Chapter 6

Statement of Cash Flows

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. TRUE
2. FALSE 7. FALSE
3. FALSE 8. TRUE
4. TRUE 9. TRUE
5. TRUE 10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D

2. D

3. A

4. B

5. D

6. B

7. C

8. B

9. D

10. A

11. A

12. B

13. D

14. C

15. D

16. Solution:

Bell Industries

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 Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

  Net income ............................ ₱ 50,000(1) 
  Adjustments:
    Depreciation expense ................ ₱ 25,000 
    Increase in accounts receivable ..... (8,000)
    Decrease in merchandise 13,000 
inventory ...
    Decrease in accounts payable ........ (10,000)  20,000 
  Net cash provided by operating
activities ........................... ₱70,000 

Cash flows from financing activities:

    Payment of cash dividends ........... ₱(40,000)
    Net cash used in financing activities  (40,000)
Net increase in cash .................... ₱ 30,000 
Cash at beginning of year ............... 10,000 
Cash at end of year ..................... ₱ 40,000 

(1)

Retained earnings
20,000 beg.
Dividends
Net income (squeeze)
declared 40,000 50,000

end. 30,000

17. Solution:

Sage Corporation
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income .............................. ₱ 45,000 
Adjustments:
- Gain on sale of investment in bonds ₱ (2,250)
- Gain on sale of equipment ........... (750)
+ Depreciation expense ................ 75,000 
- Increase in accounts receivable ..... (3,750)
- Increase in merchandise (24,000)
inventory ...
+ Decrease in prepaid insurance ....... 375 
- Decrease in accounts payable ........ (82,875)

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- Decrease in salaries payable ........ (7,500)
- Decrease in notes payable ........... (112,500 (158,250)
)
Net cash used in operating activities ... ₱(113,250)
Cash flows from investing activities:
  Sale of investment in bonds ₱ 90,000 
  Sale of equipment ..................... 4,500 
  Purchase of equipment ................. (310,125)
Net cash used in investing activities ... (215,625)
Cash flows from financing activities:
  Proceeds from bond issue .............. ₱375,000 
  Payment of cash dividends ............. (22,500)
Net cash provided by financing activities   352,500 
Net increase in cash .................... ₱ 23,625 
Cash at beginning of year ...............    63,750 
Cash at end of year ..................... ₱ 87,375 

18. Solution:

Top Ten Clothiers Inc.

Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Cash receipts from customers ........ ₱ 940,000*
Cash payments for:
Inventory ......................... ₱750,000 **
Operating expenses ................ 342,000*** 1,092,000 
Net cash used in operating ₱ (152,000)
activities .
Cash flows from investing activities:
Sale of long-term investments ....... ₱105,000   
Net cash flow provided by investing 105,000 
activities ..........................
Cash flows from financing activities:
Payment of bonds payable ............ ₱(60,000)  
Payment of dividends ................ (90,000)(1)  
Net cash flow used in financing (150,000)
activities ..........................
Net decrease in cash .................. ₱ (197,000)
Cash at beginning of year ............. 240,000 
Cash at end of year ................... ₱ 43,000 

Computations:

* Sales .......................................... ₱1,120,000 

Accounts Receivable, beginning ................. 210,000 
Accounts Receivable, ending .................... (390,000)
Cash collected from customers ................ ₱ 940,000 

** Purchases ...................................... ₱ 660,000 

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 Accounts Payable, beginning .................... 240,000 
Accounts Payable, ending ....................... (150,000)
Cash payments for inventory .................... ₱ 750,000 

*** Operating Expenses ............................. ₱ 360,000 

Operating Expenses Payable:
Beginning .................................... 30,000 
Ending ....................................... (48,000)
Cash payments for operating ₱ 342,000 
expenses ...........
(1)

Retained earnings

  300,000 beg.

Net loss 5,000  

Dividends 90,000  
end. 205,000  

PROBLEM 3: EXERCISES

1. Solutions:
Requirement (a):
Cash collected from customers (96K + 536 – 138K) ₱494,000 
Cash paid for inventory
(206K + 396K – 168K = 434K purchases);
(68K + 434K – 90K = 412K payments to suppliers) (412,000) 
Cash paid for salaries (20K + 18K – 16K) (22,000) 
Cash paid for other expenses   (56,000) 
  Cash flow from operations ₱ 4,000 

Requirement (b):
Net income ........................................... ₱44,000 
Add: Depreciation .................................. 22,000 
Increase in accounts payable .................. 22,000 
Less Increase in accounts receivable ............... (42,000)
:
Increase in inventory ......................... (38,000)
Decrease in salaries payable ..................  (4,000)
Cash flow from operations ..................... ₱ 4,000 

2. Solutions:

Requirement (a):

