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tive cash flow trends in the three categories on cash flow statements. Paula thinks this informa-
tion is even more valuable than net income trend data from income statements. She illustrates
her theory with the following patterns of cash flows for Abbott Company over the past three
years.

2003 2002 2001

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from:
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


How do you think Paula would analyze these results? Do you agree that analyzing cash flow
patterns provides superior analytical information?




exercises


EXERCISE 13-1 CLASSIFICATION OF CASH FLOWS
Indicate whether each of the following items would be associated with a cash inflow (I), cash
outflow (O), or noncash item (N) and under which category each would be reported on a
statement of cash flows: Operating Activities (OA); Investing Activities (IA); Financing Activi-
ties (FA); or not on the statement (NOS). An example is provided.


Item Classified as Reported under

Example: Sales Revenue I OA

1. Fees collected for services
2. Interest paid
3. Proceeds from sale of equipment
4. Cash (principal) received from bank on long-term note
5. Purchase of treasury stock for cash
6. Collection of loan made to company officer
7. Cash dividends paid
8. Taxes paid
9. Depreciation expense
10. Wages paid to employees
11. Cash paid for inventory purchases
12. Proceeds from sale of common stock
13. Interest received on loan to company officer
14. Purchase of land by issuing stock
15. Utility bill paid


EXERCISE 13-2 CLASSIFICATION OF CASH FLOWS
The following items summarize certain transactions that occurred during the past year for
Alta Inc. Show in which section of the statement of cash flows the information would be re-
ported by placing an X in the appropriate column. (Assume the direct method is used to re-
port operating cash flows.)
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Reported In
Statement of Cash Flows
Not Reported in
Transaction Operating Investing Financing Statement of Cash 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 Alta™s note to local bank paid
k. Interest received from a note with a customer
l. Delivery truck sold at no gain or loss




EXERCISE 13-3 TRANSACTION ANALYSIS
Following are the transactions of Equine Company:

a. Sold equipment for $1,000. The original cost was $15,700; the book value is $1,700.
b. Purchased equipment costing $110,000 by paying cash of $20,000 and signing a
$90,000 long-term note at 12% interest.
c. Received $5,000 of the principal and $450 in interest on a long-term note receivable.
d. Received $2,500 in cash dividends on stock held as a trading security. (Assume that the
cost method is used.)
e. Purchased treasury stock for $3,000.

Complete the following:

1. Prepare journal entries for each of the transactions. (Omit explanations.)
2. For each transaction, indicate the amount of cash inflow or outflow. Then, note how
each transaction would be classified on a statement of cash flows.


EXERCISE 13-4 TRANSACTION ANALYSIS
The Vikon Company had the following selected transactions during the past year:

a. Sold (issued) 1,000 shares of common stock, $10 par, for $25 per share.
b. Collected $100,000 of accounts receivable.
c. Paid dividends to current stockholders in the amount of $50,000 (assume dividends de-
clared earlier establishing a dividends payable account).
d. Received $1,500 interest on a note receivable from a company officer.
e. Paid the annual insurance premium of $1,200.
f. Recorded depreciation expense of $5,000.

1. Prepare appropriate journal entries for each of the above transactions. (Omit
explanations.)
2. For each transaction, indicate the amount of cash inflow or outflow and also how each
cash flow would be classified on a statement of cash flows.


EXERCISE 13-5 PREPARING A SIMPLE CASH FLOW STATEMENT
Assume you have access to the ledger (specifically, the detail of the cash account) for New
Company, represented by the following T-account:
650 f651
The Statement Of Cash Flows EOC Chapter 13
The Statement of Cash Flows


Cash

Beg. Bal. 11,500 (2) 75,000
(1) 150,000 (3) 60,000
(4) 6,000 (5) 5,500
(6) 30,000 (7) 25,000
(8) 12,000 (9) 15,000
End. Bal. 29,000

The transactions that are represented by posting entries (1) through (9) in the cash account
are as follows:
1. Collections on account
2. Payments for wages and salaries
3. Payments for inventory
4. Proceeds from sale of equipment
5. Payments of dividends
6. Proceeds from new bank loan
7. Payments for other cash operating expenses
8. Proceeds from sale of nontrading securities
9. Payments for taxes
From these data, prepare a statement of cash flows for New Company for the year ended De-
cember 31, 2002.

EXERCISE 13-6 DETERMINING CASH RECEIPTS AND PAYMENTS
Assuming the following data, compute:
1. Cash collected from customers.
2. Cash paid for wages and salaries.
3. Cash paid for inventory purchases.
4. Cash paid for taxes.


