The Statement of Cash Flows

Jennifer’s Wedding Shops earned net income of \(27,000, which included depreciation of \)16,000. Jennifer’s acquired a \(119,000 building by borrowing \)119,000 on a long-term note payable.

Requirements

1. How much did Jennifer’s cash balance increase or decrease during the year?
2. Were there any non-cash transactions for the company? If so, show how 

they would be reported in the statement of cash flows.

Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000 

Payments to employees 66,000 

Payment of notes payable 34,000 

Payment of dividends 7,500 

Cash receipt from issuance of stock 22,000 

Collections from customers 188,000

Cash receipt from sale of land 58,000 

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

Preparing the direct method statement of cash flows Use the data in Short Exercise S14A-12 and your results. Prepare the business’s complete statement of cash flows for the year ended June 30, 2018, using the direct method for operating activities

Preparing the direct method statement of cash flows Red Toy Company reported the following comparative balance sheet:

Requirements 

1. Compute the collections from customers during 2018 for Red Toy Company. Sales Revenue totaled \(134,000.

 2. Compute the payments for inventory during 2018. Cost of Goods Sold was \)79,000.

Using a spreadsheet to complete the statement of cash flows— indirect method 

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet. 

1. Net income 
2. Increases in current assets (other than Cash) 
3. Decreases in current liabilities 
4. Cash payment for acquisition of plant assets 
5. Cash receipt from issuance of common stock 
6. Depreciation expense

 Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet

Classifying cash flow items Consider the following transactions:

1. Purchased equipment for \(130,000 cash.
2. Issued \)14 par preferred stock for cash. 
3. Cash received from sales to customers of \(35,000. 
4. Cash paid to vendors, \)17,000. 
5. Sold building for \(19,000 gain for cash. 
6. Purchased treasury stock for \)28,000. 
7. Retired a notes payable with 1,250 shares of the company’s common stock. 

Identify the category of the statement of cash flows in which each transaction would be reported.

Classifying transactions on the statement of cash flows—indirect method Consider the following transactions:

Identify the category of the statement of cash flows, indirect method, in which each transaction would be reported.

Computing operating activities cash flow—indirect method 

The records of Vintage Color Engraving reveal the following: 

Net income \( 36,000

Depreciation expense \) 5,000 

Sales revenue 53,000 

Decrease in current liabilities 19,000 

Loss on sale of land 4,000

Increase in current assets other than cash 10,000 

Acquisition of land 35,000 

Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.

Computing operating activities cash flow—indirect method 

The accounting records of CD Sales, Inc. include the following accounts: Account                                 Beginning Balance         Ending Balance Cash                                                    \( 7,500                                \) 6,500        Accounts Receivable                           21,000                                17,500 Merchandise Inventory                        20,000                                30,000        Accounts Payable                                15,000                                19,000     Accumulated Depreciation— Equipment 

2,000 Depr. Exp. 

56,000 Jul. 1  

58,000 Jul. 31 

Retained Earnings 

Dividends 15,000

63,000 Jul. 1

50,000 Net Inc. 

98,000 Jul. 31 

Compute CD’s net cash provided by (used for) operating activities during July 2018. Use the indirect method.

Rouse Exercise Equipment, Inc. reported the following financial statements for 2018:

Requirements

1. Compute the amount of Rouse Exercise’s acquisition of plant assets. Assume the acquisition was for cash. Rouse Exercise disposed of plant assets at book value. The cost and accumulated depreciation of the disposed asset was $47,900. No cash was received upon disposal.

2. Compute new borrowing or payment of long-term notes payable, with Rouse

Exercise having only one long-term notes payable transaction during the year.

3. Compute the issuance of common stock with Rouse Exercise having only one

common stock transaction during the year.

4. Compute the payment of cash dividends.

Use the Rouse Exercise Equipment data in Exercise E14-23. Prepare the company’s statement of cash flows—indirect method—for the year ended December 31, 2018. Assume investments are purchased with cash.

Identify each item as operating (O), investing (I), financing (F), or non-cash (N). 

1. Cash receipt from the sale of equipment 

2. Cash payment for salaries 

3. Cash receipt from the collection of long-term notes receivable 

4. Purchase of equipment in exchange for notes payable 

5. Cash receipt from the issuance of common stock

Question: Owl, Inc.’s accountants have assembled the following data for the year ended December 31, 2018: Cash receipt from sale of equipment \( 20,000 

Depreciation expense 12,000

Cash payment of dividends 4,000

Cash receipt from issuance of common stock 12,000

Net income 30,000

Cash purchase of land 25,000

Increase in current liabilities 10,000

Decrease in current assets other than cash 8,000

Prepare Owl’s statement of cash flows using the indirect method for the year ended December 31, 2018. Assume beginning and ending Cash are \)12,000 and $75,000 respectively

Question: Kalapono Company expects the following for 2018:

 • Net cash provided by operating activities of \(100,000. 

