13 CHAPTER (MAN) STATEMENT OF CASH FLOWS
EYE OPENERS
1. It is costly to accumulate the data needed. 2. It focuses on the differences between net income and cash flows from operating activities, and the data needed are generally more readily available and less costly to obtain than is the case for the direct method. 3. In a separate schedule of noncash investing and financing activities accompanying the statement of cash flows. 4. The $40,000 increase must be added to income from operations because the amount of cash paid to merchandise creditors was $40,000 less than the amount of purchases included in the cost of goods sold. 5. The $20,000 decrease in salaries payable should be deducted from income to determine the amount of cash flows from operating activities. The effect of the decrease in the amount of salaries owed was to pay $20,000 more cash during the year than had been recorded as an expense. 6. a. $12,000 gain b. Cash inflow of $72,000 c. The gain of $12,000 would be deducted from net income in determining net cash flow from operating activities; $72,000 would be reported as cash flow from investing activities. 7. Cash flow from financing activitiesissuance of bonds, $6,240,000 8. a. Cash flow from investing activitiesdisposal of fixed assets, $24,000 The $24,000 gain on asset disposal should be deducted from net income in determining cash flow from operating activities under the indirect method. b. No effect 9. The same. The amount reported as the net cash flow from operating activities is not affected by the use of the direct or indirect method. 10. Cash received from customers, cash payments for merchandise, cash payments for operating expenses, cash payments for interest, cash payments for income taxes. 11. Reported in a separate schedule, as follows: Schedule of noncash financing activities: Issuance of stock for acquisitions................... $128 million
91
PRACTICE EXERCISES PE 131A (Man)
a. Financing b. Investing c. Operating d. Financing e. Operating f. Operating
PE 131B (Man)
a. Operating b. Financing c. Investing d. Operating e. Investing f. Operating
PE 132A (Man)
Net income............................................................................................. Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.................................................................................... Amortization of patents................................................................. Gain from sale of land................................................................... Net cash flow from operating activities............................................. $140,000 7,000 2,600 (15,000) $134,600
PE 132B (Man)
Net income............................................................................................. Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.................................................................................... Amortization of patents................................................................. Loss from sale of investments..................................................... Net cash flow from operating activities............................................. $86,000 6,000 2,200 3,200 $97,400
PE 133A (Man)
Net income............................................................................................. Adjustments to reconcile net income to net cash flow from operating activities: Changes in current operating assets and liabilities: Increase in accounts receivable............................................ Increase in inventory.............................................................. Increase in accounts payable................................................ Net cash flow from operating activities............................................. $320,000
(6,000) (8,500) 11,500 $317,000
Note: The change in dividends payable impacts the cash paid for dividends, which is disclosed under financing activities.
PE 133B (Man)
Net income............................................................................................. Adjustments to reconcile net income to net cash flow from operating activities: Changes in current operating assets and liabilities: Decrease in accounts receivable.......................................... Increase in inventory.............................................................. Increase in accounts payable................................................ Net cash flow from operating activities............................................. $115,000
3,000 (1,400) 1,100 $117,700
Note: The change in dividends payable impacts the cash paid for dividends, which is disclosed under financing activities.
PE 134A (Man)
Cash flows from operating activities: Net income................................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation............................................................. Loss on disposal of equipment............................. Changes in current operating assets and liabilities: Increase in accounts receivable...................... Increase in accounts payable.......................... Net cash flow from operating activities.................... $175,000 30,000 12,200 (10,800) 5,600 $212,000
PE 134B (Man)
Cash flows from operating activities: Net income................................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation............................................................. Gain on disposal of equipment............................. Changes in current operating assets and liabilities: Decrease in accounts receivable...................... Decrease in accounts payable.......................... Net cash flow from operating activities.................... $225,000 25,000 (20,500) 14,000 (3,600) $239,900
PE 135A (Man)
The gain on sale of land is deducted from net income as shown below. Gain on sale of land........................................................................ $ (50,000) The purchase and sale of land is reported as part of cash flows from investing activities as shown below. Cash received for sale of land................................................... 410,000 Cash paid for purchase of land................................................. (600,000)
PE 135B (Man)
The loss on sale of land is added to net income as shown below. Loss on sale of land........................................................................ $ 35,000
The purchase and sale of land is reported as part of cash flows from investing activities as shown below. Cash received for sale of land................................................... 110,000 Cash paid for purchase of land................................................. (340,000)
PE 136A (Man)
Sales....................................................................................................... Add decrease in accounts receivable................................................ Cash received from customers........................................................... $ 46,200 3,400 $ 49,600
PE 136B (Man)
Sales....................................................................................................... Deduct increase in accounts receivable............................................ Cash received from customers........................................................... $521,000 56,000 $465,000
PE 137A (Man)
Cost of merchandise sold.................................................................... Add increase in inventories................................................................. Deduct increase in accounts payable................................................ Cash paid for merchandise.................................................................. $130,000 11,400 (6,200) $135,200
PE 137B (Man)
Cost of merchandise sold.................................................................... Deduct decrease in inventories........................................................... Add decrease in accounts payable..................................................... Cash paid for merchandise.................................................................. $420,000 (26,000) 22,500 $416,500
EXERCISES Ex. 131 (Man)
There were net additions, such as depreciation and amortization of intangible assets of $389 million, to the net loss reported on the income statement to convert the net loss from the accrual basis to the cash basis. For example, depreciation is an expense in determining net income, but it does not result in a cash outflow. Thus, depreciation is added back to the net loss in order to determine cash flow from operations. The cash from operating activities detail is provided as follows for class discus sion: CONTINENTAL AIRLINES, INC. Cash Flows from Operating Activities (Selected from Statement of Cash Flows) (in millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).................................................................................... Adjustments to reconcile net income (loss) to net cash flow provided by operating activities: Depreciation and amortization.............................................................. Special charges...................................................................................... Gain on disposition of investments..................................................... Undistributed equity in the income of other companies................... Other, net................................................................................................. Changes in certain assets and liabilities: Decrease (increase) in accounts receivable................................... Decrease (increase) in spare parts and supplies........................... Decrease (increase) in prepaid expenses....................................... Increase (decrease) in accounts payable........................................ Increase (decrease) in air traffic liability......................................... Increase (decrease) in other liabilities............................................. Net cash provided by (used in) operating activities................................ $ (68) 389 67 (204) (62) (18) (56) (7) (59) 80 318 77 $457
Ex. 132 (Man)
a. b. c. d. Cash receipt, $198,000 Cash payment, $280,000 Cash receipt, $500,000 Cash payment, $60,000 e. f. g. h. Cash payment, $260,000 Cash payment, $320,000 Cash payment, $42,000 Cash receipt, $72,000
Ex. 133 (Man)
a. b. c. d. e. f. financing financing financing investing operating financing g. h. i. j. k. financing investing investing investing financing
Ex. 134 (Man)
a. b. c. d. e. f. added added deducted added deducted deducted g. h. i. j. k. deducted added deducted added added
Ex. 135 (Man)
Net income......................................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.................................................................. Changes in current operating assets and liabilities: Increase in accounts receivable............................. Decrease in merchandise inventory...................... Increase in prepaid expenses................................. Increase in accounts payable................................. Decrease in wages payable..................................... Net cash flow from operating activities......................... $132,000 21,800 (1,900) 3,020 (1,400) 3,400 (3,000) $153,920
Ex. 136 (Man)
a. Cash flows from operating activities: Net income....................................................................... $210,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................................. 62,500 Changes in current operating assets and liabilities: Decrease in accounts receivable.......................... 2,400 Increase in inventories........................................... (13,500) Decrease in prepaid expenses.............................. 600 Decrease in accounts payable.............................. (3,800) Increase in salaries payable.................................. 750 Net cash flow from operating activities........................
