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operating activities to cover ordinary operating costs, replace assets, and repay
creditors.




3 SELF-STUDY PROBLEM A statement of cash flows is provided below for Sound Bytes
Company.


Sound Bytes Company
Statement of Cash Flows
For the Year Ended December 31, 2004

Operating Activities
Net income $ 40,698
Adjusted for:
Increase in accounts receivable (23,034)
Increase in merchandise (36,780)
Increase in accounts payable 22,479
Increase in prepaid expenses (12,340)
Decrease in other payables (3,982)
Depreciation and amortization 35,612
Net cash flow from operating activities 22,653
Investing Activities
Sale of plant assets 86,511
Financing Activities
Repayment of debt (115,240)
Net decrease in cash (6,076)
Cash balance, December 31, 2003 15,495
Cash balance, December 31, 2004 $ 9,419
F192 ReportingSECTION F1: The Accounting Information System
192 Cash Flows

Required Use the statement to answer the following questions.

A. How much cash flow did the company create from its operating activities?
B. What are the primary explanations for the difference between the company™s net
income and operating cash flow?
C. How did the company use its cash flows?
D. How well does the company appear to be performing based on its cash flow in-
formation?
The solution to Self-Study Problem 3 appears at the end of the chapter.



REVIEW SUMMARY of IMPORTANT CONCEPTS


1. The statement of cash flows reports the cash inflows and outflows associated with the
operating, investing, and financing activities of a company for a fiscal period. The state-
ment may be presented in a direct or indirect format.
a. The direct format lists cash activities associated with operating activities for a fiscal
period.
b. The indirect format reports cash flow from operating activities by adjusting net in-
come for operating activities that did not generate or use cash during a fiscal pe-
riod. These adjustments consist of revenues or expenses (such as depreciation) that
did not have a cash effect and changes in current asset and current liability ac-
counts.

2. Cash flow information is important to decision makers.
a. Information about the sources and uses of cash indicates a company™s ability to
meet its payment obligations now and in the future.
b. Cash flow information, along with information on the income statement and bal-
ance sheet, provides insight into a company™s operating, investing, and financing ac-
tivities.



SELF-STUDY PROBLEM SOLUTIONS
SSP5-1
Jerome, Inc.
Statement of Cash Flows

Operating Activities
Received from customers $ 14,750
Paid for merchandise (8,400)
Paid to employees (4,000)
Paid for utilities (2,200)
Paid for supplies (1,800)
Net cash flow for operating activities (1,650)
Investing Activities
Received from sale of land $ 20,000
Paid for building (75,000)
Paid for equipment (13,500)
Net cash flow for investing activities (68,500)
Financing Activities
Received from sale of stock $100,000
Paid for debt repayment (35,000)
Paid for dividends (2,500)
Net cash flow from financing activities 62,500
Net decrease in cash (7,650)
Cash balance at beginning of period 16,350
Cash balance at end of period $ 8,700
F193
CHAPTER F5: Reporting Cash Flows
193
Reporting Cash Flows

The company™s primary sources of cash were from selling stock, selling land, and from sales
of goods to customers. Its primary uses of cash were the purchase of a building and equip-
ment and the repayment of debt.


SSP5-2
Bryson Co.
Statement of Cash Flows

Operating Activities
Net income $16,540
Adjustments to reconcile net income to cash flows:
Depreciation and amortization expense 3,560
Increase in accounts receivable (2,500)
Decrease in merchandise 3,200
Increase in supplies (430)
Increase in accounts payable 660
Decrease in wages payable (375)
Increase in interest payable 280
Decrease in income tax payable (700)
Net increase in operating cash flows $20,235




SSP5-3 A. Net cash flow from operating activities was $22,653.
B. Primary explanations of the differences are increases in current assets (merchandise
and receivables), an increase in accounts payable, and depreciation and amortization
expense.
C. Cash flows from operating and investing activities were used to repay debt.
D. The company does not appear to be performing very well. Its operating cash flows
were much less than its net income. The increase in merchandise and receivables and
the increase in payables suggest that the company was not selling the inventory it was
acquiring, was having difficulty collecting from its customers, and was having diffi-
culty paying its suppliers. Selling plant assets to meet current cash needs is also a sign
of poor financial performance. The company apparently needed more cash than it
could create from its operating activities to meet its obligations. It was forced to sell
assets to raise cash. In the long run, a company cannot survive by selling assets to re-
pay debt.




Thinking Beyond the Question
How is cash flow information determined and reported to external
users?

This chapter examined the opening question by describing two methods of prepar-
ing the statement of cash flows. Both methods use income statement and bal-
ance sheet amounts to determine cash flows. It is important to understand the
relationships among the statements to obtain a complete picture of a business.
Is it possible for a profitable business to fail? What do you think are the pri-
mary causes of business failure? How are a company™s financial statements use-
ful for identifying financial problems that may lead to failure? What role does the
statement of cash flows play in decision making by investors and creditors?
F194 ReportingSECTION F1: The Accounting Information System
194 Cash Flows


QUESTIONS
What question is the direct format of the statement of cash flows designed to answer?
Q5-1
Obj. 1

If a company acquires machinery in exchange for a long-term note payable, both a financing
Q5-2
activity and an investing activity have taken place. Explain how this is true.
Objs. 1, 2

Q5-3 If long-term assets are acquired in exchange for shares of stock, no cash is involved. Will this
transaction be reported on the statement of cash flows? If not, why not? If so, how?
Objs. 1, 2

The direct format and indirect format relate only to the operating activities section of the state-
Q5-4
ment of cash flows. Regarding the investing and financing activities sections, are they pre-
Objs. 1, 2
sented in a direct-type format or an indirect-type format?
Why does the cash effect of interest appear as an operating activity, rather than a financing or
Q5-5
investing activity?
Objs. 1, 2

Explain why depreciation expense and amortization expense are added back to net income in
Q5-6
the determination of cash flows from operations when the indirect format is used.
Obj. 2

In indirect format, why is an increase in accounts receivable subtracted from net income in
Q5-7
computing cash flow from operations?
Obj. 2

What question is the indirect format of the statement of cash flows designed to answer? Ex-
Q5-8
plain.
Obj. 2

Why would one usually expect a growing company to have negative cash flow from investing
Q5-9
activities?
Obj. 1

Why is it a bad sign if cash flow from operations is consistently negative?
Q5-10
Obj. 3

Why is it a bad sign if cash flow from investing activities is consistently positive?
Q5-11
Obj. 3

Assume a company consistently produces net cash inflow from operations. To what uses might
Q5-12
this cash inflow be applied?
Obj. 3

Assume a company consistently reports a net cash outflow from financing activities. What
Q5-13
does this suggest about the company?
Obj. 3