Cash collected from customers (62.4K + 616.6K – 70.6K) ₱608,400

Cash paid for inventory

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 (148.2K + 490K – 158.6K = 479.6K purchases);
(51K A/P + 40K N/P + 479.6K – 39K – 41.6K = 490K) (490,000)
Cash paid for other expenses .........................   (56,000)
Net cash flows from operating activities ............. ₱ 62,400

Requirement (b):

Net income ........................................... ₱59,800 

Add: Depreciation .................................. 18,200 
Amortization .................................. 2,600 
Loss on sale of building ...................... 3,000 
Decrease in inventory ......................... 10,400 
Increase in short-term notes payable .......... 1,600 
Less Increase in accounts receivable ............... (8,200)
:
Decrease in accounts payable .................. (12,000)
Gain on sale of investments ................... (13,000)
Cash flow from operations ..................... ₱62,400 

3. Solution:
Anderson Industries
Partial Statement of Cash Flows--Operating Activities
For the Year Ended December 31, 2002

Cash flows from operating activities:

  Net income ................................. ₱ 50,000
  Adjustments:
   + Depreciation ........................... ₱25,000 
   + Decrease in accounts receivable ........ 12,000 
   – Increase in inventory .................. (22,000)
   + Increase in accounts payable ........... 20,000  35,000
Net cash provided by operating activities .... ₱ 85,000

4. Solution:
Cash flows from operating activities:
  Net income ................................. ₱319,500 
  Adjustments:
    Depreciation expense ..................... ₱36,000 
    Increase in accounts receivable .......... (19,350)
    Increase in inventories .................. (43,500)
    Decrease in prepaid insurance ............ 1,200 
    Decrease in accounts payable ............. (22,500)
    Increase in other current liabilities .... 18,000  (30,150)
Net cash provided by operating activities .... ₱289,350 

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5. Solutions:

Requirement (a):
Cost of goods sold ................................... ₱350,000 
Inventory, ending .................................... 85,000 
Inventory, beginning ................................. (95,000)
Purchases ............................................ ₱340,000 
Accounts payable, beginning .......................... 135,000 
Accounts payable, ending ............................. (105,000
)
Cash payments for inventory .......................... ₱370,000 

Requirement (b):

Profit 15,000

Depreciation expense 30,000

Decrease in A/R 42,000

Decrease in Inventory 10,000

Decrease in A/P (30,000)

Cash flow from operating activities 67,000

Requirement (c):
Collections from customers (260K + 490K -
218K) 532,000
Payments to suppliers (see requirement ‘a’
above) (370,000)

Other expenses (see solution below) (95,000)

Cash flow from operating activities 67,000

Sales 490,000
COGS (350,000)
Depreciation (30,000)
Other expenses
(squeeze) (95,000)
Profit 15,000

6. Solution:

6
Deloitte Industries
Partial Statement of Cash Flows--Investing and Financing Activities
For the Year Ended December 31, 2002

Cash flows from investing activities:

  Purchase of equipment ..................... ₱(125,000
)
  Net cash used in investing activities ..... ₱(125,000
)

Cash flows from financing activities:

  Proceeds from sale of stock ............... ₱ 140,000
  Payment of dividends ...................... (40,000)
  Net cash provided by financing activities . ₱ 100,000

7. Solution:

Covey Corporation
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income ................................... ₱545,600 
Adjustments:
- Gain on sale of investment in bonds ₱(100,000
)
+ Depreciation expense ................... 140,000 
+ Decrease in accounts receivable ........ 28,400 
- Increase in inventories ................ (42,000)
+ Increase in accounts payable ...........    78,000  104,40
0 
Net cash provided by operating activities .... ₱
650,000 
Cash flows from investing activities:
  Purchase of equipment ...................... ₱(560,000
)
  Sale of investment in bonds ......   300,000 
Net cash used in investing activities ........ (260,000
)
Cash flows from financing activities:
  Retirement of bonds at face ................ ₱(400,000
)
  Issuance of common stock ................... 280,000 
  Payment of dividends ....................... (240,000)
Net cash used in by financing activities ..... (360,000
)
Net increase in cash and cash equivalents .... ₱ 30,000 
Cash and cash equivalents at beginning of year 220,000 
Cash and cash equivalents at end of year ..... ₱250,000 

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8. Solution:

Spurrier Co.
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income ................................... ₱150,000 
Adjustments:
+ Depreciation ........................... ₱ 12,000 
+ Loss on sale of equipment .............. 15,000 
+ Decrease in accounts receivable ........ 68,700 
- Increase in inventory .................. (43,500)
- Decrease in accounts payable ........... (27,600)  24,600 
Net cash provided by operating activities .... ₱174,600 
Cash flows from investing activities:
Proceeds from sale of equipment .............. ₱ 63,000 
Purchase of equipment ........................ (84,000)
Net cash used in investing activities ........ (21,000)
Cash flows from financing activities:
Issuance of common stock ..................... ₱105,000 
Retirement of long-term debt ................. (120,000)
Payment of dividends ......................... (18,600)
Net cash used in financing activities ........ (33,600)
Net increase in cash and cash equivalents .... ₱120,000 
Cash and cash equivalents, beginning of year . 200,000 
Cash and cash equivalents, end of year ....... ₱320,000 