$258,950
b. Yes. The amount of cash flows from operating activities reported on the statement of cash flows is not affected by the method of reporting such flows.
Ex. 137 (Man)
Cash flows from operating activities: Net income................................................................... $317,500 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation........................................................... 36,000 Gain on disposal of equipment............................ (21,000) Changes in current operating assets and liabilities: Increase in accounts receivable...................... (5,600) Decrease in inventory....................................... 3,200 Decrease in prepaid insurance........................ 1,200 Decrease in accounts payable......................... (3,800) Increase in income taxes payable................... 1,200 Net cash flow from operating activities....................
$328,700
Note: The change in dividends payable would be used to adjust the dividends declared in obtaining the cash paid for dividends in the Financing Activities section of the statement of cash flows.
Ex. 138 (Man)
Dividends declared............................................................. Add decrease in dividends payable.................................. Dividends paid to stockholders during the year............. $152,000 4,000 $156,000
The company probably had four quarterly paymentsthe first one being $42,000 declared in the preceding year and three payments of $38,000 eachof di vidends declared and paid during the current year. Thus, $156,000 [$42,000 + (3 $38,000)] is the amount of cash payments to stockholders. The $38,000 of dividends payable at the end of the year will be paid in the next year.
Ex. 139 (Man)
Cash flows from investing activities: Cash received from sale of equipment....................... $38,600
[The loss on the sale, $5,900 ($38,600 proceeds from sale less $44,500 book value), would be added to net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.]
Ex. 1310 (Man)
Cash flows from investing activities: Cash received from sale of equipment....................... $46,500
[The loss on the sale, $7,400 ($46,500 proceeds from sale less $53,900 book value), would be added to net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.]
Ex. 1311 (Man)
Cash flows from investing activities: Cash received from sale of land.................................. Less: Cash paid for purchase of land......................... $210,000 380,000
(The gain on the sale of land, $30,000, would be deducted from net income in determining the cash flows from operating activities if the indirect method of reporting cash flows from operations is used.)
Ex. 1312 (Man)
Cash flows from financing activities: Cash received from sale of common stock................ Less: Cash paid for dividends..................................... $780,000 115,800
Note: The stock dividend is not disclosed on the statement of cash flows.
Ex. 1313 (Man)
Cash flows from investing activities: Cash paid for purchase of land.................................... $410,000
A separate schedule of noncash investing and financing activities would report the purchase of $540,000 land with a long-term mortgage note, as follows: Purchase of land by issuing long-term mortgage note..... $540,000
Ex. 1314 (Man)
Cash flows from financing activities: Cash received from issuing bonds payable............... Less: Cash paid to redeem bonds payable................ $280,000 92,000
Note: The discount amortization of $1,750 would be shown as an adjusting item (increase) in the Cash Flows from Operating Activities section under the indirect method.
Ex. 1315 (Man)
Net cash flow from operating activities................. Add: Increase in accounts receivable.................. Increase in prepaid expenses...................... Decrease in income taxes payable.............. Gain on sale of investments........................ $162,500 $ 6,500 1,350 3,500 6,000
17,350 $179,850 24,500 $155,350
Deduct: Depreciation.............................................. $13,400 Decrease in inventories........................... 8,700 Increase in accounts payable................. 2,400 Net income, per income statement........................
Note to Instructors: The net income must be determined by working backward through the cash flows from the Operating Activities section of the statement of cash flows. Hence, those items that were added (deducted) to determine net cash flow from operating activities must be deducted (added) to determine net income.
Ex. 1316 (Man)
a. JONES SODA CO. Cash Flows from Operating Activities (in thousands) Cash flows from operating activities: Net income.................................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.............................................................. Stock-based compensation expense (noncash). . Changes in current operating assets and liabilities: Increase in accounts receivable......................... Increase in inventory........................................... Increase in prepaid expenses............................. Increase in accounts payable............................. Net cash flow from operating activities..................... $ 4,574 256 1,196 (3,214) (1,089) (566) 1,891 $3,048
b. Jones Soda is a very profitable company, but is using cash in operating activities (net cash flow from operating activities is lower than net income). The reason is the large increases in accounts receivable and inventory. The current assets and liabilities are all increasing because Jones Soda is expanding rapidly. Thus, the slightly lower cash flows from operating activities should not be too much of a concern to management.
Ex. 1317 (Man)
TRU-BUILT CONSTRUCTION INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income................................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation............................................................. Gain on sale of land................................................ Changes in current operating assets and liabilities: Increase in accounts receivable....................... Increase in inventories....................................... Increase in accounts payable............................ Net cash flow from operating activities.................... Cash flows from investing activities: Cash received from sale of land................................ Less cash paid for purchase of equipment............. Net cash flow provided by investing activities....... Cash flows from financing activities: Cash received from sale of common stock............. Less cash paid for dividends.................................... Net cash flow provided by financing activities....... Increase in cash................................................................ Cash at the beginning of the year.................................. Cash at the end of the year............................................. *$20 $6 = $14 $ 65 6 (15) (16) (13) 3 $30 $ 25 10 15 $ 35 14 * 21 $66 32 $98
Ex. 1318 (Man)
1. The increase in accounts receivable should be deducted from net income in the Cash Flows from Operating Activities section. 2. The gain on sale of investments should be deducted from net income in the Cash Flows from Operating Activities section. 3. The increase in accounts payable should be added to net income in the Cash Flows from Operating Activities section. 4. Cash paid for dividends should be deducted from cash received from the sale of common stock in the Cash Flows from Financing Activities section.
