1

Chapter 13

Week 13
E 1319 (LO2)

Classification of Cash Flows

Transaction

Not
Reported in
Statement
Reported in Statement of Cash Flows
of Cash
Operating
Investing
Financing
Flows

a. Collections from
customers..............................
b. Depreciation expense...........
c. Wages and salaries paid ......
d. Cash dividends paid .............
e. Taxes paid .............................
f. Utilities paid ..........................
g. Building purchased in
exchange for stock ...............
h. Stock of Western Co.
purchased..............................
i. Inventory purchased for
cash........................................
j. Interest on Altas note to
local bank paid......................
k. Interest received from a
note with a customer ............
l. Delivery truck sold at no
gain or loss............................

X
X*
X
X
X
X
X**
X
X
X
X
X

*Depreciation is ignored when using the direct method.

**This information would be reported in a supplemental note or schedule but not
on the statement itself.
E 1321 (LO3)
1.

a.

b.
c.
d.

Transaction Analysis

Cash .................................................................................
Common Stock (1,000 shares $10 par) .................
Paid-In Capital in Excess of Par ...............................

25,000

Cash .................................................................................
Accounts Receivable.................................................

100,000

Dividends Payable...........................................................
Cash ............................................................................

50,000

Cash .................................................................................

1,500

10,000
15,000
100,000
50,000

Chapter 13

Interest Revenue ........................................................

e.
f.

2.

1,500

Insurance Expense .........................................................

Cash ............................................................................

1,200

Depreciation Expense.....................................................
Accumulated Depreciation........................................

5,000

1,200
5,000

a.

The $25,000 cash inflow would be classified as a financing activity.

b.

The $100,000 cash inflow would be classified as an operating activity.

c.

The $50,000 cash outflow would be classified as a financing activity.

d.

The $1,500 cash inflow would be classified as an operating activity.

e.

The $1,200 cash outflow would be classified as an operating activity.

f.

Depreciation is a noncash item. The $5,000 would be added back as an

adjustment to net income under the indirect method and ignored when
using the direct method.
E 1322 (LO3)
Preparing a Simple Cash Flow Statement
Stern Company
Statement of Cash Flows
For the Year Ended December 31, 2008
Cash flows from operating activities:
Collections from customers ..........................................
Payments for wages and salaries .................................
Payments for inventory ..................................................
Payments for other cash operating expenses .............
Payments for taxes .........................................................
Net cash flows used in operating activities .................
Cash flows from investing activities:
Proceeds from sale of equipment .................................
Proceeds from sale of nontrading securities ...............
Net cash flows provided by investing activities...........
Cash flows from financing activities:
Proceeds from new bank loan .......................................
Payments of dividends ...................................................
Net cash flows provided by financing activities ..........
Net increase in cash ............................................................
Beginning cash balance ......................................................
Ending cash balance ...........................................................

$145,500
(60,000)
(64,000)
(10,500)
(25,000)
$(14,000)

4,750
17,000
21,750

$ 45,000
(4,000)
41,000
$ 48,750
29,870
$ 78,620

Chapter 13

E 1324 (LO4)

Adjustments to Cash Flows from Operations (Indirect Method)

1.

Increase in Accounts Receivable .....

2.

Decrease in Accounts Payable .........

3.

Increase in securities classified

as cash equivalents ...........................

4.

Gain on sale of equipment ................

5.

Decrease in Inventory ........................

6.

Increase in Prepaid Insurance ..........

7.

Depreciation .......................................

8.

Increase in Wages Payable ...............

9.

Decrease in Dividends Payable ........

10.

Decrease in Interest Receivable .......

Adjustment to Net Income

Subtracted
Subtracted
Does not affect cash flows from operations; would be included as cash
equivalent
Subtracted (proceeds reported as investing activity)
Added
Subtracted
Added (noncash item)
Added
Does not affect cash flows from operations
Added

E 1325 (LO4)

Chapter 13

Cash Flows from Operations (Direct Method)

Sales revenue .......................................................

+
Beginning accounts receivable ..................

Ending accounts receivable .......................

Total cash receipts.......................................

$510,000
42,000
(39,000)
$513,000

Cost of goods sold............................................... $320,000

+
Ending inventory ..........................................
39,000

Beginning inventory..................................... (38,000)

Purchases ............................................................. $321,000
+
Beginning accounts payable.......................
16,000

Ending accounts payable ............................ (19,000)

Cash paid to suppliers for inventory ..................

$318,000

Wages expense .................................................... $ 75,000

+
Beginning wages payable ...........................
10,000

Ending wages payable.................................

(8,800)
Cash paid to employees ......................................

76,200

Utilities expense (no adjustments required)......

2,500

Rent expense (no adjustments required)...........

35,400

Insurance expense............................................... $ 6,900

+
Ending prepaid insurance ...........................
1,800

Beginning prepaid insurance......................