Upon studying its statement of cash flows, you note that over the last three years a firm has
Q5-14
consistently reported negative cash flow from operating activities, positive cash flow from in-
Obj. 3
vesting activities, and negative cash flow from financing activities. What does this combina-
tion of cash flows suggest to you about the firm?
Q5-15 Explain how a company can have a net loss for a fiscal period but have a net increase in cash
from operating activities.
Obj. 3

A company operating in a mature industry with few opportunities for growth or expansion
Q5-16
will generally report negative cash flow from financing activities. Why? Where might this cash
Obj. 1
be going?
F195
CHAPTER F5: Reporting Cash Flows
195
Reporting Cash Flows


If your instructor is using Personal Trainer in this course, you may complete online the assign-
EXERCISES ments identified by .
The following information reflects cash flow and other activities of Better Vision Eyeglass Com-
E5-1
pany for three months ended March 31, 2004.
Obj. 1

Paid for equipment $42,000 Paid to owners $12,000
Paid for income taxes 3,000 Paid to suppliers 39,000
Paid for insurance 200 Depreciation expense 13,000
Paid for interest 450 Received from customers 87,500
Paid for utilities 790 Received from issuing long-term debt 23,000
Paid for advertising 300 Received from sale of land 19,500
Paid to employees 18,000

Use this information to answer the following questions:
a. What was net cash flow from operating activities for the period?
b. What was net cash flow from financing activities for the period?
c. What was the net cash flow from investing activities for the period?
d. What was the net change in cash for the period?
For each of the items listed below, identify whether the item would appear on the statement
E5-2
of cash flows (direct format) as part of the computation of cash flow from operating activi-
Obj. 1
ties, investing activities, financing activities, or would not appear at all. Also, indicate whether
the item is added or subtracted in computing cash flow using the direct method of preparing
the statement of cash flows.
a. Purchase of plant assets
b. Cash paid to suppliers
c. Cash collected from customers
d. Payment of long-term debt
e. Net income
f. Depreciation expense
g. Payment of dividends
h. Issuing stock
i. Cash paid to employees
j. Cash paid for income taxes
k. Disposal of plant assets
Northport Bottling Company has the following information available for the first six months
E5-3
of 2004.
Obj. 1

Cash collected from customers $268,000
Cash paid to suppliers 82,500
Cash paid for utilities 20,000
Cash paid for insurance 23,000
Cash paid for equipment 75,000
Cash paid to employees 57,500
Cash paid for interest 9,000
Cash paid for dividends 5,000
Cash received from disposal of equipment 18,500

Determine the cash flow from operating activities for the six-month period.
Bay View Company reported the following information at the end of its most recent fiscal year.
E5-4
Obj. 1
Cash paid for fire insurance $ 5,000
Cash paid for dividends 22,600
Cash paid to suppliers of inventory 119,850
Cash paid for interest 3,750
Cash collected from customers 187,200
Cash received from disposal of equipment 38,000
Cash paid for utilities 9,400
Cash paid to employees 31,500
(Continued)
Cash paid for equipment 65,100
F196 ReportingSECTION F1: The Accounting Information System
196 Cash Flows

Determine each of the following amounts. Show your work neatly and clearly.
a. Net cash flow from operating activities (direct format)
b. Net cash flow from financing activities
c. Net cash flow from investing activities
Eden Healthfoods reported the following information.
E5-5
Obj. 1
Proceeds from issuance of long-term debt $13,057
Additions to plant and equipment 5,500
Proceeds from sales of businesses 30,957
Proceeds from sales of plant and equipment 1,986
Payments of debt 83,000

Calculate the net cash flow from (a) financing and (b) investing activities for Eden.
All of the following statements apply to the statement of cash flows covering a given period.
E5-6
If a statement applies only to the direct format, write D in the space allowed. If a statement
Objs. 1, 2
applies only to the indirect format, write I in the space allowed. If a statement applies to both
formats, write B in the space allowed.
____________ a. The amount of cash received from customers is listed.
____________ b. A purpose of the statement is to reconcile the amount of cash generated
by operating activities to the amount of net income generated by operat-
ing activities.
____________ c. The amount by which cash receipts from customers differed from sales is
reported.
____________ d. Certain revenues and expenses that did not generate or consume cash are
listed.
____________ e. The amount of net income is listed on the face of the statement.
____________ f. The amount of cash paid to suppliers of inventory is included.
____________ g. The amount of cash paid for taxes is reported.
____________ h. The amount of cash raised from selling bonds to investors is listed on the
face of the statement.
____________ i. The purpose of the statement is to reveal the amount of cash received
from or paid out for specific operating activities.
____________ j. The amount of cash paid to acquire land and buildings is included.
Each of the items found below might appear on a statement of cash flows.
E5-7
Objs. 1, 2


Statement Statement Added or
Section Format Subtracted?
1. Decrease in taxes payable
2. Cash paid to suppliers of inventory
3. Dividends declared and paid
4. Depreciation expense
5. Sale of stock
6. Increase in accounts receivable
7. Cash collected from customers
8. Purchase of plant assets
9. Payments on long-term debt
10. Cash paid for taxes
11. Increase in wages payable
12. Purchase of treasury stock



For each item, indicate answers as shown.
a. Would it appear on the statement of cash flows under the operating activities (O), in-
vesting activities (I), or financing activities (F) section?
b. Would it appear in the direct format (D), indirect format (I), or in both formats (B)?
c. Would it be added (1) or subtracted (2) in computing cash flow?
F197
CHAPTER F5: Reporting Cash Flows
197
Reporting Cash Flows

E5-8 For each item in the following list, identify whether it would appear on the statement of cash
flows (indirect format) as part of the computation of cash flow from operating activities, cash
Obj. 2
flow from investing activities, or cash flow from financing activities. Also, indicate whether
the item is added or subtracted in computing cash flow using the indirect method of prepar-
ing the statement of cash flows.
a. Purchase of plant assets
b. Increase in accounts payable
c. Decrease in accounts receivable
d. Payment of long-term debt
e. Net income
f. Depreciation expense
g. Payment of dividends
h. Issuing stock
i. Increase in inventory
j. Decrease in taxes payable
k. Disposal of plant assets
The following information is available for Guardian Company for the first month of 2004.
E5-9
Obj. 2
Revenues $15,000
Expenses 8,000
Increase in accounts receivable 700
Decrease in inventory 1,200
Decrease in supplies 400
Increase in accounts payable 1,100
Decrease in wages payable 900
Depreciation expense 800
Patent expense 300

