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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

CHAPTER 22
STATEMENT OF CASH FLOWS
ASSIGNMENT CLASSIFICATION TABLE
Brief
Exercises Exercises

Topics

1. Cash flows from a


1
business perspective.
2. Uses of statement of
cash flows.

3. Cash and cash


equivalents.

Problems
2

1, 2
3

4. Classifying operating, 4, 5, 6, 7,
investing, and
8
financing activities.

2, 3, 4, 5, 6, 3, 4, 5, 6,
7, 8, 9, 10, 10
11

5. Direct and indirect


methods of preparing
operating activities.

9, 10

3, 12, 13,
14, 15, 16,
17, 18

6. Statement of cash
flows-direct method.

9, 11, 12,
13, 14

3, 4, 12, 13, 1, 3, 4, 5,
14, 15, 16, 7, 9, 10,
19, 20
11, 12

7. Statement of cash
flows-indirect
method.

10, 14,
15, 16

1, 3, 4, 5, 6, 2, 3, 4, 6,
13, 14, 15, 7, 8, 9,
16, 17, 18, 10, 11, 13
20, 21

8. Presentation and
disclosure.

7, 8

3, 4, 7, 8, 9, 1, 3, 4, 5,
10, 11, 15,
7, 10, 12,
16
13

9. Interpret a statement
of cash flows.

Solutions Manual

Writing
Assignments

1, 4, 9, 15,
17

22-1

Chapter 22

1, 2, 4, 6

3, 4, 7, 8

1, 2, 5, 7,
8, 11, 12,
13

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

ASSIGNMENT CLASSIFICATION TABLE (Continued)


Topics
10. Differences between
IFRS and ASPE.

Brief
Exercises Exercises

Problems

2, 4

6, 8, 9

Solutions Manual

4, 10, 11,
16

22-2

Chapter 22

Writing
Assignments

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

ASSIGNMENT CHARACTERISTICS TABLE


Item
E22-1
E22-2
E22-3
E22-4
E22-5
E22-6
E22-7
E22-8
E22-9
E22-10
E22-11
E22-12
E22-13
E22-14
E22-15
E22-16
E22-17
E22-18
E22-19
E22-20
E22-21
*E22-22
*E22-23

Level of Time
Difficulty (minutes)

Description
Prepare statement from transactions, and
explanation of changes in cash flow
Classification of transactions and
calculation of cash flows.
Journal entries and classification
Long-term equity investment: direct and
indirect IFRS and ASPE
Partial SCF, indirect method.
Analysis of changes in capital asset
accounts and related cash flows.
Statement presentationindirect method.
Statement presentation equity accounts
Entries and partial comparative SCF for
operating and finance lease
Classification of transactions and events.
Classification of transactions - indirect.
Operating activities sectiondirect method.
Bad debt write-offs and recoveries.
SCF direct and indirect methods with
comments.
SCF, direct and indirect methods, then
contrast results.
SCF, direct and indirect methods
Both methods of SCF and analysis.
Operating activities sectionindirect
method.
Operating activities sectiondirect method.
Accounting cycle, financial statements,
cash account, and SCF, direct and indirect
Operating activities sectionindirect
method (5)
Work sheet analysis of selected
transactions.
Work sheet preparation.

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22-3

Chapter 22

Moderate

40-45

Moderate

25-35

Moderate
Moderate

15-20
15-20

Moderate
Moderate

20-25
30-35

Moderate
Moderate
Moderate

20-30
15-20
20-25

Simple
Simple
Simple
Simple
Moderate

10-15
10-15
20-30
15-20
30-40

Moderate

30-40

Moderate
Moderate
Simple

20-30
35-40
15-20

Moderate
Moderate

20-30
40-50

Moderate

20-30

Moderate

20-25

Moderate

45-55

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

ASSIGNMENT CHARACTERISTICS TABLE (Continued)


Item
P22-1
P22-2
P22-3
P22-4
P22-5
P22-6
P22-7
P22-8
P22-9
P22-10
P22-11
P22-12
P22-13

Level of Time
Difficulty (minutes)

Description
SCF, direct method and reconciliation and
comments
SCF, indirect method.
Both methods including cash and cash
equivalents
Operating activities sectiondirect method
and SCFindirect method, and draft
overall comments
SCF, direct method and reconciliation and
comments
Equity transactions reported on the SCF
SCF, indirect method, and net cash flow
from operating activities, direct method and
comments.
Operating activities sectionindirect
method
SCF FV-OCI investment transactions, both
formats
All financial statements from account
activities involving investments.
SCF, both methods and analysis
Prepare statement of financial position from
cash flow and income statements.
SCF, indirect method with summary on
highlights concerning cash activities, and
related questions.

Solutions Manual

22-4

Chapter 22

Complex

50-55

Moderate
Complex

40-45
45-50

Moderate

40-50

Moderate

45-60

Moderate
Moderate

30-35
30-40

Moderate

20-30

Moderate

20-25

Moderate

30-35

Moderate
Complex

40-45
50-55

Moderate

50-60

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 22-1
(a)

A business should have positive cash flows to finance


expansion, pay dividends, and remain solvent during
economic downturns. Stamford may have a positive cash
balance and a solid current ratio as of the date of the
companys most recent statement of financial position, as
well as a history of profitability. However, Stamfords bank
manager will also want to assess the businesss ability to
generate positive cash flows from operations for the
period which will confirm its ability to finance the
upcoming expansion and decrease the risk involved in
lending to Stamford.

(b)

The statement of cash flows provides information about


the businesss sources and uses of cash during the
period, and helps investors and creditors assess the
businesss earnings quality. With the information on the
statement of cash flows, Stamfords bank manager can
assess the businesss ability to generate cash to pay its
maturing debt, increase productive capacity, and distribute
a return to its owners. The statement of cash flows also
allows Stamfords bank manager to assess the quality of
Stamfords reported profitability by comparing cash flow
from operations to accrual basis net income. (For example,
if accrual basis net income is much greater than cash flow
from operations, the companys reported net income may
be judged to be of lower quality, or less reflective of
economic reality).

Solutions Manual

22-5

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-2


(a)

$228,000 ($108,000 + $120,000)


Under IFRS, preferred shares acquired close to their
maturity date may be included in cash equivalents. Legally
restricted cash balances are not included in Cash
equivalents. They are reported separately in current
assets or noncurrent assets, depending on the date of
availability of the cash or of the expected disbursement.

(b)

$108,000
Under ASPE, cash equivalents exclude all equity
investments. Legally restricted cash balances are not
included in Cash equivalents. They are reported
separately in current assets or noncurrent assets,
depending on the date of availability of the cash or of the
expected disbursement.

BRIEF EXERCISE 22-3

Cash in bank
Petty cash
Investment in Canada 60-day
treasury bill
Temporary bank overdraft,
chequing account
Cash and cash equivalents

Solutions Manual

June 30 June 30
2014
2013
$12,100 $ 9,460
100
125
22,000

Net
Decrease

28,300

(13,800)
(1,000)
$20,400 $ 36,885 $ 16,485

22-6

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-4


(a) IFRS
Cash flow from investing activities
Proceeds from sale of land
Proceeds from sale of bonds
Interest received
Dividends received
Purchase of FV-NI investments
Purchase of equipment
Purchase of investments in bonds, reported
at amortized cost
Net cash provided by investing activities

$180,000
415,000
11,000
4,000
(15,000)
(495,000)
(61,000)
$ 39,000

(b) ASPE
Cash flow from investing activities
Proceeds from sale of land
Proceeds from sale of bonds
Purchase of FV-NI investments
Purchase of equipment
Purchase of investments in bonds, reported
at amortized cost
Net cash provided by investing activities

$180,000
415,000
(15,000)
(495,000)
(61,000)
$ 24,000

BRIEF EXERCISE 22-5


Cash flow from financing activities
Proceeds from issuance of common shares
Proceeds from issuance of bonds payable
Payment of bank loan principal
Dividends paid
Purchase of companys own shares
Net cash provided by financing activities

Solutions Manual

22-7

Chapter 22

$200,000
410,000
(20,000)
(170,000)
(47,000)
$373,000

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-6


(a)
(b)
(c)
(d)
(e)
(f)
(g)

D
A
R-F
A
R-I
R-I, D
P-F

(h)
(i)
(j)
(k)
(l)
(m)
(n)

P-I
P-I
A
D
R-F
N
D

(o)
(p)
(q)
(r)
(s)
(t)
(u)

R-F
P-F
R-I, A
P-F
N
N
A

BRIEF EXERCISE 22-7


(a)

Land ...................................................................................
149,000
Common Shares..........................................................
149,000

(b)

No effect

(c)

In the notes to the financial statements:


Non-cash Investing and Financing
Activities: Purchase of land through
issuance of common shares

$149,000

BRIEF EXERCISE 22-8


Financing activities:
Cash paid on capital lease.........................................

