SM 13

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth Canadian Edition
CHAPTER 13
STATEMENT OF CASH FLOWS
LEARNING OBJECTIVES
1. Describe the content and format of the statement of cash flows.
2. Prepare the operating activities section of a statement of cash flows using the indirect
method.
3. Prepare the investing and financing activities sections and complete the statement of cash
flows.
4. Prepare the financing activities section and complete the statement of cash flows.
5. Use the statement of cash flows to evaluate a company.
6. Prepare the operating activities section of a statement of cash flows using the direct
method (Appendix 13A).
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

AND BLOOM’S TAXONOMY
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT
Questions
1. 1 C 7. 1 C 13. 2,3 C 19. 5 C 25. 6 AP
2. 1 C 8. 2 C 14. 4 C 20. 5 C 26. 6 C
3. 1 C 9. 2,5 C 15. 4 AP 21. 5 C
4. 1 C 10. 2 K 16. 4 C 22. 5 C
5. 1 K 11. 2 C 17. 5 C 23. 6 C
6. 1 K 12. 2,3 C 18. 5 C 24. 6 C
Brief Exercises
1. 1 K 5. 2 AP 9. 4 AP 13. 6 AP
2. 1 C 6. 3 AN 10. 5 AN 14. 6 AP
3. 1 C 7. 3 AP 11. 5 AN 15. 6 AP
4. 2 C 8. 4 AN 12. 6 AP 16. 6 AP
Exercises
1. 1 C 4. 2 AP 7. 2,3,4 AP 10. 5 AN 13. 6 AP
2. 1 C 5. 2,3,4 C 8. 2,3,4,5 AN 11. 5 AN 14. 6 AP
3. 2 C 6. 3,4 AN 9. 2,3,4,5 AN 12. 6 C 15. 6 AP
Problems: Set A and B
1. 1 C 4. 4,5 AN 7. 2,3,4,5 AN 10. 1,2,6 AN .
2. 2 AP 5. 2,3,4,5 AN 8. 5 AN 11. 6 AN
3. 3,5 AN 6. 2,3,4,5 AN 9. 5 AN 12. 5,6 AN
Accounting Cycle Review
1. 5 AP
Cases
1. 2,3,4 AN 3. 1,5 AN 5. 5 AN 7. 5,6 AN 9. 5 E
2. 1,2,3,4,5 AN 4. 5 E 6. 1 C 8. 5 AN
Solutions Manual 13-1 Chapter 13

Copyright © 2020 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Legend: The following abbreviations will appear throughout the solutions manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

ANSWERS TO QUESTIONS
1. The statement of cash flows reports the cash receipts, cash payments, and net
change in cash resulting from the operating, investing, and financing activities of
a company during a period, in a format that reconciles the beginning and ending
cash balances.
The statement of cash flows is useful to all readers because it allows them to
assess the following aspects of a company’s financial position:
 the reasons for the difference between net income and cash provided (used)
by operating activities
 the cash generated by (used in) investing and financing transactions during
a period
 the company’s ability to generate future cash flows
Creditors in particular, are concerned about the borrower’s ability to generate
cash to repay loans and service debt. The cash flow statement helps creditors
assess risk.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash. Generally, only debt investments with
maturities of three months or less qualify under this definition. These would
include term deposits, guaranteed investment certificates and bank overdrafts.
Trading investments differ from cash equivalents in that they include those
investments that are readily marketable and are purchased with an intention to
generate short-term gains. In addition, trading investments are held for
investment purposes whereas cash equivalents are held for the purpose of
meeting short-term cash needs.
The statement of cash flows may be prepared using cash, or cash and cash
equivalents as its base. If the latter, cash equivalents must be clearly defined.

3. Operating activities include the cash flow activities arising from a company’s
principal revenue-producing activities and all other activities that are not
investing or financing activities.
Investing activities are those arising from the acquisition and disposal of non-
current assets.
Financing activities include those resulting in changes in the size and

composition of the equity and borrowings of a company.
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4. Companies following ASPE classify interest paid, interest income, and dividend
income, as part of operating activities because they are disclosed on the
statement of income as part of net income. Dividend payments are classified as
financing activities. This is the most common practice for both publicly traded
and private companies. Companies following IFRS may classify interest and
dividend income as either investing activities or operating activities, and interest
and dividend payments as either financing activities or operating activities.
Companies select where these payments and receipts will be presented and must
apply the presentation consistently.
5. Examples of noncash transactions include the issue of shares or a mortgage to

purchase property, plant, and equipment. Other examples include issuing notes
payable to settle a debt or to purchase land. In all cases, cash is not involved.
Noncash transactions should be reported in the notes to the financial statements
and cross-referenced to the statement of cash flows, but not reported as investing
and financing activities in the body of the statement of cash flows.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

6. Although the approaches and format are different, both the direct and indirect
methods will produce the same net cash provided by operating activities.
LO 1 BT: K Difficulty: S Time: 2 min. AACSB: None CPA CM: Reporting
7. (a) and (b)

(1) The adjusted trial balance is not required to prepare the statement of cash
flows because it does not provide necessary data.
(2) A comparative statement of financial position is required to obtain the

changes in individual asset, liability, and equity balances. Changes in the
noncash working capital (current) accounts may affect the operating
activities, changes in short-term investment and long-lived asset accounts
may affect the investing activities, and changes in non-current liability and
equity accounts may affect the financing activities reported in the statement
of cash flows.
(3) The statement of income is required to obtain the elements of operating

activities, which will be converted from the accrual basis to the cash basis.
The statement of income is also required to identify noncash revenues and
expenses such as depreciation and amortization expenses and accounting
gains and losses.
(4) The statement of comprehensive income is needed to reconcile certain fair-

valued assets (e.g., revaluation of the fair value of land) and equity (e.g.,
accumulated other comprehensive income) accounts appearing in the
statement of financial position. However, changes in comprehensive
income do not affect cash and are not reported on the statement of cash
flows.
(5) The statement of changes in equity will provide details of the changes in
the share capital and retained earnings accounts. From these, the cash
effects of financing transactions with shareholders, such as the issue or
repurchase of shares and/or payment of dividends, can be determined and
reported as financing activities on the statement of cash flows.

8. The indirect method involves converting accrual-based net income to net cash
provided by operating activities. This is done by starting with accrual-based net
income from the statement of income and adding or subtracting noncash items
included in net income. Examples of adjustments include adding back noncash
expenses, such as depreciation, and removing any noncash gains or losses from
net income. Then, changes in the balances of noncash current asset and current
liability accounts from one period to the next are added or subtracted.
9. A number of factors could have caused a positive amount of net cash provided
by operating activities in spite of the fact that Clearwater reported a net loss.
These include (1) a high amount of collection of deferred revenue; (2) large
amounts of depreciation or amortization; and (3) accounting losses or
impairments. The increase in deferred revenue is added as an inflow under
operating activities. Items (2) and (3) are non-cash items deducted in arriving at
net income (in this case a net loss) so they are now added back to net loss when
determining net cash flow provided by operating activities, thereby making it
positive.
LO 2,5 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10. Under the indirect method, depreciation, depletion, and amortization expenses
are added back to net income to reconcile net income to net cash provided by
operating activities because they are expenses that have reduced net income, but
do not result in the use of cash. Adding them back cancels the expenses reported
in the statement of income, as accrual net income is the starting point under the
indirect method.
Example: Income before depreciation $5,000

Less: Depreciation expense (1,000)
Income 4,000
Add: Depreciation expense 1,000
Cash provided by operating activities $5,000

11. The operating activities section of the statement of cash flows prepared using the
indirect method highlights trends in changes in working capital account balances.
For example, an increase in inventory with a decrease in accounts payable may
flag an issue with the inventory management. Increases in inventory should bring
about a corresponding increase in accounts payable. Another example would be
the increase in accounts receivable beyond the level of increase in sales which
might highlight poor management of collections from customers.
12. Under the indirect method, a gain on disposal of equipment is deducted from net
income to reconcile net income to net cash provided by operating activities. A
gain is the difference between the cash proceeds received when the asset is sold
and the carrying amount of the asset. This gain is not a cash receipt or payment.
Therefore, the noncash gain, which was included in net income, must be
deducted from net income on the statement of cash flows to convert net income
to net cash provided by operating activities. The total cash proceeds received
when the asset is disposed of would be reported in the statement of cash flows as
an investing activity.
13. When a business invests money, it does so outside of its main revenue-generating
operations. It might have excess cash, which it wants to put to use in producing
some interest or dividend income. Since the intention is to earn a return on its
investment, the buying and selling of investments is generally reported as
investing activities in the statement of cash flows. The exception occurs when the
investments are held for trading purposes, in which case they are treated similarly
to inventory acquired for resale. These types of investments are reported as
operating activities.
14. The principal amount advanced by the bank and later repaid involves borrowing
and repayment transactions that need to be reported under financing activities in
the statement of cash flows. The timing of the loan principal repayments will
lead to a portion of the loan principal being classified as current liabilities. This
classification does not change the nature of the cash activity with the bank. Both
the current and non-current principal portions are treated together for cash flow
reporting purposes.

