The Statement of Cash Flows

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.

Question: Preparing operating activities cash flow—direct method 

The accounting records of Four Seasons Parts reveal the following: 

Payment of salaries and wages \( 34,000 

Net income \) 21,000 

Depreciation expense 10,000 

Payment of income tax 16,000 

Payment of interest 17,000 

Collection of dividend revenue 5,000 

Payment of dividends 5,000

Payment to suppliers 51,000 

Collections from customers 116,000 

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

Preparing the statement of cash flows—indirect method The income statement of Boost Plus, Inc. follows: Gross Profit Net Sales Revenue Cost of Goods Sold Salaries Expense 137,000 94,000 3,000 56,000 \( 54,000 81,000 Depreciation Expense––Plant Assets Net Income Before Income Taxes Income Tax Expense Net Income Total Operating Expenses 27,000 \) 53,000 BOOST PLUS, INC. Income Statement Year Ended September 30, 2018 Operating Expenses: \( 231,000 Additional data follow: a. Acquisition of plant assets is \)124,000. Of this amount, \(108,000 is paid in cash and \)16,000 by signing a note payable. b. Cash receipt from sale of land totals \(20,000. There was no gain or loss. c. Cash receipts from issuance of common stock total \)36,000. d. Payment of notes payable is \(15,000. e. Payment of dividends is \)5,000. f. From the balance sheet: September 30 2018 2017 Cash \( 39,000 \) 13,000 Accounts Receivable 46,000 61,000 Merchandise Inventory 94,000 88,000 Land 82,000 102,000 Plant Assets 214,000 90,000 Accumulated Depreciation (61,000) (34,000) Accounts Payable 32,000 15,000 Accrued Liabilities 12,000 20,000 Notes Payable (long-term) 16,000 15,000 Common Stock, no par 40,000 4,000 Retained Earnings 314,000 266,000 Prepare Boost Plus’s statement of cash flows for the year ended September 30, 2018, using the indirect method. Include a separate section for non-cash investing and financing activities

Computing cash flows for investing and financing activities Consider the following facts for Java Jolt: 

1. Beginning and ending Retained Earnings are \(45,000 and \)70,000, respectively. Net income for the period is \(60,000. 
2. Beginning and ending Plant Assets are \)124,500 and \(134,500, respectively.
3. Beginning and ending Accumulated Depreciation—Plant Assets are \)21,500 and \(26,500, respectively. 
4. Depreciation Expense for the period is \)17,000, and acquisitions of new plant assets total \(29,000. Plant assets were sold at a \)5,000 gain. Requirements                                             1. How much are cash dividends?                                                                                                     2. What was the amount of the cash receipt from the sale of plant assets?

Question: Computing cash flows for investing and financing activities Consider the following facts for Java Jolt: 

1. Beginning and ending Retained Earnings are \(45,000 and \)70,000, respectively. Net income for the period is \(60,000. 
2. Beginning and ending Plant Assets are \)124,500 and \(134,500, respectively.
3. Beginning and ending Accumulated Depreciation—Plant Assets are \)21,500 and \(26,500, respectively. 
4. Depreciation Expense for the period is \)17,000, and acquisitions of new plant assets total \(29,000. Plant assets were sold at a \)5,000 gain. Requirements 
5. How much are cash dividends? 
6. What was the amount of the cash receipt from the sale of plant assets?

Identifying and reporting non-cash transactions

Dirtbikes, Inc. identified the following selected transactions that occurred during the year ended December 31, 2018:

1. Issued 750 shares of \(3 par common stock for cash of \)17,000.
2. Issued 5,100 shares of \(3 par common stock for a building with a fair market value of \)96,000. 
3. Purchased new truck with a fair market value of \(29,000. Financed it 100% with a long-term note. 
4. Retired short-term notes of \)28,000 by issuing 1,900 shares of \(3 par common stock. 
5. Paid long-term note of \)10,500 to Bank of Tallahassee. Issued new long-term note of $23,000 to Bank of Trust. 

Identify any non-cash transactions that occurred during the year, and show how they would be reported in the non-cash investing and financing activities section of the statement of cash flows

Use the Rouse Exercise Equipment data in Exercises E14-23 and E14-24. Rouse plans to purchase a truck for \(23,000 and a forklift for \)125,000 next year. In addition, it plans to pay cash dividends of $3,500. Assuming Rouse plans similar activity for 2019, what would be the amount of free cash flow?

Use the Rouse Exercise Equipment data in Exercises E14-23 and E14-24. Rouse plansto purchase a truck for \(23,000 and a forklift for \)125,000 next year. In addition, itplans to pay cash dividends of $3,500. Assuming Rouse plans similar activity for 2019,what would be the amount of free cash flow?