• Net cash provided by financing activities of \)10,000. 

• Net cash used for investing activities of \(20,000 (no sales of long-term assets). 

• Cash dividends paid to stockholders was \)2,000. 

How much free cash flow does Kalapono expect for 2018?

Question: Big Island, Inc. began 2018 with cash of \(40,000. During the year, Big Island earned revenue of \)200,000 and collected \(120,000 from customers. Expenses for the year totaled \)160,000, of which Big Island paid \(65,000 in cash to suppliers and \)80,000 in cash to employees. The company received \(2,000 cash for interest revenue and paid \)10,000 for income taxes. Big Island also paid \(35,000 to purchase equipment and a cash dividend of \)15,000 to its stockholders during 2018. Prepare the company’s operating activities section of the statement of cash flows for the year ended December 31, 2018. Use the direct method.

Question: What does the statement of cash flows report?

Question: Muench, Inc.’s accountant has partially completed the spreadsheet for the statement of cash flows. Fill in the remaining missing information.

Question: What types of transactions are reported in the non-cash investing and financing activities section of the statement of cash flows?

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

Question: Describe the three basic types of cash flow activities.

Question: Describe the two formats for reporting operating activities on the statement of cash flows.

Question: Describe the five steps used to prepare the statement of cash flows by the indirect method.

Question: Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.

Question: How does the statement of cash flows help users of financial statements?

Question: Classifying items on the statement of cash flows Cash flow items

must be categorized into one of four categories. Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

 a. Cash purchase of merchandise inventory

 b. Cash payment of dividends

 c. Cash receipt from the collection of long-term notes receivable 

d. Cash payment for income taxes 

e. Purchase of equipment in exchange for notes payable

 f. Cash receipt from the sale of land 

g. Cash received from borrowing money 

h. Cash receipt for interest income

 i. Cash receipt from the issuance of common stock

 j. Cash payment of salaries

Question: If current assets other than cash increase, what is the effect on cash? What about a decrease in current assets other than cash?

Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

Question: What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?

Question: What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?

Question: What should the net change in cash section of the statement of cash flows always reconcile with?

Question: What is free cash flow, and how is it calculated?

Question: How does the direct method differ from the indirect method when preparing the operating activities section of the statement of cash flows?

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal. 

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions: 

a. Predict future cash flows. 

b. Evaluate management decisions. 

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

Why might a spreadsheet be helpful when completing the statement of cash flows?

Question: Classifying items on the indirect statement of cash flows 

Destiny Corporation is preparing its statement of cash flows by the indirect method. Destiny has the following items for you to consider in preparing the statement: 

a. Increase in accounts payable 

b. Payment of dividends

 c. Decrease in accrued liabilities

 d. Issuance of common stock

 e. Gain on sale of building 

f. Loss on sale of land

 g. Depreciation expense 

h. Increase in merchandise inventory

 i. Decrease in accounts receivable 

j. Purchase of equipment 

Identify each item as a(n): • Operating activity—addition to net income (O+) or subtraction from net income (O-) • Investing activity—cash inflow (I+) or cash outflow (I-) • Financing activity—cash inflow (F+) or cash outflow (F-) • Activity that is not used to prepare the indirect statement of cash flows (N)

Question: Computing cash flows from operating activities—indirect method 

DVR Equipment, Inc. reported the following data for 2018: 

Income Statement: 

Net Income $ 43,000

 Depreciation Expense 6,000 

Balance Sheet:

 Increase in Accounts Receivable 6,000

 Decrease in Accounts Payable 2,000

 Compute DVR’s net cash provided by operating activities—indirect method.

Question: Computing cash flows from operating activities—indirect method

 Winding Road Cellular accountants have assembled the following data for the year ended April 30, 2018: 

Cash receipt from sale of land \( 27,000

 Net income \) 55,000 

Depreciation expense 2,000 

Cash purchase of equipment 44,000 

Cash payment of dividends 5,800 

Decrease in current liabilities 20,000 

Cash receipt from issuance of common stock 17,000 

Increase in current assets other than cash 27,000

 Prepare the operating activities section using the indirect method for Winding Road Cellular’s statement of cash flows for the year ended April 30, 2018.

Question: Computing investing and financing cash flows Preston Media Corporation had the following income statement and balance sheet for 2018:

                                                   PRESTON MEDIA CORPORATION

                                                          Income Statement

                                            Year Ended December 31, 2018

Sales Revenue \(80,000

Depreciation Expense––Plant Assets  \)11,000

Other Expenses \(50,000

 Net Income \)19,000

Requirements 

1. Compute the acquisition of plant assets for Preston Media Corporation during 2018. The business sold no plant assets during the year. Assume the company paid cash for the acquisition of plant assets. 