$(2,330)

In the notes to the financial statements:


Non-cash Investing and Financing Activities:
Purchase of machinery under capital lease

$85,000

Solutions Manual

22-8

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-9


Cash flows from operating activities
Cash received from customers
($205,000 $17,000)
$188,000
Cash paid
To suppliers
($120,000 + $11,000 $13,000)
$118,000
For operating expenses
($50,000 $21,000)
29,000
147,000
Net cash provided by operating activities
$ 41,000
BRIEF EXERCISE 22-10
Cash flows from operating activities
Net income
$35,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense
$21,000
Increase in accounts payable
13,000
Increase in accounts receivable
(17,000)
Increase in inventory
(11,000)
6,000
Net cash provided by operating activities
$41,000
BRIEF EXERCISE 22-11
Sales
Less: Sales returns and allowances
Less: Sales discounts
Add: Decrease in accounts receivable
Cash received from customers

Solutions Manual

22-9

Chapter 22

$420,000
(10,000)
(1,000)
13,000
$422,000

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-12


Cost of goods sold
Add: Increase in inventory
Purchases
Deduct: Increase in accounts payable
Cash paid to suppliers

$550,000
23,000
573,000
8,000
$565,000

BRIEF EXERCISE 22-13


(a)

Income tax expense 2014


Future tax benefit 2014
Changes in related SFP
accounts:
Income tax payable
Future tax asset
Future tax liability
Income taxes paid

Dec. 31
2014

Dec. 31
2013

Effect
on Cash
$(2,500)
600

$ 1,200
300
1,950

$ 1,400

1,600

(200)
(300)
350
$ (2,050)

Under ASPE, companies are encouraged to disclosure income


taxes paid, but income taxes paid are not required to be
disclosed separately.
(b)
Under IFRS, income taxes paid are required to be disclosed.

Solutions Manual

22-10

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-14


(a) Cash flows from operating activities
Cash received from customers
Cash paid for expenses ($60,000 $1,540)
Net cash provided by operating activities
(b) Cash flows from operating activities
Net income
Increase in net accounts receivable
($27,260 $18,800)
Net cash provided by operating activities

$90,000
58,460
$31,540

$40,000
(8,460)
$31,540

BRIEF EXERCISE 22-15


Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation expense
Unrealized losses on FV-NI investments
Increase in accounts payable
Increase in accounts receivable
Decrease in deferred tax assets
Increase in inventory
Net cash provided by operating activities

Solutions Manual

22-11

Chapter 22

$46,000
$17,000
3,000
9,300
(11,000)
2,000
(7,400) 12,900
$58,900

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-16


Cash flows from operating activities
Net loss
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Depreciation expense
Increase in accounts receivable
Net cash provided by operating activities

($56,000)

$87,000
(8,100)

78,900
$22,900

*BRIEF EXERCISE 22-17


(a)

OperatingNet Income....................................................
207,000
Retained Earnings.......................................................
207,000

(b)

Retained Earnings............................................................
60,000
FinancingDividends Paid........................................60,000

(c)

Equipment.........................................................................
114,000
InvestingPurchase of Equipment...........................
114,000

(d)

InvestingSale of Equipment.........................................
13,000
Accumulated DepreciationEquipment........................
32,000
Equipment...................................................................40,000
OperatingGainSale of Equipment........................ 5,000

Solutions Manual

22-12

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

SOLUTIONS TO EXERCISES
EXERCISE 22-1 (40-45 minutes)
(a)
Strong House, Inc.
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income
$42,000
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation expense (a)
$13,550
Gain on sale of investment in bonds (b)
(500) 13,050
Net cash provided by operating activities
$55,050
Cash flows from investing activities
Purchase of land (c)
(5,500)
Proceeds on sale of investment in bonds (d) 15,500
Net cash provided by investing activities
10,000
Cash flows from financing activities
Dividends paid (e)
Payments to retire bonds payable (f)
Proceeds from issuance of common
shares (g)
Net cash used by financing activities

(19,000)
(10,000)
20,000

(9,000)

Net increase in cash


Cash balance, January 1, 2014
Cash balance, December 31, 2014

56,050
10,000
$66,050

Non-cash investing and financing activities


Issuance of bonds for equipment

$32,000

Supplemental disclosures of cash flow information:


Cash paid during the year for:
Interest
Income taxes
Solutions Manual

$4,500
$19,500
22-13

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-1 (Continued)


(b) Dear Mr. Brauer:
Enclosed is your statement of cash flows for the year
ending December 31, 2014. I would like to take this opportunity
to explain the changes which occurred in your business as a
result of cash activities during 2014. (Please refer to the
attached statement of cash flows.)
The first category shows the net cash flow which resulted
from all of your operating activities. Operating activities are
those engaged in for the routine conduct of business, involving
most of the transactions used to determine net income. The
cash inflow from operations which affects this category is net
income. However, this figure must be adjusted, first for
depreciation (item a)because this expense did not involve a
cash outlay in 2014and second for the $500 gain on the sale of
your bond investment (item b). The gain must be subtracted
from this section because it was included in net income, but it is
not the result of an operating activityit is an investing activity.
The second category, cash flows from investing activities,
results from the acquisition/disposal of plant assets and
investments including the purchase of another entitys debt
such as bonds or notes. Your purchase of land (item c) as well
as the sale of your investment in bonds (item d) represents your
investment activities during 2014, the purchase being a $5,500
outflow and the sale being a $15,500 inflow.
Cash flows arising from the issuance and retirement of
debt and equity are properly classified as Cash flows from
financing activities. These inflows and outflows generally
include the long-term liability and equity items on the statement
of financial position. Examples of your financing activities
resulting in cash flows are the payment of dividends (item e), the
retirement of your bonds payable (item f), and your issuance of
common shares (item g).

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Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-1 (Continued)


Note that, although $32,000 worth of bonds were issued for the
purchase of heavy equipment, the transaction has no effect on
the change in cash from January 1, 2014 to December 31, 2014.
I hope this information helps you to better understand the
enclosed statement of cash flows. If I can further assist you,
please let me know.
Sincerely,
(c)
Strong House, Inc.
Statement of Financial Position
December 31, 2014
Assets
Cash
Current assets other than cash
Investment in bonds, at amortized cost
Plant assets (net)
Land

$66,050
34,000
25,000 (1)
75,950 (2)
44,000 (3)
$245,000

Liabilities and Equity


Current liabilities
Long-term notes payable
Bonds payable
Share capital
Retained earnings

$14,500
30,000
54,000 (4)
100,000 (5)
46,500 (6)
$245,000

(1) $40,000 $15,500 + $500


(2) $57,500 $13,550 + $32,000
(3) $38,500 + $5,500
(4) $32,000 + $32,000 $10,000
(5) $80,000 + $20,000
(6) $23,500 + $42,000 $19,000
Solutions Manual

22-15

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-1 (Continued)


(d)

The statement of cash flows used to be called the


statement of changes in financial position because it used
to report the sources of increase and decrease in working
capital. It also included all transactions affecting the
entitys assets and capital structure, regardless of whether
or not the transactions involved cash flows.

Solutions Manual

22-16

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (25-35 minutes)


(a)
Operating activities:
Cash received from customers
Sales revenue
Less: Increase in accounts receivable
Cash received from customers
(b)

$295,000
(10,000)
$285,000

The approach is to prepare a T-account for property, plant,


and equipment.
Property, Plant & Equipment

12/31/13
Equipment from exchange of B/P
Paid for purchase of PP&E
12/31/14

147,000
20,000
?
177,000

45,000

Equipment sold

Payments = $177,000 + $45,000 $147,000 $20,000


= $55,000
The purchase of property, plant, and equipment is an
investing activity. Note that the acquisition of property,
plant, and equipment in exchange for bonds payable would
be disclosed as a non-cash investing and financing activity
and the details of this exchange would be provided in a
note to the financial statements.

Solutions Manual

22-17

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued)


(c)

The approach is to set up a T-account for accumulated


depreciation.
Accumulated Depreciation

Equipment sold

67,000

12/31/13

33,000

Depreciation expense

78,000

12/31/14

Accumulated depreciation on equipment sold = $167,000 +


$33,000 $178,000 = $22,000
The entry to reflect the sale of equipment is:
Cash (proceeds from sale of equipment)
($45,000 + $14,500 $22,000)
37,500
Accumulated depreciation
22,000
Property, Plant, and Equipment
Gain on Sale of Equipment

(force)
(above)
45,000 (given)
14,500 (given)

The proceeds from the sale of equipment of $37,500 are


reported as investing activities inflow.

Solutions Manual

22-18

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued)


(d)

The cash dividends paid can be determined by analyzing Taccounts for retained earnings and dividends payable.
Retained Earnings

Dividends declared

91,000
31,000
104,000

12/31/13
Net income
12/31/14

Dividends declared = $91,000 + $31,000 $104,000


= $18,000
Dividends Payable
5,000
18,000
Cash dividends paid

12/31/13
Dividends declared

?
8,000

12/31/14

Cash dividends paid = $5,000 + $18,000 $8,000


= $15,000
Financing activities include all cash flows involving nonoperating liabilities and shareholders equity items.
Payment of cash dividends is thus a financing activity
outflow.

