Chapter 16

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.

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 \(\$ 72,000\).

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.

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

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.

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.

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?

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.

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.

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 , \(2010 .\)

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.

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 ________ ________

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?

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.

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.