Balance Sheet
Income Statement
Amount for Year Beg. of Year End of Year

Sales revenue $225,000
Accounts receivable (net) $20,000 $22,000
Wages and salaries expense 55,000
Wages and salaries payable 14,000 11,000
Cost of goods sold 105,000
Accounts payable 24,500 26,000
Inventory 34,000 28,000
Income tax expense 35,000
Income taxes payable 15,500 18,000



EXERCISE 13-7 ADJUSTMENTS TO CASH FLOWS FROM OPERATIONS
(INDIRECT METHOD)
Assume that you are using the indirect method of preparing a statement of cash flows. For
each of the changes listed, indicate whether it would be added to or subtracted from net in-
come in computing net cash flows provided by (used in) operating activities. If the change
does not affect net cash flows provided by (used in) operating activities, so indicate.
1. Increase in Accounts Receivable (net)
2. Decrease in Accounts Payable
3. Increase in securities classified as cash equivalents
651
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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

CASH FLOWS FROM OPERATIONS (DIRECT METHOD)
EXERCISE 13-8
Jane Ortiz is the proprietor of a small company. The results of operations for last year are
shown, along with selected balance sheet data. From the information provided, determine the
amount of net cash flows provided from operations, using the direct method.
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Operating expenses:
Wages expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 41,800
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,200



Beginning End of
of Year Year

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,000 $25,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 30,000
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 2,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000 17,000
Wages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 2,000



EXERCISE 13-9 CASH FLOWS FROM OPERATIONS (INDIRECT METHOD)
Given the data in Exercise 13-8, show how the amount of net cash flows from operating ac-
tivities would be calculated using the indirect method.

CASH FLOWS PROVIDED BY OPERATIONS (DIRECT METHOD)
EXERCISE 13-10
The following information was taken from the comparative financial statements of Imperial
Corporation for the years ended December 31, 2002 and 2003:
Net income for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Depreciation expense for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Amortization of goodwill for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Interest expense on short-term debt for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Dividends declared and paid in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,000


Dec. 31, Dec. 31,
2003 2002

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,000 $43,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 42,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 59,400
652 f653
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The Statement of Cash Flows


Use the direct method to compute cash flows provided by operating activities in 2003.
(HINT: You need to calculate cash paid for operating expenses.)

EXERCISE 13-11 CASH FLOWS PROVIDED BY OPERATIONS (INDIRECT
METHOD)
Given the data in Exercise 13-10, show how the amount of cash provided by operations for
2003 is computed using the indirect method.




CASH FLOWS PROVIDED BY OPERATIONS (DIRECT METHOD)
EXERCISE 13-12
The following information was taken from the comparative financial statements of Altec In-
dustries, Inc., for the years ended December 31, 2002 and 2003:
Net income for 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175,000
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,000
Depreciation expense for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Amortization of goodwill for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense on short-term debt for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Dividends declared and paid in 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Utilities expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000


Dec. 31, Dec. 31,
2003 2002

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $45,000 $57,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500 50,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 51,500


Use the direct method to compute cash flows provided by operating activities in 2003.
(HINT: You need to calculate cash paid for operating expenses.)

EXERCISE 13-13 CASH FLOWS PROVIDED BY OPERATIONS (INDIRECT METHOD)
Given the data in Exercise 13-12, show how the amount of cash flows provided by operations
for 2003 is computed using the indirect method.

NET CASH FLOWS (INDIRECT METHOD)
EXERCISE 13-14
Given the following selected data for Milton Corporation, using the indirect method to report
cash flows from operating activities, determine the net increase (decrease) in cash for the year
ended December 31, 2003.
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,000
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Increase in accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Decrease in inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Increase in prepaid assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Increase in wages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Equipment purchased for cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Increase in bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Dividends declared and paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Decrease in dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
653
f654 The Statement Of Cash Flows
Part 4 EOC Other Dimensions of Financial Reporting



EXERCISE 13-15 NET CASH FLOWS (DIRECT METHOD)
Based on the following information, determine the net increase (decrease) in cash for Porter
Corporation for the year ended December 31, 2003. Use the direct method to report cash
flows from operating activities.
Cash received from interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,000
Cash paid for dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Cash collected from customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,000
Cash paid for wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,000
Depreciation expense for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Cash received from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Cash paid for retirement of bonds at par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Cash received on sale of equipment at book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Cash paid for land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000



EXERCISE 13-16 STATEMENT OF CASH FLOWS (INDIRECT METHOD)
North Western Company provides the following financial information. Prepare a statement of
cash flows for 2003, using the indirect method to report cash flows from operating activities.


North Western Company
Comparative Balance Sheets
For the Years Ended December 31, 2003 and 2002
2003 2002

Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,500 $ 9,000
Accounts receivable (net). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 36,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 60,000
Plant and equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262,500 225,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $375,000 $330,000

Liabilities and Stockholders™ Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000 $ 54,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 217,500
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 58,500
Total liabilities and stockholders™ equity . . . . . . . . . . . . . . . . . . . . . . . $375,000 $330,000




North Western Company
Income Statement
For the Year Ended December 31, 2003

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $412,500
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $187,500
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,500
Note: Dividends of $21,000 were declared and paid during 2003. Depreciation expense for the year was $22,500.




STATEMENT OF CASH FLOWS (DIRECT METHOD)
EXERCISE 13-17
By analyzing the information in Exercise 13-16, prepare a statement of cash flows. Use the di-
rect method to report cash flows from operating activities.
654 f655
The Statement Of Cash Flows EOC Chapter 13
The Statement of Cash Flows



EXERCISE 13-18 CASH FLOW PATTERNS
Below are recent financial statement data for the following companies:
• AMAZON.COM
• COCA-COLA
• EXXONMOBIL
• MICROSOFT
Use the financial statement data to match each company with its numbers. All numbers are in
millions.