Solutions Manual

22-19

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued)


(e)

The redemption of bonds payable amount is determined by


setting up a T-account.
Bonds Payable

Redemption of B/P

146,000
20,000

12/31/13
Issuance of B/P for PP&E

149,000

12/31/14

The problem states that the bonds were issued at par and so
the redemption of bonds payable is the only change not
accounted for.
Redemption of bonds payable = $146,000 + $20,000 $149,000
= $17,000
Financing activities include all cash flows involving nonoperating liabilities and shareholders equity items.
Therefore, redemption of bonds payable is considered a
financing activity outflow.

Solutions Manual

22-20

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued)


(f)

The approach is to set up a T-account for FV-NI


Investments.
FV-NI Investments

12/31/13

49,000
17,000
3,000

Investments purch.
12/31/14

Investments sold
Unrealized loss

?
41,000

Carrying amount of investments sold = $22,000 $5,000 =


$17,000
The entry to reflect the sale of investments is:
Cash (proceedssale of investments)
FV-NI Investments
Gain on Sale of Investments

22,000

(given)
17,000 (force)
5,000 (given)

The proceeds from the sale of FV-NI investments of $22,000


is reported as investing activities inflow.
(g)

To solve for the amount of the purchase of FV-NI


investments, use the T account for the FV-NI investments
above. ($41,000 + $17,000 + $3,000 $49,000 = $12,000)
The purchase of FV-NI investments of $12,000 is reported
as investing activities outflow.

Solutions Manual

22-21

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-3 (15-20 minutes)


(a)
2014
May

1 Cash........................................................ 22,500
Accumulated Depreciation-Equipment 38,000
Gain on Sale of Equipment...............
Equipment..........................................

June 15 Accumulated Depreciation-Equipment


Loss on Disposal of Equipment............
Equipment..........................................

5,500
500

Sept. 1 Equipment...............................................
Cash....................................................

7,700

8,500
52,000

6,000
7,700

Dec. 30 Notes Receivable.................................... 75,000


Gain on Sale of Land.........................
Land....................................................

30,000
45,000

31 Depreciation Expense............................ 12,600


Accumulated Depreciation-Equip.. . .

12,600

(b) Indirect method:


Operating activities:
Depreciation expense
Loss on disposal of equipment
Gain on sale of equipment
Gain on sale of land
Investing activities:
Sale of equipment
Purchase of equipment

$12,600
500
(8,500)
(30,000)
22,500
(7,700)

Note X:Significant non-cash investing and financing activities:


A mortgage note receivable of $75,000 was obtained from
the sale of land.

Solutions Manual

22-22

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-3 (Continued)


(c) Direct method:
Operating activities:
Investing activities:
Sale of equipment
Purchase of equipment

22,500
(7,700)

Note X:Significant non-cash investing and financing activities:


A mortgage note receivable of $75,000 was obtained from
the sale of land.
(d) Although at first glance it might appear as if the results from
operating activities using the two formats differ. In fact they
do not. In the indirect method, four adjustments appear to
remove their effect on net income (the starting point of the
indirect method). These four items are listed to adjust
accrual net income to cash from operating activities. The
four items listed were included in net income, and so their
effect has to be removed by these adjustments as they do
not involve operating activities.

Solutions Manual

22-23

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-4 (15-20 minutes)


(a)
Reconciliation of transactions to investment account:
Balance Jan. 1, 2014
Purchase of additional shares Jan. 2, 2014
Add share of Black income for 2014
(40% x $33,000)
Less dividends received from Black in 2014
(40% X $14,000)
Balance Dec. 31, 2014
(b)
Operating activities:
Equity income of Black Inc.
Investing activities:
Cash received for dividends
Cash paid for Black Inc. shares

Direct

$ 5,600
(65,000)

(c)
Operating activities:
Direct
Cash received for dividends
$ 5,600
Equity in income of Black Inc. in
excess of dividends received (note 1)
Investing activities:
Cash paid for Black Inc. shares
$(65,000)
(note 1)
Investment income from Black Inc.
Dividends received from Black Inc.
Net

Solutions Manual

22-24

$422,000
65,000
13,20
0
(5,600
)
$494,600

Indirect
$(13,200)

(65,000)
Indirect

$ (7,600)
$(65,000)
$(13,200)
5,600
$ (7,600)

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-5 (20-25 minutes)


Tanaka Limited
Statement of Cash Flows (partial, indirect method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense
$16,800
Loss on sale of machinery
5,800
Dividends paid
Net cash provided by operating activities
Cash flows from investing activities
Purchase of machinery
Proceeds on sale of machinery *
Cost of machinery constructed
Net cash used by investing activities
.

* [($56,000 $25,200) $5,800] = $25,000

Solutions Manual

22-25

Chapter 22

$ 40,000

22,600
(15,000)
47,600

(62,000)
25,000
(48,000)
(85,000)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-6 (30-35 minutes)


(a)
1. Land (new)...............................................................
91,000
Cash...................................................................
Land (old)...........................................................
Gain on Disposal of Land.................................
Land.........................................................................
27,000
Cash...................................................................
($58,000 $91,000 + $60,000)
2.

3,000
60,000
28,000

27,000

Accumulated DepreciationEquipment..............
10,000
Cash.........................................................................
1,000
Equipment.........................................................
Gain on Sale of Equipment..............................

10,000
1,000

Accumulated DepreciationEquipment..............
2,300
Loss on Disposal of Equipment............................700
Equipment.........................................................

3,000

Equipment...............................................................
7,500
Cash...................................................................
($67,500 $10,000 $3,000 + X = $62,000)

7,500

Depreciation Expense............................................
3,500
Accumulated DepreciationEquipment
($24,000 $10,000 $2,300 + X = $15,200)

3,500

Solutions Manual

22-26

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-6 (Continued)


3.

Equipment under Lease.........................................


104,247
Obligations under Lease..................................
104,247
Obligations under Lease........................................
25,000
Cash...................................................................
Interest Expense.....................................................
3,962
Interest Payable................................................
[($104,247 $25,000) X 10% X 6/12]

3,962

Depreciation Expense.................................. 10,425


Accumulated Depreciation
Leased Equipment........................................
($104,247 X 6/12 divided by 5 years)

10,42
5

(b)
1. Investing activities:
Payment on exchange of land
Purchase of land
2.

3.

25,000

(3,000)
(27,000)

Investing activities:
Proceeds from sale of equipment
Purchase of equipment
Financing activities:
Payment on capital lease

(25,000)

(c)
1. Gain on disposal of land
2. Gain on sale of equipment
Loss on disposal of equipment
Depreciation expense on equipment
3. Depreciation expense on leased equipment
Increase in interest payable

Solutions Manual

22-27

1,000
(7,500)

Chapter 22

(28,000)
(1,000)
700
3,500
10,425
3,962

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-6 (Continued)


(d) In part (b), no entries appeared for operating activities for
any of the entries prepared in part (a) when using the direct
method of the statement of cash flows. In part (c) several
items needed to appear under the operating activities using
the indirect format. Although at first glance it might appear
as if the results from operating activities using the two
formats differ. In fact they do not. In the indirect method, six
adjustments appear in order to remove their effect on net
income (the starting point of the indirect method). These six
items are listed to adjust accrual net income to cash from
operating activities. The six items listed were included in
income, and so their effect has to be removed by these
adjustments as they do not involve operating activities.

Solutions Manual

22-28

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-7 (20-30 minutes)


1.

Plant assets (cost)


Accumulated depreciation ([$40,000 10] X 6)
Carrying amount at date of sale
Sale proceeds
Loss on sale

$40,000)
24,000)
16,000)
(5,300)
$10,700)

The loss on sale of plant assets is reported in the operating


activities section of the statement of cash flows. It is added to
net income to arrive at net cash provided by operating
activities.
The sale proceeds of $5,300 are reported in the investing
section of the statement of cash flows as follows:
Sale of plant assets

$5,300

2. Shown in the financing activities section of a statement of


cash flows as follows:
Sale of common shares

$410,000

3. The write off of the uncollectible accounts receivable of


$27,000 is not reported on the statement of cash flows. The
write off reduces the Allowance for Doubtful Accounts
balance and the Accounts Receivable balance. It does not
affect cash flows.