Ex. 1318 (Man) Concluded
5. The correct amount of cash at the beginning of the year, $100,320, should be added to the increase in cash. 6. The final amount should be the amount of cash at the end of the year, $148,600. A correct statement of cash flows would be as follows: DEVON INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income........................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................... Gain on sale of investments........................ Changes in current operating assets and liabilities: Increase in accounts receivable............ Increase in inventories............................ Increase in accounts payable................. Decrease in accrued expenses payable Net cash flow from operating activities........... Cash flows from investing activities: Cash received from sale of investments.......... Less: Cash paid for purchase of land.............. $108,000 Cash paid for purchase of equipment... 180,200 Net cash flow used for investing activities............................................................ Cash flows from financing activities: Cash received from sale of common stock.................................................................. Less: Cash paid for dividends.......................... Net cash flow provided by financing activities............................................................ Increase in cash........................................................ Cash at the beginning of the year.......................... Cash at the end of the year..................................... $148,080 42,000 (7,200) (11,400) (14,760) 4,440 (1,080) $160,080 $102,000 288,200 (186,200)
$128,400 54,000 74,400 $ 48,280 100,320 $148,600
Ex. 1319 (Man)
a. Sales.............................................................................. Plus decrease in accounts receivable balance........ Cash received from customers.................................. Income tax expense..................................................... Plus decrease in income taxes payable.................... Cash payments for income taxes............................... $685,000 43,500 $728,500 $ 46,000 5,200 $ 51,200
b.
Ex. 1320 (Man)
Cost of merchandise sold.................................................. Add increase in merchandise inventories........................ Deduct increase in accounts payable............................... Cash paid for merchandise................................................ *In millions $ 9,891* 350 (104) $10,137
Ex. 1321 (Man)
a. Cost of merchandise sold........................................... Add decrease in accounts payable............................ Deduct decrease in inventories.................................. Cash payments for merchandise............................... b. Operating expenses other than depreciation........... Add decrease in accrued expenses payable............ Deduct decrease in prepaid expenses...................... Cash payments for operating expenses................... $448,500 4,290 $452,790 6,760 $446,030 $ 78,000 520 $ 78,520 650 $ 77,870
Ex. 1322 (Man)
Cash flows from operating activities: Cash received from customers...................... Deduct: Cash payments for merchandise... $215,7602 Cash payments for operating expenses..................................... 70,3203 Cash payments for income taxes. . 17,3604 Net cash flow from operating activities......... $373,2001
303,440 $ 69,760
Ex. 1322 (Man) Concluded
Computations: 1. Sales..................................................................................... Add decrease in accounts receivable............................... Cash received from customers.......................................... 2. Cost of merchandise sold.................................................. Add: Increase in inventories............................................ Decrease in accounts payable................................ Cash payments for merchandise...................................... 3. Operating expenses other than depreciation.................. Deduct: Decrease in prepaid expenses.......................... Increase in accrued expenses payable............ Cash payments for operating expenses........................... 4. Income tax expense............................................................ Add decrease in income taxes payable............................ Cash payments for income taxes...................................... $ 2,800 5,760 $364,800 8,400 $373,200 $207,200 8,560 $215,760 $ 73,920 $ 2,720 880 3,600 $ 70,320 $ 15,440 1,920 $ 17,360
Ex. 1323 (Man)
Cash flows from operating activities: Cash received from customers...................... Deduct: Cash payments for merchandise... Cash payments for operating expenses..................................... Cash payments for income taxes. . Net cash flow from operating activities......... $200,2901 $73,290
2
52,5103 18,000
143,800 $ 56,490 $202,400 2,110 $200,290 $ 70,000 5,490 $ 75,490 2,200 $ 73,290 $ 52,400 770 $ 53,170 660 $ 52,510
Computations: 1. Sales........................................................................................................... Deduct increase in accounts receivable................................................ Cash received from customers............................................................... 2. Cost of merchandise sold........................................................................ Add increase in inventories..................................................................... Deduct increase in accounts payable.................................................... Cash payments for merchandise............................................................ 3. Operating expenses other than depreciation........................................ Add decrease in accrued expenses payable......................................... Deduct decrease in prepaid expenses................................................... Cash payments for operating expenses................................................
Ex. 1324 (Man)
Cash flows from operating activities................................................ Less cash paid for maintaining property, plant, and equipment.. Free cash flow.....................................................................................
$300,000 48,750* $251,250
*Property, plant, and equipment to maintain productive capacity: $65,000 75% = $48,750
Ex. 1325 (Man)
Fiscal year ended May 31, 2007 (all numbers in thousands) Cash flows from operating activities........................... Less capital expenditure to maintain existing capacity: Purchases of property and equipment.................. Percent to maintain productive capacity............... Free cash flow................................................................ $1,878.70 $313.5 90%
(282.15) $1,596.55
PROBLEMS Prob. 131A (Man)
MAVENIR TECHNOLOGIES INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income..................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.............................................. Gain on sale of investments................... Changes in current operating assets and liabilities: Increase in accounts receivable....... Increase in inventories....................... Increase in accounts payable........... Decrease in accrued expenses payable.............................................. Net cash flow from operating activities...... Cash flows from investing activities: Cash received from sale of investments.... Less: Cash paid for purchase of land........ Cash paid for purchase of equipment...................................... Net cash flow used for investing activities....................................................... Cash flows from financing activities: Cash received from sale of common stock............................................. Less cash paid for dividends....................... Net cash flow provided by financing activities....................................................... Increase in cash.................................................. Cash at the beginning of the year..................... Cash at the end of the year................................ *$48,000 + $9,600 $12,000 = $45,600 $ 75,520 9,200 (20,000) (9,440) (12,320) 11,760 (5,200) $ 49,520 $140,000 $164,000 76,000 240,000 (100,000)
$116,000 45,600* 70,400 $ 19,920 292,960 $ 312,880
Prob. 131A (Man)
(Optional)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Concluded
B C D E MAVENIR TECHNOLOGIES INC. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended December 31, 2010 Balance, Transactions Balance, Dec. 31, 2009 Debit Credit Dec. 31, 2010 Cash 292,960 (m) 19,920 312,880 Accounts receivable 104,480 (l) 9,440 113,920 Inventories 308,560 (k) 12,320 320,880 Investments 120,000 (j) 120,000 0 Land 0 (i) 164,000 164,000 Equipment 276,560 (h) 76,000 352,560 Accum. depr.equipment (74,000) (g) 9,200 (83,200) Accounts payable (202,480) (f) 11,760 (214,240) Accrued expenses payable (26,320) (e) 5,200 (21,120) Dividends payable (9,600) (d) 2,400 (12,000) Common stock (48,000) (c) 16,000 (64,000) Paid-in capital in excess of parcommon stock (140,000) (c) 100,000 (240,000) Retained earnings (602,160) (b) 48,000 (a) 75,520 (629,680) 0 334,880 334,880 0 Totals Operating activities: Net income (a) 75,520 Depreciation (g) 9,200 Loss on sale of investments (j) 20,000 Increase in accounts receivable (l) 9,440 Increase in inventories (k) 12,320 Increase in accounts payable (f) 11,760 Increase in accrued expenses payable (e) 5,200 Investing activities: Purchase of equipment (j) 140,000 (b) (c) 116,000 (d) 2,400 (m) 354,880 19,920 354,880 48,000 (h) (i) 76,000 164,000