Determine the cash flow from operating activities for the month.
Use the information provided in each of the following independent situations to answer
E5-10
the questions. For each situation, briefly explain the reasoning behind each of your calcu-
Obj. 2
lations.
a. Cash paid to suppliers for merchandise during a period was $37,500. Accounts payable
decreased during the period by $3,000. Inventory increased during the period by
$3,500. What was the cost of goods sold for the period?
b. Interest paid during a period was $4,000. Interest payable decreased during the period
by $1,200. What was the interest expense for the period?
c. Cash flow from operations for a period was $28,000. Current assets decreased during
the period by $6,000. Current liabilities decreased during the period by $2,000. What
was net income for the period?
d. Cash collected from customers for a fiscal period was $27,000. Accounts receivable in-
creased during the period by $3,000. What was sales revenue for the period?
Use the information provided in each of the following independent situations to answer the
E5-11
questions. For each situation, briefly explain the reasoning behind each of your calculations.
Obj. 2

a. Net cash flow from operations for a period was $30,000. Noncash revenues for the pe-
riod were $11,000. Noncash expenses for the period were $13,200. What was net in-
come for the period?
b. Wages expense for a period was $69,000. Wages payable increased during the period by
$10,500. How much cash was paid to employees during the period?
c. Cash collected from customers for a fiscal period was $224,500. Sales revenue for the
period was $241,000. Accounts receivable at the beginning of the period was $36,000.
What was the balance in accounts receivable at the end of the period?
d. Net income for a period was $45,000. Current assets increased during the period by
$7,500. Current liabilities increased during the period by $10,000. How much was cash
flow from operations for the period?
Changes in account balances are shown in the following chart. For each item, where appro-
E5-12
priate, indicate the adjustment that would be made to net income in the operating cash flow
Obj. 2
(Continued)
F198 ReportingSECTION F1: The Accounting Information System
198 Cash Flows

section of a cash flow statement using the indirect method and the reason for the adjustment.
Item a is provided as an example.

Account Balance Adjustment and Reason
a. Accounts receivable increased $10,000 Subtract $10,000 from net income
because cash collected from
customers was $10,000 less than
sales for the period.
b. Accounts payable increased $7,500
c. Inventory decreased $50,000
d. Notes payable increased $100,000
e. Equipment decreased $80,000
f. Prepaid insurance decreased $22,000
g. Wages payable decreased $8,000
h. Unearned revenue increased $13,000


The following information was reported by The Boeing Company in its 2000 annual report
E5-13
(in millions of dollars).
Obj. 2

Decrease in inventories $1,097
Decrease in short-term investments 100
Depreciation and amortization 1,479
Decrease in accounts payable 311
Increase in accounts receivable 768
Increase in income taxes payable 421
Net earnings 2,128
Other additions to net income 1,796

What was Boeing™s cash flow from operating activities for the fiscal year?

Martha Rosenbloom holds stock in several major corporations. Each year she receives a copy
E5-14
of the companies™ annual reports. She looks at the pictures, reads the discussion by manage-
Obj. 2
ment, and examines some of the primary financial statement numbers. She has a pretty good
understanding of some of the financial statement information. She tells her friends that she
doesn™t know how to make heads or tails of the statement of cash flows, however. She doesn™t
understand how depreciation and changes in current assets and liabilities have anything to do
with cash. A mutual friend, Arthur Doyle, has found out that you are taking accounting and
asks you to help Martha. Write Martha a letter explaining the cash flow from operating ac-
tivities section of the statement of cash flows found in most annual reports. Martha™s address
is 945 Oak Lane, Anytown, USA.

Great Adventure Travel Company had the following adjustments to net income when com-
E5-15
puting its cash flow from operations for the year just ended.
Obj. 2

Net income $326,000
Add: Adjustments
(1) Depreciation $13,000
(2) Decrease in accounts receivable 2,000
(3) Increase in inventory (4,500)
(4) Decrease in accounts payable (3,000) 7,500
Cash flow from operations $333,500

a. Explain why it is generally necessary to make additions to and subtractions from net
income when computing cash flow from operations in the indirect format.
b. For each adjustment (labeled 1 through 4), explain why that specific adjustment was
necessary to determine cash flow from operations.

Bingle, Bangle, and Bungle all manufacture toys. At year end 2004, they reported the follow-
E5-16
ing information.
Obj. 3
F199
CHAPTER F5: Reporting Cash Flows
199
Reporting Cash Flows

Bingle Bangle Bungle
Cash flow from operating activities $ 6,862 $ 14,656 $ 3,052
Cash flow from (for) investing activities (4,409) 457 938
Cash flow from (for) financing activities (834) (12,476) (2,307)

Respond to each of the following questions.
a. Which company had the largest amount of cash flow from operating activities? Which
had the smallest?
b. Would you generally expect cash flow associated with investing activities to be nega-
tive? Why or why not?
c. In what ways does Bingle appear to be different from the other two companies? What
do these differences suggest about the companies?
Consider the pattern in following selected year-end data for Landsdowne Company.
E5-17
Obj. 3
Year 1 2 3 4 5 6
Cash flow from
operating activities $20,000 $25,000 $18,000 $12,000 $ 6,000 $ 2,000
Receivables 35,000 37,000 42,000 45,000 50,000 53,000
Inventory 70,000 76,000 80,000 84,000 86,000 90,000
Payables 24,000 28,000 32,000 46,000 57,000 66,000
Net income 50,000 53,000 55,000 59,000 63,000 55,000

Provide an explanation for the changes over the six-year period. Year 6 is the most recent year.
What difficulties do you believe the company is facing?
Sommer Company has experienced the following results over the past three years.
E5-18
Obj. 3
Year 1 2 3
(In thousands)
Net income (loss) $ 2,000 $(10,000) $ (8,000)
Depreciation and amortization (9,000) (11,000) (14,000)
Net cash flow from operating activities 13,000 15,000 18,000
Net expenditures for plant assets 9,000 6,000 5,000

The price of Sommer™s common stock has declined steadily over the three-year period.
At the end of year 3, it is trading at $10 per share. Early in year 4, Bottom Fischer, who spe-
cializes in taking over poorly performing businesses, has offered shareholders of Sommer $18
per share for their stock. Why would Fischer be willing to pay such an amount? What does
he see in the company that suggests value?
Rockman Associates has reported the following selected account balances on its most recent
E5-19
balance sheet.
Obj. 3

Account and balance Anticipated future event and cash flow
a. Accounts receivable, $12,000 $12,000 of cash should be received from
customers during the next fiscal year.
This will appear in the operating activities
section.
b. Prepaid insurance, $22,000
c. Merchandise, $50,000
d. Treasury stock, $33,000
e. Accounts payable, $6,500
f. Machinery, $92,000
g. Notes payable, long-term, $88,000
h. Unearned revenue, $10,000
i. Taxes payable, $7,800
j. Retained earnings, $56,000

For each item, describe the anticipated future event and cash flow (if any) that is expected to
occur and in which section of a future statement of cash flows it will appear. The first item is
completed as an example.
F200 ReportingSECTION F1: The Accounting Information System
200 Cash Flows

If your instructor is using Personal Trainer in this course, you may complete online the assign-
PROBLEMS ments identified by .