Cash Flow from

Net Operating Investing Financing
Income Activities Activities Activities

1 $ (720) $ (91) $ (922) $ 1,104
2 7,910 15,013 (10,985) (4,779)
3 7,785 10,030 (11,191) 2,245
4 2,431 3,883 (3,421) (471)


Consider the following information as you match the companies:
1. Start-ups have high positive financing cash flows relative to investing cash flows.
2. Companies with lots of property, plant, and equipment have cash from operations that is
greater than net income because of lots of depreciation expense.
3. Old cash cows are spending money on investing but still have plenty left over for a net
cash outflow from financing activities.

ANALYZING CASH FLOWS
EXERCISE 13-19
Study the comparative cash flow statements for MICROSOFT in Appendix A. What observa-
tions do you have about Microsoft™s cash flow position? From a liquidity standpoint, is the
trend over the last few years positive or negative? Explain.




problems


PROBLEM 13-1 TRANSACTION ANALYSIS
Development Corporation reports the following summary data for the current year:
a. Sales revenue totaled $251,500.
b. Interest revenue for the period was $2,200.
c. Interest expense for the period was $800.
d. Cost of goods sold for the period was $156,000.
e. Operating expenses, all paid in cash (except for depreciation of $15,000), were $48,000.
f. Income tax expense for the period was $8,000.
g. Accounts receivable (net) increased by $10,000 during the period.
h. Accounts payable decreased by $5,000 during the period.
i. Inventory at the beginning and end of the period was $25,000 and $35,000, respectively.
j. Cash increased during the period by $5,000.
Assume all other current asset and current liability accounts remained constant during the
period.
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Part 4 EOC Other Dimensions of Financial Reporting



1. Compute the amount of cash collected from customers.
Required:
2. Compute the amount of cash paid for inventory.
3. Compute the amount of cash paid for operating expenses.
4. Compute the amount of cash flows provided by (used in) operations.
5. Interpretive Question: What must have been the combined amount of cash flows pro-
vided by (used in) investing and financing activities?

PROBLEM 13-2 ANALYSIS OF THE CASH ACCOUNT
The following information, in T-account format, is provided for the M & M Company for the
year 2003:

Cash Account

Beg. Bal. 15,400 (b) 56,500
(a) 147,000 (c) 23,000
(d) 3,500 (f) 59,700
(e) 15,000 (g) 1,600
(h) 2,400
End. Bal. 37,700


Additional information:
a. Sales revenue for the period was $145,000. Accounts receivable (net) decreased $2,000
during the period.
b. Net purchases of $58,000 were made during 2003, all on account. Accounts payable in-
creased $1,500 during the period.
c. The equipment account increased by $18,000 during the year.
d. One piece of equipment that cost $5,000, with a net book value of $3,000, was sold for
a $500 gain.
e. The company borrowed $15,000 from its bank during the year.
f. Various operating expenses were all paid in cash, except for depreciation of $1,800. Total
operating expenses were $61,500.
g. Interest expense for the year was $1,200. The interest payable account decreased by $400
during the year.
h. Income tax expense for the year was $3,600. The income taxes payable account increased
by $1,200 during the year.

1. From the information given, reconstruct the journal entries that must have been made
Required:
during the year (omit explanations).
2. Prepare a statement of cash flows for M & M Company for the year ended December
31, 2003.

PROBLEM 13-3 ANALYZING CASH FLOWS
The following information was provided by the treasurer of Surety, Inc., for the year 2003:
a. Cash sales for the year were $50,000; sales on account totaled $60,000.
b. Cost of goods sold was 50% of total sales.
c. All inventory is purchased on account.
d. Depreciation on equipment was $31,000 for the year.
e. Amortization of goodwill was $2,000.
f. Collections of accounts receivable were $38,000.
g. Payments on accounts payable for inventory equaled $39,000.
h. Rent expense paid in cash was $11,000.
i. The company issued 20,000 shares of $10-par stock for $240,000.
j. Land valued at $106,000 was acquired by issuance of a bond with a par value of
$100,000.
k. Equipment was purchased for cash at a cost of $84,000.
656 f657
The Statement Of Cash Flows EOC Chapter 13
The Statement of Cash Flows


l. Dividends of $46,000 were declared but not yet paid.
m. The company paid $15,000 of dividends that had been declared the previous year.
n. A machine used on the assembly line was sold for $12,000. The machine had a book
value of $7,000.
o. Another machine with a book value of $500 was scrapped and was reported as an ordi-
nary loss. No cash was received on this transaction.
p. The cash account increased $191,000 during the year to a total of $274,000.


Required: 1. Compute the beginning balance in the cash account.
2. How much cash was provided by (or used in) operating activities?
3. How much cash was provided by (or used in) investing activities?
4. How much cash was provided by (or used in) financing activities?
5. Would all the above items, (a) through (p), be reported on a cash flow statement? Explain.



PROBLEM 13-4 CASH FLOWS FROM OPERATIONS (INDIRECT METHOD)
Gardner Enterprises reported a net loss of $40,000 for the year just ended. Relevant data for
the company follow.