Solutions Manual

22-29

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-7 (Continued)


4. The net loss of $10,000 should be reported in the operating
activities section of the statement of cash flows. Depreciation
of $22,000 is added to income in the operating section of the
statement of cash flows. The gain on sale of land is deducted
from income (loss) in the operating activities section of the
statement of cash flows. The proceeds from the sale of land
of $39,000 are reported in the investing activities section of
the statement of cash flows. These four items might be
reported as follows:
Cash flows from operating activities
Net loss
Adjustments to reconcile net income
to net cash provided by operations*:
Depreciation expense
Gain on sale of land

$(10,000)
22,000
(9,000)

*Either net cash used or provided depending upon other


adjustments. Given only the adjustments, the net cash
provided would be used.
Cash flows from investing activities
Sale of land

$39,000

5. The purchase of the Canadian Treasury bill is not reported in


the statement of cash flows. This instrument is considered a
cash equivalent and is therefore included in cash and cash
equivalents.
6. The patent amortization of $18,000 is reported in the
operating activities section of the statement of cash flows. It
is added to net income in arriving at net cash provided by
operating activities.

Solutions Manual

22-30

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-7 (Continued)


7. The exchange of common shares for an investment in
TransCo Corp. is reported as a non-cash investing and
financing activity, most likely in the notes. It is shown as
follows:
Non-cash investing and financing activities
Purchase of investment by issuance
of common shares

$900,000

8. The accrual of an unrealized loss does not involve cash and


would have caused a reduction of net income. It is reported in
the operating activities section of the statement of cash flows.
It is added to net income in arriving at net cash provided by
operating activities.

Solutions Manual

22-31

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-8 (10-15 minutes)


(a)

Net income:
Retained earnings, end of year
Add:
Cash dividends preferred
Stock dividend
Retained earnings available for dividends
Less: beginning balance Retained Earnings
Net income (derived)

$300,000
6,250
14,000
320,250
240,000
$ 80,250

(b) Cash flows from financing activities :


Preferred dividends paid
($ 6,250)
Payments on repurchase of common shares
(28,500)
($32,000 $3,500 Contributed Surplus)
Stock dividends do not involve cash
(c)

Because Mandrich Inc. is using IFRS, it could choose to


classify the preferred dividends paid in the amount of
$6,250 as operating cash flows.

Solutions Manual

22-32

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (20-25 minutes)


(a)
July 1, 2013
Vehicles under Lease.......................... 3,064,470
Obligations under Lease............

Obligations under Lease.....................


Cash .............................................
December 31, 2013
Interest Expense..................................
Interest Payable..........................
($201,558 X 6/12 = $100,779)

545,000
545,000
100,779
100,779

Depreciation Expense.........................
218,891
Accumulated Depreciation
Vehicles under Lease .......
($3,064,470 7 years X 6/12 = $218,891)
July 1, 2014
Interest Expense..................................
Interest Payable...................................
Obligations under Lease.....................
Cash .............................................
December 31, 2014
Interest Expense..................................
Interest Payable..........................
($174,082 X 6/12 = $87,041)
Depreciation Expense.........................
Accumulated Depreciation
Vehicles under Lease .......
($3,064,470 7 years = $437,781)

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22-33

Chapter 22

3,064,470

218,891

100,779
100,779
343,442
545,000
87,041
87,041
437,781
437,781

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (Continued)


(b)
Wagner Inc.
Statement of Cash Flows Partial
For the Year ended December 31,
2014
2013
Cash provided by (used in)
Operating activities Direct Method
Payments of interest............................ $(201,558)
-0Cash provided by (used in)
Financing activities
Payments on lease obligations...........
(343,442) $(545,000)
Net decrease in cash................................... $(545,000) $(545,000)
Cash provided by (used in)
operations Indirect Method
Start with net income effect
Interest expense................................... $(187,820)*
$(100,779)
Depreciation expense..........................
(437,781)
Total reduction of income....................
(625,601)
...............................................................
Depreciation expense..........................
437,781
Changes in non-cash working capital:
Change in interest payable.............
(13,738)
Cash used in operating activities...............
(201,558)
Cash provided by (used in)
Financing activities
Payments on finance leases...............
Net decrease in cash...................................
* ($100,779 + $87,041 = $187,720)

(218,891)
(319,670)
218,891
100,779
-0-

(343,442) (545,000)
$545,000

$545,000

Note X: During 2013, Wagner Inc. signed financing leases to


acquire a fleet of trucks for the amount of $3,064,470.

Solutions Manual

22-34

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (Continued)


(c)
July 1, 2013
Prepaid Rent .............................................
Cash...................................................

545,000
545,000

December 31, 2013


Rent Expense............................................
Prepaid Rent.....................................
($545,000 X 6/12 = $272,500)
July 1, 2014
Rent Expense............................................
Cash...................................................

272,500
272,500

545,000
545,000

Wagner Inc.
Statement of Cash Flows Partial
For the Year ended December 31,
2014

2013

$(545,000)

$(545,000)

Cash provided by (used in)


operations Indirect Method
Start with net income decreased by rent
expense................................................. $(545,000)

$(272,500)

Cash provided by (used in)


operations Direct Method
Cash paid for rentals.......................

Changes in non-cash working capital:


Increase in prepaid rent..........
Net decrease in cash...............................

Solutions Manual

22-35

_______

(272,500)

$(545,000)

(545,000)

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (Continued)


(d) When looking at a statement of cash flows, an external user
would prefer to see strong cash inflows coming from
operations. The cash flows totalling $545,000 per year are
all classified as operating cash flows when the lease is
classified as an operating lease. On the other hand, when
classified as a finance lease, only the interest paid on the
lease obligation is classified as an operating cash flow,
while the principal repayments are financing cash flows.
Consequently external users would interpret a stronger
performance when looking at the cash flow where the lease
has been capitalized.

Solutions Manual

22-36

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-10 (10-15 minutes)


(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)

(a) Not a cash transaction, but activity is an operating


activity
(a) Not a cash transaction, but activity is an operating
activity because of the choice made by management
(a) Operating activity
(b) Investing activity
(a) Operating activity
(d) A significant non-cash investing or financing activity
(a) Not a cash transaction, but activity is an operating
activity
(c) Financing activity because of the choice made by
management
(a) Operating activity
(d) A significant non-cash investing and financing activity
(b) Investing activity
(b) Investing activity because of the policy choice made by
management
(b) Investing activity for the disposition of the vehicles
(a) (e) Not a cash activity or transaction that is reported on
the cash flow statement, but the activity itself would be an
operating activity as management regards dividends paid
as an operating activity. The decision to issue the
dividend and as a stock dividend instead of a cash
dividend would be an operating-type decision.

Please note:
The Instructions ask you to determine what type of activity each
transaction is, not where each transaction is reported on the
cash flow statement. Because the cash flow statement
summarizes the cash flows associated with all the transactions
and events that take place in the accounting period, it is
important to be able to identify the type of activity each
underlying transaction is. This dictates the type of cash flow
related to each.

EXERCISE 22-10 (continued)


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22-37

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

For instructors who prefer to answer this question from the


perspective of how each transaction is reported on a cash flow
statement, the following solution applies:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)

(a) Operating activity (indirect method only with offsetting


adjustments to income)
(e) None of these options
(a) Operating activity
(b) Investing activity
(a) Operating activity
(d) Non-cash investing and financing activity
(e) None of these options
(c) Financing activity because of the choice made by
management
(a) Operating activity
(d) Non-cash investing and financing activity
(b) Investing activity
(b) Investing activity because of the policy choice made by
management
(a)(b) Operating activity for the gain on disposal (indirect
method only) and Investing activity for the proceeds from
sale
(e) None of these options

Solutions Manual

22-38

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-11 (10-15 minutes)


(a)
(1)
(2)

(3)
(4)

(3)
(4)

(5)
(3)

(5)
(6)

(1)
(5)

(7)
(8)
(9)
(10)
(11)
(12)
(13)

(4)
(1)
(4)
(5)
(1)
(1)
(2)

(14)
(15)
(16)
(17)

(2)
(1)
(5)
(4)

(18)

(6)

(19)

(6)

(20)
(21)
(22)

(2)
(4)
(4)

Investing activity.
Financing activity for redemption cash paid (1 or 2)
operating add to income any loss and deduct from
income any gain resulting from the redemption.
Significant non-cash investing and financing activity.
Investing activity for any cash proceeds received
from the sale, (1 or 2) operating add to income any
loss and deduct from income any gain resulting from
the sale.
Operatingadd to net income.
Significant non-cash investing activity. (1 or 2) If any
gain is recorded on the exchange, deduct from
income in operating activities and add back any loss.
Financing activity.
Operatingadd to net income.
Financing activity.
Significant non-cash investing and financing activity.
Operatingadd to net income.
Operatingadd to net income.
Operating activity because of the choice made by
management.
Operatingdeduct from net income.
Operatingadd to net income.
Significant non-cash investing and financing activity.
Financing activity for principal paid on lease
obligation; financing activity for interest paid;
operating add to income for the interest expense.
None of these options; part of cash and cash
equivalents.
Operating activity already reflected in the income
statement so no adjustment to income is required.
Operatingdeduct from net income.
Financing activity.
Financing activity.
Solutions Manual

22-39

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-11 (Continued)


(23)

(4)

(24)

(3)

(25)

(1)

(26)

(6)

Financing activity because of the choice made by


management.
Investing activity because of the choice made by
management.
Operating activity because of the choice made by
management.
None of these options; part of cash and cash
equivalents.