Preparing a Statement of Cash Flows (Direct Format)
P5-1
Obj. 1 San Garza Properties has been in business for many years. On December 31, 2003, the firm™s
cash balance was $9,121. During January of 2004, the 14 events below were recorded in the
company™s accounting system.


ASSETS LIABILITIES OWNERS™ EQUITY
Other Contributed Retained
Date Accounts Cash Assets Capital Earnings
1 Cash 18,000
Bank Loan Payable 18,000
2 Rent Expense 3,000
Cash 3,000
3 Office Furniture 5,500
Cash 5,500
4 Merchandise 9,000
Accounts Payable 9,000
5 Cash 10,000
Common Stock 10,000
6 Advertising Expense 2,200
Cash 2,200
7 Accounts Receivable 18,000
Sales Revenue 18,000
8 Merchandise 7,500
Cost of Goods Sold 7,500
9 Cash 8,100
Accounts Receivable 8,100
10 Accounts Payable 7,000
Cash 7,000
11 Computer Equipment 4,800
Cash 4,800
12 Wages Expense 1,400
Wages Payable 1,400
13 Dividends 2,000
Cash 2,000
14 Bank Loan Payable 5,000
Interest Expense 135
Cash 5,135




Required Prepare a statement of cash flows for the month of January 2004. Use good form
and the direct format.

Preparing the Statement of Cash Flows (Direct Format)
P5-2
Obj.1 Planet Accessories Company reported the following balance sheet and income statement at
year-end 2004. In addition, dividends totaling $1,000 were paid.

Required
A. Assume the company uses the direct format to prepare its statement of cash flows.
What amounts would be reported on the 2004 statement of cash flows for each of the
following?
F201
CHAPTER F5: Reporting Cash Flows
201
Reporting Cash Flows

1. Cash collections from customers (Hint: Inspect Sales Revenue and the change in
Accounts Receivable.)
2. Cash paid to suppliers of inventory (Hint: Assume all purchases were made for cash.)
3. Cash paid for insurance (Hint: Inspect the insurance expense account and the
change in the prepaid insurance account.)
4. Cash paid for rent (Hint: Inspect Rent Expense and the change in Rent Payable.)
5. Cash paid for depreciation
6. Cash paid for wages
B. What items and amounts would be reported under cash flow from investing activities?
(Hint: Inspect the changes in long-term asset accounts.)
C. What items and amounts would be reported under cash flow from financing activities?
(Hint: Inspect the changes in long-term liability and stockholders™ equity accounts.)
D. Prepare a statement of cash flows using the direct format.


Balance Sheets at December 31 2004 2003 Income Statement for 2004
Cash $ 826 $ 553 Sales revenue $135,800
Accounts receivable 8,950 8,000 Cost of goods sold 54,300
Inventories 11,600 10,100 Gross profit 81,500
Prepaid insurance 400 300 Operating expenses:
Property, plant and equipment 8,750 3,735 Advertising 17,029
Less: Accumulated depreciation (2,900) (1,900) Depreciation 1,000
Land 5,850 4,850 Insurance 4,800
Rent 14,255
Total assets $33,476 $25,638
Wages 33,400
Rent payable $ 3,750 $ 4,000 Operating income 11,016
Wages payable 1,750 1,400 Interest expense 650
Loan payable, long-term 9,200 5,200 Income before taxes 10,366
Common stock, $1 par value 5,400 4,400 Taxes 3,628
Retained earnings 17,950 12,212 Net income $ 6,738
Treasury stock (4,574) (1,574)
Total liabilities and shareholders™ equity $33,476 $25,638




P5-3 Reconciling Net Income and Cash Flow from Operations
Obj. 2
For the fiscal year just completed, Dollar Sine Enterprises had the following summary infor-
mation available concerning operating activities. The company had no investing or financing
activities this year.

Sales of merchandise to customers on credit $307,400
Sales of merchandise to customers for cash 88,250
Cost of merchandise sold on credit 200,000
Cost of merchandise sold for cash 57,400
Purchases of merchandise from suppliers on credit 233,700
Purchases of merchandise from suppliers for cash 48,100
Collections from customers on accounts receivable 321,000
Cash payments to suppliers on accounts payable 293,600
Operating expenses (all paid in cash) 93,500

Required
A. Determine the amount of:
1. net income for the year.
2. cash flow from operations for the year (direct format).
B. Indicate the direction and amounts by which each of these accounts changed during
the year.
1. Accounts receivable
2. Merchandise inventory
3. Accounts payable
C. Using your results above, prepare the operating activities section of the statement of
cash flows (indirect format).
F202 ReportingSECTION F1: The Accounting Information System
202 Cash Flows

P5-4 Preparing a Statement of Cash Flow (Indirect Format)
Obj. 2
Reuben Corporation has completed its comparative balance sheet and income statement at
year-end 2004.

December 31,
Comparative Balance Sheet 2004 2003 Income Statement for 2004
Cash $ 4,400 $ 3,550 Sales revenue $355,000
Accounts receivable 4,100 5,300 Cost of goods sold 241,400
Inventory 5,700 4,100 Gross profit $113,600
Prepaid advertising 900 1,200 Operating expenses:
Buildings and furnishings 20,000 20,000 Advertising 8,300
Accumulated depreciation (6,000) (5,000) Depreciation 1,000
Land 14,000 10,000 Insurance 3,500
Rent 31,200
Total assets $43,100 $39,150
Wages 57,380
Rent payable $ 2,800 $ 2,600 Operating income 12,220
Taxes payable 1,600 2,000 Interest expense 1,450
Wages payable 2,000 900 Income before tax 10,770
Loan payable, long-term 14,000 22,250 Taxes 3,770
Common stock 16,000 10,000 Net income $ 7,000
Retained earnings 6,700 1,400
Total liabilities and equity $43,100 $39,150

Additional information:
1. A payment of $8,250 was made on the loan principal during the year.
2. Just before year-end, a dividend was distributed to stockholders.
3. A parcel of land was acquired early in the year.
4. New shares of common stock were sold during the year.

Required Prepare a statement of cash flows in good form using the indirect format.

Preparing the Statement of Cash Flows (Indirect Format)
P5-5
Obj. 2 Refer to the financial statement information in Problem P5-2 and use it to complete the re-
quirements below.