Beginning End of
of Year Year

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,000 $ 20,000
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 65,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,000 130,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 4,500
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 60,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 4,000
Dividends payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 35,000
Depreciation for the year, $43,000
Dividends declared, $35,000



1. Using the indirect method, determine the net cash flows provided by (used in) operating
Required:
activities for Gardner Enterprises.
2. Interpretive Question: Explain how Gardner Enterprises can pay cash dividends during
a year when it reports a net loss.



PROBLEM 13-5 CASH FLOWS FROM OPERATIONS (DIRECT METHOD)
Super Sales, Inc., shows the following information in its accounting records at year-end:
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $890,000
Interest revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,000
Wages expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000
Depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Other (cash) operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000

Selected balance sheet data are as follows:
657
f658 The Statement Of Cash Flows
Part 4 EOC Other Dimensions of Financial Reporting



Beginning End of
of Year Year

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,000 $ 78,000
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 12,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,000 220,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,000 35,000
Wages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 25,000
Dividends payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000 40,000




1. Using the direct method, compute the net cash flows provided by (used in) operating ac-
tivities for Super Sales, Inc.
2. Interpretive Question: Explain the main differences between the net amount of cash
Required:
flows from operations and net income (loss).



CASH FLOWS FROM OPERATIONS (INDIRECT AND DIRECT
METHODS)
The following combined income and retained earnings statement, along with selected balance
PROBLEM 13-6
sheet data, are provided for Roper Company:


Roper Company
Combined Income and Retained Earnings Statement
For the Year Ended December 31, 2003

Net sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,000
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500*
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $89,500
Expenses:
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $51,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700
Depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,300
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,200
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,760
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,440
Retained earnings, January 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,500
$46,940
Dividends declared and paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Retained earnings, December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . $44,440

*Gain on sale of equipment (cost, $9,500; book value, $6,000; sales price $10,500).
658 f659
The Statement Of Cash Flows EOC Chapter 13
The Statement of Cash Flows



Beginning End of
of Year Year

Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,500 $11,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,300 18,000
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 700
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200 8,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500 1,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 2,500



Required: 1. Using the indirect method, compute the net cash flows from operations for Roper Com-
pany for 2003.
2. Using the direct method, compute the net cash flows from operations for Roper Com-
pany for 2003.
3. What is the impact of dividends paid on net cash flows from operations? Explain.

PROBLEM 13-7 COMPUTATION OF NET INCOME FROM CASH FLOWS FROM
OPERATIONS (DIRECT METHOD)
The following partially completed work sheet is provided for ATM Corporation, which uses the
direct method in computing net cash flows from operations:


ATM Corporation
Partial Work Sheet”Cash Flows from Operations
(Direct Method)
For the Year Ended December 31, 2003
Adjustments
Accrual Cash
Basis Debits Credits Basis

Net sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . $ 75,000
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Loss on sale of equipment . . . . . . . . . . . . . . . . . 0
Other (cash) expenses. . . . . . . . . . . . . . . . . . . . . 26,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . $101,000
Net income (net cash flows from operations) . . . . . $ 49,000




Key:
1. Decrease in Accounts Receivable (net), $4,500.
2. Loss on sale of equipment, $1,500.
3. Increase in Inventory, $10,000.
4. Increase in Accounts Payable, $3,000.
5. Depreciation for the year, $8,000.
6. Decrease in Prepaid Expenses, $1,000.
7. Increase in Accrued Liabilities, $2,500.

Required: Complete the work sheet with the key items above and compute the net income (loss) to be re-
ported by ATM Corporation on its income statement for 2003.
659
f660 The Statement Of Cash Flows
Part 4 EOC Other Dimensions of Financial Reporting



PROBLEM 13-8 INCOME STATEMENT FROM CASH FLOW DATA
Jackson Corporation computed the amount of cash flows from operations using both the direct
and indirect methods, as follows:
Direct method:
Collections from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $445,000
Payments to suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130,000)
Payments for operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210,000)
Cash flows provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000
Indirect method:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,000
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Gain on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,500)
Decrease in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Decrease in accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Decrease in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,500)
Increase in miscellaneous accrued payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Cash flows provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,000

Required: Using the data provided, prepare an income statement for Jackson Corporation for the year
2003.

PROBLEM 13-9 STATEMENT OF CASH FLOWS (INDIRECT METHOD)
JEM Company™s comparative balance sheets for 2002 and 2003 are provided.


JEM Company
Comparative Balance Sheets
December 31, 2003 and 2002
2003 2002

Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,500 $ 10,000
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,500 51,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 115,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000 30,000
Accumulated depreciation”equipment . . . . . . . . . . . . . . . . . . . . . . . . . (21,500) (14,000)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $228,500 $192,000
Liabilities and Stockholders™ Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,500 $ 46,000
Long-term notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 50,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 60,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,000 36,000
Total liabilities and stockholders™ equity. . . . . . . . . . . . . . . . . . . . . . . $228,500 $192,000




The following additional information is available:
a. Net income for the year 2003 (as reported on the income statement) was $50,000.
b. Dividends of $40,000 were declared and paid.
c. Equipment that cost $8,000 and had a book value of $1,000 was sold during the year for
$2,500.
Required: Based on the information provided, prepare a statement of cash flows for JEM Company for
the year ended December 31, 2003. Use the indirect method to report cash flows from operat-
ing activities.
660 f661
The Statement Of Cash Flows EOC Chapter 13
The Statement of Cash Flows



PROBLEM 13-10 STATEMENT OF CASH FLOWS (DIRECT METHOD)
Financial statement data for Continental Stores, Inc., are provided. (All numbers are shown
rounded to the nearest thousand, with 000™s omitted.)


