1Chapter 21
CHAPTER 21
QUESTIONS
1
1Chapter 21
1.The statement of cash flows reconciles the difference between the beginning and ending cash balance for a period. The sum of cash flow from operations, cash flow from investing, and cash flow from financing should equal the change in the cash balance for the period being examined.
2.Accounts Receivable most often increases when a credit sale is recorded. Accounts Receivable most often decreases when a credit customer pays on account.
3.Inventory most often increases when items to be resold are purchased. Inventory most often decreases when items to be resold are in fact sold.
4.Accounts Payable most often increases when goods or services are purchased but not paid for at the time of purchase. Accounts Payable most often decreases when goods or services previously purchased on account are paid for.
5.The equipment account most often increases when equipment is purchased. The equipment account most often decreases when equipment that has been used in the business is subsequently sold. Note: When equipment is used, that use is recorded in the accumulated depreciation account.
6.The accumulated depreciation account most often increases when equipment is used and depreciation expense is recorded. The accumulated depreciation account most often decreases when equipment that has been used in the business is subsequently sold.
7.Long-Term Debt most often increases when new debt is incurred. Long-Term Debt most often decreases when debt is repaid.
8.The capital stock account most often increases when new stock is sold. The capital stock account most often decreases when stock previously issued is repurchased and retired by the issuing company.
9.The retained earnings account most often increases when a company is profitable. The retained earnings account most often decreases when a company pays a dividend. Another common reason for a decrease in retained earnings is when a company sustains a loss.
10.Because the indirect method begins with the net income figure, items included in net income that did not involve the flow of cash must be eliminated. Because depreciation expense (which does not involve cash flows this period) was subtracted to arrive at net income, it must be added back when computing cash flow from operations.
11.Because the indirect method begins with the net income figure, items included in net income that do not relate to operating activities must be eliminated. Since the sale of equipment is an investing activity, any effects of a gain or loss that have been included in net income must be removed. Since a gain is added as part of net income, it must be subtracted when computing cash flows from operations. Since a loss is subtracted as part of net income, it must be added back when computing cash flows from operations.
12.Because the indirect method begins with the net income figure, accrual items included in net income that do not accurately reflect cash flows must be adjusted. Since the computation of net income begins with the sales figure, that number must be adjusted to reflect the fact that more or less cash may have been collected than was reported as sales on the income statement. An ending balance in the accounts receivable account greater than the balance at the beginning of the period indicates that cash collected during the period was less than sales made during the period. Thus, the net income figure (which includes the sales number) must be adjusted down to reflect the cash collected during the period.
13.Because the indirect method begins with the net income figure, accrual items included in net income that do not accurately reflect cash flows must be adjusted. Since the computation of net income includes cost of goods sold (which does not necessarily represent the amount paid for inventory), the number must be adjusted to reflect the fact that more or less cash may have been paid for inventory than was reported as cost of goods sold on the income statement. An ending balance in the inventory account that is less than the balance at the beginning of the period indicates that more inventory was sold during the period than was purchased. Thus, the net income figure (which includes cost of goods sold) must be increased to reflect that less inventory was purchased (thereby resulting in a lower cash outflow) than was sold during the period.
14.The accounts payable account goes down over a period because more is paid on account than is purchased on account. The income statement indirectly reflects the amount of goods and services purchased during a period. If the amount paid is greater than the amount purchased, then net income must be reduced for the difference between the beginning and ending balance in the account.
15.If the indirect method is used to report cash flow from operations, then a company must also disclose the amount of cash paid for taxes for the period as well as the amount paid for interest.
16.A reconciliation schedule includes all items that reconcile net income to cash from operations. A reconciliation schedule is required when the direct method is used to report cash flows from operations.
17.The international cash flow standard treats interest paid, dividends paid, and income taxes paid with a little more flexibility than is the case with U.S. GAAP. Interest paid may be disclosed either as an operating activity or as a financing activity. The same is true for dividends paid. In the case of income taxes paid, it is to be included as an operating activity unless the income taxes can be specifically identified with a financing or investing activity in which case those income taxes are classified accordingly.
18.The eight categories specified in FRS 1 are:
- Operating activities
- Returns on investments and servicing of finance
- Taxation
- Capital expenditure and financial investment
- Acquisitions and disposals
- Equity dividends paid
- Management of liquid resources
- Financing
Chapter 211
PRACTICE EXERCISES
Practice 21–1CASH COLLECTED FROM CUSTOMERS
Beginning accounts receivable...... $ 89,100
+ Sales...... 947,900
= Cash available for collection...... $ 1,037,000
– Ending accounts receivable balance...... 87,000
= Cash collected from customers...... $ 950,000
Practice 21–2AMOUNT OF INVENTORY PURCHASES
Beginning inventory
+ Purchases
= Goods available for sale
– Ending inventory
= Cost of goods sold
$37,300 + Purchases – $39,400 = $404,600
Purchases = $406,700
Practice 21–3CASH PAID FOR INVENTORY
Beginning accounts payable...... $ 61,500
+ Purchases on account (from Practice 21–2)...... 406,700
= Amount owed during the year...... $ 468,200
– Ending accounts payable...... 58,200
= Amount paid for inventory...... $ 410,000
Practice 21–4CASH PAID FOR EXPENSES
Beginning balance in prepaid expenses...... $ 14,100
+ Cash paid for other operating expenses...... ?
