
Investing activities............................................................................ (3,730)
Financing activities........................................................................... 298
Net increase in cash and cash equivalents............................................. $ 28
Cash at beginning of year......................................................................... 215
Cash at end of year.................................................................................... $ 243
PE 13–6 (LO3) Computation of Cash from Operating Activities
Cash provided by operating activities is $203, as shown below:

Collections on account............................................................................. $ 4,286
Payments for inventory............................................................................. (2,874)
Payments for miscellaneous expenses................................................... (1,031)
Payment for interest.................................................................................. (43)
Payment for taxes...................................................................................... (135)
Cash flows from operating activities....................................................... $ 203
Note: Payments to stockholders as dividends are financing activities and do not
appear on the operating activities section of the statement of cash flows.
PE 13–7 (LO3) Solving for Cash from Investing Activities
Cash used in investing activities is ($221,665), as shown below:
Ending cash balance................................................................................. $ 13,405

Less: Beginning cash balance.................................................................. (12,540 )
Change in cash account for the year....................................................... $ 865
Cash from (used in) operating activities.................................................. $

136,190
Cash from (used in) financing activities.................................................. 86,340
Cash from (used in) investing activities..................................................
(221,665)
Change in cash account for the year $ 865

250 Chapter 13
PE 13–8 (LO4) Using Accounts Receivable to Compute Cash Collections
The company collected $4,557 from its customers, as shown below:

Sales on account............................................................................... $4,526
Add: Beginning accounts receivable............................................... 512
Less: Ending accounts receivable................................................... (481)
Collections on account..................................................................... $4,557
Another way to consider this problem is to make a T-account with the information
provided and solve for the unknown, as shown below:
Accounts Receivable
Beg. Bal. 512
Sales 4,526 Collections ??
End. Bal. 481
To reconcile the accounts receivable account, we can only assume that cash col-
lections of $4,557 occurred.
PE 13–9 (LO4) Identifying Noncash Flow Items and Nonoperating Activity

Items
The gain on sale of land ($540) would be subtracted from net income, and depre-
ciation expense ($1,785) would be added back to net income when computing
cash from operating activities. Gain on sale of land relates to investing activities
(not operating activities), and depreciation expense is a noncash item.
PE 13–10 (LO4) Using Inventory and Accounts Payable to Compute Cash Paid
for Inventory
To solve this problem, consider the following four T-accounts:
Inventory Accounts Payable Cost of Goods Sold

3,110 2,576 36,843 1
1
36,843 36,7152
2
36,715 36,5733
2,982 2,718
Chapter 13 251
PE 13–10 (LO4) (Concluded)
Cash
36,5733
1
Cost of inventory sold during the period.
2
Inventory purchased during the period (solved for based on the beginning and
ending Inventory balances and the cost of goods sold).
3
Cash paid for inventory during the period (solved for based on the beginning and
ending Accounts Payable balances and the inventory purchased during the peri-
od).
Alternatively, one can compute the amount of cash paid for inventory ($36,573) by
analyzing the change in the Inventory and Accounts Payable balances, as follows:
Income Cash Flows

Statement Adjustments from Operations
Cost of goods sold $(36,843) +128 (decrease in inventory) $(36,573)
+142 (increase in accounts
payable)
PE 13–11 (LO4) Using Taxes Payable to Compute Cash Paid for Taxes
Cash paid for taxes is $3,425, as shown below:
Income Cash Flows

Statement Adjustments from Operations
Income tax expense $(3,464) +39 (increase in taxes payable) $(3,425)
Another way to consider this problem is to make a T-account with the information
provided and solve for the unknown, as shown below:
Taxes Payable
Beg. Bal. 237
Taxes paid during Amount related
the period 3,425 to tax expense 3,464
End. Bal. 276
252 Chapter 13
PE 13–12 (LO4) Indirect Method
Operating Activities:
Net income....................................................................... $ 554
Add: Depreciation expense........................................ $4,503
Loss on sale of land.......................................... 1,030
Increase in accounts payable........................... 145
Decrease in prepaid expenses.......................... 130
Increase in taxes payable.................................. 14
Less: Increase in accounts receivable....................... (340)
Increase in inventory......................................... (103)
Decrease in interest payable............................. (24) 5,355
Cash flows from operations........................................... $5,909
PE 13–13 (LO4) Direct Method
Operating Activities:
Collections from customers........................................... $ 32,500
Payments for inventory.................................................. $(21,310)
Payments for miscellaneous expenses......................... (4,540)
Payments for interest..................................................... (386)
Payments for taxes......................................................... (355) (26,591)
Cash flows from operating activities............................. $ 5,909
PE 13–14 (LO4) Computing Cash Paid for Property, Plant, and Equipment
The amount of cash paid for property, plant, and equipment during the year was
$34,140, as shown, using the following T-account:
Property, Plant, and Equipment

Beg. Bal. 195,410
Cash paid for property, Historical cost of
plant, and equipment 34,140 equipment sold 18,700
End. Bal. 210,850
To reconcile the account, we can only assume that cash paid for property, plant,
and equipment was $34,140.
Chapter 13 253
PE 13–15 (LO4) Computing Gain on Sale of Property, Plant, and Equipment
The realized gain on the sale of equipment during the year is $4,460.
First, we need to compute the book value of the equipment sold during the year.
The equipment had a historical cost of $18,700 and accumulated depreciation of
$8,890 as computed using the following T-account:
Accumulated Depreciation
Beg. Bal. 74,330
Accumulated depreciation Depreciation expense
of equipment sold 8,890 for the year 8,240
End. Bal. 73,680
To reconcile the account, we can only assume that the accumulated depreciation
related to equipment sold during the year was $8,890.
The book value of the equipment sold was $9,810 ($18,700 – $8,890). So the real-
ized gain on the sale of equipment during the year was $4,460 ($14,270 sales
price – $9,810 book value).
PE 13–16 (LO4) Computing Cash from Financing Activities
Financing Activities:
Cash paid to purchase treasury stock............................................. $(12,000)
Cash payments for dividends........................................................... (2,350)
Cash payments to repay long-term debt.......................................... (25,000)
Cash flows used in financing activities........................................... $(39,350)
PE 13–17 (LO5) Using Information from the Statement of Cash Flows to Make
Decisions
You probably would feel some apprehension about loaning money to this com-
pany. The company has experienced positive earnings over the past three years,
but it is having a cash flow problem. Cash from operating activities has declined
drastically over the past three years, and cash from financing activities has in-
creased over the same three years. The company is using external funding to
fund its operations. Such a strategy might work in the short run; but if operations
do not improve and begin producing cash, the company will not be able to repay
its long-term borrowing commitments. An important thing to remember as a po-
tential lender is that net income does not repay loans—cash does.
254 Chapter 13
EXERCISES
E 13–18 (LO2) Classification of Cash Flows
Item Classified as Reported under