Continental Stores, Inc.
Income and Retained Earnings Statements
For the Year Ended December 31, 2003

Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,290
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 978
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312
Operating expenses:
Sales and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 206
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Increase in retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45




Continental Stores, Inc.
Comparative Balance Sheets
December 31, 2003 and 2002
2003 2002

Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 752 $ 725
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 448
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 953
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,340 1,240
Store fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 369
Accumulated depreciation, store fixtures. . . . . . . . . . . . . . . . . . . . . . . . (51) (37)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,097 $3,698
Liabilities and Stockholders™ Equity
Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . ...................... $ 175 $ 378
Short-term notes payable . . . . . . . . . . . . . ...................... 525 768
Long-term debt . . . . . . . . . . . . . . . . . . . . . ...................... 804 1,004
Total liabilities . . . . . . . . . . . . . . . . . . . . ...................... $1,504 $2,150
Stockholders™ equity:
Common stock . . . . . . . . . . . . . . . . . . . . . ...................... $ 448 $ 448
Paid-in capital in excess of par . . . . . . . . . ...................... 500 500
Retained earnings . . . . . . . . . . . . . . . . . . . ...................... 645 600
Total stockholders™ equity . . . . . . . . . . . ...................... $1,593 $1,548
Total liabilities and stockholders™ equity. ...................... $3,097 $3,698
661
f662 The Statement Of Cash Flows
Part 4 EOC Other Dimensions of Financial Reporting


1. Compute the net cash flows from operations using the direct method.
Required:
2. Interpretive Question: Comment on the difference between net income and net cash
flows from operations.
3. Prepare a statement of cash flows for Continental Stores, Inc., for the year ended Decem-
ber 31, 2003.


PROBLEM 13-11 STATEMENT OF CASH FLOWS (INDIRECT METHOD)
1. Using the data from Problem 13-10, prepare a statement of cash flows. Use the indirect
method to report cash flows from operating activities.
2. Interpretive Question: What are the main differences between a statement of cash flows
prepared using the indirect method and one prepared using the direct method?




PROBLEM 13-12 UNIFYING CONCEPTS: ANALYSIS OF OPERATING, INVESTING,
AND FINANCING ACTIVITIES
Grant Kesler is the manager and one of three brothers who own the Rocky Mountain Auto Parts
Company in Denver, Colorado. Grant is pleased that sales were up last year and that his new,
small company has been able to expand and open a second store in Denver. After reviewing the
balance sheet, however, Grant is concerned that Cash shows a negative balance. He can™t un-
derstand how his company can show net income, based on increased sales, yet have a negative
Cash position. He is concerned about what his banker is going to say when they meet next
month to discuss a loan for the company to expand to a third store. Grant provides the fol-
lowing financial information and asks for your help.

Rocky Mountain Auto Parts Company
Income Statement
For the Year Ended December 31, 2003

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Less cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,000
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,000
Operating expenses:
Salary and wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,400 48,900
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,100
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,200
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,900
662 f663
The Statement Of Cash Flows EOC Chapter 13
The Statement of Cash Flows



Rocky Mountain Auto Parts Company
Comparative Balance Sheets
As of December 31, 2003 and 2002
2003 2002

Assets
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,200) $ 6,400
Accounts receivable (net). ................................. 3,100 2,700
Inventory . . . . . . . . . . . . . ................................. 63,000 42,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,900 $51,100
Other assets:
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,300 $39,000
Less accumulated depreciation ............................. (20,100) (15,600)
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,200 $23,400
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,100 $74,500

Liabilities and Stockholders™ Equity
Current liabilities:
Accounts payable . . . . . .................................. $ 6,400 $ 5,700
Wages payable . . . . . . . .................................. 1,500 1,300
Taxes payable . . . . . . . . .................................. 1,900 2,100
Total current liabilities .................................. $ 9,800 $ 9,100
Other liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 10,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,800 $19,100
Stockholders™ equity:
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000 $40,000
Retained earnings . . . . . . . . . . . . . . . ........................ 45,300 15,400
Total stockholders™ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85,300 $55,400
Total liabilities and stockholders™ equity . . . . . . . . . . . . . . . . . . . . . . . . $125,100 $74,500




Required: 1. Using the direct method, compute the net cash flows from operations. Also determine
net cash flows for investing and financing activities.
2. Interpretive Question: Is Rocky Mountain Auto Parts Company in a good liquidity po-
sition? As Mr. Kesler™s banker, would you loan him more money to fund the company™s
expansion?
663
f664 The Statement Of Cash Flows
Part 4 CEO Other Dimensions of Financial Reporting



competency enhancement opportunities




LLL
LLLL



Analyzing Real Company Information The Debate
International Case Cumulative Spreadsheet Project
Ethics Case Internet Search
Writing Assignment