(2,200)
Cash paid for insurance ......................................
Total cash payments....................................
Net cash flows provided by operating activities

6,500
438,600
$ 74,400

The following spreadsheet may be helpful in explaining the adjustments:

Sales Revenue
Cost of Goods Sold

$510,000
320,000

Wages Expense
Utilities Expense
Rent Expense
Insurance Expense

75,000
2,500
35,400
6,900

Net Income

$ 70,200

3,000
1,000
3,000
1,200
0
0
400

$513,000 Cash collected from customers

318,000 Cash paid for inventory
76,200
2,500
35,400
6,500

Cash paid for wages

Cash paid for utilities
Cash paid for rent
Cash paid for insurance

$ 74,400 Cash from operating activities

Chapter 13

E 1327 (LO4)
Cash Flows Provided by Operations (Direct Method)
Cash flows from operating activities:
Cash receipts from:
1
Customers ....................................................................
$513,000
Cash payments for:
2
Inventory .......................................................................
$(311,400)
Operating expenses.....................................................
(36,500)3
Interest expense...........................................................
(3,500)
(351,400)
Net cash flows provided by operating activities ...............
$161,600
1

$ 500,000
43,000
(30,000)
$ 513,000

$ 300,000
50,000
(42,000)
$ 308,000
59,400
(56,000)
$ 311,400

Sales revenue......................................................................
Cost of goods sold .............................................................
Gross margin ......................................................................
Less expenses ....................................................................
Net income ..........................................................................

$ 500,000
300,000
$ 200,000
110,000
$ 90,000

Expenses .............................................................................
Less noncash items:
Depreciation .................................................................
Amortization .................................................................
Cash expenses .............................................................
Less interest expense..................................................
Cash operating expenses ..................................................

$ 110,000

Sales revenue......................................................................
+ Beginning accounts receivable ..................................
Ending accounts receivable........................................
Cash collected from customers ........................................
Cost of goods sold .............................................................
+ Ending inventory ..........................................................
Beginning inventory.....................................................
Purchases............................................................................
+ Beginning accounts payable.......................................
Ending accounts payable ............................................
Cash paid for inventory......................................................

(60,000)
(10,000)
$ 40,000
(3,500)
$ 36,500

The following spreadsheet may be helpful in explaining the adjustments:

Sales Revenue
Cost of Goods Sold
Depreciation Expense
Amortization Expense
Interest Expense
Other Expenses
Net Income

$500,000
300,000
60,000
10,000
3,500
36,500
$ 90,000

13,000
8,000
3,400
60,000
10,000
0
0

$513,000 Cash collected from customers

311,400 Cash paid for inventory
0
0
3,500
36,500

Cash paid for depreciation

Cash paid for goodwill
Cash paid for interest
Cash paid for other expenses

$161,600 Cash from operating activities

E 1331 (LO4)

Chapter 13

Net Cash Flows (Indirect Method)

Cash flows from operating activities:

Net income............................................................................

$ 95,000

Add (deduct) adjustments to cash basis:

Depreciation ....................................................................
Increase in accounts receivable....................................
Decrease in inventory.....................................................
Increase in prepaid assets .............................................
Decrease in accounts payable.......................................
Increase in wages payable.............................................
Net cash flows provided by operating activities ..........

25,000
(10,000)
3,000
(7,000)
(5,000)
15,000

Cash flows from investing activities:

Cash payment for equipment.........................................
Net cash flows used in investing activities ..................

$(40,000)

Cash flows from financing activities:

Cash receipts from issuance of bonds .........................
Cash payments for dividends ........................................
Net cash flows provided by financing activities ..........
Net increase in cash ............................................................

$116,000

(40,000)
$100,000
(42,000)*
58,000
$134,000

*Dividends declared and paid ($40,000) plus decrease in Dividends Payable

($2,000).
E 1333 (LO4)

Statement of Cash Flows (Indirect Method)

North Western Company
Statement of Cash Flows
(Indirect Method)
For the Year Ended December 31, 2009

Cash flows from operating activities:

Net income ......................................................................

$ 52,500

Add (deduct) adjustments to cash basis:

Depreciation ....................................................................
Decrease in accounts receivable ..................................
Increase in inventory ......................................................
Increase in accounts payable ........................................
Net cash flows provided by operating activities ..........

22,500
3,000
(15,000)
6,000

Cash flows from investing activities:

Cash payments for plant and equipment......................
Net cash flows used in investing activities ..................

$(60,000)*

Cash flows from financing activities:

Cash payments for dividends ........................................

$ 69,000

(60,000)
$(21,000)

Chapter 13

Cash receipts from issuance of capital stock ..............

Net cash flows used in financing activities ..................
Net decrease in cash and cash equivalents ......................
Cash and cash equivalents at beginning of period...........
Cash and cash equivalents at end of period .....................