15. (a) Dividends declared reduce retained earnings once the declaration is made
by the board of directors. For the cash flow statement, only dividends paid
are reported in the financing activities section of the statement. Similar to
the adjustments made for the changes in working capital accounts in the
indirect format of the statement of cash flows, any increase or decrease in
the Dividends Payable account will adjust dividends declared (accrual
basis) to dividends paid (cash basis). For this example, the amount of the
increase of $2,000 ($10,000 - $8,000) in dividends payable will be
deducted from the amount of dividends declared of $40,000 to arrive at
cash paid for dividends of $38,000.
(b) My answer would change if the company had declared dividends in the
amount of $2,000. This amount corresponds to the increase in the
Dividends Payable account for the year. Consequently, no dividends would
have been paid during the year and no amount would appear in the
financing activities of the statement of cash flows.
LO 4 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
16. The statement of cash flows is prepared from detailed information about the
changes in account balances that occurred between two periods of time, as shown
on the other financial statements. Unlike the other financial statements, it is not
prepared from an adjusted trial balance. In particular, the information to prepare
the statement of cash flows comes from a comparative statement of financial
position, the statement of income, the statement of changes in equity, and
additional information concerning specific transactions such as disposals of
property, plant, and equipment.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

17. (a) The corporate life cycle consists of four phases: introductory, growth,
maturity, and decline.
(b) In the introductory and growth phases, we don’t usually expect to see a
company generate positive cash from its operating activities until part way
through the growth phase. Because the company is making significant
investments in its long-lived assets, cash will be used by investing
activities. During the first two phases, cash generated by financing
activities is usually positive as debt and equity are issued to pay for the
investments and cover the operating activities shortfall. These patterns
reverse in the maturity and decline phases of the cycle. In the decline
phase, cash from operating activities decreases. Cash from investing
activities is positive as the company sells off its excess assets, before
starting to decline. Cash is used for financing activities as the company
continues to pay off its debt.
18. A company that just commenced its operations would be expected to report low
or negative cash flows from operating activities. Later, when the company is
growing and healthy, the cash from operating activities will become positive.
The company would also usually show cash used in investing activities as it
invests in its productive capacity. At this stage, the company will also usually
show cash inflows in financing activities to finance the purchase of productive
assets not covered from operating activities.
19. Creditors may be concerned about the company’s ability to repay its obligations
over the long-term. The lack of cash flows from operating activities may be of
concern to investors for several reasons. First, the decrease in cash flows may
have an adverse effect on the company’s share price. In addition, some investors
may be concerned that the company will not generate enough cash to pay
dividends in the future. This concern is supported by the declining free cash
flow, which also indicates the company is generating less cash from operating
activities to pay future dividends and to expand the business.
LO 5 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance

20. Improvements in free cash flow that do not involve improving cash from
operating activities include reducing the amount of capital expenditures or by
reducing the amount of dividends paid.
21. If net capital expenditures and dividends paid exceed cash provided by operating
activities, then free cash flow will be negative.
LO 5 BT: C Difficulty: M Time: 2 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

22. Data collected from customers using loyalty cards can be mined to target
advertising of specific products meeting the customer’s need and buying habits.
Based on the most popular product sold, a store can adjust their product
placement to maximize customer traffic to those products. These strategies can
lead to increased sales and corresponding increases in operating cash flow.
*23. Net cash provided by operating activities under the direct method is the
difference between cash revenues and cash expenses. The direct method adjusts
the accrual-based revenues and expenses directly to reflect the cash-based
revenues and expenses, which combine to equal "net cash provided by operating
activities."
*24. Depreciation and amortization expenses are not listed in the operating activities
section under the direct method because they are not cash flow items—they do
not affect cash. Recall the journal entry to record depreciation: debit
Depreciation Expense and credit Accumulated Depreciation. The entry to record
amortization is similar. As you can see, there is no cash involved in this journal
entry. This is different from the indirect method, which uses net income as its
starting point and must add back depreciation and amortization as noncash items
included in the determination of net income.

*25. When preparing the operating activities of the statement of cash flows using the
direct method, the same information is needed as when preparing the statement
using the indirect method. For the amount of cash received from customers, the
amount of sales, changes in accounts receivable, change in refund liability and
changes in deferred revenue are needed. In the case of the cash paid to suppliers,
cost of goods sold and the changes in inventory, estimated inventory returns and
accounts payable are needed.
LO 6 BT: AP Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
*26. The gain on disposal of equipment and the loss on the sale of land would not
appear on the operating activity section of statement of cash flows prepared
using the direct method because these are not cash flow items. However, the
gross proceeds received when the assets are sold would be reported in the
statement of cash flows, as investing activities.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13.1–

a. –
b. NE
c. +
d. –
e. +
f. NE
g. –
h. –
i. NE
j. ̶

BRIEF EXERCISE 13.2
a. F
b. O if reporting under ASPE but if reporting under IFRS a choice exists between
showing this as an operating or financing activity
c. NC – an exchange of land (investing activity) for shares (financing activity) that
does not involve cash
d. F
e. O
f. O
g. Not a cash activity – a reduction of retained earnings and an increase in dividends
payable
h. F if reporting under ASPE but if reporting under IFRS a choice exists between
showing this as a financing or operating activity
i. O
j. Not a cash activity – a cost allocation
k. F

BRIEF EXERCISE 13.3
a. 1. F
2. O
3. O
4. I
5. F
6. O
7. F
8. O
b. Linamar uses the indirect method as indicated by the change in noncash

operating working capital items and the depreciation and amortization expenses.
BRIEF EXERCISE 13.4
a. +
b. –
c. +
d. +
e. N/A
f. +
g. +
h. –
i. –
j. +
k. N/A
l. +
m. +
n. + unless designated as a cash equivalent in which case it does not appear

BRIEF EXERCISE 13.5
DUPIGNE CORPORATION
Statement of Cash Flows (Partial)
Year Ended March 31, 2021
Operating activities
Net income ............................................................................ $275,000
Adjustments to reconcile net income to
net cash provided (used) by operating activities
Depreciation expense..................................................... $60,000
Loss on disposal of land................................................. 15,000
Accounts receivable increase......................................... (20,000)
Inventory increase.......................................................... (5,000)
Accounts payable decrease........................................... (5,000) 45,000
Net cash provided by operating activities.......................................... $320,000
[Adjustments to net income include depreciation (+); loss (+); increase in noncash current assets
(–); and decrease in current liabilities (−)]. Dividends pertain to financing activities.