– Other operating expenses used...... (140,600)
= Ending balance in prepaid expenses...... $ 12,500
Cash paid for other operating expenses = $139,000
Practice 21–5DEPRECIATION EXPENSE
$0—Cash is not paid for depreciation.
Practice 21–6CASH PAID FOR EQUIPMENT
Equipment, beginning balance...... $ 765,000
+ Cost of equipment purchased...... ?
– Original cost of equipment sold...... (87,000)
= Equipment, ending balance...... $ 750,000
Equipment purchased during the year...... $ 72,000
Practice 21–7PROCEEDS FROM SALE OF EQUIPMENT
Original cost of equipment...... $ 61,000
–Accumulated depreciation...... (17,500)
= Book value of equipment sold...... $ 43,500
Book value of equipment sold...... $ 43,500
+ Gain on sale of equipment...... 8,500
= Proceeds from sale of equipment...... $ 52,000
Practice 21–8LOAN REPAYMENT
Long-term debt, beginning balance...... $ 347,000
+ Additional debt issued during the year...... 214,000
– Debt repaid during the year...... ?
= Long-term debt, ending balance...... $ 525,000
Debt repaid during the year...... $ 36,000
Practice 21–9CASH PAID FOR DIVIDENDS
Retained earnings, beginning balance...... $ 955,500
+ Net income...... 176,000
– Dividends...... ?
= Retained earnings, ending balance...... $ 1,070,500
Dividends paid during the year...... $ 61,000
Practice 21–10STATEMENT OF CASH FLOWS IN THE UNITED KINGDOM
1.U.S. approach
(e)Cash collected from customers...... $10,000
(a)Cash paid to purchase inventory...... (7,800)
(c)Cash paid for interest...... (450)
(h)Cash paid for income taxes...... (1,320)
Net cash flow from operating activities...... $ 430
2.U.K. approach
(e)Cash collected from customers...... $10,000
(a)Cash paid to purchase inventory...... (7,800)
Net cash flow from operating activities...... $ 2,200
Under the U.K. approach, cash paid for interest and cash paid for income taxes are not shown as part of operating activities.
EXERCISES
21–11.
Accounts receivable, beginning balance...... $ ?
+ Sales...... 450,000
– Cash collected from customers...... (415,000)
= Accounts receivable, ending balance...... $ 77,500
Accounts receivable, beginning balance...... $ 42,500
21–12.
Net income...... $ ?
+ Depreciation expense...... 40,000
+ Inventory decrease...... 28,000
– Accounts receivable increase...... (12,000)
– Accounts payable decrease...... (8,000)
= Cash flow from operations...... $ 184,000
Net income...... $ 136,000
21–13.
The following table may be helpful in understanding the adjustments made:
Income Statement / Adjustments / Cash Flowsfrom Operations
Sales / 947,900 / 2,100 / 950,000
Cost of goods sold / –404,600 / –2,100 / –410,000
–3,300
Depreciation expense / –96,000 / 96,000 / 0
Other operating expenses / –140,600 / 1,600 / –139,000
Gain on sale of equipment / 3,000 / –3,000 / 0
Net income / 309,700 / 401,000
Sales—Sales are lower than cash collected from customers because accounts receivable decreased during the period. More cash was collected ($2,100 more) than was reported as sales on the income statement.
Cost of goods sold—Because accounts payable decreased over the period, more was paid for inventory ($3,300 more) than was purchased during the period. Because inventory increased for the period, more inventory was purchased ($2,100 more) than was sold during the year. The net result of these two adjustments is that $5,400 more in inventory was paid for during the period than was sold during the period.
21–13.(Concluded)
Depreciation expense—Since depreciation does not involve a cash flow this
period, it is not included on the statement of cash flows. However, it is included on the income statement as an expense.
Other operating expenses—Because prepaid expenses decreased during the period, more of these prepaid expenses were used during the period ($1,600 more) than were paid for during the period.
The income statement would be as follows:
Sales...... $ 947,900
Cost of goods sold...... (404,600)
Depreciation expense...... (96,000)
Gain on sale of equipment...... 3,000
Other operating expenses...... (140,600)
Net income...... $ 309,700
21–14.