A
30 Purchase of land 31 Sale of investments 32 Financing activities: 33 Declaration of cash dividends 34 Sale of common stock 35 Increase in dividends payable 36 Net increase in cash 37 Totals
Prob. 132A (Man)
AMELIA ENTERPRISES, INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income........................................................ Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................ Changes in current operating assets and liabilities: Decrease in accounts receivable........ Increase in merchandise inventory..... Increase in prepaid expenses.............. Increase in accounts payable.............. Net cash flow from operating activities......... Cash flows from investing activities: Cash paid for equipment................................. Net cash flow used for investing activities......................................................... Cash flows from financing activities: Cash received from sale of common stock. . Less: Cash paid for dividends....................... $ 76,800 Cash paid to retire mortgage note payable..................................... 168,000 Net cash flow used in financing activities......................................................... Decrease in cash................................................... Cash at the beginning of the year....................... Cash at the end of the year.................................. $126,000 41,700 8,700 (11,200) (1,900) 6,300 $ 169,600 $ 81,400 (81,400) $140,000 244,800 (104,800) $ (16,600) 89,900 $ 73,300
Prob. 132A (Man)
(Optional)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29
Concluded
B C D E AMELIA ENTERPRISES, INC. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended December 31, 2010 Balance, Transactions Balance, Dec. 31, 2009 Debit Credit Dec. 31, 2010 Cash 89,900 (l) 16,600 73,300 Accounts receivable 121,000 (k) 8,700 112,300 Merchandise inventory 149,600 (j) 11,200 160,800 Prepaid expenses 4,800 (i) 1,900 6,700 Equipment 268,500 (h) 81,400 (g) 22,400 327,500 Accum. depr.equipment (66,100) (g) 22,400 (f) 41,700 (85,400) Accounts payable (118,800) (e) 6,300 (125,100) Mortgage note payable (168,000) (d) 168,000 0 Common stock (12,000) (c) 12,000 (24,000) Paid-in capital in excess of parcommon stock (160,000) (c) 128,000 (288,000) Retained earnings (108,900) (b) 76,800 (a) 126,000 (158,100) 0 361,700 361,700 0 Totals Operating activities: Net income (a) 126,000 Depreciation (f) 41,700 Decrease in accts. receivable (k) 8,700 Increase in merchandise inventory (j) 11,200 Increase in prepaid expenses (i) 1,900 Increase in accounts payable (e) 6,300 Investing activities: Purchase of equipment (h) (b) (c) 140,000 (d) 168,000 (l) 16,600 339,300 339,300 81,400 76,800
A
27 Financing activities: Payment of cash dividends Sale of common stock Payment of mortgage note 30 payable 31 Net decrease in cash 32 Totals
Prob. 133A (Man)
PUTNAM CYCLE CO. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net loss........................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.............................................. Loss on sale of land................................ Changes in current operating assets and liabilities: Increase in accounts receivable...... Increase in inventories..................... Decrease in prepaid expenses........ Decrease in accounts payable......... Net cash flow from operating activities...... Cash flows from investing activities: Cash received from land sold...................... Less: Cash paid for acquisition of building...................................... Cash paid for purchase of equipment.................................. Net cash flow used for investing activities....................................................... Cash flows from financing activities: Cash received from issuance of bonds payable............................................. Cash received from issuance of common stock............................................. Less cash paid for dividends....................... Net cash flow provided by financing activities....................................................... Decrease in cash................................................. Cash at the beginning of the year..................... Cash at the end of the year................................ $ (17,400) 30,900 7,000 (37,200) (58,600) 3,200 (19,900) $ (92,000) $ 84,000 $312,000 58,000 370,000 (286,000)
$150,000 220,000 $ 370,000 18,000 352,000 $ (26,000) 536,000 $ 510,000
Prob. 133A (Man)
(Optional)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
Concluded
B C D E PUTNAM CYCLE CO. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended December 31, 2010 Balance, Transactions Balance, Dec. 31, 2009 Debit Credit Dec. 31, 2010 Cash 536,000 (o) 26,000 510,000 Accounts receivable 423,300 (g) 37,200 460,500 Inventories 646,100 (h) 58,600 704,700 Prepaid expenses 19,500 (f) 3,200 16,300 Land 266,500 (l) 91,000 175,500 Buildings 500,500 (k) 312,000 812,500 Accum. depr.buildings (212,400) (e) 14,600 (227,000) Equipment 252,600 (i) 58,000 (j) 26,000 284,600 Accum. depr.equipment (88,200) (j) 26,000 (d) 16,300 (78,500) Accounts payable (532,400) (c) 19,900 (512,500) Bonds payable 0 (m) 150,000 (150,000) Common stock (65,000) (n) 10,000 (75,000) Paid-in capital in excess of parcommon stock (310,000) (n) 210,000 (520,000) Retained earnings (1,436,500) (a) 17,400 (1,401,100) (b) 18,000 Totals 0 547,100 547,100 0 Operating activities: Net loss (a) 17,400 Depreciationequipment (d) 16,300 Depreciationbuildings (e) 14,600 Loss on sale of land (l) 7,000 Increase in accounts receivable (g) 37,200 Increase in inventories (h) 58,600 Decrease in prepaid expenses (f) 3,200 Decrease in accounts payable (c) 19,900 Investing activities: Purchase of equipment (i) 58,000 Acquisition of building (k) 312,000 Sale of land (l) 84,000 Financing activities: Payment of cash dividends (b) 18,000 Issuance of bonds payable (m) 150,000 Issuance of common stock (n) 220,000 Net decrease in cash (o) 26,000 521,100 521,100 Totals
A
Prob. 134A (Man)
RUCKER PHOTOGRAPHY PRODUCTS INC. Statement of Cash Flows For the Year Ended December 31, 2011 Cash flows from operating activities: Cash received from customers.................... $2,980,3001 Deduct: Cash payments for merchandise............................. $1,228,4002 Cash payments for operating expenses................................... 1,553,7003 Cash payments for income taxes 51,400 2,833,500 Net cash flow from operating activities...... 146,800 $ Cash flows from investing activities: Cash received from sale of investments.... Less: Cash paid for purchase of land........ $ 260,000 Cash paid for purchase of equipment...................................... 100,000 Net cash flow used for investing activities Cash flows from financing activities: Cash received from sale of common stock Less cash paid for dividends....................... Net cash flow provided by financing activities.................................................... Decrease in cash................................................. Cash at the beginning of the year..................... Cash at the end of the year................................ $ 88,000 360,000 (272,000) $ 116,000 8,800* 107,200 $ (18,000) 339,700 $ 321,700
Reconciliation of Net Income with Cash Flows from Operating Activities: Net income......................................................................... $ 108,600 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................................. 22,000 Loss on sale of investments...................................... 32,000 Changes in current operating assets and liabilities: Increase in accounts receivable................................ (9,700) Increase in inventories............................................... (14,100) Increase in accounts payable.................................... 11,700 Decrease in accrued expenses payable................... (3,700) Net cash flow from operating activities......................... $ 146,800 *Dividends paid: $10,000 + $3,200 $4,400 = $8,800
Prob. 134A (Man)
Concluded
$2,990,000 9,700 $2,980,300 $1,226,000 14,100 $1,240,100 11,700 $1,228,400 $1,550,000 3,700 $1,553,700
Computations: 1. Sales................................................................................... Deduct increase in accounts receivable........................ Cash received from customers....................................... 2. Cost of merchandise sold............................................... Add increase in inventories............................................ Deduct increase in accounts payable............................ Cash payments for merchandise.................................... 3. Operating expenses other than depreciation............... Add decrease in accrued expenses payable................ Cash payments for operating expenses........................