The following additional assignments provide opportunities for students to de-
velop critical thinking, ethical perspectives, oral and written communication
skills, experience with electronic research, and teamwork through group and
business activities.
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ANALYZING REAL COMPANY INFORMATION
• Analyzing 13-1 (Microsoft)
The 1999 annual report for MICROSOFT appears in Appendix A. Locate that
annual report and consider the following questions:
1. Does Microsoft present the three cash flow statement categories”operat-
ing, investing, and financing”in the same order as that illustrated in the
chapter?
2. In 1999, Microsoft spent $11.191 billion on various investing activities. Were
the cash flows from operations sufficient to pay for these investments?
3. In its 1999 operating activities section, Microsoft reports both $5.877 bil-
lion and $4.526 billion in relation to unearned revenue. Exactly what does
each of these numbers represent? Compare these numbers to the corre-
sponding numbers in 1997 and comment on the reason for such a big dif-
ference.
4. Did Microsoft pay any cash dividends to common stockholders during
1999? Did Microsoft make any payments to common stockholders during
the year?
• Analyzing 13-2 (The Coca-Cola Company)
The 1999 statement of cash flows for THE COCA-COLA COMPANY is given on
page 665. Use the statement to answer the following questions:
1. Compute Coca-Cola™s “Net cash provided by operations after reinvest-
ment.” This amount is computed by subtracting “Net cash used in invest-
ing activities” from “Net cash provided by operating activities.” Interpret
the results of the calculation for Coca-Cola for the period 1997“1999.
2. In its operating activities section, Coca-Cola subtracts gains on sales of as-
sets in computing net cash provided by operating activities. Why are these
gains subtracted?
3. Think of the dealings that The Coca-Cola Company has with its sharehold-
ers. The shareholders give money to the company by purchasing new
shares of stock. In turn, the company returns cash to shareholders by pay-
ing cash dividends and by repurchasing shares of stock. For the three-year
period 1997“1999, did The Coca-Cola Company receive more cash from its
shareholders than it paid back to them, or did it pay more cash to its share-
holders than it received? Show your calculations.
4. Look carefully at the statement of cash flows. Did the U.S. dollar get
stronger or weaker during the three-year period 1997“1999?
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The Coca-Cola Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1997, 1998, 1999
(in millions)
Year Ended December 31, 1999 1998 1997

Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . .......... $ 2,431 $ 3,533 $ 4,129
Depreciation and amortization . . . . . . .......... 792 645 626
Deferred income taxes . . . . . . . . . . . . .......... 97 (38) 380
Equity income, net of dividends . . . . . .......... 292 31 (108)
Foreign currency adjustments . . . . . . .......... (41) 21 37
Gains on issuances of stock by equity
investees. . . . . . . . . . . . . . . . . . . . . .......... ” (27) (363)
Gains on sales of assets, including
bottling interests . . . . . . . . . . . . . . . .......... (49) (306) (639)
Other operating charges. . . . . . . . . . . .......... 799 73 60
Other items . . . . . . . . . . . . . . . . . . . . .......... 119 51 (42)
Net change in operating assets and
liabilities . . . . . . . . . . . . . . . . . . . . . .......... (557) (550) (47)
Net cash provided by operating
activities . . . . . . . . . . . . . . . . . . . . . .......... $ 3,883 $ 3,433 $ 4,033
Investing activities:
Acquisitions and investments, principally
trademarks and bottling companies . . . . . ..... $(1,876) $(1,428) $(1,100)
Purchases of investments and other assets . ..... (518) (610) (459)
Proceeds from disposals of investments and
other assets . . . . . . . . . . . . . . . . . . . . . . . ..... 176 1,036 1,999
Purchases of property, plant and equipment ..... (1,069) (863) (1,093)
Proceeds from disposals of property, plant
and equipment . . . . . . . . . . . . . . . . . . . . . ..... 45 54 71
Other investing activities . . . . . . . . . . . . . . . ..... (179) (350) 82
Net cash used in investing activities . . . . . . . ..... $(3,421) $(2,161) $ (500)

Financing activities:
Issuances of debt . . . . . . . . . . . . . . . . .......... $ 3,411 $ 1,818 $ 155
Payments of debt . . . . . . . . . . . . . . . . .......... (2,455) (410) (751)
Issuances of stock . . . . . . . . . . . . . . . .......... 168 302 150
Purchases of stock for treasury. . . . . . .......... (15) (1,563) (1,262)
Dividends . . . . . . . . . . . . . . . . . . . . . . .......... (1,580) (1,480) (1,387)
Net cash used in financing activities. . .......... $ (471) $(1,333) $(3,095)
Effect of exchange rate changes on
cash and cash equivalents . . . . . . . . . .......... $ (28) $ (28) $ (134)
Cash and cash equivalents:
Net increase (decrease) during the year. .......... (37) (89) 304
Balance at beginning of the year . . . . . . .......... 1,648 1,737 1,433
Balance at end of year. . . . . . . . . . . . . . .......... $ 1,611 $ 1,648 $ 1,737
665
f666 The Statement Of Cash Flows
Part 4 CEO Other Dimensions of Financial Reporting