BRIEF EXERCISE 13.6
Original cost of equipment sold........................................................................ $20,000

Less: Accumulated depreciation...................................................................... (5,500
Carrying amount of equipment sold................................................................. 14,500
Less: Loss on disposal..................................................................................... (1,500
Cash received from disposal of equipment....................................................... $13,000
The following journal entry may be helpful in understanding this brief exercise:
Cash........................................................................................ 13,000
Accumulated Depreciation—Equipment............................... 5,500
Loss on Disposal.................................................................... 1,500
Equipment.................................................................. 20,000
a. Cash provided by disposal of equipment = $13,000
b. Investing activities for the proceeds; Operating activities for the loss as it is
shown on the statement of income.
LO 3 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.7
($ in thousands)
Investing activities
Purchase of long-term investments ($150 – $100)........................... $ (50)
Disposal of equipment...................................................................... 60 *
Purchase of equipment [$500 – ($400 – $100)]................................ (200)
Net cash used by investing activities.......................................................... $(190)
Equipment
400
XXX
100
500
*Cost of equipment sold................................................................... $100

*Accumulated depreciation ($100 – carrying amount of $50)......... 50
*Carrying amount............................................................................. 50
*Gain on disposal.............................................................................. 10)
*Cash proceeds from disposal.......................................................... $ 60)
LO 3 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.8
($ in millions)
Beginning balance, retained earnings.................................... $4,169.3

Add: Net income................................................................... 692.1
Less: Ending balance, retained earnings................................ (3,720.7)
Dividends paid....................................................................... $1,140.7
Retained Earnings
4,169.3
692.1
1,140.7
3,720.7
The answer would change if the Dividends Payable account increased during the year. In
this case, the $1,140.7 decrease in Retained Earnings would be reduced by the increase
in Dividends Payable to arrive at the amount of dividends paid.
LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13.9
($ in thousands)
Financing activities
Payment of cash dividends................................................................ $(195) 1
Repayment of bank loan payable...................................................... (200)2
Issue of common shares ($600 – $400)............................................ 200
Net cash used by financing activities.......................................................... $(195)
Note X to the Statement of Cash Flows: During the year, the company purchased equipment
costing $500 by paying $200 cash and issuing a $300 bank loan payable.
1
Beginning balance, retained earnings.......................... $500
Add: Net income......................................................... 400
Less: Ending balance, retained earnings...................... (700)
Dividends declared....................................................... $200
Beginning balance, dividends payable......................... $ 10

Add: Dividends declared (from above) ....................... 200
Less: Ending balance, dividends payable.................... (15)
Dividends paid............................................................. $195
2
Beginning balance, bank loan ($200 + $300).............. $500
Additional borrowings................................................. 300
800
Ending balance, bank loan ($200 + $400)................... (600)
Loan payments made................................................... $200
(Financing activity cash flows = Issuance/repayment of long-term debt,

issuance/repurchase of shares, and payment of cash dividends)

BRIEF EXERCISE 13.10
a. Free cash flow = $325,000 – $200,000 – $25,000 = $100,000
b. Free cash flow provides better information than net cash provided by operating
activities because it includes the corporation’s ability to sustain capital asset
replacements and additions, and its ability to distribute dividends to its
shareholders.
LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 13.11
a. Apple would have obtained cash as proceeds from the disposal of long-term
investments in amounts that are larger than the amount of net capital
expenditures resulting in net cash provided by investing activities in 2018.
b. Based on the changes in cash flows from 2017 and 2018, Apple Inc. is likely in
the maturity stage of the corporate life cycle. This is due to the reduced uses of
cash from investing activities and increased uses of cash from financing
activities.
c. Free cash flow in millions of US dollars:

a. 2018: $77,434 – $13,313 – $13,712 = $50,409
b. 2017: $64,225 – $12,451 – $12,769 = $39,005
d. As a shareholder of Apple Inc., I would be pleased with the large increase in the
free cash flow generated in 2018 compared to 2017.
e. The amount of the dividends paid exceeds the amount of capital expenditures in
both years because all necessary capital expenditures have been made throughout
the previous years, as needed and also because of the nature of Apple’s business,
which is not capital intensive and the fact that the business is in the maturity
stage.


*BRIEF EXERCISE 13.12

+ Increase in refund
+ Decrease in accounts
Cash receipts Sales liability
= receivable
from customers revenues - Decrease in refund
– Increase in accounts
liability
receivable
Thus, cash receipts from customers must have equalled = $160,700 [ $170,000 –
($24,000 – $14,000) + ($1,700 - $1,000)].
(in USD millions)

+ Increase in inventory + Decrease in accounts payable
Cash payments to = Cost of goods
suppliers sold – Decrease in inventory – Increase in accounts payable
Thus, the cash payments to suppliers must have equalled = $1,458 ($1,416 + $64 – $22).
+ Increase in prepaid expenses

Operating
Cash – Decrease in prepaid expenses
expenses
payments for
= (excluding and
other operating
depreciation and + Decrease in liabilities relating to other operating expenses
expenses
amortization)
– Increase in liabilities relating to other operating expenses
Thus, the cash payments for other operating expenses must have equalled = $184,000
($200,000 – $30,000 – $5,000 + $1,000 + $13,200 + $4,800).

a.
Income tax expense $50,000

Less: Increase in income tax payable (4,000)
Cash payments for income tax $46,000
b.

Add: Decrease in income tax payable 3,000

Cash receipts from customers..............................................................
$830,0001
Cash payments
To suppliers....................................................................................... $474,0002
To employees.................................................................................... 37,0003
For other operating expenses............................................................ 212,0004
For income tax.................................................................................. 10,0005 733,000*
Net cash provided by operating activities................................................... $ 97,000*
1
$850,000 – $20,000 = $830,000
2
$475,000 – $6,000 + $5,000 = $474,000
3
$40,000 – $3,000 = $37,000
4
$230,000 – $20,000 + $2,000 = $212,000
5
$15,000 – $5,000 = $10,000

SOLUTIONS TO EXERCISES
EXERCISE 13.1
(a) (b)
Cash Effect Classification
1. + $50,000 F
2. – $5,000 I / NC*
3. + $16,000 O
4. – $25,000 F
5. + $18,000 I
6. + $1,000 O
7. – $18,000 O
8. – $100,000 O
9. NE **
10. + $1,000 O
11. – $25,000 F
* Investing activity; Cash payment of $5,000.

Also requires note disclosure of the $25,000 noncash transaction acquisition of
machine in exchange for long-term note payable.
** No effect on cash flows; increase in inventory offset by increase in accounts
payable.

EXERCISE 13.2
1. An impairment loss on goodwill involves the recording of a loss and a reduction

of the asset account Goodwill. This transaction does not involve cash in any way.
This would not be reported on the statement of cash flows when using the direct
method but the impairment might be discussed in the accompanying notes. (The
amount would be shown as an adjustment to net income to reverse this loss in the
operating activities section prepared using the indirect method.)
2. Depreciation is a cost allocation technique. The cash transaction occurred with

the purchase of the property, plant, and equipment. Depreciation charges the cost
to expense as the assets are being consumed. This transaction does not involve
cash. This would not be reported on the statement of cash flows or in the
accompanying notes. (The amount would be shown as an adjustment to net
income to reverse this expense in the operating activities section prepared using
the indirect method.)
3. The recording of the fair value adjustment through net income or loss for an
unrealized gain on a trading investment does not involve cash, but increases net
income for the gain that is accrued and the carrying amount of the investment on
the statement of financial position. This would not be reported on the statement
of cash flows if the direct method were used or shown in the accompanying
notes. (The amount would be shown as reduction in net income in the operating
activities section prepared using the indirect method.)
4. The reduction of inventory to net realizable value is similar to the recording of an

impairment in item 1 above. This transaction does not involve cash in any way.
This would not be reported on the statement of cash flows when using the direct
method but the charge to cost of goods sold might be discussed in the
accompanying notes. (The amount would be included in the change in inventory
amount that appears as an adjustment to net income in the operating activities
section prepared using the indirect method.)