Prob. 135A (Man)
MAVENIR TECHNOLOGIES INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Cash received from customers..................... $1,941,2591 Deduct: Cash payments for merchandise... $1,200,9902 Cash payments for operating expenses..................................... 640,4023 Cash payments for income taxes. . 50,347 1,891,739 Net cash flow from operating activities....... $ 49,520 Cash flows from investing activities: Cash received from sale of investments...... Less: Cash paid for land................................ $ 164,000 Cash paid for equipment..................... 76,000 Net cash flow used for investing activities. Cash flows from financing activities: Cash received from sale of common stock Less cash paid for dividends........................ Net cash flow provided by financing activities........................................................ Increase in cash................................................... Cash at the beginning of the year...................... Cash at the end of the year................................. $ 140,000 240,000 (100,000) $ 116,000 45,6004 70,400 $ 19,920 292,960 $ 312,880
Reconciliation of Net Income with Cash Flows from Operating Activities: Net income........................................................................... $ 75,520 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................................... 9,200 Gain on sale of investments......................................... (20,000) Changes in current operating assets and liabilities: Increase in accounts receivable.................................. (9,440) Increase in inventories.................................................. (12,320) Increase in accounts payable....................................... 11,760 Decrease in accrued expenses payable...................... (5,200) Net cash flow from operating activities............................ $ 49,520
Prob. 135A (Man)
Concluded
Computations: 1. Sales................................................................................... $ 1,950,699 Deduct increase in accounts receivable........................ 9,440 Cash received from customers....................................... $ 1,941,259 2. Cost of merchandise sold............................................... $ 1,200,430 Add increase in inventories............................................ 12,320 $ 1,212,750 Deduct increase in accounts payable............................ 11,760 Cash payments for merchandise.................................... $ 1,200,990 3. Operating expenses other than depreciation................................................................. $ Add decrease in accrued expenses payable................ Cash payments for operating expenses........................ $ 4. Cash dividends declared................................................. $ Deduct increase in dividends payable........................... Cash paid for dividends................................................... $ 635,202 5,200 640,402 48,000 2,400 45,600
Prob. 131B (Man)
HOUSE CONSTRUCTION CO. Statement of Cash Flows For the Year Ended June 30, 2010 Cash flows from operating activities: Net income........................................................ Adjustments to reconcile net income to net cash flow from operating activities: Depreciation................................................ Loss on sale of investments..................... Changes in current operating assets and liabilities: Increase in accounts receivable.......... Increase in inventories......................... Increase in accounts payable.............. Increase in accrued expenses payable Net cash flow from operating activities......... Cash flows from investing activities: Cash received from sale of investments....... Less: Cash paid for purchase of land........... $174,000 Cash paid for purchase of equipment......................................... 47,400 Net cash flow used for investing activities......................................................... Cash flows from financing activities: Cash received from sale of common stock. . Less cash paid for dividends......................... Net cash flow provided by financing activities......................................................... Increase in cash..................................................... Cash at the beginning of the year....................... Cash at the end of the year.................................. *$60,000 + $12,000 $15,000 = $57,000 $ 79,200 8,700 6,000 (11,200) (5,100) 6,800 2,200 $ 86,600 $ 54,000 221,400 (167,400) $151,200 57,000* 94,200 $ 13,400 28,200 $ 41,600
Prob. 131B (Man)
(Optional)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29
Concluded
B C D E HOUSE CONSTRUCTION CO. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended June 30, 2010 Balance Transactions Balance June 30, 2009 Debit Credit June 30, 2010 Cash 28,200 (m) 13,400 41,600 Accounts receivable 110,700 (l) 11,200 121,900 Inventories 170,500 (k) 5,100 175,600 Investments 60,000 (j) 60,000 0 Land 0 (i) 174,000 174,000 Equipment 210,600 (h) 47,400 258,000 Accum. dep.equipment (49,600) (g) 8,700 (58,300) Accounts payable (114,200) (f) 6,800 (121,000) Accrued expenses payable (15,800) (e) 2,200 (18,000) Dividends payable (12,000) (d) 3,000 (15,000) Common stock (60,000) (c) 7,200 (67,200) Paid-in capital in excess of (120,000) (c) 144,000 (264,000) parcommon stock Retained earnings (208,400) (b) 60,000 (a) 79,200 (227,600) Totals 0 311,100 311,100 0 Operating activities: Net income (a) 79,200 Depreciation (g) 8,700 Loss on sale of investments (j) 6,000 Increase in accounts (l) 11,200 receivable Increase in inventories (k) 5,100 Increase in accounts payable (f) 6,800 Increase in accrued expenses (e) 2,200 payable Investing activities: Purchase of equipment (j) 54,000 (b) (c) 151,200 (d) 3,000 (m) 311,100 13,400 311,100 60,000 (h) (i) 47,400 174,000
A
30 Purchase of land 31 Sale of investments 32 Financing activities: 33 Declaration of cash dividends 34 Sale of common stock 35 Increase in dividends payable 36 Net increase in cash 37 Totals
Prob. 132B (Man)
TORMAX TECHNOLOGY, INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income......................................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.................................................................. Patent amortization...................................................... Changes in current operating assets and liabilities: Increase in accounts receivable............................. Decrease in inventories........................................... Increase in prepaid expenses................................. Decrease in accounts payable................................ Decrease in salaries payable.................................. Net cash flow from operating activities......................... Cash flows from investing activities: Cash paid for construction of building.......................... Net cash flow used for investing activities................... Cash flows from financing activities: Cash received from issuance of mortgage note........... Less: Cash paid for dividends........................................ Net cash flow provided by financing activities............. Increase in cash..................................................................... Cash at the beginning of the year........................................ Cash at the end of the year................................................... Schedule of Noncash Financing and Investing Activities: Issuance of common stock to retire bonds.................. *$46,800 + $9,000 $11,700 = $44,100 $184,150 26,550 5,000 (26,100) 48,100 (2,300) (32,000) (2,900) $ 200,500 $207,000 (207,000) $ 80,000 44,100* 35,900 $ 29,400 128,900 $ 158,300 $ 140,000
Prob. 132B (Man)
(Optional)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Continued