(b) The following answers would be different under ASPE:


(13)
(23)

(24)
(25)
(26)

(4)

Financing activity if charged directly to retained


earnings.
(6)
Operating activity if recognized in net income; if
already reflected in the income statement, no
adjustment to income is required when using the
indirect method.
(6) Operating activity already reflected in the income
statement so no adjustment to income is required
when using the indirect method.
(6) Operating activity already reflected in the income
statement so no adjustment to income is required
when using the indirect method.
(3) Investing activity.

Solutions Manual

22-40

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-12 (20-30 minutes)


(a)
Ellis Corp.
Partial Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers
Cash paid
To suppliers
$486,000 (b)
For income taxes
60,500 (c)
Net cash provided by
operating activities
(a)

(b)

(c)

$797,000 (a)
546,500
$250,500

Computation of cash received from customers:


Revenue from fees
Add: Decrease in accounts receivable
Add: ($54,000 $35,000)
Cash received from customers
Computation of cash paid to suppliers:
Operating expenses per income statement
Deduct: Increase in accounts payable
Deduct: ($44,000 $31,000)
Cash paid to suppliers
Computation of cash paid for taxes:
Income tax expense per income statement
Add: Decrease in income tax payable
Add: ($8,500 $6,000)
Cash paid for income taxes

Solutions Manual

22-41

Chapter 22

$778,000
19,000
$797,000
$499,000
(13,000)
$486,000
$58,000
2,500
$60,500

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-12 (Continued)


(b) Current cash debt coverage ratio in 2014
Current cash debt coverage ratio
= Net cash provided by operating activities / Average current
liabilities
= $250,500 / [($31,000 + $8,500) + ($44,000 + $6,000)] / 2
= 5.6
Current cash debt coverage ratio is a measure of the companys
ability to pay off its current liabilities in a specific year from its
operations. An increase in the companys current cash debt
coverage ratio from 2 to 5.6 is an improvement and a sign of
better liquidity in 2014. A creditor is interested in analyzing the
companys liquidity (short-term ability to repay maturing
obligations) and current cash debt coverage ratio, to help
determine the level of credit risk associated with lending to the
company. A creditor may interpret the increase in current cash
debt coverage ratio as an indication that it is less likely that the
company will experience difficulty in meeting its current
liabilities as they come due, and that the credit risk associated
with lending to the company in the short-term has decreased.

Solutions Manual

22-42

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-13 (15-20 minutes)


Allowance for Doubtful Accounts.................
Accounts Receivable..............................

5,000

Accounts Receivable.....................................
Allowance for Doubtful Accounts.........

3,500

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

3,500

Bad Debt Expense..........................................


Allowance for Doubtful Accounts.........

4,400

5,000
3,500
3,500
4,400

Cash provided by (used in) operations Direct Method


Cash received from customers................

$3,500

Cash provided by (used in) operations Indirect Method


Start with net income decreased by bad
debt expense...............................................
$(4,400)
Changes in non-cash working capital:
Decrease in accounts receivable net
of net write-offs (1).......................
Net increase in cash.......................................

7,900
$3,500

(1) Accounts receivable:


Bad debt write-of...................................
Bad debt recovery..................................
Collection of bad debt recovered..........

$(5,000)
3,500
(3,500) $(5,000)

Allowance for doubtful accounts:


Bad debt write-of...................................
Bad debt recovery.................................
Accrual of bad debt expense.................
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22-43

Chapter 22

$5,000
(3,500)
(4,400)

(2,900)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Decrease in accounts receivable, net


$(7,900)

Solutions Manual

22-44

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (30-40 minutes)


(a)
Tuit Inc.
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash received from customers (1)
$331,150
Cash paid to suppliers for goods and
167,000
services (2)
Cash paid to and on behalf of
65,000
employees (3)
Cash paid for interest
11,400
Cash paid for taxes (4)
6,125 249,525
Net cash provided by operating activities
81,625a
Cash flows from investing activities
Proceeds on sale of equipment (5)
Purchase of equipment (6)
Net cash used by investing activities

8,000
(44,000)

Cash flows from financing activities


Principal payments on short-term loan
Principal payments on long-term loan
Dividend paid
Net cash used by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, January 1, 2014
Cash and cash equivalents, December 31, 2014

Solutions Manual

22-45

Chapter 22

(36,000)
(2,000)
(9,000)
(6,000)
(17,000)
28,625
25,000
$ 53,625

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued)


Computations:
(1) Cash received from customers
Sales revenue
Less: Increase in accounts receivable
Cash received from customers
(2)

(3)

(4)

Cash paid to suppliers for goods and services


Cost of goods sold
Less: Decrease in inventory
Purchases
Less: Increase in accounts payable
Cash paid to suppliers for goods
Operating expenses
Less: Salaries and wages expense
Depreciation expense (7)
Add: Increase in prepaid rent
Paid to suppliers for goods and services
Cash paid to and on behalf of employees
Salaries and wages expense
Increase in salaries and wages payable
Cash paid to and on behalf of employees
Income taxes paid
Income tax expense
Decrease in income tax payable
Income taxes paid

$338,150
(7,000)
$331,150
$165,000
(20,000)
145,000
(6,000)
139,000
120,000
(69,000)
(24,000)
1,000
$167,000
$69,000
(4,000)
$65,000
$4,125
2,000
$6,125

(5) Calculation of proceeds from sale of equipment:


Cost of equipment sold
$ 20,000
Accumulated depreciation of equipment sold (70%) (14,000)
Carrying amount of equipment sold
6,000
Gain on sale of equipment
2,000
Proceeds on sale of equipment
$ 8,000

Solutions Manual

22-46

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued)


(6) Calculation of cost of new equipment purchased:
Equipment Jan. 1, 2014
$ 130,000
Equipment Dec. 31, 2014
154,000
Net increase in equipment
24,000
Cost of equipment sold
20,000
Cost of equipment purchased during year
$ 44,000
(7) Calculation of depreciation expense:
Accumulated depreciation Jan. 1, 2014
Accumulated depreciation of equipment sold
Accumulated depreciation Dec. 31, 2014
Depreciation expense for the year

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22-47

Chapter 22

$ (25,000)
14,000
35,000
$ 24,000

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued)


(b)
Tuit Inc.
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense
$24,000
Impairment loss, goodwill
30,000
Gain on sale of equipment
(2,000)
Increase in accounts receivable
(7,000)
Decrease in inventory
20,000
Increase in prepaid rent
(1,000)
Increase in accounts payable
6,000
Increase in salaries and wages payable
4,000
Decrease in income tax payable
(2,000)
Total adjustments
Net cash provided by operating activities
Cash flows from investing activities
Proceeds on sale of equipment
Purchase of equipment
Net cash used by investing activities
Cash flows from financing activities
Principal payments on short-term loan
Principal payments on long-term loan
Dividend paid
Net cash used by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, January 1, 2014
Cash and cash equivalents, December 31, 2014

Solutions Manual

22-48

Chapter 22

$9,625

72,000
81,625

8,000
(44,000)
(36,000)
(2,000)
(9,000)
(6,000)
(17,000)
28,625
25,000
$53,625

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued)


Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
(c)

$11,400
$6,125

Because Tuit Inc. follows ASPE, there are no choices on


how to classify interest and dividend payments in the
statement of cash flows.
Companies that adopt IFRS do have some choices. Under
IFRS, interest paid and received and dividends paid and
received can be recognized as operating flows.
Alternatively, interest paid can be recognized as a
financing outflow while interest and dividends received can
be recognized as investing inflows. A choice is permitted
for dividends paid: a financing outflow as a return to equity
holders, or an operating outflow as a measure of the ability
of operations to cover returns to shareholders.

(d)

Tuit Inc.s operating activities generate significant positive


cash flow, which supports the companys investing and
financing activities. The company is using the significant
cash generated from its operations to expand by
purchasing equipment and to repay creditors and pay
dividends to shareholders, which is a sign of a mature,
successful company. The company is expanding by
purchasing equipment, likely due to high forecasted
demand for the companys product(s). The company repaid
creditors and paid dividends to shareholders, and still
generated a significant increase in net cash and cash
equivalents in 2014. An investor who is interested in
investing in mature, successful companies may view Tuit
Inc. favourably, and decide to invest in the company.

Solutions Manual

22-49

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (30-40 minutes)


(a)

Both the direct method and the indirect method for


reporting cash flows from operating activities are
acceptable in preparing a statement of cash flows.
However, accounting standards encourage the use of the
direct method. Under the direct method, the statement of
cash flows reports the major classes of cash received and
cash disbursements, and discloses more information; this
may be the statements principal advantage. Under the
indirect method, net income on the accrual basis is
adjusted to the cash basis by adding or deducting noncash items included in net income, thereby providing a
useful link between the statement of cash flows and the
income statement and statement of financial position.