EXERCISE 13.2 (CONTINUED)
5. The purchase of land in exchange for a note payable issued to the seller would
not appear on the statement of cash flows. Since this transaction does not involve
cash directly, it is not reported on the statement of cash flows. Rather it is
reported in a note to the financial statements explaining this non-cash financing
and investing transaction.
6. A stock split results in additional shares being issued and does not involve
cash in any way. This would not be reported on the statement of cash flows, but
would be reported in the statement of changes in equity and the notes to the
financial statements.
7. The conversion occurs as a result of non-payment of the outstanding receivable

and does not involve cash. This would not be reported separately on the
statement of cash flows or in the accompanying notes. (The amount would be
included in the change in accounts receivable and the change in notes receivable
that appear as adjustments to net income in the operating activities section
prepared using the indirect method.)
8. The equipment was purchased by paying with common shares rather than cash.
Since this transaction does not involve cash directly, it is not reported on the
statement of cash flows. This is, however, an example of a significant noncash
investing (acquisition of equipment) and financing (issue of shares) activity and
would be disclosed in the notes to the financial statements.
LO 1 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.3
Cash Provided (Used)
Transaction Net income by Operating Activities
1. Sold inventory for cash at a higher price than cost. + +
2. Collected cash in advance from a customer for a service
NE +
to be provided in the future.
3. Purchased inventory on account in a perpetual inventory
NE NE
system.
4. Declared and paid dividends. NE NE
5. Recorded and paid salaries. – –
6. Recorded income tax payable. – NE
7. Accrued interest receivable. + NE
8. Recorded depreciation expense. – NE
9. Paid an amount owing on account to a supplier. NE –
10. Collected an amount owing from a customer. NE +

EXERCISE 13.4
JUNO LTD.
Year Ended December 31, 2021
Net income........................................................................................
$21,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation expense.............................................................. $11,000
Loss on disposal of equipment................................................ 5,000
Decrease in accounts receivable............................................. 5,000
Increase in inventory............................................................... (1,400)
Increase in prepaid expenses................................................... (500)
Increase in accounts payable................................................... 1,250
Increase in income tax payable............................................... 400
Increase in property tax payable............................................. 1,000
21,750
Net cash provided by operating activities...................................................
$42,750
Note: The current portion of the bank loan payable was not included because this bank
loan was issued for borrowing purposes rather than trade.
[Adjustments to net income include depreciation (+); loss (+); decrease in noncash current assets
(+); increase in noncash current assets (-); and increase in current liabilities (+)]

EXERCISE 13.5
Operating Investing Financing Noncash

Transaction Activities Activities Activities Activities
1. Purchased inventory for cash. – NE NE NE
2. Sold inventory on account. (+/–) NE NE NE NE
3. Sold equipment for cash at a loss. + + NE NE
4. Recorded depreciation on equipment. + NE NE NE
5. Paid dividends. NE NE – NE
6. Recorded an unrealized loss on a long-
term equity investment carried at fair + NE NE NE
value through profit or loss.
7. Collected an account from a customer. + NE NE NE
8. Signed and received a mortgage payable. NE NE + NE
9. Paid, in full, the current portion of a
NE NE – NE
mortgage payable.
10. Purchased land by issuing common shares. NE NE NE +/–
LO 2,3,4 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13.6
DUPRÉ CORP.
Year Ended December 31
Proceeds from disposal of equipment............................................... $ 6,000*
Purchase of land................................................................................ (6,000)
Purchase of equipment [$70,000 + ($53,000 – $43,000)]................ (80,000)
Net cash used by investing activities.......................................................... $(80,000)
Payment of cash dividends**............................................................ nil
*Cost of equipment sold................................................................... $39,000

*Accumulated depreciation.............................................................. 30,000
*Carrying amount............................................................................. 9,000
*Loss on disposal of equipment........................................................ 3,000)
*Cash proceeds................................................................................. $ 6,000)
Cash............................................................................................ 6,000
Accumulated Depreciation—Equipment................................... 30,000
Loss on Disposal........................................................................ 3,000
Equipment.............................................................................. 39,000
Notes to the financial statements: Equipment of $53,000 was purchased by paying

$10,000 cash and issuing a bank loan payable specifically for the purchase of this
equipment for $43,000.
** For this year, no dividends were paid. We know this because the dividends declared
are equal to the increase in the Dividends Payable account. The amount of dividends
paid is equal to dividends declared plus any decrease in the Dividends Payable
account or minus any increase in the Dividends Payable account. In this case, the
dividends paid = $4,000 - $4,000 = $0.
LO 3,4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.7
PUFFY LTD.
Statement of Cash Flows
Net income.............................................................................. $115,000
Gain on sale of long-term investments......................... $ (5,000)
Depreciation expense.................................................... 34,000
Increase in accounts receivable
($80,000 – $76,000)................................................... (4,000)
Decrease in inventory ($186,000 – $180,000).............. 6,000
Increase in estimated inventory returns
($5,000 – $3,000) ...................................................... (2,000)
Decrease in accounts payable ($41,000 – $29,000) (12,000 )
Increase in refund liability ($10,000 – $6,000)............. 4,000 21,000
Net cash provided by operating activities......................................... 136,000
Proceeds from sale of long-term investments......................... $35,000*
Purchase of equipment............................................................ (65,000)
Net cash used by investing activities................................................ (30,000)
Payment of cash dividends
($134,000 + $115,000 – $199,000)...................................... $(50,000)
Repayment of bank loan ........................................................ (50,000)
Issue of common shares.......................................................... 25,000
Net cash used by financing activities................................................ (75,000)
Net increase in cash.......................................................................... 31,000)

Cash, January 1................................................................................. 22,000)
Cash, December 31........................................................................... $ 53,000)

* Cash proceeds received from sale of long-term investments:

Cash ................................................................................. 35,000
Long-Term Investments ($100,000 – $70,000)...... 30,000
Gain on Disposal..................................................... 5,000
It is assumed that the carrying value of the long-term investments is the same as its
fair value.
LO 2,3,4 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.8
a. CHARMAINE RETAILERS LTD.

Net income.............................................................................. $62,000
Depreciation expense.................................................... $21,000
($50,000 – $42,000)................................................... (8,000)
Increase in inventory ($168,000 – $143,000)............... (25,000)
Increase in accounts payable ($45,000 – $35,000)....... 10,000 (2,000 )
Purchase of furniture ($163,000 – $80,000)........................... $(83,000)
Increase in bank loans
($20,000 + $83,000 + $10,000 – $61,000 – $15,000...........) $37,000
Repayment of bank loan ........................................................ (10,000)
Issue of common shares ($60,000 – $55,000)........................ 5,000
Net cash provided by financing activities......................................... 32,000

Cash, January 1................................................................................. 9,000)
Cash, December 31........................................................................... $18,000)
b. The company was able to generate a sufficient amount of operating cash flows
and to obtain bank financing and use both of these sources of cash to purchase
additional furniture. The net cash from operating activities seems sufficiently
large enough to make any loan payments in the future. One needs to ask why the
inventory rose as much as it did because it did lower cash from operating
activities.
LO 2,3,4,5 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13.9
a.
DAGENAIS RETAILERS LTD.
Net income.............................................................................. $32,000
net cash used by operating activities
Gain on disposal of furniture........................................ $ (2,000)
Depreciation expense.................................................... 19,000
($77,000 – $50,000)................................................... (27,000)
Increase in inventory ($219,000 – $168,000)............... (51,000)
Increase in accounts payable ($68,000 – $45,000)....... 23,000 (38,000 )
Net cash used by operating activities................................................ (6,000)
Proceeds from disposal of furniture (see below).................... $6,000
Net cash provided by investing activities......................................... 6,000
($173,000 - $32,000 – $146,000)......................................... $(5,000)
Repurchase of common shares................................................ (10,000)
Repayment of bank loan ($103,000 – $90,000)...................... (13,000)
Net decrease in cash.......................................................................... (28,000)

Cash, January 1................................................................................. 18,000)
Bank overdraft, December 31........................................................... $(10,000)))
The bank overdraft is considered a cash equivalent.


Calculations:
Transactions involving Furniture:
Furniture
Dec. 31, 2020 163,000 Disposal 33,000
Dec. 31, 2021 130,000
Accumulated Depreciation—Furniture
Dec. 31, 2020 45,000
Disposal (derived) 29,000 Depreciation 19,000
Dec. 31, 2021 35,000
Cost of furniture sold (derived).................................................. $33,000

Accumulated depreciation (derived).......................................... 29,000
Net carrying amount (derived)................................................... 4,000
Add: Gain on disposal of furniture............................................ 2,000
Cash proceeds from disposal...................................................... $ 6,000
Cash............................................................................................ 6,000
Accumulated Depreciation—Furniture...................................... 29,000
Gain on Disposal.................................................................. 2,000
Furniture................................................................................ 33,000

b. In 2021, Dagenais suffered a significant decline in cash. This decline was

principally caused by the repurchase of common shares and the mismanagement
of accounts receivable and inventory. The increase in accounts receivable is most
likely attributable to difficulty in collecting these receivables and the increase in
inventory has probably occurred because of slowing inventory turnover. Under
the circumstances, management could have postponed the payment of dividends.
This year the negative cash from operations may have led to the disposal of
furniture in an attempt to generate cash to finance day to day operations. When a
company cannot generate positive cash flows from its operating activities and
drains its cash balances, bankruptcy will follow without the support of creditors
like a bank or the support of shareholders who are willing to provide more equity
to the company.