7,500
(13,500)
$ (4,500)
9,000
$ 4,500

*Increase in plant and equipment ($37,500) plus depreciation ($22,500) = $60,000

cash paid for plant and equipment.
The following spreadsheet may be helpful in explaining the adjustments:
Sales Revenue
Cost of Goods Sold

$412,500
225,000

Depreciation Expense
Other Expenses

22,500
112,500

Net Income

$ 52,500

3,000
15,000
6,000
22,500
0

$415,500 Cash collected from customers

234,000 Cash paid for inventory
0 Cash paid for depreciation
112,500 Cash paid for other expenses
$ 69,000 Cash from operating activities

P 1338 (LO3, LO4) ............ Analysis of the Cash Account

1. a. Accounts Receivable ......................................................
Sales ...........................................................................

b.

c.

d.

e.
f.

164,000
164,000

Cash .................................................................................
Accounts Receivable.................................................

168,000

Inventory ..........................................................................
Accounts Payable ......................................................

48,000

Accounts Payable ...........................................................

Cash ............................................................................

45,500

Equipment........................................................................
Cash ............................................................................
Equipment purchases ($29,000) less equipment
sales ($8,000) = increase in equipment account
($21,000).

29,000

Cash .................................................................................
Accumulated DepreciationEquipment .......................
Equipment ..................................................................
Gain on Sale of Equipment .......................................

5,000
4,000

Cash .................................................................................
Notes Payable ............................................................

22,000

Operating Expenses .......................................................

Accumulated DepreciationEquipment..................
Cash ............................................................................

43,200

168,000
48,000
45,500
29,000

8,000
1,000
22,000
2,400
40,800

Chapter 13

g.

h.

Interest Expense .............................................................

Interest Payable .........................................................

1,800

Interest Payable...............................................................
Cash ............................................................................

2,100

Income Tax Expense.......................................................

Income Taxes Payable ..............................................

4,200

Income Taxes Payable....................................................

Cash ............................................................................

3,300

1,800
2,100
4,200
3,300

Chapter 13

P 1338 (LO3, LO4)

2.

(Concluded)
Mars Company
Statement of Cash Flows
For the Year Ended December 31, 2009

Cash flows from operating activities:

Cash collected from customers ............................
Cash payments for inventory.................................
Cash payments for operating expenses ...............
Cash payment for interest......................................
Cash payment for taxes .........................................
Net cash flows provided by operating activities ..

$168,000
(45,500)
(40,800)
(2,100)
(3,300)

Cash flows from investing activities:

Purchase of equipment ..........................................
Sale of equipment...................................................
Net cash flows used in investing activities ..........

$ (29,000)
5,000

Cash flows from financing activities:

Proceeds from bank loan .......................................
Net cash flows provided by financing activities ..
Net increase in cash ....................................................
Beginning cash balance ..............................................
Ending cash balance ...................................................
P 1342 (LO4)
1.

$ 76,300

(24,000)

$ 22,000
22,000
$ 74,300
16,300
$ 90,600

Cash Flows from Operations (Indirect and Direct Methods)

Indirect method:
Net income ....................................................................................
Add (deduct) adjustments to cash basis:
Depreciation.............................................................................
Decrease in accounts receivable ...........................................
Increase in inventory...............................................................
Increase in prepaid expenses ................................................
Decrease in accounts payable ...............................................
Increase in interest payable ...................................................
Increase in income taxes payable..........................................
Gain on sale of equipment......................................................
Net cash flows from operations .............................................

$21,840
5,400
1,300
(1,200)
(150)
(200)
250
300
(3,000)
$24,540

The following spreadsheet may be helpful in explaining the adjustments:

Sales Revenue
Other Revenues

$105,000
3,000

1,300
3,000

$106,300 Cash collected from customers

0 Eliminate gain on sale

10

Chapter 13

Cost of Goods Sold

55,000

S & A Expenses
Depreciation Expense
Interest Expense
Tax Expense

15,200
5,400
1,200
9,360

Net Income

2.

$ 21,840

1,200
200
150
5,400
250
300

56,400 Cash paid for inventory

15,350
0
950
9,060

Cash paid for S & A expenses

Cash paid for depreciation
Cash paid for interest expense
Cash paid for taxes

$ 24,540 Cash from operating activities

Direct method:
Cash collected from customers........................................................
Cash paid for inventory .....................................................................
Cash paid for S & A expenses ..........................................................
Cash paid for interest expense .........................................................
Cash paid for taxes ............................................................................
Cash from operating activities..........................................................

$106,300
56,400
15,350
950
9,060
$ 24,540

3. Dividends paid have no impact on net cash flows from operations. Dividends affect retained earnings, not net income. The cash flows from dividends are shown as a financing activity, not as an operating activity.