B C D E TORMAX TECHNOLOGY, INC. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended December 31, 2010 Balance, Transactions Balance, Dec. 31, 2009 Debit Credit Dec. 31, 2010 Cash 128,900 (p) 29,400 158,300 Accounts receivable (net) 211,500 (o) 26,100 237,600 Inventories 365,200 (n) 48,100 317,100 Prepaid expenses 9,000 (m) 2,300 11,300 Land 108,000 108,000 Buildings 405,000 (l) 207,000 612,000 Accum. depr.buildings (148,050) (k) 18,450 (166,500) Machinery and equipment 279,000 279,000 Accum. depr.machinery and (68,400) (j) 8,100 (76,500) equipment Patents 43,200 (i) 5,000 38,200 Accounts payable (331,100) (h) 32,000 (299,100) Dividends payable (9,000) (g) 2,700 (11,700) Salaries payable (31,100) (f) 2,900 (28,200) Mortgage note payable 0 (e) 80,000 (80,000) Bonds payable (140,000) (d) 140,000 0 Common stock (18,000) (c) 5,000 (23,000) Paid-in capital in excess of (45,000) (c) 135,000 (180,000) parcommon stock Retained earnings (759,150) (b) 46,800 (a) 184,150 (896,500) Totals 0 486,500 486,500 0
A
Prob. 132B (Man)
A 1 2 3 4 5
Concluded
E
B C D TORMAX TECHNOLOGY, INC. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended December 31, 2010 Balance, Transactions Dec. 31, 2009 Debit Credit (a) 184,150 (k) 18,450 (j) (i) 8,100 5,000 (o) (n) 48,100 (m) (h) (f) (l) (b) (e) (g) 80,000 2,700 2,300 32,000 2,900 207,000 46,800 26,100
Balance, Dec. 31, 2010
6 Operating activities: 7 Net income 8 Depreciationbuildings Depreciationmachinery and 9 equipment 10 Amortization of patents Increase in accounts 11 receivable 12 Decrease in inventories 13 Increase in prepaid expenses 14 Decrease in accounts payable 15 Decrease in salaries payable 16 Investing activities: 17 Construction of building 18 Financial activities: 19 20 21 22 23 24 25 Declaration of cash dividends Issuance of mortgage note payable Increase in dividends payable Schedule of noncash investing and financing activities: Issuance of common stock to retire bonds Net increase in cash Totals
(c) 140,000 _ 486,500
(d) 140,000 (p) 29,400 486,500
Prob. 133B (Man)
CANTOR INDUSTRIES, INC. Statement of Cash Flows For the Year Ended December 31, 2010 Cash flows from operating activities: Net income..................................................... Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.............................................. Gain on sale of land................................. Changes in current operating assets and liabilities: Increase in accounts receivable....... Increase in inventories....................... Decrease in prepaid expenses.......... Decrease in accounts payable.......... Increase in income taxes payable.... Net cash flow from operating activities...... Cash flows from investing activities: Cash received from land sold...................... Less: Cash paid for acquisition of building...................................... Cash paid for purchase of equipment.................................. Net cash flow used for investing activities....................................................... Cash flows from financing activities: Cash received from issuance of bonds payable............................................. Cash received from issuance of common stock............................................. Less cash paid for dividends....................... Net cash flow provided by financing activities....................................................... Decrease in cash................................................. Cash at the beginning of the year..................... Cash at the end of the year................................ $ 35,100 11,400 (10,000) (15,800) (8,800) 1,300 (6,200) 800 $ $ 76,000 $165,000 32,800 197,800 (121,800) 7,800
$ 55,000 66,000 $121,000 13,200 107,800 $ (6,200) 56,300 $ 50,100
Prob. 133B (Man)
(Optional)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 A
Concluded
B C D E CANTOR INDUSTRIES, INC. Spreadsheet (Work Sheet) for Statement of Cash Flows For the Year Ended December 31, 2010 Balance, Transactions Balance, Dec. 30, 2009 Debit Credit Dec. 30, 2010 Cash 56,300 (p) 6,200 50,100 Accounts receivable 101,600 (i) 15,800 117,400 Inventories 144,300 (h) 8,800 153,100 Prepaid expenses 4,400 (g) 1,300 3,100 Land 231,000 (m) 66,000 165,000 Buildings 165,000 (l) 165,000 330,000 Accum. depr.buildings (61,000) (f) 5,200 (66,200) Equipment 88,300 (j) 32,800 (k) 11,000 110,100 Accum. depr.equipment (27,000) (k) 11,000 (e) 6,200 (22,200) Accounts payable (105,200) (d) 6,200 (99,000) Income taxes payable (3,600) (c) 800 (4,400) Bonds payable 0 (n) 55,000 (55,000) Common stock (30,000) (o) 6,000 (36,000) Paid-in capital in excess of (135,000) (o) 60,000 (195,000) parcommon stock Retained earnings (429,100) (b) 13,200 (a) 35,100 (451,000) Totals 0 252,800 252,800 0 Operating activities: Net income (a) 35,100 Depreciationequipment (e) 6,200 Depreciationbuildings (f) 5,200 Gain on sale of land (m) 10,000 Increase in accounts receivable (i) 15,800 Increase in inventories (h) 8,800 Decrease in prepaid expenses (g) 1,300 Decrease in accounts payable (d) 6,200 Increase in income taxes (c) 800 payable Investing activities: Purchase of equipment (j) 32,800 Acquisition of building (l) 165,000 Sale of land (m) 76,000 Financing activities: Payment of cash dividends (b) 13,200 Issuance of bonds payable (n) 55,000 Issuance of common stock (o) 66,000 Net decrease in cash (p) 6,200 Totals 251,800 251,800
Prob. 134B (Man)
LIM GARDEN SUPPLIES INC. Statement of Cash Flows For the Year Ended December 31, 2011 Cash flows from operating activities: Cash received from customers.................... Deduct: Cash payments for merchandise................................ Cash payments for operating expenses..................................... Cash payments for income tax..... Net cash flow from operating activities...... Cash flows from investing activities: Cash received from sale of investments.... Less: Cash paid for land.............................. Cash paid for equipment................... Net cash flow used for investing activities....................................................... Cash flows from financing activities: Cash received from sale of common stock............................................. Less cash paid for dividends....................... Net cash flow used for financing activities..................................... Decrease in cash................................................. Cash at the beginning of the year..................... Cash at the end of the year................................ $1,477,9201 $756,4002 452,0803 99,700 1,308,180 $ 169,740 $ 196,000 $320,000 80,000 400,000 (204,000)
$ 168,000 140,800* 27,200 (7,060) 227,700 $ 220,640 $
Schedule Reconciling Net Income with Cash Flows from Operating Activities: Net income................................................................................... $ 186,320 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense............................................................. 37,700 Gain on sale of investments.................................................. (52,000) Changes in current operating assets and liabilities: Increase in accounts receivable............................................ (26,080) Increase in inventories........................................................... (10,200) Increase in accounts payable................................................ 37,800 Decrease in accrued expenses payable............................... (3,800) Net cash flow from operating activities.................................... $ 169,740 *Dividends paid: $144,000 + $30,400 $33,600 = $140,800
Prob. 134B (Man)
Computations:
Concluded