Preparing operating activities cash flow—direct method 

The accounting records of Four Seasons Parts reveal the following: 

Payment of salaries and wages \( 34,000 

Net income \) 21,000 

Depreciation expense 10,000 

Payment of income tax 16,000 

Payment of interest 17,000 

Collection of dividend revenue 5,000 

Payment of dividends 5,000

Payment to suppliers 51,000 

Collections from customers 116,000 

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

Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

1. Collections from customers are \(13,000 more than sales.
2. Dividend revenue, interest expense, and income tax expense equal their cash amounts. 
3. Payments to suppliers are the sum of cost of goods sold plus advertising expense. 
4. Payments to employees are \)3,000 more than salaries expense. 
5. Cash payment for the acquisition of plant assets is \(102,000.
6. Cash receipts from sale of land total \)29,000. 
7. Cash receipts from issuance of common stock total \(38,000. 
8. Payment of long-term notes payable is \)10,000.
9. Payment of dividends is \(9,000. 
10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.
    Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method. 
     

Question: Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

1. Collections from customers are \(13,000 more than sales.
2. Dividend revenue, interest expense, and income tax expense equal their cash amounts. 
3. Payments to suppliers are the sum of cost of goods sold plus advertising expense. 
4. Payments to employees are \)3,000 more than salaries expense. 
5. Cash payment for the acquisition of plant assets is \(102,000.
6. Cash receipts from sale of land total \)29,000. 
7. Cash receipts from issuance of common stock total \(38,000. 
8. Payment of long-term notes payable is \)10,000.
9. Payment of dividends is \(9,000. 
10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000. 

Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method.

Computing cash flow items—direct method Consider the following facts:

1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000. 
2. Cost of goods sold is \)77,000. 
3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000. 
4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively. 

Requirements 

1. Compute cash collections from customers.
2. Compute cash payments for merchandise inventory

Question: Computing cash flow items—direct method Consider the following facts:

1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000. 
2. Cost of goods sold is \)77,000. 
3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000. 
4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively. 

Requirements 

1. Compute cash collections from customers.
2. Compute cash payments for merchandise inventory

A-One Mobile Homes reported the following in its financial statements for the year Ended December 31, 2018:

2018 2017

Income Statement

Net Sales Revenue \( 25,118 \) 21,893

Cost of Goods Sold 18,074 15,501

Depreciation Expense 271 234

Other Operating Expenses 4,632 4,277

Income Tax Expense 530 482

Net Income \( 1,611 \) 1,399

Balance Sheet

Cash \( 21 \) 19

Accounts Receivable 798 615

Merchandise Inventory 3,483 2,832

Property, Plant, and Equipment, net 4,351 3,437

Accounts Payable 1,547 1,364

Accrued Liabilities 938 851

Long-term Liabilities 477 461

Common Stock, no par 670 443

Retained Earnings 5,021 3,784

Requirements

1. Compute the collections from customers.

2. Compute payments for merchandise inventory.

3. Compute payments of other operating expenses.

4. Compute the acquisitions of property, plant, and equipment (no sales of property during 2018).

5. Compute the amount of borrowing, with A-One paying no long-term liabilities.

6. Compute the cash receipt from issuance of common stock.

7. Compute the payment of cash dividends.

Using a spreadsheet to prepare the statement of cash flows—indirect method Use the Boost Plus, Inc. data in Exercise E14-21 to prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method.

American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow: 

a. On January 1, 2018, ARC issued no par common stock for \(450,000. 

b. Early in January, ARC made the following cash payments: 

1. For store fixtures, \)53,000 
2. For merchandise inventory, \(340,000
3. For rent expense on a store building, \)20,000

c. Later in the year, ARC purchased merchandise inventory on account for \(239,000. Before year-end, ARC paid \)139,000 of these accounts payable. 

d. During 2018, ARC sold 2,400 units of merchandise inventory for \(275 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)250,000, and ending merchandise inventory totaled \(329,000. 

e. The store employs three people. The combined annual payroll is \)96,000, of which ARC still owes \(3,000 at year-end.

f. At the end of the year, ARC paid income tax of \)17,000. There are no income taxes payable.

g. Late in 2018, ARC paid cash dividends of $44,000.

h. For store fixtures, ARC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements 

1. What is the purpose of the statement of cash flows? 
2. Prepare ARC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together. 
3. Prepare ARC’s balance sheet at December 31, 2018. 

Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Preparing the statement of cash flows—indirect method 

Accountants for Morganson, Inc. have assembled the following data for the year ended December 31, 2018: 

                                                                                     2018                     2017 Current Assets:                                                                                                     Cash                                                                            \( 99,400             \) 25,000 Accounts Receivable                                                    64,100                69,700 Merchandise Inventory                                                 83,000                 75,000 Current Liabilities:                                                                                               Accounts Payable                                                         57,600                  55,200 Income Tax Payable                                                           14,800                   16,800 

Transaction Data for 2018:

 Issuance of common stock for cash \( 38,000  

Payment of notes payable \) 46,100 

Depreciation expense 24,000

 Payment of cash dividends 50,000 

Purchase of equipment with cash 74,000 

Issuance of notes payable to borrow cash 62,000 

Acquisition of land by issuing long-term notes payable 119,000 

Gain on sale of building 4,500 Book value of building sold 54,000 

Net income 68,500 

Prepare Morganton's statement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities.

Preparing the statement of cash flows—indirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Rolling Hills, Inc. follow:

Additionally, Rolling Hills purchased land of \(21,100 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset was $13,410. The plant acquisition was for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method. 

2. How will what you learned in this problem help you evaluate an investment?

The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the following:

Jackson’s transactions during 2018 included the following:

Payment of cash dividends \( 16,200 

Depreciation expense \) 16,700 

Purchase of equipment with cash 54,700 

Purchase of building with cash 98,000 

Issuance of long-term notes payable to borrow cash 48,000 

Net income 57,600

Issuance of common stock for cash 105,000 

Requirements 

1. Prepare the statement of cash flows of Jackson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
2. Evaluate Jackson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
3. If Jackson plans similar activity for 2019, what is its expected free cash flow?

Boundary Rare Coins (BRC) was formed on January 1, 2018. Additional data for the year follow: 

1. On January 1, 2018, BRC issued no-par common stock for \(475,000.
2. Early in January, BRC made the following cash payments: For store fixtures, \)53,000; For merchandise inventory, \(260,000; For rent expense on the store building, \)13,000 
3. Later in the year, BRC purchased merchandise inventory on account for \(240,000. Before year-end, BRC paid \)160,000 of these accounts payable.
4. During 2018, BRC sold 2,200 units of merchandise inventory for \(450 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)330,000, and ending merchandise inventory totaled \(170,000.
5. The store employs three people. The combined annual payroll is \)80,000, of which BRC still owes \(4,000 at year-end. 
6. At the end of the year, BRC paid income tax of \)24,000. There are no income taxes payable.
7. Late in 2018, BRC paid cash dividends of $40,000. 
8. For store fixtures, BRC uses the straight-line depreciation method, over five years, with zero residual value. 

Requirements 

1. Prepare BRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
2. Prepare BRC’s balance sheet at December 31, 2018. 
3. Prepare BRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method.

Preparing the statement of cash flows—direct method Use the Rolling Hills, Inc. data from Problem P14-34A. Requirements 

1. Prepare the 2018 statement of cash flows by the direct method.

2. How will what you learned in this problem help you evaluate an investment?

The 2018 comparative balance sheet and income statement of Appleton Group, Inc. follow. Appleton disposed of a plant asset at book value during 2018

Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method. A plant asset was disposed of for \(0. The cost and accumulated depreciation of the disposed asset was \)11,600. There were no sales of land, no retirement of common stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.

Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow: 

a. On January 1, 2018, CRC issued no-par common stock for \(525,000. 

b. Early in January, CRC made the following cash payments: 

1. For store fixtures, \)51,000 

2. For merchandise inventory, \(240,000 

3. For rent expense on a store building, \)18,000

c. Later in the year, CRC purchased merchandise inventory on account for \(243,000. Before year-end, CRC paid \)153,000 of these accounts payable. 

d. During 2018, CRC sold 2,800 units of merchandise inventory for \(325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was \)290,000, and ending merchandise inventory totaled \(193,000. 

e. The store employs three people. The combined annual payroll is \)82,000, of which CRC still owes \(5,000 at year-end. 

f. At the end of the year, CRC paid income tax of \)17,000. There were no income taxes payable. 

g. Late in 2018, CRC paid cash dividends of $38,000. 

h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual value. 