Required
A. Assume the company uses the indirect format to prepare its statement of cash flows.
What amounts would be reported on the 2004 statement of cash flows for each of the
following?
1. Net income
2. Adjustment for depreciation expense
3. Adjustment for accounts receivable
4. Adjustment for inventories
5. Adjustment for prepaid insurance
6. Adjustment for rent payable
7. Adjustment for wages payable
B. What items and amounts would be reported under cash flow from investing activities?
(Hint: Inspect the changes in long-term asset accounts.)
C. What items and amounts would be reported under cash flow from financing activities?
(Hint: Inspect the changes in long-term liability and stockholders™ equity accounts.)
D. Prepare a statement of cash flows using the indirect format.
F203
CHAPTER F5: Reporting Cash Flows
203
Reporting Cash Flows

Interpreting Cash Flows
P5-6
Obj. 3 The statement of cash flows for Rowe Furniture Corporation is shown below. Based in Salem,
Virginia, the firm manufactures upholstered household furniture including sofas, sofa beds,
and chairs.

Required Use the statement of cash flows to answer the following questions.
A. What were Rowe™s primary sources of cash in 2001? Were these different than in the
prior two years?
B. What were Rowe™s primary uses of cash in 2001? Were these different than in the prior
two years?
C. What were the primary reasons for the decrease in cash flow from operating activities
between 2000 and 2001?
D. Evaluate Rowe™s cash flows over the period shown. Has the company been able to fi-
nance its growth, dividends, and acquisition of treasury stock out of cash flow from
operations? Explain.
E. Over the past three years, what were the primary reasons that cash flows from opera-
tions differed so much from net income?
F. The portion of the statement titled “Reconciliation of net earnings to net cash provided
by operating activities” is a required disclosure. Of what does this section and presenta-
tion remind you? Might this disclosure requirement help explain why so few companies
use the direct method? Explain.



The Rowe Companies Annual Report 2001
Consolidated Statements of Cash Flows

Year Ended
12/2/01 12/3/00 11/28/99
(52 weeks) (53 weeks) (52 weeks)
(in thousands)
Increase (Decrease) In Cash
Cash flows from Operating Activities
Cash received from customers $ 329,683 $ 379,400 $ 295,563
Cash paid to suppliers and employees (328,948) (354,570) (274,870)
Income taxes paid, net of refunds 585 (6,183) (7,726)
Interest paid (4,642) (5,693) (2,686)
Interest received 480 288 159
Other receipts”net 1,109 1,156 1,684
Net cash and cash equivalents provided by (used in)
operating activities (1,733) 14,398 12,124
Cash flows from Investing Activities
Proceeds from sale of property and equipment 1,056 21 19
Capital expenditures (3,317) (9,155) (8,830)
Payments to acquire businesses ” (5,160) (8,892)
Net cash used in investing activities (2,261) (14,294) (17,703)
Cash flows from Financing Activities
Net borrowings (payments) under line of credit 5,368 (164) 2,071
Proceeds from issuance of long-term debt 6,865 13,020 25,132
Payments to reduce long-term debt (3,821) (11,922) (14,522)
Proceeds from loans against life insurance policies 3,014 ” ”
Proceeds from issuance of common stock 27 51 460
Dividends paid (1,379) (1,849) (1,714)
Purchase of treasury stock (16) (951) (3,224)
Net cash provided by (used in) financing activities 10,058 (1,815) 8,203
Net increase (decrease) in cash and cash equivalents 6,064 (1,711) 2,624
Cash at beginning of year 3,393 5,104 2,480
Cash at end of year $ 9,457 $ 3,393 $ 5,104

(Continued)
F204 ReportingSECTION F1: The Accounting Information System
204 Cash Flows


The Rowe Companies Annual Report 2001
Reconciliation of Net Earnings (Loss) to Net Cash
Provided by (Used In) Operating Activities:

Year Ended
12/2/01 12/3/00 11/28/99
(52 weeks) (53 weeks) (52 weeks)
(in thousands)
Net earnings (loss) $ (6,189) $ 3,544 $13,901
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities, net
of acquisition and disposition of businesses
Loss on disposition of Wexford ” 5,455 ”
Depreciation and amortization 8,569 8,581 6,165
Provision for deferred compensation 173 816 1,083
Payments made for deferred compensation (813) (160) (319)
Deferred income taxes 1,001 (2,099) (472)
Provision for losses on accounts receivable 4,421 1,485 413
Loss (gain) on disposition of assets 15 29 4
Change in operating assets and liabilities net of
effects of acquisition and disposition of businesses
Decrease (increase) in accounts receivable 4,649 5,564 (9,379)
Decrease (increase) in inventories 227 (832) (5,692)
Decrease (increase) in prepaid expenses and other 1,679 (887) (795)
Decrease (increase) in other assets (352) 472 (1,210)
Increase (decrease) in accounts payable (10,277) (4,750) 3,830
Increase (decrease) in accrued expenses (4,433) (1,715) 2,170
Increase (decrease) in customer deposits (403) (1,105) 2,425
Total adjustments 4,456 10,854 (1,777)
Net cash provided by (used in) operating activities $ (1,733) $14,398 $12,124
Note: Slight modifications have been made to the format of the statement to simplify the presentation.




P5-7 Errors in Reporting Cash Flow from Operating Activities
Obj. 3
Starkovich Architects, Inc. uses the direct format to prepare the statement of cash flows. At
year-end 2004, the following comparative balance sheet and abbreviated income statement
were available as shown.

December 31
Comparative Balance Sheet 2004 2003 Income Statement for 2004
Cash $ 3,400 $ 2,750 Service revenue $ 73,000
Accounts receivable 5,800 4,300 Commission revenue 42,100
Inventory 4,700 5,100 Advertising expense (13,400)
Land 10,000 10,000 Rent expense (24,000)
Wages expense (42,600)
Total assets $23,900 $22,150
Taxes expense (12,000)
Rent payable $ 2,500 $ 2,900 Net income $ 23,100
Taxes payable 1,600 1,600
Wages payable 3,200 1,050
Common stock 15,000 15,000
Retained earnings 1,600 1,600
Total liabilities and equity $23,900 $22,150

From this information, the accounting staff prepared the operating activities section of the
statement of cash flows shown on the following page using the direct format.
F205
CHAPTER F5: Reporting Cash Flows
205
Reporting Cash Flows


Starkovich Architects, Inc.
Operating Activities (Direct Format)
Year Ending December 31, 2004

Operating Activities
Cash received from customers $115,100
Cash paid for advertising (13,400)
Cash paid for rent (23,600)
Cash paid for wages (40,450)
Cash paid for taxes (11,000)
Cash provided by operating activities $ 26,650



Required
A. What evidence can you identify to suggest that certain items are misstated in the com-
putation of cash flow from operating activities? For each item that you believe is mis-
stated, specify why you know this. (You may assume that the income statement and
balance sheets are correct as presented.)
B. Prepare a revised computation of cash flow from operating activities incorporating the
necessary changes.