1. Sales................................................................................... $1,504,000 Deduct increase in accounts receivable........................ 26,080 Cash received from customers....................................... $1,477,920 2. Cost of merchandise sold............................................... Add increase in inventories............................................ Deduct increase in accounts payable............................ Cash payments for merchandise.................................... 3. Operating expenses other than depreciation............... Add decrease in accrued expenses payable................ Cash payments for operating expenses........................ $ 784,000 10,200 $ 794,200 37,800 $ 756,400 $ 448,280 3,800 $ 452,080
Prob. 135B (Man)
HOUSE CONSTRUCTION CO. Statement of Cash Flows For the Year Ended June 30, 2010 Cash flows from operating activities: Cash received from customers.................... Deduct: Cash payments for merchandise Cash payments for operating expenses..................................... Cash payments for income tax..... Net cash flow from operating activities...... Cash flows from investing activities: Cash received from sale of investments.... Less: Cash paid for purchase of land........ Cash paid for purchase of equipment...................................... Net cash flow used for investing activities....................................................... Cash flows from financing activities: Cash received from sale of common stock............................................................. Less cash paid for dividends....................... Net cash flow provided by financing activities....................................................... Increase in cash.................................................. Cash at the beginning of the year..................... Cash at the end of the year................................ $1,123,7001 $696,7002 287,6003 52,800 1,037,100 $ 86,600 $ $174,000 47,400 221,400 (167,400) 54,000
$ 151,200 57,000* 94,200 $ 13,400 28,200 $ 41,600
Schedule Reconciling Net Income with Cash Flows from Operating Activities: Net income......................................................................... $ 79,200 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation expense................................................. 8,700 Loss on sale of investments...................................... 6,000 Changes in current operating assets and liabilities: Increase in accounts receivable................................ (11,200) Increase in inventories............................................... (5,100) Increase in accounts payable.................................... 6,800 Increase in accrued expenses payable.................... 2,200 Net cash flow from operating activities......................... $ 86,600 *Dividends paid: $60,000 + $12,000 $15,000 = $57,000
Prob. 135B (Man)
Computations:
Concluded
1. Sales................................................................................... $1,134,900 Deduct increase in accounts receivable........................ 11,200 Cash received from customers....................................... $1,123,700 2. Cost of merchandise sold............................................... Add increase in inventories............................................ Deduct increase in accounts payable............................ Cash payments for merchandise.................................... 3. Operating expenses other than depreciation............... Deduct increase in accrued expenses payable............ Cash payments for operating expenses........................ $ 698,400 5,100 $ 703,500 6,800 $ 696,700 $ 289,800 2,200 $ 287,600
SPECIAL ACTIVITIES Activity 131 (Man)
Although this situation might seem harmless at first, it is, in fact, a violation of generally accepted accounting principles. The operating cash flow per share figure should not be shown on the face of the income statement. The income statement is constructed under accrual accounting concepts, while operating cash flow undoes the accounting accruals. Thus, unlike Kellys assertion that this information would be useful, more likely the information could be confusing to users. Some users might not be able to distinguish between earnings and operating cash flow per shareor how to interpret the difference. By agreeing with Kelly, Tripp has breached his professional ethics because the disclosure would violate generally accepted accounting principles. On a more subtle note, Kelly is being somewhat disingenuous. Apparently, Kelly is not pleased with this years operating performance and would like to cover the earnings bad news with some cash flow good news disclosures. An interesting question is: Would Kelly be as interested in the dual per share disclosures in the opposite scenario with earnings per share improving and cash flow per share deteriorating? Probably not.
Activity 132 (Man)
Start-up companies are unique in that they frequently will have negative retained earnings and operating cash flows. The negative retained earnings are often due to losses from high start-up expenses. The negative operating cash flows are typical because growth requires cash. Growth must be financed with cash before the cash returns. For example, a company must expend cash to make the service in Period 1 before selling it and receiving cash in Period 2. The start-up company constantly faces spending cash today for the next periods growth. For Steam boat IQ Inc., the money spent on salaries to develop the business is a cash out flow that must occur before the service provides revenues. In addition, the company must use cash to market its service to potential customers. In this situ ation, the only way the company stays in business is from the capital provided by the owners. This owner-supplied capital is the lifeblood of a start-up com pany. Banks will not likely lend money on this type of venture (except with assets as security). Steamboat IQ Inc. could be a good investment. It all depends on whether the new service has promise. The financial figures will not reveal this easily. Only actual sales will reveal if the service is a hit. Until this time, the company is at risk. If the service is not popular, the company will have no cash to fall back onit will likely go bankrupt. If, however, the service is successful, then Steamboat IQ Inc. should become self-sustaining and provide a good return for the shareholders.
Activity 133 (Man)
a. 1. Normal practice for determining the amount of cash flows from operat ing activities during the year is to begin with the reported net income. This net income must ordinarily be adjusted upward and/or downward to determine the amount of cash flows. Although many operating expenses decrease cash, depreciation does not. The amount of net income understates the amount of cash flows provided by operations to the extent that depreciation expense is deducted from revenue. Accordingly, the depreciation expense for the year must be added back to the reported net income in arriving at cash flows from operating activities. Generally accepted accounting principles require that significant trans actions affecting future cash flows should be reported in a separate schedule to the statement, even though they do not affect cash. Accord ingly, even though the issuance of the common stock for land does not affect cash, the transaction affects future cash flows and must be reported. The $60,000 cash received from the sale of the investments is reported in the Cash Flows from Investing Activities section. Since the sale in cluded a gain of $10,000, to avoid double reporting of this amount, the gain is deducted from net income to remove it from the determination of cash flows from operating activities. The balance sheets for the last two years will indicate the increase in cash but will not indicate the firms activities in meeting its financial obligations, paying dividends, and maintaining and expanding operating capacity. Such information, as provided by the statement of cash flows, assists creditors in assessing the firms solvency and profitabilitytwo very important factors bearing on the evaluation of a potential loan.