(b)

The Statement of Cash Flows for Guas Inc., for the year
ended May 31, 2014, using the direct method, is presented
below.

Solutions Manual

22-50

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued)


Guas Inc.
Statement of Cash Flows (Direct Method)
For the Year Ended May 31, 2014
Cash flows from operating activities
Cash received from customers
Cash paid
To suppliers for goods and services
To and on behalf of employees
For interest
For income taxes
Net cash provided by operating activities

$1,326,600
$822,300
218,800
64,600
65,400

Cash flows from investing activities


Purchase of plant assets

1,171,100
155,500
(44,000)

Cash flows from financing activities


Proceeds from issuance of
common shares
Dividends paid
Paid on retirement of bonds payable
Net cash used by financing activities

$ 4,750
(78,000)
(25,000)
(98,250)
13,250
20,000
$33,250

Net increase in cash


Cash, June 1, 2013
Cash, May 31, 2014

Note 1:
Schedule of non-cash investing and financing activities:
Issuance of common shares for plant assets
$51,000

Solutions Manual

22-51

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued)


Supporting calculations:
Collections from customers
Sales
Less: Increase in accounts receivable
Cash collected from customers
Cash paid to suppliers for goods and services
Cost of goods sold
Less: Decrease in inventory
Increase in accounts payable
Cash paid for goods for resale
Other expenses
Add: Increase in prepaid expenses
Cash paid to suppliers for goods and services
Cash paid to and on behalf of employees
Salaries and wages expense
Add: Decrease in salaries and wages
payable
Cash paid to and on behalf of employees
Cash paid for interest
Interest expense
Less: Increase in interest payable
Cash paid for interest

Solutions Manual

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Chapter 22

$1,345,800
19,200
$1,326,600
$814,000
10,300
8,000
795,700
24,800
1,800
$822,300
$207,800
11,000
$218,800
$66,700
2,100
$64,600

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued)


(c)

The calculation of the cash flow from operating activities


for Guas Inc., for the year ended May 31, 2014, using the
indirect method, is presented below.

Guas Inc.
Statement of Cash Flows (partial)
For the Year Ended May 31, 2014
Cash flows from operating activities
Net earnings
$141,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense
$26,000
Decrease in inventory
10,300
Increase in accounts payable
8,000
Increase in interest payable
2,100
Increase in accounts receivable
(19,200)
Increase in prepaid expenses
(1,800)
Decrease in salaries and wages
payable
(11,000)
14,400
Net cash provided by operating activities
$155,500
(d)

Under IFRS, a choice is permitted for dividends paid: a


financing flow as a return to equity holders, or an operating
flow as a measure of the ability of operations to cover
returns to shareholders. However management views these
specific flows, once the choice is made, it is applied
consistently from period to period.

Solutions Manual

22-53

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued)


(e)

The dividend payout ratio for the year ending May 31, 2014
can be easily calculated using amounts reported on the
statement of cash flows. The dividend payout ratio is 55%
[$78,000 (dividends paid) divided by $141,100, (net
earnings)]. From the perspective of a shareholder, this
would be a positive ratio, as shareholders are recipients of
this return on investment. The companys operations
generated the cash required to pay this dividend, which is
a positive sign that the company may be able to sustain
payment of dividends in the future.

Solutions Manual

22-54

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-16 (20-30 minutes)


(a)
NORTH ROAD INC.
Statement of Cash Flows Indirect Method
Year Ended December 31, 2014
Cash flows from operating Activities
Net income
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense
$ 58,700
Gain on sale of equipment
(8,750)
Increase in accounts receivable
(53,800)
Increase in inventory
(19,250)
Increase in accounts payable
4,420
Decrease in accrued liabilities
(6,730)
Net cash provided by operating activities

(25,410)
66,070

Cash flows from investing activities


Sale of investments
Sale of equipment
Purchase of equipment
Net cash used by investing activities

(52,950)

22,500
15,550
(91,000)

Cash flows from financing activities


Issuance of notes payable
70,000
Payment of cash dividends
(37,670)
Net cash flows provided by financing activities
Net increase in Cash
Cash, January 1
Cash, December 31

Solutions Manual

$91,480

32,330
45,450
47,250
$92,700

22-55

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-16 (Continued)


(a) (Continued)
Note X:Significant non-cash investing and financing activities:
Equipment with a cost of $50,000 was exchanged for
common shares.
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest

$2,940

(b)
NORTH ROAD INC.
Cash Flow Statement Direct Method
Year Ended December 31, 2014
Operating Activities
Cash collections from customers
Cash payments to suppliers

(1)
(2)

Cash payments for operating expenses


Cash payments for interest
Cash payments for income taxes
Net cash provided by operating activities

Solutions Manual

22-56

Chapter 22

(3)

$243,700
(114,290)
(21,400
)
(2,940
)
(39,000
)
$66,070

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-16 (Continued)


Calculations:
(1) Cash receipts from customers
Sales revenue ........................................................
Less: Increase in accounts receivable................
(2)

(3)

(c)

Cash payments to suppliers


Cost of goods sold.................................................
Add: Increase in inventory...................................
Less: Increase in accounts payable.....................
Cash payments for operating expenses
Operating expenses...............................................
Add: Decrease in accrued liabilities....................

$297,500
(53,800)
$243,700
$99,460
19,250
(4,420)
$114,290
$14,670
6,730
$21,400

Since North Road Inc. follows ASPE it does not have the
choice in the classification of the payment of dividends on
the statement of cash flows. Dividends paid must be
classified as financing outflows. Had North Road Inc.
followed IFRS, a choice would be permitted for dividends
paid: a financing flow as a return to equity holders, or an
operating flow as a measure of the ability of operations to
cover returns to shareholders. However management
views these specific flows, once the choice is made, it is
applied consistently from period to period.

Solutions Manual

22-57

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-17 (35-40 minutes)


(a)
Tobita Limited
Statement of Cash Flows
For the Year Ended December 31, 2014
(Indirect Method)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense ($1,200 $1,170)
Gain on sale of investments (FV-NI)
Increase in accounts receivable
Decrease in inventory
Increase in accounts payable
Decrease in accrued liabilities
Net cash provided by operating activities

$945
$30
(80)
(450)
300
300
(50)

Cash flows from investing activities


Sale of FV-NI investments *
Purchase of plant assets **
Net cash provided by investing activities

200
(130)

Cash flows from financing activities


Issuance of common shares ***
Retirement of bonds payable
Payment of cash dividends ****
Net cash used by financing activities

130
(150)
(260)

Net increase in cash


Cash, January 1, 2014
Cash, December 31, 2014

50
995

70

(280)
785
1,150
$1,935

($1,420 $1,300) + $80 gain


**
($1,900 $1,700)
$70
*** ($1,900 $1,700) $70
****($1,900 $2,585) + $945 income
Non-cash investing and financing activities
Issuance of common shares for plant assets
$70
Cash paid for interest during the year
$20
Solutions Manual

22-58

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-17 (Continued)


(b)
Tobita Limited
Statement of Cash Flows
For the Year Ended December 31, 2014
(Direct Method)
Cash flows from operating activities
Cash received from customers*
Less: Cash paid to suppliers for goods
and services**
Cash paid for interest
Cash paid for income taxes

$6,450
$5,030
20
405

Net cash provided by operating activities

995

Cash flows from investing activities


Proceeds from sale of FV-NI investments
Purchase of plant assets
Net cash provided by investing activities

200
(130)

Cash flows from financing activities


Proceeds on issuance of common shares
Payment to retire bonds payable
Dividends paid
Net cash used by financing activities

130
(150)
(260)

Net increase in cash


Cash, January 1, 2014
Cash, December 31, 2014

70

(280)
785
1,150
$1,935

Non-cash investing and financing activities


Issuance of common shares for plant assets
* $1,300 + $6,900 $1,750
** $4,700 + ($910 $30) $300 $300 + $50

Solutions Manual

5,455

22-59

Chapter 22

$70

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-17 (Continued)


(c)

Because Tobita Limited follows ASPE, there are no choices


on how to classify interest and dividend payments in the
statement of cash flows.
Companies that adopt IFRS do have some choices. Under
IFRS, interest paid and received and dividends paid and
received can be recognized as operating flows.
Alternatively, interest paid can be recognized as a
financing outflow while interest and dividends received can
be recognized as investing inflows. A choice is permitted
for dividends paid: a financing outflow as a return to equity
holders, or an operating outflow as a measure of the ability
of operations to cover returns to shareholders.

