Accounting

Carl S. Warren, James M. Reeve, Philip E. Fess

Chapter 16

Statement of Cash Flows - all with Video Answers

Educators

Chapter Questions

Problem 1

On its income statement for a recent year, Continental Airlines, Inc. reported a net loss of $\$ 68$ million from operations. On its statement of cash flows, it reported $\$ 457$ million of cash flows from operating activities.

Explain this apparent contradiction between the loss and the positive cash flows.

Tiffany Tran

Tiffany Tran

Numerade Educator

Problem 2

State the effect (cash receipt or payment and amount) of each of the following transactions, considered individually, on cash flows:
a. Sold a new issue of $\$ 200,000$ of bonds at 99 .
b. Purchased 4,000 shares of $\$ 35$ par common stock as treasury stock at $\$ 70$ per share.
c. Sold 10,000 shares of $\$ 20$ par common stock for $\$ 50$ per share.
d. Purchased a building by paying $\$ 60,000$ cash and issuing a $\$ 100,000$ mortgage note payable.
e. Retired $\$ 250,000$ of bonds, on which there was $\$ 2,500$ of unamortized discount, for $\$ 260,000$.
f. Purchased land for $\$ 320,000$ cash.
g. Paid dividends of $\$ 2.00$ per share. There were 25,000 shares issued and 4,000 shares of treasury stock.
h. Sold equipment with a book value of $\$ 50,000$ for $\$ 72,000$.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 3

Identify the type of cash flow activity for each of the following events (operating, investing, or financing):
a. Issued common stock.
g. Purchased treasury stock.
b. Redeemed bonds.
h. Sold long-term investments.
c. Issued preferred stock.
i. Sold equipment.
d. Purchased patents.
j. Purchased buildings.
e. Net income.
$\mathrm{k}$. Issued bonds.
f. Paid cash dividends.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 4

Indicate whether each of the following would be added to or deducted from net income in determining net cash flow from operating activities by the indirect method:
a. Decrease in accounts receivable $\quad$ g. Increase in notes receivable due in
b. Increase in notes payable due
g. Increase in notes receivable
in 90 days to vendors
h. Depreciation of fixed assets
c. Decrease in salaries payable
i. Increase in merchandise inventory
d. Decrease in prepaid expenses
j. Amortization of patent
e. Gain on retirement of long-term debt
$\mathrm{k}$. Loss on disposal of fixed assets
f. Decrease in accounts payable

Breanna Ollech

Numerade Educator

Problem 5

The net income reported on the income statement for the current year was $\$ 132,000$. Depreciation recorded on store equipment for the year amounted to $\$ 21,800$. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:
\begin{tabular}{lcr}
& End of Year & Beginning of Year \\
\hline Cash & $\$ 52,300$ & $\$ 48,200$ \\
Accounts receivable (net) & 37,500 & 35,600 \\
Merchandise inventory & 51,200 & 54,220 \\
Prepaid expenses & 6,000 & 4,600 \\
Accounts payable (merchandise creditors) & 49,000 & 45,600 \\
Wages payable & 26,800 & 29,800
\end{tabular}
Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.

Breanna Ollech

Numerade Educator

Problem 6

The net income reported on the income statement for the current year was $\$ 210,000$. Depreciation recorded on equipment and a building amounted to $\$ 62,500$ for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:
\begin{tabular}{lrr}
& End of Year & Beginning of Year \\
\hline Cash & $\$ 56,000$ & $\$ 59,500$ \\
Accounts receivable (net) & 71,000 & 73,400 \\
Inventories & 140,000 & 126,500 \\
Prepaid expenses & 7,800 & 8,400 \\
Accounts payable (merchandise creditors) & 62,600 & 66,400 \\
Salaries payable & 9,000 & 8,250
\end{tabular}
a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.
b. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.

Breanna Ollech

Numerade Educator

Problem 7

The income statement disclosed the following items for 2010:
$\begin{array}{lr}\text { Depreciation expense } & \$ 36,000 \\ \text { Gain on disposal of equipment } & 21,000 \\ \text { Net income } & 317,500\end{array}$
Balances of the current assets and current liability accounts changed between December 31, 2009, and December 31, 2010, as follows:
Accounts receivable
Inventory
Prepaid insurance
Accounts payable
Income taxes payable
Dividends payable
*Decrease
Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.