EXERCISE 13.10
a. Company A and Company C both show a source of increase in their cash from
operating activities of $25,000 when compared to net income or loss. Since the
amount of depreciation is assumed to be the same, both companies show an
equal ability in managing non-cash working capital, which is better than
Company B.
b. When a company has cash provided by investing activities, it arises from an

excess of cash proceeds received from the sale of non-current assets such as
long-term investments or property, plant, and equipment over amounts paid to
purchase these assets. This can occur for a number of reasons, including the
timing of these cash flows. For example, if a company sells such assets first but
then replaces them later in a subsequent year, cash provided from investment
activities will be shown. Another reason why this may occur is because the
company is not generating sufficient cash flows from operations and must sell
off non-current assets in order to obtain funds.
c. Company A is the most likely to have sufficient cash flows to pay down debt or
pay out dividends because it is the only company of the three that has provided
positive cash flows from operations.
d. Company A is the most capable of growing the size of its business operations as
its operations have generated the most cash and this made it able to spend
$50,000 on investing activities, to pay out cash for financing activities, and still
increase its cash position by the end of the year.


EXERCISE 13.11
Category of Cash Impact on Cash
Flow Affected Flow (Increase or
Decrease)
Collect accounts receivable more quickly and use Operating and Increase and
the cash received to buy equipment. Investing Decrease
Pay accounts payable more slowly and use the cash Operating and Increase and
saved to pay dividends. Financing Decrease
Issue common shares and use the proceeds to pay Financing and Increase and
down bank loans. Financing Decrease
Sell non-current bond investments and use the Investing and Increase and
proceeds to pay a larger bonus to employees to Operating Decrease
improve retention rates.
LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*EXERCISE 13.12
Part (a)
Add to (+) or
Deduct from
Statement of Change in Current (–) Statement Part (b)
Income Asset / Current of Income Related Cash Receipt or
Account Liability Account Account Payment
1. Sales Decrease in accounts + Cash receipts from
receivable customers
2. Dividend income Increase in dividends – Cash receipts from

receivable dividends
3. Interest income Decrease in interest + Cash receipts from interest

receivable
4. Rent income Decrease in deferred – Cash receipts from

revenue customers
5. Cost of goods Decrease in inventory – Cash payments to

sold suppliers
6. Cost of goods Decrease in accounts + Cash payments to

sold payable suppliers
7. Insurance Decrease in prepaid – Cash payments for other

expense insurance operating expenses
8. Salaries expense Decrease in salaries + Cash payments to

payable employees
9. Interest expense Increase in interest – Cash payments for interest

payable
10. Income tax Decrease in income + Cash payments for income

expense tax payable tax

*EXERCISE 13.13
a. Sales $160,000
Add: Decrease in accounts receivable 2,000
Add: Increase in deferred revenue 3,000
Cash receipts from customers $165,000
b. Cost of goods sold $85,000

Add: Increase in inventory 1,700
Less: Increase in accounts payable (3,200)
Cash payments to suppliers $83,500
c. Salaries expense $45,000

Less: Increase in salaries payable (1,175)
Cash payments to employees $43,825
d. Operating expenses $50,000

Add: Decrease in rent payable 300
Less: Decrease in prepaid expenses (450)
Cash payments for other operating expenses $49,850

*EXERCISE 13.14
JUNO LTD.
Cash receipts from customers.............................................................. $195,000
1
Cash payments
To suppliers....................................................................................... $114,1502
For other operating expenses............................................................ 33,5003
For interest........................................................................................ 1,200
For income tax.................................................................................. 3,4004 152,250
Net cash provided by operating activities................................................... $ 42,750
Note: The current portion of the bank loan payable was not included because this bank
loan was issued for lending purposes rather than trade.
1
$190,000 + $5,000 = $195,000
2
$114,000 + $1,400 – $1,250 = $114,150
3
$50,000 – $11,000 – $5,000 + $500 – $1,000 = $33,500
4
$3,800 – $400 = $3,400

*EXERCISE 13.15
PUFFY LTD.
Cash receipts from customers*............................................... $978,000
Cash payments
To suppliers**.................................................................. $759,000
For other operating expenses........................................... 43,000
For interest....................................................................... 14,000
For income tax................................................................. 26,000 842,000
Proceeds from sale of long-term investments***................... $35,000
Purchase of equipment............................................................ (65,000)
($134,000 + $115,000 – $199,000)......................................... $(50,000)
Repayment of bank loan......................................................... (50,000)
Issue of common shares.......................................................... 25,000

Cash, January 1................................................................................. 22,000
Cash, December 31........................................................................... $ 53,000)
Calculations:
* Cash receipts = sales – increase in accounts receivable + increase in refund liability =
$978,000 – $4,000 + $4,000 = $978,000
** Cash payments to suppliers = cost of goods sold – decrease in inventory – increase in

estimated inventory returns + decrease in accounts payable
$751,000 – $6,000 + $2,000 + $12,000 = $759,000

*** Cash proceeds received from sale of long-term investments:

Cash ................................................................................. 35,000
Long-Term Investments ($100,000 – $70,000)...... 30,000
Gain on Disposal .................................................... 5,000
It is assumed that the carrying value of the long-term investments is the same as its
fair value.

SOLUTIONS TO PROBLEMS
PROBLEM 13.1A
a. c.
b.
Transaction Classification Cash Flow Net Income
1. Paid salaries to employees. O – –
2. Sold land for cash, at a gain. O + +
(for the gain) (for the cash (gain
I received) increases
(for the cash income)
received)
3. Purchased a building by making a down I – NE

payment in cash and signing a mortgage (for the cash (for the cash
payable for the balance. down-payment) down-
NC payment)
(for the
exchange)
4. Made a blended principal and interest O – –
repayment on the mortgage. (for the interest) (for the
F interest)
(for the
principal)
5. Paid interest on the mortgage. O – –
6. Issued common shares for cash. F + NE
7. Purchased shares of another company to I – NE
be held as a long-term non-strategic
investment.
8. Paid dividends to shareholders. F – NE
9. Sold inventory on account, at a price O NE +
greater than cost. The company
uses a perpetual inventory system.
10. Wrote down the cost of the remaining NE NE –
inventory to its net realizable value.

PROBLEM 13.1A (CONTINUED)
d. Because of the accrual basis of accounting, it is not surprising that transactions

can impact cash and net income differently. For example, in transaction #6
above, cash was received from the issue of common shares without net income
being affected in any way. In transaction #9 above, revenue and net income were
affected by the sale of inventory but because it was sold on account, cash was not
affected.

PROBLEM 13.2A
a. WHISTLER LTD.
Year Ended November 30, 2021
Net income....................................................................... $600,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation expense............................................. $ 75,000
Impairment loss on property, plant,
and equipment.................................................. 100,000
Increase in accounts receivable.............................. (190,000)
Decrease in inventory............................................. 50,000
Increase in prepaid expenses.................................. (40,000)
Decrease in accounts payable................................. (180,000)
Decrease in rent payable......................................... (90,000)
Decrease in interest payable................................... (10,000)
Decrease in deferred revenue................................. (17,000)
Increase in income tax payable.............................. 20,000 (282,000)
Net cash provided by operating activities.................................. $318,000
b. If Whistler were a publicly traded company following IFRS, it could choose to

disclose interest expense as part of financing activities rather than in operating
activities. Reporting interest paid as in part (a) in the operating activities section
above is the usual practice for a publicly traded company and the required
practice followed by a private company using ASPE.