L
INTERNATIONAL CASE
• Glaxo Wellcome
GLAXO WELLCOME, a British company, is one of the largest pharmaceutical
firms in the world. The name “Glaxo” comes from the company™s first major
product line, baby food products that were sold with the slogan, “Builds Bon-
nie Babies.” Growth of the company in recent years has been driven by sales
of Zantac, an anti-ulcer drug.
Glaxo Wellcome™s 1999 statement of cash flows is shown on the next page.
Look at the statement and answer the following questions. (Note: Translations
of British accounting terms into American English are shown in square brack-
ets.)
1. In a U.S. statement of cash flows, cash flows are sorted into three cate-
gories. How many categories does Glaxo Wellcome use?
2. List some of the items that Glaxo Wellcome has excluded from the com-
putation of cash from operating activities that would be included if the state-
ment of cash flows were prepared according to U.S. standards.
3. Given your answer in (2), which is a better indication of cash from operat-
ing activities: the number reported by Glaxo Wellcome using a British clas-
sification of cash flows, or the number that would be reported using a U.S.
classification? Explain your answer.
4. If you were to redo Glaxo Wellcome™s statement of cash flows for 1999 us-
ing the U.S. classification scheme with just three categories, the total of
these three categories would result in the same net change in cash (36) re-
ported by Glaxo Wellcome using the British classification. Why is this?
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The Statement of Cash Flows




Glaxo Wellcome plc
Consolidated Statement of Cash Flows
31st December 1999
(in millions of £)
1999 1998

Trading profit 2,625 2,683
Depreciation 360 358
Impairment 68 ”
Amortization of goodwill 9 6
Loss/(profit) on sale of tangible fixed assets 7 7
Profit on sale of equity investments (139) (38)
Increase in stocks [inventory] (391) (297)
Decrease/(increase) in debtors [accounts receivable] (126) (250)
(Decrease)/increase in creditors [accounts payable] 64 30
(Decrease)/increase in pension and other provisions 166 (41)
Other (37) (110)
Net cash inflow from operating activities 2,606 2,348
Earnings from joint ventures and associated undertakings 2 40

Returns on investment and servicing of finance
Interest received 110 112
Interest paid (198) (200)
Cost of financing (2) ”
Dividends paid to minority shareholders (31) (9)
(121) (97)
Taxation paid
Corporate taxation (672) (626)
Capital expenditure less disposals
Purchase of tangible fixed assets (597) (475)
Sale of tangible fixed assets 82 55
(515) (420)

Acquisitions and disposals
Purchase of businesses (67) (156)
Investment in joint ventures and associated undertakings (3) (16)
Dissolution of joint ventures ” 20
Disposal of interest in associate 41 ”
Purchase of own shares (421) (10)
Purchase of equity investments (7) (51)
Sale of equity investments 118 54
(339) (159)
Equity dividends paid (1,305) (1,255)
Net cash inflows before financing (344) (169)

Financing
Management of liquid resources (42) (251)
Issue of ordinary share capital 104 284
Increase in long-term loans 110 5
Repayment of long-term loans (9) (63)
Net repayment of short-term loans 150 117
New obligations under finance [capital] leases (5) (4)
Net cash inflow from financing activities 308 88
(Decrease)/increase in cash in the year (36) (81)
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Part 4 CEO Other Dimensions of Financial Reporting




L
ETHICS CASE
• Manipulating the Federal Budget Deficit
Assume that you are the paymaster in charge of all U.S. Department of De-
fense (DOD) payroll matters. The total amount that you disburse in payroll
checks in any given week is in excess of $1 billion.
Assume also that tax receipts have been lower than expected and that a
federal budget deficit, and not a surplus, is now projected. Currently, Congress
is struggling to reduce the projected budget deficit. It is an election year, and
the members of Congress are worried that they will be stuck with a “tax and
spend” label if the government runs a deficit this year. Of course, the DOD
budget has been scrutinized very carefully to reduce reported expenditures as
much as possible.
Yesterday, a congressional leader came to your office with a disturbing pro-
posal. Because the federal budget numbers are reported on a cash basis, rather
than on an accrual basis, expenses are reported when they are paid instead of
when they are incurred. This year, the final DOD payday of the year happens
to fall on the last day of the federal government™s fiscal year (September 30).
The congressional leader suggested that you delay issuing the payroll checks
by one day. This would push the actual payment of the cash into the next fis-
cal year. Thus, even though the payment would be for services performed in
the current fiscal year, the expense wouldn™t be reported until next year. With
this simple trick, the reported deficit for this year (an election year) can be re-
duced by $1 billion.
What should you do?
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WRITING ASSIGNMENT
• Convincing the Old-Timers of the Need for Cash Flow Data
You are the chief accountant for Harry Monst Company. The president of the
company is a former accountant who worked her way up through the man-
agement ranks over the course of 30 years. She is a great manager, but her
knowledge of accounting is outdated.
Harry Monst Company has a revolving line of credit with Texas Commer-
cial Bank. A new loan officer has just been put in charge of the Harry Monst
account. The new loan officer is surprised to see that Harry Monst has not been
submitting a statement of cash flows along with the rest of the financial state-
ments that comprise the annual loan review packet. The new loan officer called
you and asked for a statement of cash flows.
You were surprised when you took the completed statement of cash flows
to the president for her signature. She refused to sign, stating that she had
never looked at or prepared a statement of cash flows in her career and she
wouldn™t start now.
Write a one-page memo to the president with the objective of convincing
her of the usefulness of the statement of cash flows.
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L
THE DEBATE
• No One Can Understand the Indirect Method!
Companies have the option of reporting cash flows from operating activities
using either the direct or the indirect method. Many financial statement users
think that the information provided with the direct method is easier to under-
stand. In spite of this, more than 95% of large U.S. companies use the indirect
method.
Divide your group into two teams.