1. Fees collected for services.......................... I OA
2. Interest paid.................................................. O OA
3. Proceeds from sale of equipment............... I IA
4. Cash (principal) received from bank on
long-term note.............................................. I FA
5. Purchase of treasury stock for cash........... O FA
6. Collection of loan made to company
officer............................................................ I IA
7. Cash dividends paid..................................... O FA
8. Taxes paid..................................................... O OA
9. Depreciation expense................................... N NOS*
10. Wages paid to employees............................ O OA
11. Cash paid for inventory purchases............. O OA
12. Proceeds from sale of common stock........ I FA
13. Interest received on loan to company
officer............................................................ I OA
14. Purchase of land by issuing stock.............. N NOS**
15. Utility bill paid............................................... O OA
*Ignored with direct method; added back to net income with indirect method.
**Disclosed in a separate narrative or schedule if it is a significant transaction.
Chapter 13 255
E 13–19 (LO2) Classification of Cash Flows
Not
Reported in
Statement
Reported in Statement of Cash Flows of Cash
Transaction Operating Investing Financing Flows
a. Collections from
customers............................. X
b. Depreciation expense........... X*
c. Wages and salaries paid...... X
d. Cash dividends paid............. X
e. Taxes paid............................. X
f. Utilities paid.......................... X
g. Building purchased in
exchange for stock............... X**
h. Stock of Western Co.
purchased............................. X
i. Inventory purchased for
cash....................................... X
j. Interest on Alta’s note to
local bank paid...................... X
k. Interest received from a
note with a customer............ X
l. Delivery truck sold at no
gain or loss........................... X
*Depreciation is ignored when using the direct method.
**This information would be reported in a supplemental note or schedule but not
on the statement itself.
256 Chapter 13
E 13–20 (LO2) Transaction Analysis
1. a. Cash................................................................................. 3,600
Accumulated Depreciation—Equipment....................... 8,050
Gain on Sale of Equipment....................................... 550
Equipment.................................................................. 11,100
($3,600 proceeds – $3,050 book value = $550 gain)
b. Equipment....................................................................... 77,000
Cash............................................................................ 27,000
Note Payable.............................................................. 50,000
c. Cash................................................................................. 8,690
Note Receivable......................................................... 8,200
Interest Revenue........................................................ 490
d. Cash................................................................................. 6,300
Dividend Revenue...................................................... 6,300
e. Treasury Stock................................................................ 2,400
Cash............................................................................ 2,400
2. a. The $3,600 cash receipt is reported under investing activities; with the
indirect method, the $550 gain is subtracted from net income under op-
erating activities.
b. The $27,000 cash payment is reported under investing activities;
$50,000 of the transaction is reported in a note or in a separate schedule
since it is a significant noncash transaction.
c. The $490 cash receipt from interest is reported under operating activit-
ies; the $8,200 cash receipt from repayment of a note is reported under
investing activities.
d. The $6,300 cash receipt from dividend revenue is reported under operat-
ing activities.
e. The $2,400 cash payment for treasury stock is reported under financing
activities.
Chapter 13 257
E 13–21 (LO3) Transaction Analysis
1. a. Cash................................................................................. 25,000
Common Stock (1,000 shares × $10 par).................. 10,000
Paid-In Capital in Excess of Par................................ 15,000
b. Cash................................................................................. 100,000
Accounts Receivable................................................. 100,000
c. Dividends Payable.......................................................... 50,000
Cash............................................................................ 50,000
d. Cash................................................................................. 1,500
Interest Revenue........................................................ 1,500
e. Insurance Expense......................................................... 1,200
Cash............................................................................ 1,200
f. Depreciation Expense..................................................... 5,000
Accumulated Depreciation........................................ 5,000
2. a. The $25,000 cash inflow would be classified as a financing activity.

b. The $100,000 cash inflow would be classified as an operating activity.
c. The $50,000 cash outflow would be classified as a financing activity.
d. The $1,500 cash inflow would be classified as an operating activity.
e. The $1,200 cash outflow would be classified as an operating activity.
f. Depreciation is a noncash item. The $5,000 would be added back as an
adjustment to net income under the indirect method and ignored when
using the direct method.
258 Chapter 13
E 13–22 (LO3) Preparing a Simple Cash Flow Statement
Stern Company
Statement of Cash Flows
For the Year Ended December 31, 2008
Cash flows from operating activities:
Collections from customers........................................... $145,500
Payments for wages and salaries.................................. (60,000)
Payments for inventory.................................................. (64,000)
Payments for other cash operating expenses.............. (10,500)
Payments for taxes......................................................... (25,000)
Net cash flows used in operating activities.................. $(14,000)
Cash flows from investing activities:

Proceeds from sale of equipment.................................. $ 4,750
Proceeds from sale of nontrading securities................ 17,000
Net cash flows provided by investing activities........... 21,750
Cash flows from financing activities:

Proceeds from new bank loan........................................ $ 45,000
Payments of dividends................................................... (4,000)
Net cash flows provided by financing activities........... 41,000
Net increase in cash............................................................. $ 48,750
Beginning cash balance....................................................... 29,870
Ending cash balance............................................................ $ 78,620
Chapter 13 259
E 13–23 (LO4) Determining Cash Receipts and Payments
1. Cash collected from customers = $445,000
Accounts Receivable
Beg. Bal. 28,000
Sales 450,000 Cash Collections 445,000
End. Bal. 33,000
2. Cash paid for wages and salaries = $98,000
Wages and Salaries Payable

Beg. Bal. 11,000
Cash Payments 98,000 Wages and Salaries Exp. 95,000
End. Bal. 8,000
3. Cash paid for inventory purchases = $225,500
Inventory
Beg. Bal. 22,000
Net Purchases 223,000 Cost of Goods Sold 220,000
End. Bal. 25,000
Accounts Payable
Beg. Bal. 23,500
Cash Payments 225,500 Net Purchases 223,000
End. Bal. 21,000
4. Cash paid for taxes = $38,500
Taxes Payable
Beg. Bal. 19,000
Cash Payments 38,500 Income Tax Exp. 40,000
End. Bal. 20,500
260 Chapter 13
E 13–24 (LO4) Adjustments to Cash Flows from Operations (Indirect Method)
Adjustment to Net Income

1. Increase in Accounts Receivable Subtracted
2. Decrease in Accounts Payable.... Subtracted
3. Increase in securities classified Does not affect cash flows from oper-
as cash equivalents...................... ations; would be included as cash
equivalent
4. Gain on sale of equipment........... Subtracted (proceeds reported as in-
vesting activity)
5. Decrease in Inventory.................. Added
6. Increase in Prepaid Insurance..... Subtracted
7. Depreciation.................................. Added (noncash item)
8. Increase in Wages Payable.......... Added
9. Decrease in Dividends Payable. . . Does not affect cash flows from oper-
ations
10. Decrease in Interest Receivable. . Added
E 13–25 (LO4) Cash Flows from Operations (Direct Method)
Sales revenue....................................................... $510,000

+ Beginning accounts receivable................... 42,000
– Ending accounts receivable ....................... (39,000)
Total cash receipts....................................... $513,000
Cost of goods sold............................................... $320,000
+ Ending inventory.......................................... 39,000
– Beginning inventory..................................... (38,000)
Purchases............................................................. $321,000
+ Beginning accounts payable....................... 16,000
– Ending accounts payable............................. (19,000)
Cash paid to suppliers for inventory................... $318,000
Wages expense.................................................... $ 75,000
+ Beginning wages payable............................ 10,000
– Ending wages payable................................. (8,800 )
Cash paid to employees....................................... 76,200
Utilities expense (no adjustments required)...... 2,500
Rent expense (no adjustments required)........... 35,400
Insurance expense............................................... $ 6,900
+ Ending prepaid insurance............................ 1,800
– Beginning prepaid insurance....................... (2,200)
Cash paid for insurance....................................... 6,500
Total cash payments.................................... 438,600
Net cash flows provided by operating activities $ 74,400
The following spreadsheet may be helpful in explaining the adjustments:
Sales Revenue $510,000 3,000 $513,000 Cash collected from customers