PROBLEM 13.3A
a. Cash receipts and payments related to property, plant, and equipment in 2021:
Land purchase $(40,000)

Equipment purchase (10,000)
Proceeds from disposal of equipment 8,000*
* Cost of equipment sold: $240,000 + $75,000 – $300,000 = $15,000
Accumulated depreciation of equipment sold

$96,000 + $60,000 – $144,000 = $12,000
Cash proceeds = Carrying amount (cost $15,000 – accumulated depreciation

$12,000) + gain $5,000 = $8,000
Note to instructor–some students may find journal entries helpful in understanding this
problem.
Equipment............................................................................................................ 75,000
Bank Loan Payable..................................................................................... 65,000
Cash............................................................................................................. 10,000
Land ..................................................................................................................... 40,000

Cash............................................................................................................. 40,000
Cash ............................................................................................................8,000
Accumulated Depreciation—Equipment............................................................. 12,000
Gain on Disposal......................................................................................... 5,000
Equipment................................................................................................... 15,000

b.
Land purchase Investing activities (use)

Equipment purchase Investing activities (use)
Proceeds from equipment disposal Investing activities (source)
Also include the following note to the financial statements:

Note: During the year the company purchased equipment costing $75,000 by paying
$10,000 cash and issuing a bank loan payable for $65,000.
c. A growing company must invest in productive assets so it would normally be

using cash in its investing activities.

PROBLEM 13.4A
a. Cash receipts: Issue of common shares

$550,000 – $400,000 +$100,000 = $250,000
Issuance of preferred shares
$325,000 – $275,000 = $50,000
Cash payments: Repurchase of common shares

10,000 shares at $10 per share = $100,000
Payment of dividends = $15,626
Note to instructor: Students may find summary journal entries helpful in understanding
this problem.
Cash .....................................................................................50,000
Preferred Shares ($325,000 – $275,000)...............................
50,000
To record issue of preferred shares
Common Shares [10,000 x ($400,000 ÷ 40,000)].......................... 100,000

Cash (10,000 x $10)............................................................... 100,000
To record the repurchase of common shares
Cash ...................................................................................250,000
Common Shares ($550,000 – $400,000 + $100,000)............ 250,000
To record the issue of common shares
Dividends Declared......................................................................... 16,250

Dividends Payable ($4,062 – $3,438).................................... 624
Cash........................................................................................ 15,626
To record the payment of dividends
b. All of the above activities would be classified as financing activities on the

statement of cash flows.

c. A growing company would usually be generating cash from its financing

activities. Cash is needed to invest in productive assets, such as buildings and
equipment and most companies are not able to generate sufficient cash from their
operating activities. To finance these purchases, companies normally have to
issue debt or shares.

PROBLEM 13.5A
a. E-PERFORM INC.
Net income........................................................................................ $155,180
Depreciation expense.............................................................. $46,500
Loss on disposal of equipment................................................ 7,500
Unrealized gain on trading investments.................................. (14,000)
Increase in accounts receivable............................................... (32,800)
Increase in inventory............................................................... (29,150)
Increase in estimated inventory returns.................................. (500)
Decrease in prepaid expenses................................................. 7,600
Increase in accounts payable................................................... 15,700
Increase in property taxes payable.......................................... 4,300
Increase in refund liability...................................................... 200 5,350
Net cash provided by operating activities................................................... 160,530
Proceeds from disposal of equipment............................................... $ 1,500
Purchase of equipment (Note X)....................................................... (25,000)
Net cash used by investing activities.......................................................... (23,500)
Sale of common shares..................................................................... $ 40,000
Repurchase of common shares
($200,000 – $175,000 – $40,000)......................................... (15,000)
Repayment of bank loan payable
($130,000 + $20,000 + $60,000 – $86,000 – $24,000)......... (100,000)
($105,450 + $155,180 – $248,000)........................................ (12,630)
Net cash used by financing activities.......................................................... (87,630)
Net increase in cash.................................................................................... 49,400

Cash, January 1........................................................................................... 48,400
Cash, December 31..................................................................................... $ 97,800


Note X to the Statement of Cash Flows: During the year, the company purchased
equipment costing $85,000 by paying $25,000 cash and issuing a $60,000 bank loan
payable.
b. E-Perform’s cash position has increased primarily because of

significant amounts of cash generated from its operating activities. Cash from
operating activities increased the company’s cash account by $160,530. Some of
this cash was used to purchase equipment, repay its bank loans and pay
dividends, but sufficient cash remained at the end of the year to increase its cash
position by $49,400.

PROBLEM 13.6A
a. SYLVESTER LTD.
Net income................................................................................. $57,000
provided(used) by operating activities
Depreciation expense (3)................................................. $ 74,000
Gain on disposal of land.................................................. (7,000)
Gain on disposal of building (1)...................................... (38,000)
Loss on disposal of equipment (2)................................... 4,000
Decrease in accounts receivable...................................... 11,000
Decrease in inventory...................................................... 21,000
Increase in accounts payable............................................ 17,000
Decrease in interest payable............................................. (1,000)
Increase in income tax payable........................................ 1,000 82,000
Net cash provided by operating activities............................................ 139,000
Purchase of building (1)............................................................. $(364,000)
Purchase of equipment (2)......................................................... (65,000)
Proceeds from disposal of land
($110,000 – $100,000 + $7,000 gain)............................. 17,000
Proceeds from disposal of equipment (2).................................. 5,000
Proceeds from disposal of building (1)...................................... 50,000
Net cash used by investing activities................................................... (357,000)
Issue of common shares ($198,000 – $88,000)......................... $110,000
Additions to bank loan............................................................... 210,000
Repayments of bank loan (5)..................................................... (36,000)
Dividends paid (4)...................................................................... (35,000)
Net cash provided by financing activities............................................
249,000

a. (continued)
Net increase in cash............................................................................. 31,000
Bank overdraft, January 1.................................................................... (8,000)

Cash, December 31.............................................................................. $ 23,000
Calculations:
(1) Transactions involving Buildings:
Buildings
Dec. 31, 2020 263,000 Disposal 100,000
Purchases 364,000
Dec. 31, 2021 527,000
Accumulated Depreciation—Buildings
Dec. 31, 2020 100,000
Dec. 31, 2021 67,000
Cost of building sold (derived)................................................... $100,000

Accumulated depreciation.......................................................... 88,000
Net carrying amount (derived)................................................... 12,000
Add: Gain on disposal of buildings (derived)........................... 38,000
Cash proceeds from disposal...................................................... $50,000
Cash............................................................................................ 50,000
Accumulated Depreciation—Buildings..................................... 88,000
Gain on Disposal.................................................................. 38,000
Buildings................................................................................ 100,000

(2) Transactions involving Equipment:
Equipment
Dec. 31, 2020 40,000 Disposal 20,000
Purchases 65,000
Dec. 31, 2021 85,000
Accumulated Depreciation—Equipment
Dec. 31, 2020 10,000
Disposal 11,000 Depreciation 19,000
Dec. 31, 2021 18,000
Cost of equipment sold (derived)............................................... $20,000

Accumulated depreciation.......................................................... 11,000
Net carrying amount................................................................... 9,000
Less: Loss on disposal............................................................... 4,000
Cash proceeds from disposal...................................................... $ 5,000
Cash............................................................................................ 5,000
Loss on Disposal........................................................................ 4,000
Equipment.............................................................................. 20,000
(3) Total depreciation recorded during the year:

For buildings.................................................................... $55,000
For equipment.................................................................. 19,000
Total depreciation expense for the year:......................... $74,000

a. (continued)
(4) Transactions involving Retained Earnings:
Retained Earnings
Dividends declared Dec. 31, 2020 30,000
(derived) 37,000 Net income 57,000
Dec. 31, 2021 50,000
Dividends Payable
Dec. 31, 2020 1,000
Dividends paid 35,000 Dividends declared 37,000
Dec. 31, 2021 3,000
(5) Transactions involving Bank Loan Payable:
Bank loan balance Dec. 31, 2020:

Current portion..................................................................... $ 20,000
Non-current portion.............................................................. 212,000
Total...................................................................................... $232,000

Current portion..................................................................... $ 26,000
Total...................................................................................... $406,000
Net increase during the year ($406,000 – $232,000)................. $174,000