2.
3.
4.
b. The statement of cash flows indicates a strong liquidity position for Tech Trends Inc. The increase in cash of $97,000 for the past year is more than adequate to cover the $60,000 of new building and store equipment costs that will not be provided by the loan. Thus, the statement of cash flows most likely will enhance the companys chances of receiving a loan. However, oth er information, such as a projection of future earnings, a description of collateral pledged to support the loan, and an independent credit report, would normally be considered before a final loan decision is made.
Activity 134 (Man)
The senior vice president is very focused on profitability but has been bleeding cash. The increase in accounts receivable and inventory is striking. Apparently, the new credit card campaign has found many new customers, since the accounts receivable is growing. Unfortunately, it appears as though the new campaign has done a poor job of screening creditworthiness in these new customers. In other words, there are many new credit card purchasersunfortu nately, they do not appear to be paying off their balances. The new merchandise purchases appear to be backfiring. The company has received some good deals, except that they are only good deals if it can resell the merchandise. If the merchandise has no customer appeal, then that would explain the inventory increase. In other words, the division is purchasing merchandise that sits on the shelf, regardless of pricing. The reduction in payables is the result of the division becoming overdue on payments. The memo reports that most of the past due payables have been paid. This situation is critical in the retailing business. A retailer cannot afford a poor payment history, or it will be denied future merchandise shipments. This is a signal of severe cash problems. Overall, the picture is of a retailer having severe operating cash flow difficulties. Note to Instructors: This scenario is essentially similar to Kmarts path to eventu al bankruptcy. It reported earnings, while having significant negative cash flows from operations due to expanding credit too liberally (increases in accounts receivable) and purchasing too much unsaleable inventory (increases in inventory). Eventually, Kmarts inventory write-down resulted in significant losses about the time it entered bankruptcy.
Activity 135 (Man)
a. and b. Recent statements of cash flows for Johnson & Johnson and AMR Corp. are shown on the following pages. The actual analysis may be different due to up dated information. However, this answer shows the structure for a possible response. Johnson & Johnson Johnson & Johnson (J&J) is a powerful generator of cash flows from operating activities, with over $14 billion in cash flows. This is enough to support over $2 billion in new investment, with the remainder available for dividends and repur chases of common stock. Overall, the statement of cash flows indicates very favorable cash flows for J&J. J&Js free cash flow is approximately $11.5 billion for the year ($14.2 $2.7). AMR Corp. AMR is weaker than J&J. AMR had cash flows from operating activities of almost $2 billion. In addition, AMR had net negative cash flows from investing activities of approximately $1.4 billion. The net uses of cash from financing activities was $591 million primarily used to repay debt and capital leases. AMR generates suf ficient cash from operations to maintain the necessary investment in its fixed assets. Free cash flow is approximately $1,409 million ($1,939 $530). However, AMR does not generate cash at nearly the same amount as Johnson & Johnson.
Activity 135 (Man)
Continued
JOHNSON & JOHNSON Consolidated Statements of Cash Flows 1-Jan-07
In Millions For Period Ended Jan. 1, 2007
01/01/07
CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings.................................................................................................... $ 11,053 Adjustments to reconcile net earnings to cash flows: Depreciation and amortization of property and intangibles................... 2,177 Purchased in-process research and development................................. 559 Deferred tax provision............................................................................... (509) Accounts receivable allowances.............................................................. (14) Changes in assets and liabilities, net of effects from acquisitions: Increase in accounts receivable........................................................... (699) (Increase)/decrease in inventories....................................................... (210) (Decrease)/increase in accounts payable and accrued liabilities..... 1,750 (Decrease)/(increase) in other current and noncurrent assets.......... (269) Increase in other current and noncurrent liabilities........................... 410 NET CASH FLOWS FROM OPERATING ACTIVITIES......................................... $ 14,248 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................................................ (2,666) Proceeds from the disposal of assets.......................................................... 511 Acquisitions, net of cash acquired (Note 17)............................................... (18,023) Purchases of investments............................................................................. (467) Sales of investments...................................................................................... 426 Other (primarily intangibles).......................................................................... (72) NET CASH USED BY INVESTING ACTIVITIES................................................... $ (20,291) CASH FLOWS FROM FINANCING ACTIVITIES Dividends to shareholders............................................................................ Repurchase of common stock...................................................................... Proceeds from short-term debt..................................................................... Retirement of short-term debt....................................................................... Proceeds from long-term debt...................................................................... Retirement of long-term debt......................................................................... Proceeds from the exercise of stock options.............................................. NET CASH USED BY FINANCING ACTIVITIES................................................... Effect of exchange rate changes on cash and cash equivalents.................... Increase in cash and cash equivalents.............................................................. Cash and cash equivalents, beginning of year (Note 1)................................... CASH AND CASH EQUIVALENTS, END OF YEAR (NOTE 1)............................ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Treasury stock issued for employee compensation and stock option plans, net of cash proceeds.................................................... Conversion of debt............................................................................................... $ (4,267) (6,722) 6,385 (2,633) 6 (13) 1,135 $ (6,109) 180 $ (11,972) 16,055 $ 4,083
622 26
Activity 135 (Man)
Concluded
AMR CORP. Consolidated Statements of Cash Flows 31-Dec-06
In Millions For Period Ended Dec. 31, 2006 Cash Flow from Operating Activities: Net income.............................................................................................. Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation........................................................................................ Amortization........................................................................................ Equity based stock compensation................................................... Redemption payments under operating leases for special facility revenue bonds................................................................... Change in assets and liabilities: Decrease (increase) in receivables.............................................. Decrease (increase) in inventories.............................................. Increase (decrease) in accounts payable and accrued liabilities Increase (decrease) in air traffic liability..................................... Increase (decrease) in other liabilities and deferred credits.... Other, net......................................................................................... Net cash (used) provided by operating activities.................................... Cash Flow from Investing Activities: Capital expenditures, including purchase deposits on flight equipment............................................................................................. Net increase in short-term investments.............................................. Net decrease (increase) in restricted cash and short-term investments.......................................................................................... Proceeds from sale of equipment and property and other investments.......................................................................................... Other........................................................................................................ Net cash used for investing activities....................................................... Cash Flow from Financing Activities: Payments on long-term debt and capital lease obligations.............. Proceeds from: Reimbursement from construction reserve account..................... Issuance of common stock, net of issuance costs....................... Securitization transactions............................................................... Exercise of stock options.................................................................. Net cash provided by financing activities................................................ Net increase in cash.................................................................................... Cash at beginning of year........................................................................... Cash at end of year...................................................................................... 12/31/06 $ 231 1,022 135 142 (28) 3 (7) (130) 168 382 21 $ 1,939 (530) (918) 42 49 (8) $(1,365) $(1,366) 145 400 0 230 $ (591) (17) 138 $ 121