Cost of Goods Sold –320,000 –1,000 –318,000 Cash paid for inventory
3,000
Wages Expense –75,000 –1,200 –76,200 Cash paid for wages
Utilities Expense –2,500 0 –2,500 Cash paid for utilities
Rent Expense –35,400 0 –35,400 Cash paid for rent
Insurance Expense –6,900 400 –6,500 Cash paid for insurance
Net Income $ 70,200 $ 74,400 Cash from operating activities

262 Chapter 13
E 13–26 (LO4) Cash Flows from Operations (Indirect Method)
Net income................................................................................................. $70,200
Add (deduct) adjustments to cash basis:

Decrease in accounts receivable...................................................... 3,000
Increase in inventory......................................................................... (1,000)
Decrease in prepaid insurance......................................................... 400
Increase in accounts payable........................................................... 3,000
Decrease in wages payable............................................................... (1,200)
Net cash flows provided by operating activities..................................... $74,400

3,000
Wages Expense –75,000 –1,200 –76,200 Cash paid for wages
Rent Expense –35,400 0 –35,400 Cash paid for rent
Insurance Expense –6,900 400 –6,500 Cash paid for insurance

E 13–27 (LO4) Cash Flows Provided by Operations (Direct Method)

Cash receipts from:
Customers.................................................................... $513,0001
Cash payments for:
Inventory....................................................................... $(311,400)2
Operating expenses..................................................... (36,500)3
Interest expense........................................................... (3,500)
(351,400)
Net cash flows provided by operating activities................ $161,600
1
Sales revenue...................................................................... $ 500,000
+ Beginning accounts receivable................................... 43,000
– Ending accounts receivable........................................ (30,000)
Cash collected from customers......................................... $ 513,000
2
Cost of goods sold............................................................. $ 300,000
+ Ending inventory.......................................................... 50,000
– Beginning inventory..................................................... (42,000)
Purchases............................................................................ $ 308,000
+ Beginning accounts payable....................................... 59,400
– Ending accounts payable............................................ (56,000)
Cash paid for inventory...................................................... $ 311,400
3
Sales revenue...................................................................... $ 500,000
Cost of goods sold............................................................. 300,000
Gross margin....................................................................... $ 200,000
Less expenses.................................................................... 110,000
Net income.......................................................................... $ 90,000
Expenses............................................................................. $ 110,000
Less noncash items:
Depreciation.................................................................. (60,000)
Amortization................................................................. (10,000)
Cash expenses............................................................. $ 40,000
Less interest expense.................................................. (3,500)
Cash operating expenses................................................... $ 36,500
–3,400
Depreciation Expense –60,000 60,000 0 Cash paid for depreciation
Amortization Expense –10,000 10,000 0 Cash paid for goodwill
Interest Expense –3,500 0 –3,500 Cash paid for interest
Other Expenses –36,500 0 –36,500 Cash paid for other expenses
Net Income $ $161,600 Cash from operating activities

90,000
264 Chapter 13
E 13–28 (LO4) Cash Flows Provided by Operations (Indirect Method)

Net income......................................................................................... $ 90,000
Depreciation....................................................................................... 60,000
Amortization....................................................................................... 10,000
Decrease in accounts receivable...................................................... 13,000
Decrease in accounts payable.......................................................... (3,400 )

–3,400
Amortization Expense –10,000 10,000 0 Cash paid for goodwill
Net Income $ 90,000 $161,600 Cash from operating activities

E 13–29 (LO4) Cash Flows Provided by Operations (Direct Method)

Cash receipts from:
Customers.................................................................... $895,0001
Cash payments for:

Inventory....................................................................... $(734,200)2
Operating expenses..................................................... (58,500)3
Interest expense........................................................... (7,400)
Utilities expense........................................................... (4,100)
(804,200 )
Net cash flows provided by operating activities................ $ 90,800
1
Sales revenue...................................................................... $ 900,000
+ Beginning accounts receivable................................... 46,000
– Ending accounts receivable........................................ (51,000)
Cash receipts from customers........................................... $ 895,000
2
Cost of goods sold............................................................. $ 720,000
+ Ending inventory.......................................................... 83,100
– Beginning inventory..................................................... (72,400)
Purchases............................................................................ $ 730,700
+ Beginning accounts payable....................................... 68,700
– Ending accounts payable............................................ (65,200)
Cash paid to suppliers for inventory................................. $ 734,200
3
Sales revenue...................................................................... $ 900,000
Cost of goods sold............................................................. 720,000
Gross margin....................................................................... $ 180,000
Less operating expenses................................................... (120,000)
Net income.......................................................................... $ 60,000
Operating expenses............................................................ $ 120,000
Less noncash items:
Depreciation.................................................................. (50,000)
Cash expenses............................................................. $ 70,000
Less interest expense.................................................. (7,400)
Less utilities expense.................................................. (4,100)
Cash operating expenses................................................... $ 58,500
266 Chapter 13
E 13–29 (LO4) (Concluded)
Sales Revenue $900,000 –5,000 $895,000 Cash collected from customers

–3,500
E 13–30 (LO4) Cash Flows Provided by Operations (Indirect Method)
Net income................................................................................................. $60,000

Depreciation....................................................................................... 50,000
Increase in accounts receivable....................................................... (5,000)
Decrease in accounts payable.......................................................... (3,500)
Sales Revenue $900,000 –5,000 $895,000 Cash collected from customers

–3,500

E 13–31 (LO4) Net Cash Flows (Indirect Method)

Net income............................................................................ $ 95,000
Depreciation.................................................................... 25,000
Increase in accounts receivable.................................... (10,000)
Decrease in inventory..................................................... 3,000
Increase in prepaid assets.............................................. (7,000)
Decrease in accounts payable....................................... (5,000)
Increase in wages payable............................................. 15,000
Net cash flows provided by operating activities........... $116,000
Cash payment for equipment......................................... $(40,000)
Net cash flows used in investing activities................... (40,000)
Cash receipts from issuance of bonds.......................... $100,000
Cash payments for dividends........................................ (42,000)*
Net increase in cash............................................................. $134,000
*Dividends declared and paid ($40,000) plus decrease in Dividends Payable
($2,000).
E 13–32 (LO4) Net Cash Flows (Direct Method)

Cash receipts from:
Customers....................................................................... $712,000
Interest............................................................................. 16,000 $ 728,000
Cash payments for:
Wages.............................................................................. (476,000)
Net cash flows provided by operating activities........... $ 252,000
Cash receipt from sale of equipment............................. $ 13,000
Cash payment for land.................................................... (210,000)
Cash received from issuance of common stock.......... $ 350,000
Cash paid to retire bonds............................................... (150,000)
Cash payments for dividends........................................ (80,000)
Net increase in cash............................................................. $ 175,000
268 Chapter 13
E 13–33 (LO4) Statement of Cash Flows (Indirect Method)
North Western Company

(Indirect Method)
Net income....................................................................... $ 52,500
Depreciation.................................................................... 22,500
Decrease in accounts receivable................................... 3,000
Increase in inventory...................................................... (15,000)
Increase in accounts payable......................................... 6,000
Cash payments for plant and equipment....................... $(60,000)*
Cash payments for dividends........................................ $(21,000)
Cash receipts from issuance of capital stock............... 7,500
Net cash flows used in financing activities................... (13,500)
Net decrease in cash and cash equivalents....................... $ (4,500)
Cash and cash equivalents at beginning of period............ 9,000
Cash and cash equivalents at end of period...................... $ 4,500
*Increase in plant and equipment ($37,500) plus depreciation ($22,500) = $60,000
cash paid for plant and equipment.