Breanna Ollech

Numerade Educator

Problem 8

The board of directors declared cash dividends totaling $\$ 152,000$ during the current year. The comparative balance sheet indicates dividends payable of $\$ 42,000$ at the beginning of the year and $\$ 38,000$ at the end of the year. What was the amount of cash payments to stockholders during the year?

Zach Steedman

Numerade Educator

Problem 9

An analysis of the general ledger accounts indicates that office equipment, which cost $\$ 67,000$ and on which accumulated depreciation totaled $\$ 22,500$ on the date of sale, was sold for $\$ 38,600$ during the year. Using this information, indicate the items to be reported on the statement of cash flows.

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 10

An analysis of the general ledger accounts indicates that delivery equipment, which cost $\$ 96,000$ and on which accumulated depreciation totaled $\$ 42,100$ on the date of sale, was sold for $\$ 46,500$ during the year. Using this information, indicate the items to be reported on the statement of cash flows.

Daniel Cisneros

Daniel Cisneros

Numerade Educator

Problem 11

On the basis of the details of the following fixed asset account, indicate the items to be reported on the statement of cash flows:

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 12

On the basis of the following stockholders' equity accounts, indicate the items, exclusive of net income, to be reported on the statement of cash flows. There were no unpaid dividends at either the beginning or the end of the year.
\begin{tabular}{l|r|r|r|r|r}
ACCOUNT Common Stock, $\$ 10$ par & & & \multicolumn{2}{|c}{ ACCOUNT NO. } \\
\hline \multicolumn{2}{l|}{ Date } & \multicolumn{1}{|c|}{ Item } & Debit & Credit & Debit
\end{tabular}
\begin{tabular}{l|r|r|r|r|r}
\multicolumn{1}{l|}{ ACCOUNT Paid-In Capital in Excess of Par-Common Stock } & \multicolumn{3}{c}{ ACCOUNT NO. } \\
\hline \multicolumn{2}{l|}{} & \multicolumn{1}{c|}{ Item } & & \multicolumn{2}{c}{ Balance } \\
\cline { 1 - 2 } \multicolumn{2}{c|}{ Date } & \multicolumn{1}{|c|}{ Debit } & Credit & Debit &
\end{tabular}
ACCOUNT Retained Earnings
ACCOUNT NO.
\begin{tabular}{l|r|l}
\hline \multicolumn{2}{c|}{ Date } & \\
\hline 2010 & & \\
Jan. & 1 & Balance \\
June & 30 & Stock dividend \\
Dec. & 30 & Cash dividend \\
& 31 & Net income
\end{tabular}

Breanna Ollech

Numerade Educator

Problem 13

On the basis of the details of the following fixed asset account, indicate the items to be reported on the statement of cash flows:

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 14

On the basis of the details of the following bonds payable and related discount accounts, indicate the items to be reported in the Financing section of the statement of cash flows, assuming no gain or loss on retiring the bonds:

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 15

Sanhueza, Inc., reported a net cash flow from operating activities of $\$ 162,500$ on its statement of cash flows for the year ended December 31, 2010. The following information was reported in the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method:
$\begin{array}{lr}\text { Decrease in income taxes payable } & \$ 3,500 \\ \text { Decrease in inventories } & 8,700 \\ \text { Depreciation } & 13,400 \\ \text { Gain on sale of investments } & 6,000 \\ \text { Increase in accounts payable } & 2,400 \\ \text { Increase in prepaid expenses } & 1,350 \\ \text { Increase in accounts receivable } & 6,500\end{array}$
Determine the net income reported by Sanhueza, Inc., for the year ended December 31 , $2010 .$

Breanna Ollech

Numerade Educator

Problem 16

Selected data derived from the income statement and balance sheet of Jones Soda Co. for a recent year are as follows:
$\begin{array}{lr}\text { Income statement data (in thousands): } & \\ \text { Net earnings } & \$ 4,574 \\ \text { Depreciation expense } & 256 \\ \text { Stock-based compensation expense (noncash) } & 1,196 \\ \text { Balance sheet data fin thousands): } & \\ \text { Increase in accounts receivable } & \$ 3,214 \\ \text { Increase in inventory } & 1,089 \\ \text { Increase in prepaid expenses } & 566 \\ \text { Increase in accounts payable } & 1,891\end{array}$
a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows using the indirect method for Jones Soda Co. for the year.