Depreciation and Cash Flow
P5-8
Obj. 3 A colleague is about to make a presentation to the management group regarding a $2 million
capital investment proposal. She is quite sure that the management group will press her to
identify a new source of financing to support the proposed investment. She shows you the op-
erating activities section of the company™s most recent statement of cash flows. (Amounts are
in thousands of dollars.)
Your colleague is aware that there are a variety of methods acceptable under GAAP by
which depreciation expense can be computed. Further, she knows that the company currently
uses a very conservative method that results in low depreciation expense, especially in the early
years of an asset™s life. Your colleague is going to suggest that the firm use a more aggressive
depreciation policy that will result in higher depreciation expense for the next several years.
Says she, “The higher depreciation expense will generate more cash from operating activities.
According to the cash flow statement here, adding back greater depreciation expense will re-
sult in more cash provided by operating activities. See?” Assume it™s quite reasonable that the
firm use a more aggressive depreciation method.

Required
A. What format is this company using to prepare the statement of cash flows?
B. Do you agree with your colleague™s thinking? Why or why not?
C. Construct a numerical example to prove your argument.




Interrelationships among Financial Statements
P5-9
Objs. 2, 3 Avnet, Inc. is a manufacturer of electronic instruments and controls with corporate head-
quarters in Phoenix, Arizona. Following are comparative income statements and comparative
statements of cash flow from a recent annual report.




(Continued)
F206 ReportingSECTION F1: The Accounting Information System
206 Cash Flows


Avnet, Inc. and Subsidiaries
Consolidated Statements of Operations

Years Ended
(In thousands, except June 28, June 29, June 30,
per share amounts) 2002 2001 2000
Sales $8,920,248 $12,814,010 $9,915,042
Cost of sales 7,697,434 10,948,484 8,470,257
Gross profit 1,222,814 1,865,526 1,444,785
Selling, general and
administrative expenses 1,225,799 1,611,874 1,076,793
Operating income (loss) (2,985) 253,652 367,992
Other income, net 6,755 25,495 10,452
Interest expense (124,583) (191,895) (94,798)
Income (loss) from
continuing operations
before income taxes (120,813) 87,252 283,646
Income tax (provision) benefit 36,377 (87,155) (121,082)
Income (loss) from
continuing operations (84,436) 97 162,564
Income from discontinued
operations, net of income
taxes of $0, $1,611 and
$100, respectively ” 2,416 828
Gain on disposal of
discontinued operations,
net of income taxes of $0,
$8,611 and $0,
respectively ” 12,889 ”
Income (loss) before
cumulative effect of
change in accounting
principle (84,436) 15,402 163,392
Cumulative effect of
change in accounting
principle (580,495) ” ”
Net income (loss) $ (664,931) $ 15,402 $ 163,392
Earnings (loss) per share
from continuing operations:
Basic $ (0.71) $ ” $ 1.52
Diluted $ (0.71) $ ” $ 1.50
Earnings (loss) per share
before cumulative effect
of change in accounting
principle:
Basic $ (0.71) $ 0.13 $ 1.53
Diluted $ (0.71) $ 0.13 $ 1.51
Net earnings (loss) per share:
Basic $ (5.61) $ 0.13 $ 1.53
Diluted $ (5.61) $ 0.13 $ 1.51
Shares used to compute
earnings (loss) per share:
Basic 118,561 117,263 106,627
Diluted 118,561 118,815 108,257
Note: Slight modifications have been made to the format of the statement to simplify the presentation.
F207
CHAPTER F5: Reporting Cash Flows
207
Reporting Cash Flows


Avnet, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

Years Ended
(In thousands) June 28, June 29, June 30,
2002 2001 2000
Cash flows from operating
activities:
Net income (loss) $ (664,931) $ 15,402 $ 163,392
Income from discontinued
operations, net of income
taxes ” (2,416) (828)
Gain on disposal of
discontinued operations,
net of income taxes ” (12,889) ”
Cumulative effect of
change in accounting
principle 580,495 ” ”
Net income (loss) from
continuing operations (84,436) 97 162,564
Non-cash and other
reconciling items:
Depreciation and
amortization 103,879 119,398 83,516
Deferred taxes 10,828 (79,659) (40,159)
Other, net 121,240 296,450 43,339
151,511 336,286 249,260
Changes in (net of effects
from businesses
acquisitions
and dispositions):
Receivables 433,863 315,669 (453,330)
Inventories 552,621 248,978 (535,844)
Payables, accruals and
other, net (161,690) (714,733) 245,532
Net cash flows provided
from (used for)
operating activities 976,305 186,200 (494,382)
Cash flows from financing
activities:
Sales (repayments) of
accounts receivable (150,000) 350,000 ”
Issuance of notes in
public offerings, net 394,328 572,389 358,326
(Repayment) issuance of
debt, net (1,051,375) (453,210) 695,966
Cash dividends (26,546) (27,387) (18,180)
Other, net 24,225 10,834 29,157
Net cash flows (used for)
provided from financing
activities (809,368) 452,626 1,065,269




(Continued)
F208 ReportingSECTION F1: The Accounting Information System
208 Cash Flows


Years Ended
(In thousands) June 28, June 29, June 30,
2002 2001 2000
Cash flows from investing
activities:
Purchases of property,
plant and equipment (83,750) (125,421) (92,488)
Acquisitions of operations,
net (31,547) (858,851) (675,030)
Investments in
non-consolidated
entities, net (2,544) (2,955) (42,972)
Proceeds from sale of
discontinued operations ” 226,390 ”
Net cash flows used for
investing activities (117,841) (760,837) (810,490)
Effect of exchange rate
changes on cash and cash
equivalents 12,859 (7,468) (995)
Net decrease in cash from
discontinued operations ” (25,073) (11,082)
Cash and cash equivalents:
-(decrease) increase 61,955 (154,552) (251,680)
-at beginning of year 97,279 251,831 519,924
-at end of year $ 159,234 $ 97,279 $ 268,244
Note: Slight modifications have been made to the format of the statement to simplify the presentation.



Required Answer the following questions.
A. Which reporting format does Avnet use for the statement of cash flows?
B. Compare the three-year trends of sales and net income. Do they exhibit an encouraging
pattern? Why or why not? Discuss.
C. How does the pattern of cash flow from operations match up with the trends of net in-
come and sales for the most recent three years?
D. During the most recent year shown, determine whether the following balance sheet ac-
counts increased or decreased.
1. Cash
2. Receivables
3. Inventory
4. Payables
E. Study the overall pattern and components of financing cash flows. What have been the
major sources and uses of cash during the three years shown? What do you conclude
from this information?
F. Study the overall pattern and components of investing cash flows. What have been the
major sources and uses of cash during the three years shown? What do you conclude
from this information?