6,000

E 13–34 (LO4) Statement of Cash Flows (Direct Method)
North Western Company

(Direct Method)
Cash receipts from:
Customers....................................................................... $ 415,5001
Cash payments for:
Inventory.......................................................................... (234,000)2
Operating expenses........................................................ (112,500)3
Cash payments for plant and equipment....................... $ (60,000)4
Cash payments for dividends........................................ $ (21,000)
Cash receipts from issuance of capital stock............... 7,500
Net decrease in cash and cash equivalents....................... $ (4,500)
Cash and cash equivalents at beginning of period............ 9,000
Cash and cash equivalents at end of period...................... $ 4,500
Computations:
1
Sales of $412,500 plus beginning accounts receivable ($36,000) minus ending ac-
counts receivable ($33,000) = $415,500 cash collected from customers.
2
Cost of goods sold of $225,000 plus ending inventory ($75,000) minus beginning
inventory ($60,000) plus beginning accounts payable ($54,000) minus ending ac-
counts payable ($60,000) = ($234,000) cash paid for inventory.
3
Operating expenses ($135,000) less depreciation ($22,500) = ($112,500) cash pay-
ments for operating expenses.
4
Increase in plant and equipment ($37,500) plus depreciation ($22,500) = ($60,000)
cash paid for plant and equipment.

6,000

270 Chapter 13
E 13–35 (LO5) Cash Flow Patterns
1. Amazon.com is a start-up company that, as is typical of start-up companies,

is reporting a loss from operations. The company has a significant cash in-
flow from financing and is investing that money in the business.
2. ExxonMobil has a very large amount of fixed assets resulting in a lot of de-
preciation expense being reported every year. The primary difference
between ExxonMobil’s net income of $7,910 million and its $15,013 million in
cash from operations relates to depreciation.
3. Microsoft is a very profitable company that pays only a small dividend.

Therefore, its cash flow from financing activities will rarely be negative.
4. Coca-Cola, on the other hand, is famous for paying a dividend (hence the
negative cash flow from financing). It is a profitable company that continues
to expand and regularly pays a dividend.
E 13–36 (LO5) Analyzing Cash Flows
The following points may be made concerning Wal-Mart’s cash flow position and
liquidity trends.
1. Wal-Mart is generating positive net cash flows from operations. These cash
flows are more than sufficient to fund its investing and financing activities.
The year 2006 was another good year, with net cash flows from operations
increasing by over $2.5 billion from the previous year and by more than $1.6
billion over 2004.
2. Wal-Mart is generating more cash flows from operations than it is reporting

as accrual net income.
3. Wal-Mart is continuing to generate funds by issuing long-term debt, but is

actually using a large amount of cash to repurchase its own stock.
4. Wal-Mart is continuing to expand by investing in property, plant, and equip-

ment.
PROBLEMS
P 13–37 (LO4) Transaction Analysis
1. Sales revenue.................................................................................... $125,750

Increase in accounts receivable....................................................... (5,000)
Cash collected from customers....................................................... $120,750
2. Cost of goods sold............................................................................ $ 78,000

+ Ending inventory............................................................................ 12,500
Goods available for sale................................................................... $ 90,500
– Beginning inventory....................................................................... (17,500)
Purchases for period......................................................................... $ 73,000
– Increase in accounts payable........................................................ (2,500)
Cash paid for inventory..................................................................... $ 70,500
3. Operating expenses.......................................................................... $ 24,000

– Depreciation (noncash expense)................................................... (7,500)
Cash paid for operating expenses................................................... $ 16,500
4. Operating activities:
Cash collected from customers.................................................. $120,750
Cash received from interest........................................................ 1,100
Cash paid for inventory............................................................... (70,500)
Cash paid for operating expenses.............................................. (16,500)
Cash paid for interest................................................................... (400)
Cash paid for income taxes......................................................... (4,000)
Cash flows provided by operations................................................. $ 30,450
5. Cash flows used in investing and financing activities = $27,950*

*Cash flows provided by operations ($30,450) less increase in cash during
the period ($2,500) = cash flows used in investing and financing activities
($27,950).
272 Chapter 13
P 13–38 (LO3, LO4) Analysis of the Cash Account
1. a. Accounts Receivable...................................................... 164,000

Sales........................................................................... 164,000
Cash................................................................................. 168,000
Accounts Receivable................................................. 168,000
b. Inventory.......................................................................... 48,000
Accounts Payable...................................................... 48,000
Accounts Payable........................................................... 45,500
Cash............................................................................ 45,500
c. Equipment....................................................................... 29,000
Cash............................................................................ 29,000
Equipment purchases ($29,000) less equipment
sales ($8,000) = increase in equipment account
($21,000).
d. Cash................................................................................. 5,000
Accumulated Depreciation—Equipment....................... 4,000
Equipment.................................................................. 8,000
Gain on Sale of Equipment....................................... 1,000
e. Cash................................................................................. 22,000
Notes Payable............................................................ 22,000
f. Operating Expenses....................................................... 43,200
Accumulated Depreciation—Equipment.................. 2,400
Cash............................................................................ 40,800
g. Interest Expense............................................................. 1,800
Interest Payable......................................................... 1,800
Interest Payable............................................................... 2,100
Cash............................................................................ 2,100
h. Income Tax Expense....................................................... 4,200
Income Taxes Payable............................................... 4,200
Income Taxes Payable.................................................... 3,300
Cash............................................................................ 3,300
P 13–38 (LO3, LO4) (Concluded)
2. Mars Company
Cash collected from customers............................. $168,000
Cash payments for inventory................................. (45,500)
Cash payments for operating expenses................ (40,800)
Cash payment for interest...................................... (2,100)
Cash payment for taxes.......................................... (3,300)
Net cash flows provided by operating activities... $ 76,300

Purchase of equipment........................................... $ (29,000)
Sale of equipment................................................... 5,000
Net cash flows used in investing activities........... (24,000)

Proceeds from bank loan....................................... $ 22,000
Net cash flows provided by financing activities... 22,000
Net increase in cash..................................................... $ 74,300
Beginning cash balance............................................... 16,300
Ending cash balance.................................................... $ 90,600
274 Chapter 13
P 13–39 (LO4) Analyzing Cash Flows
1. Beginning balance in cash account............................ $ X

Increase in cash during the year................................. 191,000
Ending balance in cash account................................. $274,000
X + $191,000 = $274,000
X = $ 83,000
2. Cash flows from operating activities:

Cash receipts from:
Customers............................................................... $ 88,0001
Cash payments for:
Inventory.................................................................. (39,000)
Rent.......................................................................... (11,000)
1
Cash sales of $50,000; collections of accounts receivable, $38,000.
3. Cash flows from investing activities:

Cash payment for purchase of equipment............ $ (84,000)
Cash receipt from sale of machine........................ 12,000
Net cash flows used in investing activities........... $(72,000)
4. Cash flows from financing activities:

Cash receipt from sale of stock............................. $240,000
Cash payment for dividends.................................. (15,000)
Net cash flows provided by financing activities... $225,000
5. No. The land valued at $106,000 was acquired by issuing a $100,000 bond at
a premium of $6,000. Since this is a noncash transaction, it would not be re-
ported on a statement of cash flows. The machine that was scrapped
provided no cash and therefore also would not be reported on a statement of
cash flows. The depreciation and amortization expenses also do not involve
cash. They would be ignored when using the direct method and added back
as an adjustment to net income when using the indirect method.
P 13–40 (LO4) Cash Flows from Operations (Indirect Method)
1. Net loss.............................................................................................. $(40,000)