Additions to the bank loans during the year (given).................. 210,000
Repayments made on bank loans during the year...................... $ 36,000

b. On the surface, Sylvester Ltd. looks as if it is managing its noncash working

capital efficiently. It decreased its accounts receivable and inventory while at the
same time increased its accounts payable. A creditor might find this alarming
because suppliers don’t look as if they are being paid on time. As well, a decline
in inventory might not necessarily mean that the company is making sure that
inventory is on hand to secure sales.
c. The purchase of the building was financed partially from the issuance of
common shares and mostly from increasing the bank loan. The amount of the
investment for the building is disproportionate to the amount of the retained
earnings, which in turn was substantially depleted from a large dividend
payment. Net income is modest and is made up of a one-time gain realized on the
disposal of the old building. The net income level will decline in the future as a
result of servicing the additional debt. Sylvester Ltd. could not afford to
purchase the building without external financing.
LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.7A
a. ALTON LTD.
Net income................................................................................. $10,000
Depreciation expense (4)................................................. $ 73,000
Loss on disposal of land................................................... 21,000
Gain on disposal of building (1)...................................... (15,000)
Loss on disposal of equipment (2)................................... 11,000
Increase in accounts receivable........................................ (35,000)
Increase in inventory........................................................ (31,000)
Decrease in accounts payable.......................................... (43,000)
Increase in interest payable.............................................. 5,000
Decrease in income tax payable....................................... (2,000) (16,000)
Net cash used by operating activities................................................... (6,000)
Purchase of building (1)............................................................. $(520,000)
Purchase of equipment (2)......................................................... (72,000)
Proceeds from disposal of land (3)............................................ 29,000
Proceeds from disposal of equipment (2).................................. 21,000
Proceeds from disposal of building (1)...................................... 40,000
Repurchase of common shares ($180,000 – $160,000)............. $ (20,000)
Additions to bank loan............................................................... 512,000
Repayments of bank loan (6)..................................................... (25,000)
Dividends paid (5)...................................................................... (32,000)
Net cash provided by financing activities............................................ 435,000

a. (continued)
Net decrease in cash and cash equivalents........................................... (73,000)

Cash and cash equivalents, January 1.................................................. 78,000
Cash and cash equivalents, December 31............................................ $ 5,000
Calculations:
(1) Transactions involving Buildings:
Buildings
Dec. 31, 2020 524,000 Disposal 121,000
Purchases 520,000
Dec. 31, 2021 923,000
Accumulated Depreciation—Buildings
Dec. 31, 2021 190,000
Dec. 31, 2021 136,000
Cost of building sold (derived)................................................... $121,000

Net carrying amount .................................................................. 25,000
Add: Gain on disposal of buildings........................................... 15,000
Cash proceeds from disposal...................................................... $40,000
Cash............................................................................................ 40,000
Accumulated Depreciation—Buildings..................................... 96,000
Gain on Disposal.................................................................. 15,000
Buildings................................................................................ 121,000

a. (continued)
(2) Transactions involving Equipment:
Equipment
Dec. 31, 2020 70,000 Disposal 42,000
Purchases 72,000
Dec. 31, 2021 100,000
Accumulated Depreciation—Equipment
Dec. 31, 2020 20,000
Disposal 10,000 Depreciation (der.) 31,000
Dec. 31, 2021 41,000
Cost of equipment sold............................................................... $42,000

Net carrying amount................................................................... 32,000
Less: Loss on disposal............................................................... 11,000
Cash proceeds from disposal ..................................................... $ 21,000
Cash............................................................................................ 21,000
Loss on Disposal........................................................................ 11,000
Equipment.............................................................................. 42,000
(3) Transaction involving Land:
Cash (derived)............................................................................ 29,000

Loss on Disposal........................................................................ 21,000
Land ($230,000 - $180,000).................................................. 50,000
(4) Total depreciation recorded during the year:

For buildings.......................................................................... $42,000
For equipment........................................................................ 31,000
Total depreciation expense for the year:............................... $73,000

a. (continued)
(5) Transactions involving Retained Earnings:
Retained Earnings
Dividends declared Dec. 31, 2020 72,000
(derived) 32,000 Net income 10,000
Dec. 31, 2021 50,000
(6) Transactions involving Bank Loan Payable:

Current portion..................................................................... $ 40,000
Total...................................................................................... $460,000

Current portion..................................................................... $ 56,000
Total...................................................................................... $947,000
Net increase during the year ($947,000 – $460,000)................. $487,000

Additions to the bank loans during the year (given).................. 512,000
Repayments made on bank loans during the year...................... $ 25,000
Total Bank Loan

Dec. 31, 2020 460,000
Loan payments 25,000 New loans 512,000
Dec. 31, 2021 947,000

b. Alton Ltd. did not manage its noncash working capital efficiently. It increased
both its accounts receivable and inventory while at the same time decreased its
accounts payable. A creditor might find this an alarming trend. Alton runs the
increased risk of not being able to collect receivables and sell its entire inventory
in the future.
c. The banker would be worried for the reasons mentioned in part (b) but also for
Alton’s poor performance in obtaining cash from operating activities. The
purchase of the building was financed completely with debt and no equity.
Although some cash was obtained from selling land, this sale was done at a large
loss. Cash paid in dividends was more than three times the size of the net income
and additional cash was spent buying back common shares. The amount of the
investment for the building is disproportionate to the amount of the retained
earnings, which in turn was substantially depleted from the large dividend
payment. The net income level will decline in the future as a result of servicing
the additional debt and depreciating the new building. Alton Ltd. could not
afford to purchase the building without external financing.
LO 2,3,4,5 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13.8A
a.
($ in thousands) Reitmans Le Château
$48,713 – $26,122 – $(7,472) –

$12,666 $2,835 – $0
Free cash flow
= $9,925
= $(10,307)
Le Château has negative free cash flow, but Reitmans has positive free cash flow
and therefore is in the better free cash flow position.
b. It is possible that a negative free cash flow is generated by a

company, particularly during the introductory and growth phases of its life cycle.
A negative free cash flow does not necessarily lead to overall cash flows that are
negative. For example, there may be large increases in cash during the year from
the sale of investments, issuance of shares, or borrowing of funds. In addition,
large capital expenditures can turn overall positive cash flow into negative free
cash flow.
c. Reitmans has positive cash flows from operations while le Le Château has
negative cash flows from operations. This is the primary reason that Reitmans is
in a financial position to pay dividends while Le Château is not.


PROBLEM 13.9A
a. Although Second Cup had a modest amount of income for the year, it managed
to generate a larger positive cash flows from operating activities. The overall
increase in cash and cash equivalent came mainly from additional cash from
financing activities.
The increase in Starbucks’ cash and cash equivalents for the year came from the
large amount of cash provided by operating activities that was more than enough
to cover the amount of cash consumed by investing and financing activities. The
company generated 164% more cash from operating activities than net income
[($11,937.8 – $4,518.0) ÷ $4,518.0].
b. Starbucks appears to be in the stronger cash position based on its ability to

generate sufficient cash flow from operations to cover the uses of cash from
investing and financing activities.