2. Compute the payment of a long-term note payable. During the year, the business issued a $4,400 note payable.

Julie Lopez Company expects the following for 2018:

1. Net cash provided by operating activities of \(148,000.
2. Net cash provided by financing activities of \)56,000.
3. Net cash used for investing activities of \(77,000 (no sales of long-term assets).
4. Cash dividends paid to stockholders of \)7,000.

How much free cash flow does Lopez expect for 2018?

Preparing a statement of cash flows using the direct method Jelly Bean, Inc. began 2018 with cash of \(58,000. During the year, Jelly Bean earned revenue of \)595,000 and collected \(614,000 from customers. Expenses for the year totaled \)427,000, of which Jelly Bean paid \(212,000 in cash to suppliers and \)205,000 in cash to employees. Jelly Bean also paid \(148,000 to purchase equipment and a cash dividend of \)57,000 to its stockholders during 2018. Prepare the company’s statement of cash flows for the year ended December 31, 2018. Format operating activities by the direct method.

Preparing a statement of cash flows using the direct method Jelly Bean, Inc. began 2018 with cash of \(58,000. During the year, Jelly Bean earned revenue of \)595,000 and collected \(614,000 from customers. Expenses for the year totaled \)427,000, of which Jelly Bean paid \(212,000 in cash to suppliers and \)205,000 in cash to employees. Jelly Bean also paid \(148,000 to purchase equipment and a cash dividend of \)57,000 to its stockholders during 2018. Prepare the company’s statement of cash flows for the year ended December 31, 2018. Format operating activities by the direct method.

 Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000 

Payments to employees 66,000 

Payment of notes payable 34,000 

Payment of dividends 7,500 

Cash receipt from issuance of stock 22,000 

Collections from customers 188,000

Cash receipt from sale of land 58,000 

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

Question: Computing cash flows from investing and financing activities Use the data in Short Exercise S14-5 to complete this exercise. Prepare Winding Road Cellular’s statement of cash flows using the indirect method for the year ended April 30, 2018. Assume beginning and ending Cash are \(48,000 and \)52,200, respectively.

Question: Preparing the statement of cash flows—indirect method Use the Preston Media Corporation data in Short Exercise S14-7 and the results you calculated from the requirements. Prepare Preston Media’s statement of cash flows— indirect method—for the year ended December 31, 2018.

Preparing the direct method statement of cash flows Use the data in Short Exercise S14A-12 and your results. Prepare the business’s complete statement of cash flows for the year ended June 30, 2018, using the direct method for operating activities.

Preparing the direct method statement of cash flows Red Toy Company reported the following comparative balance sheet:

Requirements 

1. Compute the collections from customers during 2018 for Red Toy Company. Sales Revenue totaled \(134,000.

 2. Compute the payments for inventory during 2018. Cost of Goods Sold was \)79,000.

Using a spreadsheet to complete the statement of cash flows— indirect method 

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet. 

1. Net income 
2. Increases in current assets (other than Cash) 
3. Decreases in current liabilities 
4. Cash payment for acquisition of plant assets 
5. Cash receipt from issuance of common stock 
6. Depreciation expense

 Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet

Classifying cash flow items Consider the following transactions:

1. Purchased equipment for \(130,000 cash.
2. Issued \)14 par preferred stock for cash. 
3. Cash received from sales to customers of \(35,000. 
4. Cash paid to vendors, \)17,000. 
5. Sold building for \(19,000 gain for cash. 
6. Purchased treasury stock for \)28,000. 
7. Retired a notes payable with 1,250 shares of the company’s common stock. 

Identify the category of the statement of cash flows in which each transaction would be reported.

Classifying transactions on the statement of cash flows—indirect method Consider the following transactions:

Identify the category of the statement of cash flows, indirect method, in which each transaction would be reported.

Question: Classifying items on the indirect statement of cash flows 

The statement of cash flows categorizes like transactions for optimal reporting. Identify each item as a(n):

 • Operating activity—addition to net income (O+) or subtraction from net income (O-) 

• Investing activity—cash inflow (I+) or cash outflow (I-) 

• Financing activity—cash inflow (F+) or cash outflow (F-)

 • Non-cash investing and financing activity (NIF) 

• Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

1. Loss on sale of land.
2. Acquisition of equipment by issuance of note payable. 
3. Payment of long-term debt. 
4. Acquisition of building by issuance of common stock. 
5. Increase in Salaries Payable.
6. Decrease in Merchandise Inventory. 
7. Increase in Prepaid Expenses. 
8. Decrease in Accrued Liabilities. 
9. Cash sale of land (no gain or loss). 
10. Issuance of long-term note payable to borrow cash. 
11. Depreciation Expense.
12. Purchase of treasury stock. 
13. Issuance of common stock. 
14. Increase in Accounts Payable. 
15. Net income.
16. Payment of cash dividend