Depreciation................................................................................. 43,000
Decrease in accounts receivable................................................ 15,000
Increase in inventory.................................................................... (7,000)
Decrease in prepaid expenses.................................................... 3,000
Increase in accounts payable...................................................... 5,000
Decrease in accrued liabilities.................................................... (6,000)
Net cash flows provided by operating activities........................ $ 13,000
Note: The amount of cash dividends paid was $25,000 ($35,000 declared +
$25,000 payable at beginning of year – $35,000 payable at year-end).
However, dividends are classified as a financing activity, not as an operating
activity.
2. Gardner Enterprises can pay $25,000 in cash dividends, even though the
company reported a $40,000 net loss, because the cash flows from opera-
tions were positive (positive $13,000). The positive cash flows come primar-
ily from the collection of receivables and the addition of depreciation (a
noncash item) to net income. Also, other investing and financing activities
may have generated some positive cash flows. Finally, the company prob-
ably used some of the beginning cash balance to pay the dividends (the cash
and cash equivalents balance decreased $30,000).
276 Chapter 13
P 13–41 (LO4) Cash Flows from Operations (Direct Method)
1. Sales revenue............................................................... $ 740,000

+ Beginning accounts receivable.............................. 63,000
– Ending accounts receivable................................... (74,000)
Cash collected from customers.................................. $729,000
Interest revenue............................................................ $ 24,000

+ Beginning interest receivable................................ 9,000
– Ending interest receivable...................................... (6,000)
Cash collected from interest....................................... 27,000
Total cash receipts from operations...................... $756,000
Cost of goods sold....................................................... $ 380,000

+ Ending inventory..................................................... 219,000
– Beginning inventory................................................ (210,000)
Purchases..................................................................... $ 389,000
+ Beginning accounts payable.................................. 41,000
– Ending accounts payable....................................... (44,000)
Cash paid for inventory................................................ $386,000
Wages expense............................................................ $ 190,000

+ Beginning wages payable....................................... 32,000
– Ending wages payable............................................ (34,000)
Cash paid for wages..................................................... 188,000
Cash paid for other operating expenses..................... 68,000

Total cash payments for operations...................... $642,000
Net cash flows provided by operating activities........ $114,000
2. The $114,000 net cash flows from operations differs from the $84,000 net in-
come ($740,000 + $24,000 – $380,000 – $190,000 – $42,000 – $68,000 =
$84,000) because depreciation (a noncash item) must be added back to net
income and because net income must be adjusted from an accrual basis to a
cash basis, as shown in part (1). Note that dividends do not enter into the
computation of either amount; they are a financing activity.
P 13–42 (LO4) Cash Flows from Operations (Indirect and Direct Methods)
1. Indirect method:
Net income.................................................................................... $21,840
Depreciation............................................................................ 5,400
Decrease in accounts receivable........................................... 1,300
Increase in inventory.............................................................. (1,200)
Increase in prepaid expenses................................................ (150)
Decrease in accounts payable............................................... (200)
Increase in interest payable................................................... 250
Increase in income taxes payable.......................................... 300
Gain on sale of equipment..................................................... (3,000)
Net cash flows from operations............................................. $24,540

Other Revenues 3,000 –3,000 0 Eliminate gain on sale
–200
S & A Expenses – –150 –15,350 Cash paid for S & A expenses
15,200
Interest Expense – 250 –950 Cash paid for interest expense
1,200
Tax Expense –9,360 300 –9,060 Cash paid for taxes
2. Direct method:
Cash collected from customers....................................................... $106,300
Cash paid for inventory..................................................................... –56,400
Cash paid for S & A expenses.......................................................... –15,350
Cash paid for interest expense......................................................... –950
Cash paid for taxes............................................................................ –9,060
Cash from operating activities......................................................... $ 24,540
3. Dividends paid have no impact on net cash flows from operations. Dividends
affect retained earnings, not net income. The cash flows from dividends are
shown as a financing activity, not as an operating activity.
278 Chapter 13
P 13–43 (LO4) Computation of Net Income from Cash Flows from Operations
(Direct Method)
ATM Corporation
Partial Work Sheet—Cash Flows from Operations
(Direct Method)
Accrual Adjustments Cash
Basis Debits Credits Basis
Net sales revenue................................. $145,500 $4,5001 $150,000
Expenses:
Cost of goods sold....................... $ 68,000 $10,0003 3,0004 $ 75,000
Depreciation.................................. 8,000 8,0005 —
Loss on sale of equipment.......... 1,500 1,5002 —
Other (cash) expenses................. 29,500 1,0006
2,5007 26,000
Total expenses.............................. $107,000 $101,000
Net income............................................ $ 38,500 Net cash flows
from operations.... $ 49,000
Key:
1
Accounts Receivable (net) decrease
2
Loss on sale of equipment
3
Inventory increase
4
Accounts Payable increase
5
Depreciation for the year
6
Prepaid Expenses decrease
7
Accrued Liabilities increase
P 13–44 (LO4) Income Statement from Cash Flow Data
Parker Corporation
Income Statement
For the Year 2009
Revenues.............................................................................. $521,4001
Cost of goods sold.............................................................. 165,6002
Gross margin........................................................................ $355,800
Operating expenses............................................................. $202,7003

Depreciation......................................................................... 62,1004
Total operating expenses.................................................... 264,800
Operating income................................................................. $ 91,000
Gain on sale of equipment................................................... 4,0005
Net income............................................................................ $ 95,000
Computations:
1
Cash collections from customers ($525,000) adjusted for decrease in Accounts
Receivable ($3,600) equals accrual revenue amount ($521,400) for the period.
2
Cash payments to suppliers ($170,000) adjusted for decrease in Accounts Pay-
able ($6,800) equals purchases; purchases adjusted for decrease in Inventory
($2,400) equals cost of goods sold ($165,600).
3
Cash payments for operating expenses ($198,000) adjusted for increase in Mis-
cellaneous Accrued Payable ($4,700) equals operating expenses ($202,700).
4
Depreciation is a valid expense on the income statement.
5
The gain on sale of equipment should be reported on the income statement.
280 Chapter 13
P 13–45 (LO4) Statement of Cash Flows (Indirect Method)
JEM Company
(Indirect Method)
Net income....................................................................... $ 50,000

Depreciation.................................................................... 14,5001
Increase in accounts receivable.................................... (13,500)
Decrease in inventory..................................................... 15,000
Increase in accounts payable......................................... 6,500
Gain on sale of equipment............................................. (1,500)

Cash receipts from sale of equipment........................... $ 2,500
Cash payments for purchase of equipment.................. (33,000)2

Cash receipts from borrowing (long-term note
payable)...................................................................... $ 20,000
Cash payments for dividends........................................ (40,000)
Net increase in cash and cash equivalents........................ $ 20,500
Cash and cash equivalents at beginning of year............... 10,000
Cash and cash equivalents at end of year.......................... $ 30,500
1
Accumulated depreciation beginning balance ($14,000) + depreciation expense
(X) – write-off on sale ($7,000) = accumulated depreciation ending balance
($21,500); therefore, X = $14,500 depreciation for current year.
2
Equipment beginning balance ($30,000) + purchase (X) – sale ($8,000) = equip-
ment ending balance ($55,000); therefore, X = $33,000 purchase of equipment
during year.
P 13–46 (LO4) Statement of Cash Flows (Direct Method)
1. The following spreadsheet may be helpful in explaining the adjustments:
Sales Revenue $1,450 –8 $1,442 Cash collected from customers

Cost of Goods Sold –1,030 735 –491 Cash paid for inventory
–196
S & A Expenses –110 0 –110 Cash paid for S & A expenses
Depreciation Ex- –17 17 0 Cash paid for depreciation
pense
Other Expenses –81 0 –81 Cash paid for other expenses
Tax Expense –53 0 –53 Cash paid for taxes
Net Income $ 159 $ 707 Cash from operating activities
Disclosure using the direct method:
Cash collected from customers $1,442