*PROBLEM 13.10A
a. (1) TREMBLANT LIMITED

Net income................................................................................. $111,750
Depreciation expense....................................................... $50,000
Amortization expense...................................................... 15,000
Loss on disposal of equipment....................................... 26,000
Increase in accounts receivable......................................... (10,000)
Decrease in prepaid expenses........................................... 3,000
Decrease in accounts payable........................................... (5,000)
Decrease in salaries payable............................................. (500)
Increase in deferred revenue............................................. 3,000
Increase in interest payable............................................... 1,250
Decrease in income tax payable........................................ (5,250) 77,500
Net cash provided by operating activities............................................. $189,250
a. (2) TREMBLANT LIMITED

Cash receipts from customers..................................................... $918,000 (1)
Cash payments
For other operating expenses............................................ $(112,000) (2)
To employees.................................................................... (500,500) (3)
For interest........................................................................ (73,750) (4)
For income tax.................................................................. (42,500) (5) (728,750)
Net cash provided by operating activities............................................. $189,250

*PROBLEM 13.10A (CONTINUED)
Note: Calculations follow below.
(1) Cash receipts from customers

Service revenue $925,000
Add: Increase in deferred revenues ($12,000 – $9,000) 3,000
Less: Increase in accounts receivable ($57,000 – $47,000) (10,000 )
Cash receipts from customers $918,000
(2) Cash payments for other operating expenses

Operating expenses $110,000
Add: Decrease in accounts payable ($41,000 – $36,000) 5,000
Deduct: Decrease in prepaid expenses ($12,000 – $15,000) (3,000 )
Cash payments for other operating expenses $112,000
(3) Cash payments to employees

Salaries expense $500,000
Add: Decrease in salaries payable ($20,000 – $19,500) 500
Cash payments to employees $500,500
(4) Cash payments for interest expense

Interest expense per statement of income $75,000
Deduct: Increase in interest payable ($6,250 – $5,000) (1,250)
Cash payments for interest $73,750
(5) Cash payments for income tax

Income tax expense per statement of income $37,250
Add: Decrease in income tax payable ($4,000 – $9,250) 5,250

b. Both methods are acceptable under both IFRS and ASPE. I would recommend
that the company use the direct method to prepare its operating activities section.
Users usually find this method to be more informative because it shows cash
receipts from customers and other sources and cash payments for major
categories. It is also the method preferred by the standard setters. Nonetheless,
many companies prefer to use the indirect method because it is easier to prepare
and their accounting system may not be adapted to capture the transaction data
required in the direct method.
LO 1,2,6 BT: AN Difficulty: M Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

*PROBLEM 13.11A
a.
WHISTLER LTD.
Year Ended November 30, 2021
Cash receipts from customers........................................... $7,793,000 (1)
Cash payments
To suppliers............................................................ $(5,130,000) (2)
For other operating expenses.................................. (1,955,000) (3)
For interest.............................................................. (110,000) (4)
For income tax........................................................ (280,000) (5) (7,475,000)
Net cash provided by operating activities.................................. $ 318,000

Sales $8,000,000
Deduct: Decrease in deferred revenue (17,000)
Deduct: Increase in accounts receivable (190,000)
Cash receipts from customers $7,793,000
(2) Cash payments to suppliers

Cost of goods sold $5,000,000
Deduct: Decrease in inventory (50,000)
Cost of purchases 4,950,000
Add: Decrease in accounts payable 180,000
Cash payments to suppliers $5,130,000

a. (continued)

Operating expenses $2,000,000
Deduct: Depreciation expense (75,000)
Deduct: Impairment loss (100,000)

Operating expenses, net of
depreciation and impairment 1,825,000
Add: Increase in prepaid expenses $40,000
Decrease in rent payable 90,000 130,000
Cash payments for other operating expenses $1,955,000
(4) Cash payments for interest

Interest expense $100,000
Add: Decrease in interest payable 10,000
Cash payments for interest $110,000
(5) Cash payments for income tax

Deduct: Increase in income tax payable (20,000)
b. If Whistler were a publicly traded company following IFRS, it could choose to

disclose interest expense as part of financing activities rather than in operating
activities. Reporting interest paid as in part (a) in the operating activities section
above is the usual practice for a publicly traded company and the required
practice followed by a private company using ASPE.

*PROBLEM 13.12A
a. E-PERFORM, INC.
Cash receipts from customers (1)............................................... $460,180
Cash payments
To suppliers (2)................................................................. $(199,410)
For other operating expenses (3)....................................... (50,510)
For income tax.................................................................. (45,000)
For interest........................................................................ (4,730) (299,650)

Net cash provided by operating activities............................................. 160,530
Proceeds from disposal of equipment....................................... $ 1,500
Purchase of equipment (Note X)............................................... (25,000)
Sale of common shares.............................................................. $ 40,000
Repurchase of common shares
($200,000 – $175,000 – $40,000)................................... (15,000)
Repayment of bank loan payable
($130,000 + $20,000 + $60,000 – $86,000 – $24,000)(100,000)
($105,450 + $155,180 – $248,000).................................. (12,630)
Net cash used by financing activities.................................................. (87,630)
Net increase in cash............................................................................. 49,400

Cash, January 1.................................................................................... 48,400
Cash, December 31.............................................................................. $ 97,800
Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing
$85,000 by paying $25,000 cash and issuing a $60,000 bank loan payable.
Note: Calculations follow below.

a. (continued)
Calculations

Sales ................................................................................................$492,780
Deduct: Increase in accounts receivable........................................................ (32,800)
Add: Increase in refund liability.................................................................... 200
Cash receipts from customers......................................................................... $460,180
(2) Cash payments to suppliers

Cost of goods sold........................................................................................... $185,460
Add: Increase in inventory............................................................................. 29,150
Increase in estimated inventory returns................................................ 500
Deduct: Increase in accounts payable............................................................ (15,700)
Cash payments to suppliers............................................................................. $199,410

Operating expenses from statement of income............................................... $116,410
Deduct: Depreciation expense.................................................................... (46,500
)
Loss on disposal of equipment...................................................... (7,500
)
Decrease in prepaid expenses........................................................ (7,600
)
Increase in property taxes payable................................................ (4,300
)
Cash payments for other operating expenses.................................................. $ 50,510
b. E-Perform’s cash position has increased primarily because of

significant amounts of cash generated from its operating activities. Cash from
operating activities increased the company’s cash account by $160,530. Some of
this cash was used to purchase equipment, repay its bank loans, and pay
dividends, but sufficient cash remained at the end of the year to increase its cash
position by $49,400.


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Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Eighth Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES

Solutions Manual 13-1 Chapter 13

Solutions Manual 13-2 Chapter 13

AACSB Association to Advance Collegiate Schools of Business

Solutions Manual 13-3 Chapter 13

Solutions Manual 13-4 Chapter 13

Financing activities include those resulting in changes in the size and

5. Examples of noncash transactions include the issue of shares or a mortgage to

Solutions Manual 13-5 Chapter 13

7. (a) and (b)

(2) A comparative statement of financial position is required to obtain the

(3) The statement of income is required to obtain the elements of operating

(4) The statement of comprehensive income is needed to reconcile certain fair-

Solutions Manual 13-6 Chapter 13

Example: Income before depreciation $5,000

Solutions Manual 13-7 Chapter 13

Solutions Manual 13-8 Chapter 13

Solutions Manual 13-9 Chapter 13

Solutions Manual 13-10 Chapter 13

LO 5 BT: C Difficulty: M Time: 2 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

Solutions Manual 13-11 Chapter 13

Solutions Manual 13-12 Chapter 13

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13.1–

Solutions Manual 13-13 Chapter 13

BRIEF EXERCISE 13.2

Solutions Manual 13-14 Chapter 13

BRIEF EXERCISE 13.3

b. Linamar uses the indirect method as indicated by the change in noncash

BRIEF EXERCISE 13.4

Solutions Manual 13-15 Chapter 13

BRIEF EXERCISE 13.5

Solutions Manual 13-16 Chapter 13

BRIEF EXERCISE 13.6

Original cost of equipment sold........................................................................ $20,000

a. Cash provided by disposal of equipment = $13,000

Solutions Manual 13-17 Chapter 13

BRIEF EXERCISE 13.7

*Cost of equipment sold................................................................... $100

Solutions Manual 13-18 Chapter 13

BRIEF EXERCISE 13.8

Beginning balance, retained earnings.................................... $4,169.3

Solutions Manual 13-19 Chapter 13

BRIEF EXERCISE 13.9

Beginning balance, dividends payable......................... $ 10

(Financing activity cash flows = Issuance/repayment of long-term debt,

Solutions Manual 13-20 Chapter 13

BRIEF EXERCISE 13.10

a. Free cash flow = $325,000 – $200,000 – $25,000 = $100,000

LO 5 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 13.11

c. Free cash flow in millions of US dollars:

LO 5 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

Solutions Manual 13-21 Chapter 13

*BRIEF EXERCISE 13.12

*BRIEF EXERCISE 13.13

(in USD millions)

*BRIEF EXERCISE 13.14

+ Increase in prepaid expenses

Solutions Manual 13-22 Chapter 13

*BRIEF EXERCISE 13.15

Income tax expense $50,000