Exam Review - Chapters 17 Statement of Cash Flows

Chapter 17
Objective 1: Usefulness and Format
Describe the usefulness of the statement of cash flows:

1. The entity’s ability to generate future cash flows

2. The entity’s ability to pay dividends and meet obligations

3. The reasons for the difference between net income and net cash provided (used)
by operating activities
4. The net investing and financing transactions during the period

Define:
Term Definition

Operating Activities Include the cash effects of transactions

Investing Activities
Financing Activities
Significant Noncash Activities
that generate revenues and expenses
Include acquiring and disposing of
investments and property, plant and
equipment, and lending money
Include obtaining cash from issuing debt
and repaying the amounts borrowed.
Obtaining cash from stockholders,
purchase of treasury stock and payment
of dividends
Include transactions that impact these
other areas but do not include cash.
Example: purchase land with stock

1|Page
Exam Review - Chapters 17 Statement of Cash Flows
Example cash inflows and outflows from each section:

OPERATING INVESTING FINANCING

+ Cash from sale of
goods/services
+ interest received and
dividend received
- Cash paid for inventory
- Cash paid for wages
- Cash paid for taxes
- Cash paid for interest
- Cash paid for other
expenses
+ Cash collected from sale of + Cash received from sale of
property, plant and equipment stock
+ Cash from sale of + Cash received from
investments issuance of debt (bonds and
+ Cash from collection of notes)
principle on loans - Cash paid for dividends
- Cash paid to purchase - Cash paid for debt
property, plant and equipment - Cash paid for treasury
- Cash paid to purchase stock
investments
- Cash paid to make loans

Objective 2: Indirect Method of the Statement of Cash Flows

Equation:

Steps Define
Net Income
1. Add Depreciation /Loss
2. Deduct Gain
3. Analyze Current assets (not cash) - Increase + decrease
3. Analyze Current liabilities + increase - decrease
= Net cash / Provided
by Operating Activities

Practice: Indicate whether you would add or deduct the following from Net Income to get the
net cash provided/used by operating activities

Example Indicate add or deduct

Depreciation Expense +
Loss on Disposal of Plant Asset +
Gain on Disposal of Plant Asset -
Decrease in Account Receivable +
Increase in Inventory -
Increase in Prepaid Expenses -
2|Page
 Exam Review - Chapters 17 Statement of Cash Flows
Increase in Accounts Payable +
Decrease in Income Tax Payable -

Example 1:

The company’s net income for the year was $153 and it did not sell or retire any property,
plant and equipment during the year. Cash dividends were $28. Based on the below
information, what should the net cash provided by operating activities for the year be using
the indirect method?

Account Ending Beginning Change

Balance Balance
Cash $34 29 +5
Accounts Receivable 44 41 +3
Inventory 72 60 +12
Property, Plant, Equipment 610 550 +60
Less: Accumulated 274 229 +45
Depreciation
Accounts Payable 32 28 +4
Bonds Payable 305 400 -95
Common Stock 51 50 +1
Retained Earnings 98 (27) +125

Example 2:

Selected transactions for the Hamilton Company are listed below.

1. Collected accounts receivable. O

2. Declared and paid dividends on common stock. F

3. Sold long-term investments for cash. I

4. Issued stock for equipment. NO

5. Repaid five year note payable. F

6. Paid employee wages. O

7. Converted bonds payable to common stock. NO

3|Page
 Exam Review - Chapters 17 Statement of Cash Flows
8. Acquired long-term investment with cash. I

9. Sold buildings and equipment for cash. I

10. Sold merchandise to customers. O

Classify each transaction as either (a) an operating activity, (b) an investing

activity, (c) a financing activity, or (d) a noncash investing and financing activity.

Example 3

Assuming a statement of cash flows is prepared using the indirect method, indicate the
reporting of the transactions and events listed below by major categories on the statement.
Use the following code letters to indicate the appropriate category under which the item
would appear on the statement of cash flows.

Code
Cash Flows from Operating Activities
Add to Net Income A
Deduct from Net Income D
Cash Flows from Investing Activities IA
Cash Flows from Financing Activities FA

Category
1. Common stock is issued for cash at an amount above par value FA
2. Inventory increased during the period D
3. Depreciation expense recorded for the period A
4. Building was purchased for cash IA
5. Bonds payable were acquired and retired at their carrying value FA
6. Accounts payable decreased during the period D
7. Prepaid expenses decreased during the period A
8. Treasury stock was acquired for cash FA
9. Land is sold for cash at an amount equal to book value IA
10. Patent amortization expense recorded for a period A

4|Page
 Exam Review - Chapters 17 Statement of Cash Flows
Presented below are the financial statements of Rocastle Company

Additional data:
1. Depreciation expense was $6,000.
2. Dividends of $25,000 were declared and paid.
3. During the year, equipment was sold for $12,000 cash. This equipment cost $15,000
originally and had accumulated depreciation of $3,000 at the time of sale.
4. Additional equipment was purchased for $7,000 cash.
Instructions
Prepare a statement of cash flows using the indirect method.

5|Page
Exam Review - Chapters 17 Statement of Cash Flows
ROCASTLE COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2017

Cash flows from operating activities

Net income ................................................................. $28,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense........................................ $ 6,000
Increase in income taxes payable ..................... 4,000
Increase in accounts receivable ........................ (11,000)
Decrease in accounts payable .......................... (12,000)
Increase in inventory ......................................... (20,000) (33,000)
Net cash used by operating
activities................................................... (5,000)

Cash flows from investing activities

Sale of plant assets .................................................... 12,000
Purchase of equipment .............................................. (7,000)
Net cash provided by investing
activities ........................................................ 5,000

Cash flows from financing activities

Issuance of bonds ...................................................... 10,000
Payment of cash dividends ........................................ (25,000)
Net cash used by financing
activities ........................................................ (15,000)

Net decrease in cash .......................................................... (15,000)

Cash at beginning of period ................................................ 33,000
Cash at end of period .......................................................... $18,000

6|Page