The following table may be helpful in understanding the adjustments made:
Income Statement / Adjustments / Cash Flowsfrom Operations
Revenues / 980,000 / 5,500 / 985,500
Cost of Goods Sold / –400,000 / 2,900 / –409,400
–12,300
Other expenses / –136,000 / 0 / –136,000
Depreciation expense / –107,000 / 107,000 / 0
Loss on sale of equipment / –12,000 / 12,000 / 0
Net income / 325,000 / 440,100
Sales—Sales are lower than cash collected from customers because accounts receivable decreased during the period. More cash was collected ($5,500 more) than was reported as sales on the income statement.
Cost of goods sold—Because accounts payable decreased over the period, more was paid for inventory ($12,300 more) than was purchased during the period. Because inventory decreased for the period, more inventory was sold ($2,900 more) than was purchased during the year. The net result of these two adjustments is that $9,400 more in inventory was paid for during the period than was sold during the period.
Depreciation expense—Since depreciation does not involve a cash flow this period, it is not included on the statement of cash flows. However, it is included on the income statement as an expense and under the indirect method an adjustment would be made.
21–14.(Concluded)
Other operating expenses—Since the balance in Prepaid Operating Expenses and/or Operating Expenses Payable did not change during the period (if the balance had changed, the figures would have been given), it is safe to assume that the amount used and the amount paid during the period are the same.
Loss on sale of equipment—The sale of equipment is an investing activity. All cash flows relating to the purchase and sale of equipment will be disclosed in that section of the statement of cash flows. Because the loss is included on the income statement, using the indirect method means the loss must be added back (since it was originally subtracted).
The statement of cash flows (using the indirect method) would be as follows:
Net income...... $ 325,000
Plus depreciation...... 107,000
Plus loss on sale of equipment...... 12,000
Plus decrease in accounts receivable...... 5,500
Plus decrease in inventory...... 2,900
Less decrease in accounts payable...... (12,300)
Cash flows from operating activities...... $ 440,100
The statement of cash flows (using the direct method) would be as follows:
Cash collected from customers...... $ 985,500
Cash paid for inventory...... (409,400)
Cash paid for other expenses...... (136,000)
Cash flows from operating activities...... $ 440,100
21–15.
Sunnyvale Corporation
Statement of Cash Flows (Indirect method)
For the Year Ended December 31, 2008
Cash flows from operating activities:
Net income...... $ 280,000
Adjustments:
Depreciation expense ($240,000 + $60,000)...... 300,000
Gain on sale of equipment...... (3,000)
Increase in accounts receivable...... (15,000)
Increase in merchandise inventory...... (96,000)
Decrease in prepaid insurance...... 1,500
Decrease in accounts payable...... (331,500)
Decrease in salaries payable...... (30,000)
Net cash provided by operating activities...... $ 106,000
Cash flows from investing activities:
Sale of equipment...... $ 18,000
Purchase of buildings and equipment...... (1,240,500)
Net cash used in investing activities...... (1,222,500)
Cash flows from financing activities:
Issuance of long-term note...... $ 1,500,000
Payment of dividends...... (90,000)
Payment of note payable at bank...... (450,000)
Net cash provided by financing activities...... 960,000
Net decrease in cash and cash equivalents...... $ (156,500)
Cash and cash equivalents at beginning of year...... 675,000
Cash and cash equivalents at end of year...... $ 518,500
21–16.
Germaine Company
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2008
(Dollars in thousands)
Cash flows from operating activities:
Net income...... $ 38
Adjustments:
Depreciation expense...... $ 55
Decrease in accounts receivable...... 20
Decrease in inventory...... 20
Increase in prepaid general expenses...... (9)
Increase in accounts payable...... 25
Increase in interest payable...... 3
Increase in income taxes payable...... 3 117
Net cash provided by operating activities...... $ 155
Cash flows from investing activities:
Sale of plant assets...... $ 180
Purchase of plant assets...... (315) (a)
Net cash used in investing activities...... (135)
Cash flows from financing activities:
Issuance of bonds payable...... $ 8 (b)
Issuance of common stock...... 8 (c)
Payment of cash dividends...... (30)
Net cash provided by financing activities...... (14)
Net increase in cash and cash equivalents...... $ 6
Cash and cash equivalents at beginning of year...... 16
Cash and cash equivalents at end of year...... $ 22
COMPUTATIONS:
(a)Beginning plant assets...... $ 1,000
Less: Plant assets sold...... 290
$ 710
Ending plant assets...... 1,025
Difference (plant assets purchased)...... $ 315
(b)Beginning bonds payable...... $ 97
Ending bonds payable...... 105
Increase (bonds payable issued)...... $ 8
(c)Beginning common stock...... $ 354
Ending common stock...... 362
Increase (common stock issued)...... $ 8
21–16.(Concluded)
The following table also can be used in computing cash from operating activities:
Income Statement / Adjustments / Cash Flowsfrom Operations
Sales / 1,450 / (a) 20 / 1,470
Cost of goods sold / (990) / (b) 20
(c) 25 / (945)
Depreciation expense / (55) / (d) 55 / 0
General expenses / (340) / (e) (9) / (349)
Interest expense / (12) / (f) 3 / (9)
Income tax expense / (15) / (g) 3 / (12)
Net income / 38 / 155
(a)Decrease in accounts receivable
(b)Decrease in inventory
(c)Increase in accounts payable
(d)Amount of reported depreciation expense
(e)Increase in prepaid general expenses
(f)Increase in interest payable
(g)Increase in income taxes payable
21–17.