9. Solution:

UR Company
Statements of Income
For Years Ended December 31, 2002 & 2003

Forecasted
Description 2002 , Explanations
12/31/03
Sales ₱3,172,00 ₱6,000,000 Given.
0
Same percentage of
Cost of Goods 2,532,000 4,789,407 sales as last year.
Sold
Gross Margin 640,000 1,210,593
Depreciation Same percentage of
Expense 14,576 28,224 PP&E as last year.
Other Operating Same percentage of
Expenses 122,684 410,134 sales as last year.
Operating Profit 502,740 772,235
Interest Expense 142,740 119,400 Same as prior year: 15%

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 of bank loan
Income before
Taxes 360,000 652,835
Income Taxes 108,000 195,850 Same as prior year: 30%
of Income before Taxes
Net Income 252,000 456,985

UR Company
Forecasted Statement of Cash Flows
For Year Ended December 31, 2003

Cash flows from operating activities:

Net income ................................. ₱456,985 
Adjustments:
Depreciation ............................. 28,224 
Increase in other current assets ......... (440,000
)
Increase in accounts payable ............. 36,000  ₱ 81,209 

Cash flows from investing activities:

Purchase of property, plant and equipment .. (440,224)
Cash flows from financing activities:
Payment of dividends ....................... ₱(32,985)
Borrowings on bank loans ................... 472,000  439,015 

Net increase in cash and cash equivalents .... ₱

80,000 
Cash and cash equivalents at beginning of 132,000 
the year ...................................
Cash and cash equivalents at end of year ..... ₱212,00
0 

10. Solution:

EMD, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2002
(in thousands)

Cash flows from operating activities:

  Net income ................................. ₱44
  Adjustments for noncash revenue and expense
  items:
    Depreciation expense ..................... ₱22
    Increase in accounts receivable .......... (42)
    Increase in inventory .................... (38)
    Increase in accounts payable ............. 22
    Decrease in income taxes payable ......... (4) (40)
  Net cash flows from operating activities ... ₱4

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Cash flows from investing activities:
  Purchase of building ....................... (26)
Cash flows from financing activities:
  Sale of stock .............................. ₱60
  Payment of cash dividends .................. (8)
  Net cash flows from financing activities ... 52
Increase in cash ............................. ₱30
Cash January 1, 2002 ......................... 36
Cash December 31, 2002 ....................... ₱66

PROBLEM 4: MULTIPLE CHOICE – THEORY

1. D 6. D
2. B 7. D
3. A 8. D
4. C 9. A
5. D 10. C

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PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL
1. B

Solution:
Profit 420,000
Gain on sale of equipment (7,000)
Depreciation expense 72,800
Net cash from operating activities 485,800

2. A

Solution:
The entry for the sale of the equipment is reconstructed as follows:
200 Cash (squeeze) 25,200
2 Accumulated depreciation 16,800
Equipment 35,000
Gain 7,000

Selling price of equipment sold (see journal

entry) 25,200

Cash payment for equipment purchased (28,000)

Net cash used in investing activities (2,800)

3. C

Accounts receivable
Jan. 1 108,000
Sales on account 2,190,00 Cash collections
and cash sales 0 2,146,000 (squeeze)
152,000 Dec. 31
4. B

Solution:
Profit for the year 360,000
Amortization 20,000
Depreciation 60,000
Increase in accounts receivable (140,000)
Increase in inventory (48,000)
Decrease in accounts payable (76,000)
Increase in salaries payable 28,000
Net cash from operating activities 204,000

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5. D

Solution:
Profit 396,000
Depreciation expense 102,000
Decrease in accounts receivable 126,000
Increase in inventories (90,000)
Increase in accounts payable 24,000
Decrease in income taxes payable (16,000)
Cash flow from operating activities 542,000

6. D

Solution:
Cash paid to suppliers and employees (1,020,000)
Cash received from customers 1,740,000
Rent received 20,000
Taxes paid (220,000)
Cash flow from operating activities 520,000

7. C

Solution:
Rent payable
  40,000 beg.
Payment
35,000 10,000
(squeeze) Rent expense
end. 15,000

8. B 50,000 net proceeds less carrying amount of 70,000 (250,000 –

180,000) = 20,000 loss, added back to profit when computing for
the net cash flows from operating activities under the indirect
method.

9. D (100,000 + 75,000) = 175,000 total dividends paid, cash

outflow under financing activities.

10. C

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