(d)

There is an alarming trend that is flagged by the indirect


format of the statement of cash flows illustrated above.
Tobita decreased its inventory 16% while at the same time
increasing its accounts payable 33%. Attention should be
paid to the possibility of inventory stock outs or poor
relationships developing with suppliers for non payment of
accounts within payment terms. The direct format of the
statement of cash flows does not highlight this change,
although the trends could be noticed from a comparison of
balances taken from the statement of financial position.

Solutions Manual

22-60

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-18 (15-20 minutes)


Ellis Corp.
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income
$137,000
Adjustment to reconcile net income to
net cash provided by operating activities:
Depreciation expense
$66,000
Loss on sale of equipment
14,000
Unrealized lossFV-NI investments
4,000
Decrease in accounts receivable
19,000
Increase in accounts payable
13,000
Decrease in income tax payable
(2,500)
113,500
Net cash provided by operating activities
$250,500

Solutions Manual

22-61

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-19 (20-30 minutes)


(a)

Sales revenue
Deduct: Increase in accounts receivable,
net of write-offs
Cash collected from customers

$557,400

(b)

Cost of goods sold


Deduct: Decrease in inventory
Purchases
Deduct: Increase in accounts payable
Cash paid to suppliers for goods
Selling expenses
Administrative expenses
Less depreciation expense
Less bad debt expense
Cash paid to suppliers for goods and services

$253,000
(16,000)
237,000
(9,500)
227,500
138,000
140,000
(1,500)
(5,000)
$499,000

(c)

Interest expense
Deduct: Decrease in unamortized bond discount
netted with the liability
Cash paid for interest

$15,600

Income tax expense


Add: Decrease in income tax payable
Deduct: Increase in deferred tax liability
Cash paid for income taxes

$20,200
8,100
(700)
$27,600

(d)

Solutions Manual

22-62

Chapter 22

(7,800)
$549,600

(500)
$15,100

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (40-50 minutes)


(a)
Sept.

1
2
4

Cash
Common Shares

31,000

Equipment
Cash

17,280

31,000
17,280

Prepaid Rent ($680 X 3)


Cash

2,040
2,040

No entry

Supplies
Accounts Payable

1,142

Cash
Service Revenue

1,690

1,142
1,690

10 Office Expense
Cash

430
430

14 Accounts Receivable
Service Revenue

5,120
5,120

18 Accounts Payable
Cash

600
600

19 Retained Earnings
Cash (5,000 X $1.00)

5,000
5,000

20 Cash
Accounts Receivable

980

21 Salaries and Wages Expense


Cash

600

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22-63

Chapter 22

980
600

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


Sept. 28
29

Accounts Receivable
Service Revenue

2,110
2,110

Utilities Expenses
Office Expense
Cash

Sept. 1
Sept. 9
Sept. 20

Bal. Sept. 30

135
85
220

Cash
31,000 Sept. 2
1,690 Sept. 4
980 Sept. 10
Sept. 18
Sept. 19
Sept. 21
Sept. 29
7,500

17,280
2,040
430
600
5,000
600
220

(b)
Sept.

30

Depreciation Expense

263

Accumulated Depreciation
($17,280 $1,500) 5 X 1/12
30
30

30
30

263

Salaries and Wages Expense


Salaries and Wages Payable

300

Supplies Expense
Supplies
($1,142 $825)

317

Rent Expense
Prepaid Rent

680

Utilities Expense
Accounts Payable

195

Solutions Manual

300
317

680

22-64

195
Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


(c)
A.S. Design Limited
Adjusted Trial Balance
September 30, 2014
Cash
Accounts Receivable ($5,120 $980 + $2,110)
Supplies
Prepaid Rent
Equipment
Accumulated Depreciation-Equipment
Accounts Payable ($1,142 $600 + $195)
Salaries and Wages Payable
Common Shares
Retained Earnings
Service Revenue (1,690 + 5,120 + 2,110)
Rent Expense
Supplies Expense
Salaries and Wages Expense ($600 + $300)
Utilities Expenses ($135 + $195)
Office Expense ($430 + $85)
Depreciation Expense

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Chapter 22

Debit
$7,500
6,250
825
1,360
17,280

Credit

$263
737
300
31,000
5,000
8,920
680
317
900
330
515
263
$41,220

$41,220

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


(d)
A. S. Design Limited
Income Statement
For the Month Ended September 30, 2014
Service revenue
Expenses:
Rent expense
Supplies expense
Salaries and wages expense
Depreciation expense
Utilities expenses
Office expense
Total expenses
Net Income

Solutions Manual

22-66

$8,920
$ 680
317
900
263
330
515
3,005
$5,915

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


A. S. Design Limited
Statement of Financial Position
As at September 30, 2014
Assets
Cash
Accounts receivable
Supplies
Prepaid rent
Current assets
Equipment
Accumulated depreciation

$ 7,500
6,250
825
1,360
15,935
17,280
263
17,017
$32,952

Total assets
Liabilities
Accounts payable
Salaries and wages payable
Total liabilities
Shareholders Equity
Common shares
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity

Solutions Manual

22-67

Chapter 22

737
300
1,037

31,000
915
31,915
$32,952

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


(e)
A. S. Design Limited
Statement of Cash Flows
For the Month Ended September 30, 2014
(Indirect Method)
Cash flows from operating activities
Net income
$5,915
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense
$263
Increase in accounts receivable
(6,250)
Increase in supplies
(825)
Increase in prepaid rent
(1,360)
Increase in accounts payable
737
Increase in salaries and wages payable
300 (7,135)
Net cash used in operating activities
(1,220)
Cash flows from investing activities
Purchase of equipment

(17,280)

Cash flows from financing activities


Issuance of common shares
Payment of cash dividends
Net cash provided by financing activities
Net increase in cash
Cash, September 1, 2014
Cash, September 30, 2014

Solutions Manual

31,000
(5,000)
26,000
7,500
0
$7,500

22-68

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


(f)
A. S. Design Limited
Statement of Cash Flows Partial
For the Month Ended September 30, 2014
(Direct Method)
Cash flows from operating activities
Cash received from customers (1)
Less: Cash paid to suppliers for goods
and services (2)
Cash paid for salaries and wages
Net cash used in operating activities

$2,670
$3,290
600

Computations:
(1) Cash received from customers
Service revenue
Less: Increase in accounts receivable
Cash received from customers
(2)

Cash paid to suppliers for goods and services


Total expenses
Less: Depreciation expense
Less: Salaries and wages expense

3,890
$(1,220)

$8,920
(6,250)
$2,670

Less: Increase in accounts payable


Add: Increase in supplies
Add: Increase in prepaid rent

$3,005
(263)
(900)
1,842
(737)
825
1,360

Paid to suppliers for goods and services

$3,290

(g) The statement of cash flows balance at September 30, 2014


corresponds to the balance at September 30, 2014 for the
cash account, arrived at in part (a) to the exercise. The
operating activities section using the direct format in (f)
more closely resembles the activity in the cash account as
the amounts of the entries correspond (when aggregated) to
the amounts appearing as increases and decreases in the
cash account.
Solutions Manual

22-69

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued)


(h) If this were an established company, it might be considered
alarming (in the indirect format of the statement of cash
flows prepared in part (e) above), that operating cash flows
are well below net income levels. Typically, the amount of
net cash provided by operating activities exceeds the
amount for net income. This is mainly due to the adjustment
to income for non-cash items for expenses such as
depreciation. In the case of A. S. Design Limited, increases
in its accounts receivable and prepaid rent exceed the
amount of the income. Prepaid rent does not represent a
potential collection risk but accounts receivable certainly
do. However, as a company that is just beginning to grow its
business, this is often the case and is to be expected as
cash resources are invested in inventories, receivables and
other necessary working capital. The direct format of the
statement of cash flows does not highlight this issue,
although the same situation could be noticed from a
comparison of balances on the statement of financial
position.

Solutions Manual

22-70

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-21 (20-30 minutes)

(a) Cash flows from operating activities


Net income
Adjustment to reconcile net income to
net cash provided by operating activities:
Decrease in accounts receivable
$1,500
Decrease in inventory
1,400
Decrease in accounts payable
(300)
Net cash provided by operating activities
(b) Cash flows from operating activities
Net income
Adjustment to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable
$(3,000)
Decrease in inventory
3,200
Increase in accounts payable
4,400
Net cash provided by operating activities
(c) Cash flows from operating activities
Net income
Adjustment to reconcile net income to
net cash provided by operating activities:
Increase in accounts receivable
$(20,000)
Increase in inventory
(12,000)
Increase in accounts payable
7,000
Net cash provided by operating activities
(d) Cash flows from operating activities
Net income
Adjustment to reconcile net income to
net cash provided by operating activities:
Decrease in accounts receivable
$1,500
Increase in inventory
(3,900)
Decrease in accounts payable
(3,900)
Net cash provided by operating activities
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Chapter 22

$32,000

2,600
$34,600

$32,000

4,600
$36,600

$32,000

(25,000)
$7,000

$32,000

(6,300)
$25,700

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-21 (Continued)


(e) Cash flows from operating activities
Net income
Adjustment to reconcile net income to
net cash provided by operating activities:
Decrease
in
accounts
$2,500
receivable
Decrease in inventory
1,100
Increase in accounts payable
2,000
Net cash provided by operating activities

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Chapter 22

$32,000

5,600
$37,600

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

*EXERCISE 22-22 (20-25 minutes)


1.