Cash paid for inventory –491
Cash paid for S & A expenses –110
Cash paid for other expenses –81

Cash paid for taxes –53
Cash from operating activities $ 707
2. Net cash flows from operations is significantly higher than reported net in-
come primarily because Bankhead has sold inventory this period that it has
not replaced. Inventory levels are down significantly, which has generated
large amounts of cash. Bankhead will have to use some of that cash to pur-
chase more inventory in the future if it is to maintain the same level of sales.
282 Chapter 13
P 13–46 (LO4) (Concluded)
3. Bankhead, Inc.
(Direct Method)
(Dollars in Thousands)
Cash receipts from:
Customers............................................................... $1,442
Cash payments for:
Inventory.................................................................. (491)
Sales and administrative expenses....................... (110)
Other cash expenses.............................................. (81)
Income taxes........................................................... (53)
Net cash flows provided by operating activities... $707

Cash payment to purchase land............................ $ (150)
Net cash flows used in investing activities........... (150)

Cash payments to reduce short-term borrowing.. $ (161)
Cash payments to reduce long-term borrowing... (200)
Cash payments for dividends................................ (25)
Net cash flows used in financing activities........... (386)
Net increase in cash and cash equivalents................ $ 171
Cash and cash equivalents at beginning of year....... 612
Cash and cash equivalents at end of year.................. $ 783
P 13–47 (LO4) Statement of Cash Flows (Indirect Method)
1. Bankhead, Inc.
(Indirect Method)
(Dollars in Thousands)
Net income............................................................... $ 159
Depreciation ........................................................... 17
Increase in accounts receivable............................ (8)
Decrease in inventory............................................. 735
Decrease in accounts payable............................... (196)
Net cash flows provided by operating activities... $ 707
Cash payment to purchase land............................ $(150)
Net cash flows used in investing activities........... (150)
Cash payments to reduce short-term borrowing.. $(161)
Cash payments to reduce long-term borrowing... (200)
Cash payments for dividends................................ (25)
Net cash flows used in financing activities........... (386)
Net increase in cash and cash equivalents................ $ 171
Cash and cash equivalents at beginning of year....... 612
Cash and cash equivalents at end of year.................. $ 783
Sales Revenue $1,450 –8 $1,442 Cash collected from customers
Cost of Goods Sold –1,030 735 –491 Cash paid for inventory
–196
S & A Expenses –110 0 –110 Cash paid for S & A expenses
Depreciation Ex- –17 17 0 Cash paid for depreciation
pense
Other Expenses –81 0 –81 Cash paid for other expenses
Tax Expense –53 0 –53 Cash paid for taxes
Net Income $ 159 $ 707 Cash from operating activities

2. The direct and indirect methods of preparing a statement of cash flows differ
in the calculation of net cash flows provided by (used in) operating activities.
The direct method shows only the operating cash receipts and payments.
The indirect method adjusts net income (as reported on the income state-
ment) for noncash items (for example, depreciation) and from an accrual to a
cash basis. Both methods will produce the same net cash flows from opera-
tions, and both will have identical investing and financing sections on the
statement of cash flows.
284 Chapter 13
P 13–48 (LO4, LO5) Unifying Concepts: Analysis of Operating, Investing, and

Financing Activities
1. Cash flows from operating activities:

Cash receipts from:
Customers.......................................................... $209,3001
Cash payments for:
Inventory............................................................ (107,200)2
Salary and wages............................................... (42,900)3
Other operating expenses................................. (14,200)
Income taxes...................................................... (13,700)4
Cash used to purchase property, plant, and equip-
ment (increase in property, plant, and equipment
account)................................................................... $
(48,500 )
Cash provided by borrowing (increase in notes
payable account)..................................................... $ 10,000
1
Sales....................................................... $210,000
Accounts receivable increase............... (700)
Cash collected from customers............ $209,300
2
Cost of goods sold................................ $ 96,000
Inventory increase................................. 9,000
Accounts payable decrease.................. 2,200
Cash paid for inventory......................... $107,200
3
Salary and wages expense.................... $ 41,000
Wages payable decrease....................... 1,900
Cash paid for salary and wages............ $ 42,900
4
Income taxes.......................................... $ 12,300
Taxes payable decrease........................ 1,400
Cash paid for taxes................................ $ 13,700
P 13–48 (LO4, LO5) (Concluded)
2. Mile High Sporting Goods Company is not in as good a liquidity position as

it was last year. Net cash flows provided by operations are less than accrual
net income, and the end-of-year cash position is now negative, having de-
creased $7,200 from the end of last year. This decrease is the result of the
company opening a new store, which required significant cash flows to pur-
chase additional equipment ($48,500) and inventory ($9,000). The company
was able to use operations to fund part of the expansion but also had to in-
crease its borrowing ($10,000) and decrease its cash position.
As Mr. Beecher’s banker, you might not want to lend more money just now,
but if sales keep increasing and the company manages its expenses care-
fully, it is likely that the company will produce sufficient future cash flows to
pay its obligations.
In the short run, Mile High needs some cash (collect receivables, delay pay-
ables, borrow, or have the owners put more money into the business). Other-
wise, the company might not have a chance to be profitable in the long run.
286 Chapter 13
ANALYTICAL ASSIGNMENTS
AA 13–49 Should We Make the Loan?

Discussion
1. Dec. 31, Dec. 31, Dec. 31, Dec. 31,

2005 2006 2007 2008
Net income...................................................................... $ 492 $ 467 $440 $ 481
Depreciation.............................................................. 50 55 60 60
Accounts receivable change.................................... (152) 39 (60) (78)
Inventory change...................................................... 111 (241) (2) (637)
Accounts payable change....................................... (2) 264 (28) (201)
Net cash flows provided by (used in) operations... $ 499 $ 584 $410 $(375)
2. The sudden decrease in net cash flows from operations is caused by a decrease in the collection of
receivables, a significant increase in inventories, and the payment of accounts payable.
3. Several factors would be important to know before making a loan to Save More, Inc. Some of them
are:
a. Are the receivables collectible? Are the receivables from good customers, or are they just left
on the books to make assets look better? Something is causing the balance in accounts receiv -
able to increase significantly.
b. Why have inventories increased so significantly? Does the inventory balance represent salable
merchandise, or is some of the inventory becoming obsolete, making it necessary for all new
merchandise to be purchased? Will the inventory be sold in the near future?
c. Does the company plan to continue paying cash dividends even though it is in a cash crunch?
Should the bank (if it decides to make the loan) place restrictions on dividend payments?
d. What are the other cash flows from financing and investing activities?
AA 13–50 Analyzing the Cash Position of Good Time, Inc.
Discussion
1. Schedule of cash collections from accounts receivable

Accounts receivable, September 1, 2008............................................. $ 13,300
Add increase from sales........................................................................ 352,000
Total accounts to be collected............................................................... $365,300
Subtract accounts not collected:
Accounts receivable, August 31, 2009................................................. (15,000 )
Cash collections of accounts receivable for year................................. $350,300
Schedule of cash payments for accounts payable
Accounts payable, September 1, 2008................................................. $ 5,600
Add purchases for year:
Inventory at end of year.................................................................. $ 10,500
Cost of goods sold for year............................................................. 184,000
Goods available for sale................................................................. $194,500
Inventory at beginning of year........................................................ (12,700 ) 181,800
Total accounts to be paid...................................................................... $187,400
Subtract accounts payable, August 31, 2009...................................... (3,500 )
Cash payments for accounts payable for year.................................... $183,900
Schedule of cash payments for interest
Interest expense for year....................................................................... $ 1,400
Add beginning interest payable............................................................. 1,000
Subtract ending interest payable.......................................................... (500 )
Cash payments for interest for year...................................................... $ 1,900
Schedule of cash payments for insurance
Insurance expense for year................................................................... $ 1,200
Add ending prepaid insurance balance................................................ 2,800
Subtract beginning prepaid insurance balance................................... (2,000 )
Cash payments for insurance for year.................................................. $ 2,000
288 Chapter 13
AA 13–50 (Continued)
2. Good Time, Inc.