Evaluating Information from a Statement of Cash Flows
P5-10
Obj. 3 Circuit City is the nation™s largest retailer of brand-name consumer electronics and major ap-
pliances. Its headquarters are in Richmond, Virginia. The company™s comparative statements
of cash flows from a recent annual report are shown on the next page.
Required Answer the following questions.
A. For the three years shown, compare the trend in net income to the trend in cash pro-
vided by operations.
B. What were the three most significant reasons that cash provided by operations was
positive for fiscal 2002?
C. Inspect the information shown under investing activities. Also note the amount of de-
preciation and amortization reported under operating activities. Does this company™s
long-term asset base appear to be expanding, shrinking, or staying about the same size?
Explain your answer.
F209
CHAPTER F5: Reporting Cash Flows
209
Reporting Cash Flows


Circuit City Stores, Inc.
Consolidated Statements of Cash Flows

Years Ended February 28 or 29
(In thousands) 2002 2001 2000
OPERATING ACTIVITIES:
Net earnings $ 218,795 $ 160,802 $ 197,590
Adjustments to reconcile net earnings to net cash provided
by operating activities of continuing operations:
Loss from discontinued operations ” ” 16,215
Loss on disposal of discontinued operations ” ” 114,025
Depreciation and amortization 150,711 153,090 148,164
Unearned compensation amortization of restricted stock 15,678 11,365 12,096
Loss on disposition of property and equipment 13,735 4,674 17
Provision for deferred income taxes 31,166 19,765 43,053
Changes in operating assets and liabilities, net of effects
from business acquisitions:
(Increase) decrease in net accounts receivable and retained
interests in securitized receivables (140,766) 7,541 (18,922)
Decrease (increase) in inventory 124,337 (67,655) (184,507)
Decrease (increase) in prepaid expenses and other current assets 16,312 (41,426) 81,316
(Increase) decrease in other assets (720) 1,012 240
Increase (decrease) in accounts payable, accrued expenses and
other current liabilities and accrued income taxes 336,774 (64,193) 244,559
Increase (decrease) in deferred revenue and other liabilities 71,186 (17,855) (15,565)
NET CASH PROVIDED BY OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 837,208 167,120 638,281
INVESTING ACTIVITIES:
Cash used in business acquisitions ” (1,325) (34,849)
Purchases of property and equipment (213,997) (285,556) (222,268)
Proceeds from sales of property and equipment, net 187,426 115,695 100,151
NET CASH USED IN INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (26,571) (171,186) (156,966)
FINANCING ACTIVITIES:
Proceeds from (payments on) short-term debt, net 9,037 (1,805) (5,011)
Principal payments on long-term debt (132,388) (178,060) (2,707)
Issuances of Circuit City Group Common Stock, net 17,920 26,912 6,942
Issuances of CarMax Group Common Stock, net (1,958) (263) 1,914
Proceeds from CarMax Group Common Stock offering, net 139,546 ” ”
Dividends paid on Circuit City Group Common Stock (14,556) (14,346) (14,207)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
OF CONTINUING OPERATIONS 17,601 (167,562) (13,069)
CASH USED IN DISCONTINUED OPERATIONS [NOTE 15] (22,837) (26,174) (90,193)
Increase (decrease) in cash and cash equivalents 805,401 (197,802) 378,053
Cash and cash equivalents at beginning of year 446,131 643,933 265,880
Cash and cash equivalents at end of year $1,251,532 $ 446,131 $ 643,933
Note: Slight modifications have been made to the format of the statement to simplify the presentation.




Evaluating Income and Cash Flows
P5-11
Objs. 2, 3 Selected financial statement information is reported below for Office Decor Company. All
amounts are in thousands.

For the Year Ended December 31, 2004
Sales revenue $11,200
Cost of goods sold 6,400
Operating expenses 2,800
Net income 2,000
(Continued)
Dividends paid 1,000
F210 ReportingSECTION F1: The Accounting Information System
210 Cash Flows

December 31 2004 2003
Cash $ 1,340 $1,940
Accounts receivable 4,600 2,200
Inventories 9,400 5,000
Accounts payable 3,800 2,600
Notes payable 10,000 6,000

Required Prepare a statement of cash flows (indirect format) for Office Decor, assuming
that all important cash flow activities are reflected in the information provided above. Exam-
ine the financial information presented for Office Decor Company. What financial problems
do you see? What are some potential causes of these problems?

Interpreting a Cash Flow Statement
P5-12
Obj. 3 Sara Lee Corporation, a food products company headquartered in Chicago, Illinois, recently
reported the following cash flow statement.



Consolidated Statements of Cash Flows

Years June 29 June 30, July 1,
Dollars in millions Ended 2002 2001 2000
Operating Activities
Income from continuing operations $ 1,010 $ 1,603 $ 1,158
Adjustments for non-cash charges included in income
from continuing operations
Depreciation 471 392 402
Amortization of intangibles 111 207 200
Unusual items
Gain on disposal of Coach business ” (967) ”
Charges for exit activities and business dispositions 101 500 ”
Increase in deferred taxes 21 88 48
Other non-cash credits, net 7 (62) (38)
Changes in current assets and liabilities,
net of businesses acquired and sold
Decrease (increase) in trade accounts receivable 93 42 (116)
Decrease (increase) in inventories 304 25 (152)
Decrease (increase) in other current assets 7 (11) (47)
(Decrease) in accounts payable (417) (133) (56)
Increase (decrease) in accrued liabilities 27 (164) 57
Net cash from operating activities”continuing operations 1,735 1,520 1,456
Operating cash flows (used by) from discontinued operations ” (24) 84
Net cash from operating activities 1,735 1,496 1,540
Investment Activities
Purchases of property and equipment (669) (532) (647)
Acquisitions of businesses and investments (1,930) (300) (743)
Dispositions of businesses and investments 23 1,819 21
Sales of assets 113 65 64
Other (12) 13 9
Net cash (used in) from investment activities (2,475) 1,065 (1,296)
Financing Activities
Issuances of common stock 109 104 84
Purchases of common stock (138) (643) (1,032)
Borrowings of long-term debt 1,362 1,023 725
Repayments of long-term debt (503) (390) (502)
Short-term borrowings (repayments), net 124 (1,914) 1,022
Payments of dividends (484) (486) (485)
Net cash from (used in) financing activities 470 (2,306) (188)
Effect of changes in foreign exchange rates on cash 20 (21) (21)
(Decrease) increase in cash and equivalents (250) 234 35
Cash and equivalents at beginning of year 548 314 279
Cash and equivalents at end of year $ 298 $ 548 $ 314
F211
CHAPTER F5: Reporting Cash Flows
211
Reporting Cash Flows

Required Use the information from the statement of cash flows for Sara Lee Corporation
to answer the following questions.
A. What was the amount of change in Sara Lee™s cash account for 2002?
B. What were the primary sources of cash for the company?
C. What were the primary uses of cash?
D. Why were depreciation and amortization added to net income in computing cash flow
from operating activities?
E. Why were the decreases in inventories and trade accounts receivable added to net in-
come in computing cash flow from operating activities?
F. Why were the purchase of property and equipment, sales of assets and acquisitions of
businesses listed as investing activities?
G. Did short-term debt increase or decrease during the year?
H. How much new long-term debt was issued during the year? How much old long-term
debt was paid off?
I. Does the company appear to be facing a cash flow problem? Explain your answer.