Breanna Ollech

Numerade Educator

Problem 17

The comparative balance sheet of Tru-Built Construction Inc. for December 31,2010 and 2009 , is as follows:
The following additional information is taken from the records:
a. Land was sold for $\$ 25$.
b. Equipment was acquired for cash.
c. There were no disposals of equipment during the year.
d. The common stock was issued for cash.
e. There was a $\$ 65$ credit to Retained Earnings for net income.
f. There was a $\$ 20$ debit to Retained Earnings for cash dividends declared.
Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.

Breanna Ollech

Numerade Educator

Problem 18

List the errors you find in the following statement of cash flows. The cash balance at the beginning of the year was $\$ 100,320$. All other amounts are correct, except the cash balance at the end of the year.
Devon Inc.
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $148,080
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000
Gain on sale of investements . . . . . . . . . . . . . . . . . . . . . . . . . 7,200
Changes in current operating assets and liabilities:
Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . 11,400
Increase in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,760)
Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (4,440)
Decrease in accrued expenses payable . . . . . . . . . . . . . . . . . . (1,080) ________
Net cash flow from operating activities . . . . . . . . . . . . . . . . . . . . $188,400
Cash flows from investing activities:
Cash received from sale of investments . . . . . . . . . . . . . . . . . . . $ 102,000
Less: Cash paid for purchase of land . . . . . . . . . . . . . . . . . . . . . $ 108,000
Cash paid for purchase of equipment . . . . . . . . . . . . . . . . . 180,200 288,200 _________ ________
Net cash flow used for investing activities . . . . . . . . . . . . . . . . . . (186,200)
Cash flows from financing activities:
Cash received from sale of common stock . . . . . . . . . . . . . . . . . $128,400
Cash paid for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000 _________
Net cash flow provided by financing activities . . . . . . . . . . . . . . . 182,400 ________
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $184,600
Cash at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,300 ________
Cash at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . $310,900 ________ ________

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 19

The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following:
a. If sales for the current year were $\$ 685,000$ and accounts receivable decreased by $\$ 43,500$ during the year, what was the amount of cash received from customers?
b. If income tax expense for the current year was $\$ 46,000$ and income tax payable decreased by $\$ 5,200$ during the year, what was the amount of cash payments for income tax?

Breanna Ollech

Numerade Educator

Problem 20

The cost of merchandise sold for Kohl's Corporation for a recent year was $\$ 9,891$ million. The balance sheet showed the following current account balances (in millions):
\begin{tabular}{lcc}
& Balance, End of Year & Balance, Beginning of Year \\
\hline Merchandise inventories & $\$ 2,588$ & $\$ 2,238$ \\
Accounts payable & 934 & 830
\end{tabular}
Determine the amount of cash payments for merchandise.

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 21

Selected data taken from the accounting records of Lachgar Inc. for the current year ended December 31 are as follows:
- mayable (operating experandise creditors)
\begin{tabular}{rr}
Balance, December 31 & Balance, January 1 \\
\hline$\$ 5,590$ & $\$ 6,110$ \\
41,730 & 46,020 \\
77,350 & 84,110 \\
3,250 & 3,900
\end{tabular}
During the current year, the cost of merchandise sold was $\$ 448,500$, and the operating expenses other than depreciation were $\$ 78,000$. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows.

Determine the amount reported on the statement of cash flows for (a) cash payments for merchandise and (b) cash payments for operating expenses.

Breanna Ollech

Numerade Educator

Problem 22

The income statement of Kodiak Industries Inc. for the current year ended June 30 is as follows:

Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 23

The income statement for M2 Pizza Pie Company for the current year ended June 30 and balances of selected accounts at the beginning and the end of the year are as follows:

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.

Puneet Prajapati

Puneet Prajapati

Numerade Educator

Problem 24

Morrocan Marble Company has cash flows from operating activities of $\$ 300,000$. Cash flows used for investments in property, plant, and equipment totaled $\$ 65,000$, of which $75 \%$ of this investment was used to replace existing capacity.
Determine the free cash flow for Morrocan Marble Company.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 25

The financial statements for Nike, Inc., are provided in Appendix $E$ at the end of the text.

Determine the free cash flow for the year ended May 31, 2007. Assume that $90 \%$ of additions to property, plant and equipment were used to maintain productive capacity.

Puneet Prajapati

Puneet Prajapati

Numerade Educator