(Direct Method)
For the Year Ended August 31, 2009
Cash receipts from customers (see schedule).............................. $350,300
Cash payments for:
Inventory (see schedule)................................................................. $183,900
Operating expenses 1....................................................................... 87,400
Interest (see schedule).................................................................... 1,900
Insurance (see schedule)................................................................ 2,000
Income taxes2................................................................................... 16,800 292,000
Net cash flows provided by operating activities............................ $ 58,300
Cash proceeds from sale of long-term investments..................... $ 6,400
Cash proceeds from sale of equipment......................................... 1,500
Cash payments to purchase equipment 3....................................... (6,000 )
Net cash flows provided by investing activities............................. 1,900
Cash proceeds from the sale of treasury stock............................. $ 3,000
Cash payment of principal amount on long-term note................. (4,000 )
Net cash flows used in financing activities.................................... (1,000 )
Net increase in cash............................................................................... $ 59,200
Beginning cash and cash equivalents balance.................................... 29,000
Ending cash and cash equivalents balance......................................... $ 88,200
Computations:
1
Operating expenses (per income statement)........ $93,500
Less: Interest expense shown separately........... (1,400)
Insurance expense shown separately....... (1,200)
Subtract expenses not paid in cash:
Depreciation....................................................... (3,500 )
Cash paid for operating expenses for year........... $87,400
2
Income taxes for year............................................. $18,800
Add beginning income taxes payable................... 4,000
Subtract ending income taxes payable................. (6,000 )
Cash paid for income taxes for year..................... $16,800
3
Equipment beginning balance............................... $33,000
Subtract sale of equipment.................................... (5,000)
Add purchase of equipment................................... 12,000 *
Equipment ending balance.................................... $40,000
*Cash paid, $6,000; balance paid for by issuing common stock and increasing paid-in capital in
excess of par.
3. The major reasons for the significant increase in Good Time’s cash balance are (1) the very profit -
able year Good Time had and (2) the lack of payment of dividends. The cash inflows and outflows
from investing and financing activities were about equal; Good Time did purchase some equip -
ment, paying for half of it by issuing stock, which did not require the use of cash.
AA 13–50 (Concluded)
4. Under the circumstances, Good Time might have paid a dividend to its stockholders. Net cash
flows for the year were very positive, and it appears that the balance in the cash account is cer -
tainly adequate to consider paying a dividend. However, if the company is planning a substantial
expansion of facilities or operations, then it might not want to pay dividends to save cash for these
other future uses.
AA 13–51 Analyzing Cash Flow Patterns

Discussion
Abbott Company has gone from a company producing positive cash flows to one using up cash to op -
erate the company. The negative cash flows from operations preceded the reporting of negative in -
come by one year. This indicates that perhaps current noncash operating assets such as accounts re-
ceivable were increasing and producing net income but not producing cash.
The positive financing cash flows mean that Abbott is either borrowing or selling stock to provide cash
to run the business. Financing inflows can only continue so long. If the inflows are from debt, the
source of debt will diminish. If the inflows are from stock, the decline in income will make the sale of
stock less desirable.
The positive investing cash flows mean that the financing inflows are not being used to make addition -
al investments. Instead the investment assets are being liquidated to provide operating cash.
In summary, Abbott Company seems to be heading into difficult financial times. Cash is being obtained
from whatever sources possible to meet operating needs. To completely analyze the company, Paula
should obtain and review the balance sheets and the income statements. These statements can be
used to determine the reasonableness of the assumptions made above. All three statements are useful
for analyzing a company, as each statement provides information that can be used to examine the
health of an organization.
AA 13–52 You Decide: Which method is better at reporting information on the

statement of cash flows—the indirect or direct method?
Judgment Call
Issues to be discussed with this question are:
1. The indirect method is probably more common but often harder to understand.
2. The direct method doesn’t allow for an easy reconciliation with the income statement as does the
indirect method.
3. Both methods result in the same “cash provided by operations” number and so it really doesn’t
matter. Either method is fine.
290 Chapter 13
AA 13–53 You Decide: Ignoring all other factors, will a company that is generat-
ing negative cash flows from operating activities be a good or bad in-
vestment?
Judgment Call
Issues to be discussed with this question are:
1. A company could have a negative cash flow from operations for several reasons:
a. It is building up inventories.
b. It is increasing its accounts receivables.
c. It is paying down its current payables.
d. Etc.
2. To determine whether a negative cash flow from operations is bad, you would need to see what is
causing it, how persistent it is, and what the future prospects of the company are.
3. If a company continually has negative cash flows from operations and is getting cash through fin -
ancing activities, that would probably be a warning sign.
4. This case illustrates the importance of the cash flow statement—so you can see where the cash
flows are coming from.
AA 13–54 Wal-Mart
Real Company Analysis
1. Yes. Most companies present the cash flow categories in the order of operating, investing, and fin -
ancing.
2. An increase in receivables from the beginning to the end of the year indicates that less cash was
received from customers than was reported as sales on the income statement. Since the state-
ment of cash flows begins with an income statement figure (income from continuing operations)
that includes sales, that figure must be reduced—hence the subtraction.
3. In 2006, Wal-Mart spent $14.183 billion on various investing activities. Cash flows from operations
were $17.633 billion, which was more than sufficient to pay for these investments.
4. Wal-Mart paid cash dividends of $2.511 billion to common stockholders during 2006. In addition,
Wal-Mart made some other large payments to common stockholders during the year. The total
cash paid to repurchase the shares of common stockholders during the year was $3.580 billion.
AA 13–55 The Coca-Cola Company
Real Company Analysis
1. “Net cash provided by operations after reinvestment” represents the operating cash flows gener -
ated by Coca-Cola that are in excess of what the company needed to pay for new property, plant,
and equipment and other investing activities. For the years 2003 through 2005, this excess was:
2003, $4.52 billion; 2004, $5.465 billion; and 2005, $4.927 billion.
2. Coca-Cola subtracts gains on sales of assets in the computation of net cash provided by operating
activities to avoid double counting these gains. The gains are included in the proceeds from the
disposal of property, plant, and equipment and other investments that are reported in the investing
activities section. The gains are also included in the computation of net income. If the gains were
not subtracted in computing cash from operating activities, they would be included in cash from op -
erating activities (by being included in net income) and would also be included in investing activit -
ies.
3. (in millions)
2005 2004 2003
Received from shareholders:
Issuances of stock................................................ $ 230 $ 193 $ 98
Paid to shareholders:
Purchases of stock for treasury............................ (2,055) (1,739) (1,440)
Dividends............................................................... (2,678) (2,429) (2,166)
Net cash paid to shareholders.................................... $(4,503) $(3,975) $(3,508)
For 2003, The Coca-Cola Company made a net cash payment to its shareholders of almost $3.508
billion, in 2004, that amount approached $3.975 billion, and in 2005, Coca-Cola paid over $4.503
billion to shareholders.
4. The U.S. dollar weakened during 2003 and 2004. It then got stronger in 2005. You can tell this by
looking at the line titled “Effect of exchange rate changes on cash and cash equivalents.” This
amount represents the change in the U.S. dollar value of the foreign currency cash (yen, rupiah,
baht, euro, etc.) held by Coca-Cola. Notice that in 2003 and 2004 this amount results in an addi -
tion to cash. This means that, in each of these two years, these foreign currencies (as a whole) got
weaker (lost value) relative to the U.S. dollar. Another way to say this is that the U.S. dollar got
stronger. In 2005, foreign currencies decreased in value relative to the U.S. dollar.
AA 13–56 GlaxoSmithKline
International
1. Interest received is included in the investing activities section and interest paid is included in the
financing activities section. Interest received is considered an investing activity because it is a re -
turn on an investment. Interest paid is considered a financing activity because it is considered a
cost of financing. Both of these classifications make sense and were considered by the FASB in its
deliberations. However, at the end of the day their classification on the income statement caused
them both to be classified as operating activities in the United States.
2. Since many financial statements users do not understand all of the adjustments that go into con -
verting accrual-basis numbers to cash-basis numbers, the UK approach separates those adjust -
ments from the “net cash inflow from operating activities” total.
292 Chapter 13
AA 13–57 Manipulating the Federal Budget Deficit