Interpreting Cash Flows
P5-13
Obj. 3 The operating activities section of Bernstein Company™s cash flow statement is reported
below.

(In millions) 2004 2003 2002
Net income $ 391 $ 455 $467
Depreciation and amortization 258 247 223
Special and nonrecurring items (3) 0 0
Changes in current assets and liabilities:
Accounts receivable (220) (102) (66)
Inventories (112) (73) (45)
Accounts payable 15 (22) 19
Income taxes 6 (7) 30
Other accrued expenses (17) 26 11
Cash flow provided by operations $ 318 $ 524 $639

Required What does this information reveal about why cash flow from operations has de-
creased by 50% over the three-year period? Be specific and explain the basis for your conclu-
sions.


Interpreting the Cash Flow Statement
P5-14
Obj. 3 Best Buy Company, Inc., a retailer of consumer electronics headquartered in Minnesota, re-
cently reported the following partial cash flow statement and income statement.


(Dollars in millions)
Year Ended
March 2, 2002

Cash flows from operating activities
Net income $ 570
Adjustments to reconcile net income to net cash:
Depreciation and amortization 309
Increase in accounts receivable (18)
Decrease in inventories (330)
Increase in other assets (39)
Increase in accounts payable 529
Increase in accrued expenses and other 557
Net cash provided by operating activities $1,578
F212 ReportingSECTION F1: The Accounting Information System
212 Cash Flows


(Dollars in millions)
Year Ended
March 2, 2002

Revenues $19,597
Cost of goods sold 15,167

Gross profit 4,430
Selling, general, and administrative expenses 3,493
Interest expense, net 1
Income before provision for income taxes 936
Provision for income taxes 366
Net income $ 570



Required Use the information from the financial statements to answer each of the follow-
ing questions.
A. How much cash did Best Buy collect from customers in the fiscal year ended March 2,
2002?
B. How much cash did Best Buy pay out for inventory in the fiscal year ended March 2,
2002? The increase in Accounts Payable arose from purchases of inventory that had not
yet been paid for.
C. How much cash did Best Buy pay out for selling, general, and administrative expenses
in the fiscal year ended March 2, 2002? The changes in other assets and in accrued ex-
penses and other are related to selling, general, and administrative expenses.


Comparing Cash Flows
P5-15
Obj. 3 Summarized cash flow statements for 2001 are shown below for two computer industry firms:
Intel Corporation, based in Santa Clara, California, and Apple Computer, headquartered in
Cupertino, California.


Intel Apple
(In millions) Corporation Computer

Net income $ 1,291 $ (25)
Adjustments:
Depreciation and amortization 6,469 102
(Increase) decrease in accounts receivable 1,561 487
(Increase) decrease in inventories 24 22
(Increase) decrease in other assets 898 118
Increase (decrease) in payables (2,484) (416)
Changes in taxes (84) (36)
Other adjustments 979 (67)
Net cash provided by operating activities 8,654 185
Net cash provided by (used in) investing activities (195) 892
Net cash provided by (used in) financing activities (3,465) 42
Net change in cash 4,994 1,119



Required Write a short report comparing the financial performance of the two companies.
In what important ways were the results for both companies similar? In what important ways
were the results different?


Interpreting Cash Flows
P5-16
Obj. 3
Required Identify whether each of the following statements is true or false. Explain your an-
swers. Write in complete sentences. Computations may be used as part of your explanation.
F213
CHAPTER F5: Reporting Cash Flows
213
Reporting Cash Flows

A. When a company prepares a cash flow statement using the indirect method, it adds de-
preciation expense to net income because depreciation is a source of cash during a fis-
cal period.
B. Alpha Company reported an increase in Accounts Receivable of $2 million during
2004. As a result, Alpha™s cash flow from operating activities was $2 million less than
its operating revenues.
C. Beta Company purchased $40 million of merchandise inventory during 2004. Beta™s ac-
counts payable increased from $5 million to $8 million during the year. Beta™s cash
flow statement (indirect method) would report an adjustment to net income of $3
million.
D. Delta Company reported cost of goods sold of $27 million for 2004. Its merchandise
inventory increased by $8 million during the year. If all inventory purchased was paid
for in cash, then Delta™s cash payments to suppliers of inventory during the year were
$35 million.
E. Gamma Company reported the following:

Net cash flow for operating activities $80
Net cash flow from investing activities 35
Net cash flow from financing activities 50
Net change in cash $5

From this information, it appears that Gamma is facing financial problems.

The Differential Effect of Transactions on Net Income and Cash
P5-17
Flow
Obj. 3
During March, each of the following events occurred at Frolic Park, Inc.

Effect on Effect on
Type March™s March™s
Event of Activity Net Income Cash Flow
1. Sold $18,000 of goods on credit to customers. Received a 25%
down payment with the balance on account.
2. Paid $500 cash for office supplies that will be used during April.
3. Received $3,000 from a customer in full payment of her
account balance.
4. Borrowed $80,000 from a local bank to be repaid in monthly
installments plus interest starting in April.
5. Paid rent on the office space ($1,200 per month) for the
months of February, March, and April.
6. Distributed monthly paychecks to employees totaling $13,300.
30% was for work performed in February and the balance
for work performed in March.
7. Purchased new Internet server equipment at a cost of
$50,000.
8. Purchased a 3-year fire insurance policy at a total cost of
$10,800. Its coverage began on March 1.
9. Purchased merchandise from suppliers on credit at a cost of
$70,000.
10. Collected $22,000 from customers in payment of their
accounts. 80% of this amount was from sales recorded in
February and the balance was from March sales.
11. Collected four months™ rent in advance (at $700 per month)
from a tenant who will move in on April 1.
12. Paid $45,000 to suppliers in partial payment for goods
purchased in #9 above.
13. Sold $33,000 of merchandise to customers on credit.
14. Sold an investment in stocks and bonds for $28,000; the same
amount that had been paid for it. A 3-year, 9% note
receivable was accepted in full payment.
Totals for March
(Continued)
F214 ReportingSECTION F1: The Accounting Information System
214 Cash Flows

Required
A. Identify whether each transaction is an operating, investing, or financing activity.
B. For each event, identify the effect it had on March™s net income and on March™s cash
flow from operations.
C. What does this problem suggest to you about the hazards of trying to manage an orga-
nization with accrual-basis accounting information only? Discuss.

Comparing Cash Flow Statements Among Firms

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