Exam Review (Chapters 17 & 18)

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

1.

2.

3.

4.

Define:
Term Definition

Operating Activities

Investing Activities

Financing Activities

Significant Noncash Activities

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Exam Review (Chapters 17 & 18)
Example (Illustration 12.1): Fill in the cash inflows and outflows from each section:

OPERATING INVESTING FINANCING

Objective 2: Indirect Method of the Statement of Cash Flows

Equation:

Steps Define
Net Income
1. Add
2. Deduct
3. Analyze
3. Analyze
= 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
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 Exam Review (Chapters 17 & 18)
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
Accounts Receivable 44 41
Inventory 72 60
Property, Plant, Equipment 610 550
Less: Accumulated 274 229
Depreciation
Accounts Payable 32 28
Bonds Payable 305 400
Common Stock 51 50
Retained Earnings 98 (27)

Example 2:

Selected transactions for the Hamilton Company are listed below.

1. Collected accounts receivable.

2. Declared and paid dividends on common stock.

3. Sold long-term investments for cash.

4. Issued stock for equipment.

5. Repaid five year note payable.

6. Paid employee wages.

7. Converted bonds payable to common stock.

8. Acquired long-term investment with cash.

9. Sold buildings and equipment for cash.

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 Exam Review (Chapters 17 & 18)
10. Sold merchandise to customers.

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

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 Exam Review (Chapters 17 & 18)
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.

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Exam Review (Chapters 17 & 18)

CHAPTER 18
Objective 1:
Comparison bases
Intracompany Intercompany Industry Average

Objective 2
Tool of analysis

Horizontal Vertical Ratio

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