Germaine Company
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2008
(Dollars in thousands)
Cash flows from operating activities:
Cash receipts from customers...... $ 1,470 (a)
Cash payments for:
Purchases of inventory...... $ (945) (b)
General expenses...... (349) (c)
Interest...... (9) (d)
Income tax...... (12) (e) (1,315)
Net cash provided by operating activities...... $ 155
Cash flows from investing activities:
Sale of plant assets...... $ 180
Purchase of plant assets...... (315)
Net cash used in investing activities...... (135)
Cash flows from financing activities:
Issuance of bonds payable...... $ 8
Issuance of common stock...... 8
Payment of cash dividends...... (30)
Net cash provided by financing activities...... (14)
Net increase in cash and cash equivalents...... $ 6
Cash and cash equivalents at beginning of year...... 16
Cash and cash equivalents at end of year...... $ 22
COMPUTATIONS:
(a) Sales...... $ 1,450
+Beginning accounts receivable...... 245
–Ending accounts receivable...... (225)
=Cash receipts from customers...... $ 1,470
(b)Cost of goods sold...... $ 990
–Beginning inventory...... (125)
+Ending inventory...... 105
=Inventory purchases...... $ 970
+Beginning accounts payable...... 45
–Ending accounts payable...... (70)
=Cash payments for inventory purchases...... $ 945
(c)General expenses...... $ 340
–Beginning prepaid general expenses...... (12)
+Ending prepaid general expenses...... 21
=Cash payments for general expenses...... $ 349
21–17.(Concluded)
(d)Interest expense...... $ 12
+Beginning interest payable...... 12
–Ending interest payable...... (15)
=Cash payments for interest expense...... $ 9
(e)Income tax expense...... $ 15
+Beginning income taxes payable ...... 77
–Ending income taxes payable ...... (80)
=Cash payments for income tax...... $ 12
The following table also can be used in computing cash from operating activities.
Income Statement / Adjustments / Cash Flowsfrom Operations
Sales / 1,450 / (a) 20 / 1,470
Cost of goods sold / 990) / (b) 20
(c) 25 / (945)
Depreciation expense / (55) / (d) 55 / 0
General expenses / (340) / (e) (9) / (349)
Interest expense / (12) / (f) 3 / (9)
Income tax expense / (15) / (g) 3 / (12)
Net income / 38 / 155
(a)Decrease in accounts receivable
(b)Decrease in inventory
(c)Increase in accounts payable
(d)Amount of reported depreciation expense
(e)Increase in prepaid general expenses
(f)Increase in interest payable
(g) Increase in income taxes payable
PROBLEMS
21–18.
1.Cash flows from operating activities:
Cash receipts from customers...... $ 182,000(a)
Cash payments for:
Inventory...... $ 111,400 (b)
Selling and administrative expenses...... 31,700(c)
Interest...... 2,000(d)
Income taxes...... 6,240(e) 151,340
Net cash provided by operating activities...... $ 30,660
COMPUTATIONS:
(a)Cash receipts from customers:
Net sales revenue...... $ 185,000
Less: Increase in accounts receivable...... 3,000
Total cash received from customers...... $ 182,000
(b)Cash payments for inventory:
Cost of goods sold...... $ 118,000
Less: Decrease in inventory...... (3,200)
Less: Increase in accounts payable...... (3,400)
Total cash paid for inventory...... $ 111,400
(c)Cash payments for selling and administrative expenses:
Selling and administrative expenses...... $ 32,100
Less: Decrease in prepaid expenses...... (400)
Total cash paid for selling and administrative expenses...... $ 31,700
(d)Cash payments for interest expense:
Interest expense...... $ 1,500
Add: Decrease in interest payable...... 500
Total cash paid for interest expense...... $ 2,000
(e)Cash payments for income taxes:
Income taxes...... $ 9,740
Less: Increase in income taxes payable...... (3,500)
Total cash paid for income taxes...... $ 6,240
2.According to FASB Statement No. 95, dividends paid have no impact on net cash flow from operations. Dividends affect retained earnings, not net income. The cash paid for dividends is shown as a financing activity, not as an operating activity.