• One team represents the “Direct Method.” Prepare a two-minute oral pre-
sentation arguing that the direct method is just what its name implies”di-
rect and easy to understand. The indirect method is merely an attempt by
accountants to confuse financial statement users.
• The other team represents the “Indirect Method.” Prepare a two-minute
oral presentation arguing that the direct method may seem easy to un-
derstand, but only to unsophisticated financial statement readers. The in-
direct method reveals much more useful information.
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CUMULATIVE SPREADSHEET PROJECT
This spreadsheet assignment is a continuation of the spreadsheet assignments
given in earlier chapters. If you completed those spreadsheets, you have a head
start on this one.
1. Handyman wishes to prepare a forecasted balance sheet, income state-
ment, and statement of cash flows for 2004. Use the original financial state-
ment numbers for 2003 [given in part (1) of the Cumulative Spreadsheet
Project assignment in Chapter 2] as the basis for the forecast along with
the following additional information:
a. Sales in 2004 are expected to increase by 40% over 2003 sales of $700.
b. In 2004, Handyman expects to acquire new property, plant, and equip-
ment costing $80.
c. The $160 in operating expenses reported in 2003 breaks down as fol-
lows: $5 depreciation expense, $155 other operating expenses.
d. No new long-term debt will be acquired in 2004.
e. No cash dividends will be paid in 2004.
f. New short-term loans payable will be acquired in an amount sufficient
to make Handyman™s current ratio in 2004 exactly equal to 2.0.
Construction of the forecasted statement of cash flows for 2004 involves ana-
lyzing the forecasted income statement for 2004, along with the balance sheets
for 2003 (actual) and 2004 (forecasted).
For this exercise, the current assets are expected to behave as follows:
a. Cash will increase at the same rate as sales.
b. The forecasted amount of accounts receivable in 2004 is determined
using the forecasted value for the average collection period (computed
using the end-of-period Accounts Receivable balance). The average col-
lection period for 2004 is expected to be 14.08 days. This is from the
Chapter 6 spreadsheet.
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f670 The Statement Of Cash Flows
Part 4 CEO Other Dimensions of Financial Reporting




c. The forecasted amount of inventory in 2004 is determined using the
forecasted value for the number of days™ sales in inventory (computed
using the end-of-period Inventory balance). The number of days™ sales
in inventory for 2004 is expected to be 107.6 days. This is from the
Chapter 7 spreadsheet.
d. The forecasted amount of accounts payable in 2004 is determined us-
ing the forecasted value of the number of days™ purchases in accounts
payable (computed using the end-of-period Accounts Payable balance).
The number of days™ purchases in accounts payable for 2004 is ex-
pected to be 48.34 days. This is from the Chapter 7 spreadsheet.

Clearly state any additional assumptions that you make.

2. Repeat (1), with the following changes in assumptions:
a. The average collection period is expected to be 9.06 days with days™
sales in inventory remaining at 107.6 days and days™ purchases in
payables remaining at 48.34 days.
b. The average collection period is expected to be 20 days with days™ sales
in inventory remaining at 107.6 days and days™ purchases in payables
remaining at 48.34 days.
c. Days™ sales in inventory are expected to be 66.2 days with the average
collection period remaining at 14.08 days and days™ purchases in
payables remaining at 48.34 days.
d. Days™ sales in inventory are expected to be 150 days with the average
collection period remaining at 14.08 days and days™ purchases in
payables remaining at 48.34 days.
3. Comment on the forecasted values of cash from operating activities in 2004
under each of the scenarios given in (2).
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INTERNET SEARCH
• Home Depot
Access HOME DEPOT™s Web site at http://www.homedepot.com. Sometimes
Web addresses change, so if this address does not work, access the Web site
for this textbook (http://albrecht.swcollege.com) for an updated link.
Once you™ve gained access to the site, answer the following questions:

1. Locate Home Depot™s services site and determine how many different ways
Home Depot can help you finance your home improvement plans.
2. Home Depot is highly supportive of various community efforts. Use its Web
site to identify the community activities that Home Depot sponsors or is
associated with.
3. Home Depot™s Web site also includes a number of calculators designed to
help buyers determine how much of a given item they need to purchase.
Access the calculator for ceramic tile and determine how many tiles you
would have to purchase if the room is 10 feet by 20 feet, the surface tiles
are 12 inches by 12 inches, and the border tiles are 6 inches by 6 inches.
4. Find Home Depot™s most recent set of financial statements. In its statement
of cash flows, does Home Depot use the direct method or the indirect
method in reporting cash from operating activities?
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Statement of Cash Flows




5. In the most recent year, which is greater”Home Depot™s net income or its
cash flows from operating activities?
6. Did Home Depot pay any cash dividends in the most recent year?
appendix a
MICROSOFT CORPORATION
1999 ANNUAL REPORT




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