Ethics
This Ethics Case is based on an actual situation that arose in 1987. In that year, Congress directed the
Department of Defense to delay the last payday of the fiscal year from September 30 to October 1. By
doing so, the reported cash-basis deficit number for fiscal 1987 was reduced by $1 billion. A similar
tactic was used in 1984 with military service retirement payments. (See Charles A. Bowsher, “The Fed -
eral Budget: Presenting and Facing the Facts,” Accounting Horizons, June 1990, p. 104.)
In this particular case, the Department of Defense paymaster has little choice because he or she is
bound to do as ordered by Congress. The broader question is whether it is ethical for Congress to ma -
nipulate the reported federal budget numbers in such a cynical way. Probably not. However, the repor -
ted federal budget numbers are so misunderstood anyway that an extra $1 billion of confusion prob -
ably doesn’t make much difference.
AA 13–58 Convincing the Old-Timers of the Need for Cash Flow Data
Writing
MEMO
TO: President, Harry Monst Company
FROM: Chief Accountant
I can understand your reluctance to sign the statement of cash flows that I presented to you at your
office. In contrast to the long history of the balance sheet and the income statement, the statement of
cash flows has only been a required part of the standard set of financial statements since 1987. It is
still a relatively new statement, and many financial analysts and loan officers are not familiar with its
use.
With that said, let me add that those who have used the statement of cash flows have found it to be
a useful supplement to the income statement. This is the reason that our new loan officer has re -
quested that we provide the statement. The cash flow data are particularly useful to bankers as they
evaluate whether our operations will generate sufficient cash flow to enable us to make our debt ser -
vice payments.
I have carefully examined our statement of cash flows and am convinced that it provides accurate
and relevant information about our operations. I have attached a copy of the statement to this memo.
Note that the three categories in the statement—operating, investing, and financing—give a nice
summary of what we have done in our business in the past year. I ask that you take another look at
the statement.
AA 13–59 Preparing New Forecasts

Cumulative Spreadsheet Project
The solutions to the Cumulative Spreadsheet Project can be found in the Instructor's Resource section
of the Albrecht Web site at http://www.thomsonedu.com/accounting/albrecht . In addition, the solu-
tions can be found on the Instructor’s Resource CD-ROM, ISBN 0-324-64578-3.
SOLUTIONS TO "STOP & THINK"
Stop & Think (p. 625): Why must gains (losses) on the sale of equipment be subtracted (added) when
computing cash flows from operations?
Gains (losses) on the sale of equipment must be eliminated when computing cash flows from opera -
tions because the transaction, though reflected on the income statement, is an investing activity, not an
operating activity. Gains are subtracted because they were originally added to arrive at net income;
losses are added back because they were originally subtracted in computing net income.
Stop & Think (p. 630): Now that you have seen both methods for preparing the operating activities
section of the statement of cash flows, which method do you prefer? Which method do you think is
used most often by companies?
The analysis presented in this text for preparing a statement of cash flows results in either method be -
ing readily available. Hopefully, the students realize that the two methods differ in presentation, not
preparation. As the students find in the next section, the indirect method is used by approximately 95%
of large corporations.

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CHAPTER 13

1. The main purpose of a statement of cash bonds, dividend payments to stockholders,

3. Analyze long-term assets to identify the

PE 13–1 (LO2) Categories of Cash Inflows and Outflows

PE 13–2 (LO2) Identifying Operating Activities

The correct answer is B.

a. This is an example of a financing activity.

PE 13–3 (LO2) Identifying Investing Activities

The correct answer is D.

a. This is an example of an operating activity.

PE 13–4 (LO2) Identifying Financing Activities

The correct answer is B.

a. This is an example of an investing activity.

PE 13–5 (LO3) Computing Net Change in Cash for the Period

The ending cash balance is $243, as shown below:

PE 13–6 (LO3) Computation of Cash from Operating Activities

Cash provided by operating activities is $203, as shown below:

PE 13–7 (LO3) Solving for Cash from Investing Activities

Cash used in investing activities is ($221,665), as shown below:

Ending cash balance................................................................................. $ 13,405

Cash from (used in) operating activities.................................................. $

Change in cash account for the year $ 865

PE 13–8 (LO4) Using Accounts Receivable to Compute Cash Collections

The company collected $4,557 from its customers, as shown below:

PE 13–9 (LO4) Identifying Noncash Flow Items and Nonoperating Activity

To solve this problem, consider the following four T-accounts:

Inventory Accounts Payable Cost of Goods Sold

PE 13–10 (LO4) (Concluded)

Income Cash Flows

Cash paid for taxes is $3,425, as shown below:

Income Cash Flows

PE 13–12 (LO4) Indirect Method

PE 13–13 (LO4) Direct Method

Property, Plant, and Equipment

PE 13–15 (LO4) Computing Gain on Sale of Property, Plant, and Equipment

PE 13–16 (LO4) Computing Cash from Financing Activities

E 13–18 (LO2) Classification of Cash Flows

Item Classified as Reported under

E 13–19 (LO2) Classification of Cash Flows

E 13–20 (LO2) Transaction Analysis

E 13–21 (LO3) Transaction Analysis

2. a. The $25,000 cash inflow would be classified as a financing activity.

E 13–22 (LO3) Preparing a Simple Cash Flow Statement

Cash flows from investing activities:

Cash flows from financing activities:

E 13–23 (LO4) Determining Cash Receipts and Payments

1. Cash collected from customers = $445,000

2. Cash paid for wages and salaries = $98,000

Wages and Salaries Payable

3. Cash paid for inventory purchases = $225,500

4. Cash paid for taxes = $38,500

E 13–24 (LO4) Adjustments to Cash Flows from Operations (Indirect Method)

Adjustment to Net Income

Sales revenue....................................................... $510,000

The following spreadsheet may be helpful in explaining the adjustments:

Sales Revenue $510,000 3,000 $513,000 Cash collected from customers

Net Income $ 70,200 $ 74,400 Cash from operating activities

E 13–26 (LO4) Cash Flows from Operations (Indirect Method)

Net income................................................................................................. $70,200

Add (deduct) adjustments to cash basis:

The following spreadsheet may be helpful in explaining the adjustments:

Sales Revenue $510,000 3,000 $513,000 Cash collected from customers