Requirements 

1. What is the purpose of the statement of cash flows? 

2. Prepare CRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together. 

3. Prepare CRC’s balance sheet at December 31, 2018. 

4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Accountants for Benson, Inc. have assembled the following data for the year ended December 31, 2018: 

                                                                                            2018                   2017     Current Assets:                                                                                                       Cash                                                                           \( 105,100           \) 18,000 Accounts Receivable                                                     64,400              68,900 Merchandise Inventory                                                  86,000              82,000 Current Liabilities:                                                                                              Accounts Payable                                                           58,000              56,100 Income Tax Payable                                                            14,700                16,900 

Transaction Data for 2018:

 Issuance of common stock for cash \( 37,000

 Payment of notes payable \) 47,100 

Depreciation expense 24,000 

Payment of cash dividends 53,000 

Purchase of equipment with cash 69,000 

Issuance of notes payable to borrow cash 68,000 

Acquisition of land by issuing long-term notes payable 123,000

 Gain on sale of building 4,500 

Book value of building sold 61,000 

Net income 66,000 

Prepare Benson’s statement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities

The 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset was $13,240. Plant asset was acquired for cash. 

Requirements 

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method. 

2. How will what you learned in this problem help you evaluate an investment?

Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flows 

The comparative balance sheet of Robeson Educational Supply at December 31, 2018, reported the following: 

    2018                 2017              Current Assets:                                                                                                         Cash                                                                            \( 83,900           \) 20,500 Accounts Receivable                                                   14,500               21,800 Merchandise Inventory                                                 61,800              60,400 Current Liabilities:                                                                                             Accounts Payable                                                         29,600              28,100 Accrued Liabilities                                                        10,500              11,900 Robeson’s transactions during 2018 included the following: 

Payment of cash dividends \( 21,200

 Depreciation expense \) 17,400 

Purchase of equipment with cash 54,400 

Purchase of building with cash 103,000 

Issuance of long-term notes payable to borrow cash 44,000

 Net income 63,600

 Issuance of common stock for cash 111,000 

Requirements 

1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities. 

2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.

 3. If Robeson plans similar activity for 2018, what is its expected free cash flow?

Preparing the statement of cash flows—direct method 

Diversion Rare Coins (DRC) was formed on January 1, 2018. Additional data for the year follow: 

a. On January 1, 2018, DRC issued no par common stock for \(450,000. 

b. Early in January, DRC made the following cash payments: 

1. For store fixtures, \)46,000 

2. For merchandise inventory, \(310,000 

3. For rent expense on a store building, \)18,000 

c. Later in the year, DRC purchased merchandise inventory on account for \(238,000. Before year-end, DRC paid \)138,000 of this accounts payable.

 d. During 2018, DRC sold 2,700 units of merchandise inventory for \(400 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)340,000, and ending merchandise inventory totaled \(208,000.

 e. The store employs three people. The combined annual payroll is \)97,000, of which DRC still owes \(6,000 at year-end.

f. At the end of the year, DRC paid income tax of \)18,000. There was no income taxes payable. 

g. Late in 2018, DRC paid cash dividends of $35,000. 

h. For store fixtures, DRC uses the straight-line depreciation method, over five years, with zero residual value. 

Requirements

 1. Prepare DRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.

 2. Prepare DRC’s balance sheet at December 31, 2018. 

3. Prepare DRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method

Preparing the statement of cash flows—indirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset were $13,240. Plant asset was acquired for cash. 

Requirements 

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method. 

2. How will what you learned in this problem help you evaluate an investment?

Using a spreadsheet to prepare the statement of cash flows— indirect method The 2018 comparative balance sheet and income statement of Attleboro Group, Inc. follow. Attleboro disposed of a plant asset at book value in 2018.

Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method. A plant asset was disposed of for \(0. The cost and accumulated depreciation of the disposed asset was \)13,600. There were no sales of land, no retirement of common stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.

Preparing the statement of  cash flows-indirect statement This problem continues the Canyon Canoe Company situation from Chapter 13. Canyon Canoe Company's comparative balance sheet is shown below.  2019 amounts are assumed, but include several transactions from prior chapters.

Additional data fellow:

1. The income statement for 2019 included the following items:                                                Net income, \(417,000.                                                                                                            Depreciation expense for the year, \)34,330.                                                                  Amortization on the bonds payable, \(254. 
2. There were no disposals of property, plant and equipment during this year. All acquistions of PP&E were for cash except the land, which was acquired by issuing preferred stock.  
3. The company issued bonds payable with a face value of \)210,000, receiving cash of \(208,476.
4. The company distributed 4,000 shares of common stock in a stock dividend when the market value was \)4.50 per share. All other dividends were paid in cash.
5. The common stock, except for the stock dividend, was issued for cash.
6. The cash receipt from the note payable in 2019 is considered a financing activity because it does not relate to operations.                                                                                     Requirements                                                                                                                            Prepare the statement of cash flows for the year ended December 31, 2019, using the indirect method. 

  Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan. 

Requirements 

1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better? 
2. Under what condition would the reclassification of the receivables be ethical? Unethical?