Bonds Payable........................................................
300,000
Contributed SurplusConversion Rights
9,000
Common Shares...............................................
309,000
(Non-cash investing and financing
activity)

2.

OperatingNet income..........................................
410,000
Retained Earnings.............................................
410,000

3.

OperatingDepreciation Expense........................
90,000
Accumulated DepreciationBuildings...........

4.

5.

6.

Investment in Associate.........................................
34,440
OperatingInvestment Income or
Loss.............................................................
($123,000 X 28% = $34,440)
Accumulated Depreciation
30,00
Equipment...................................................... 0
Equipment...............................................................
10,000
OperatingGain on Disposal of
Equipment.....................................................
InvestingPurchase of Equipment.................

90,000

34,440

6,000
34,000

Retained Earnings..................................................
123,000
Dividends Payable............................................
123,000
(Non-cash financing activity)

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Intermediate Accounting, Tenth Canadian Edition

*EXERCISE 22-23 (45-55 minutes)


Cosky Corporation
WORK SHEET FOR PREPARATION OF STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2014
Acct.
Reconciling TransAcct.
Bal. At
actions during 2014
Bal. at
end of
end of
2013
2014
Debits
Debit
Credit
Cash
$ 21,000
(17) $ 4,500
$16,500
FV-NI investments
19,000 (2) $ 6,000
25,000
Accounts receivable
45,000
(3)
2,000
43,000
Prepaid expenses
2,500 (4)
1,700
4,200
Inventory
65,000 (5)
16,500
81,500
Land
50,000
50,000
Buildings
73,500 (10) 51,500
125,000
Equipment
46,000 (11)
7,000
53,000
Delivery equipment
39,000
39,000
Patents
_______ (12) 15,000
15,000
Total debits
$361,000
$452,200

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Intermediate Accounting, Tenth Canadian Edition

*EXERCISE 22-23 (Continued)

Credits
Accounts payable
Short-term notes payable (trade)
Accrued liabilities
Allowance for doubtful accounts
Accumulated depreciationbuildings
Accumulated depreciationequipment
Accumulated depreciationdelivery equipment
Mortgage payable
Bonds payable
Share capital
Retained earnings
Total credits

Solutions Manual

Acct.
Reconciling TransAcct.
Bal. At
actions During 2014
Bal. At
end of
end of
2013
2014
Debit
Credit
$ 16,000
(6) $10,000 $ 26,000
6,000 (7) $ 2,000
4,000
4,600 (8)
1,600
3,000
2,000 (3)
200
1,800
23,000
(13)
7,000
30,000
15,500
(13)
3,500
19,000
20,500
(13)
1,500
22,000
53,400
(14) 19,600
73,000
62,500 (16) 12,500
50,000
106,000
(15) 44,000
150,000
51,500 (9)
15,000 (1)
36,900
73,400
$361,000
$452,200

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Intermediate Accounting, Tenth Canadian Edition

*EXERCISE 22-23 (Continued)


Debit
Statement of Cash Flows effects
Operating activities
Net income
Depreciation expense
Decrease in accounts receivable (net)
Increase in prepaid expenses
Increase in inventory
Increase in accounts payable
Decrease in notes payable
Decrease in accrued liabilities
Investing activities
Purchase of FV-NI investments
Purchase of building
Purchase of equipment
Purchase of patents
Financing activities
Dividends paid
Issuance of mortgage payable
Proceeds from sale of shares
Payments to retire bonds
Totals
Decrease in cash
Totals
Solutions Manual

(1)
(13)
(3)
(6)

(14)
(15)

(17)

Credit

36,900
12,000
1,800
(4)
(5)

1,700
16,500

(7)
(8)

2,000
1,600

(2)
(10)
(11)
(12)

6,000
51,500
7,000
15,000

(9)

15,000

10,000

19,600
44,000
_______ (16)
124,300
4,500
$128,800

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12,500
128,800
_______
$128,800

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy


Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS


Problem 22-1

(Time 50-55 minutes)

Purposeto provide the student with a comprehensive set of financial


statements and supporting notes to arrive at a statement of cash flows using the
direct method. The student must first analyze some of the changes in the
statement of financial position amounts in order to calculate the activity of certain
accounts such as development costs. The indirect format of the cash flow from
operating activities is then required, along with some comments explaining the
cash crunch experienced by the entity.

Problem 22-2

(Time 40-45 minutes)

Purposeto develop an understanding of the procedures involved in the


preparation of a statement of cash flows. The student is required to prepare the
statement using the indirect method, provide the necessary disclosure notes, and
present an alternative treatment for the payment and collection of interest.
Comments highlighting the investment strategy of the business as well as
assessing the companys liquidity position are required in the problem.

Problem 22-3

(Time 45-50 minutes)

Purposeto provide a comprehensive problem involving the preparation of a


statement of cash flows. The student is required to prepare the statement using
the indirect method. The student must also calculate the net cash flows from
operating activities using the direct method. Long-term investments accounted
for using the equity method are included in this problem. The original instructions
have the student report the change in cash and cash equivalents, including
temporary bank overdrafts. At the end of the problem, the student must discuss
the effect of excluding or including cash equivalents from cash and cash
equivalents.

Problem 22-4

(Time 40-50 minutes)

Purposeto develop an understanding of both the direct and indirect method.


The student is first asked to prepare the statement of cash flows using the
indirect method. In addition the student is asked to calculate the net cash flows
from operating activities using the direct method and then provide overall
comments about cash activities.

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TIME AND PURPOSE OF PROBLEMS (CONTINUED)


Problem 22-5

(Time 45-60 minutes)

Purposeto develop an understanding of the procedures involved in the


preparation of a statement of cash flows. The student is required to prepare the
statement using the direct method, including a reconciliation schedule and must
then provide short comments summarizing the cash flow activities. FV-NI
investments at fair value are included in this problem.

Problem 22-6

(Time 30-35 minutes)

Purposeto provide the student with the opportunity to analyze the effects of
several different transactions on several equity accounts. The student is required
to prepare the entries for the transactions and is then asked to prepare the
corresponding captions on a partial statement of cash flows using the indirect
method and well as prepare any necessary additional disclosure notes. This is
not a long problem but it required a thorough understanding of the equity
transactions including the recording a property dividends involving a FV-OCI
Investment.

Problem 22-7

(Time 30-40 minutes)

Purposeto develop an understanding of the procedures involved in the


preparation of a statement of cash flows. The student is required to prepare the
statement using the indirect method. The student also must calculate the net
cash flow from operating activities using the direct method. As a final task, the
student must take on the role of a member of an investment club, preparing a
report of the cash activities of the company for the clubs consideration.

Problem 22-8

(Time 20-30 minutes)

Purposeto give the opportunity to the student to prepare the operating activities
of the cash flow statement, using the indirect format from the description of
several items and transactions occurring during the year. Since the whole
statement is not being prepared the student needs to distinguish which items do
or do not affect the operating activities section of the statement. Since some of
the transactions described are not simple, the task is not simple either.

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Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS (CONTINUED)


Problem 22-9

(Time 20-25 minutes)

Purposeto provide the student with the opportunity to analyze the effects of
transactions on the accounts: FV-OCI Investments and Accumulated Other
Comprehensive Income. Once the reconciliation is prepared of the activity of
these two accounts for the year, the student is asked to prepare the
corresponding captions on the statement of cash flows using both the direct and
the indirect methods. This is not a long problem but it required a thorough
understanding of the accounting of FV-OCI investments.

Problem 22-10

(Time 30-35 minutes)

Purposeto provide the student with the opportunity to analyze the effects of
several transactions affecting investment and related accounts over a two year
period. The student must prepare partial statements of income, comprehensive
income, changes in accumulated other comprehensive income and financial
position. After the preparation selected journal entries, a partial statement of cash
flows is required, using both the direct and indirect methods. Finally, some
comparisons between IFRS and ASPE are discussed. Although this question
involves only investments, it is thorough in all aspects of financial statement
presentation and disclosure.

Problem 22-11

(Time 60-70 minutes)

Purposeto develop an understanding of the procedures involved in the


preparation of a statement of cash flows. The student is required to prepare the
statement using the indirect method. The student also must calculate some
specific captions appearing in the net cash flow from operating activities using
the direct method and must then reconcile the amounts in total to the cash
obtained from operating activities arrived at using the indirect method.
Investments accounted for by the equity method have been included in this
problem. The cash flow is reporting cash and cash equivalents in this problem.

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Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS (CONTINUED)


Problem 22-12 (Time 50-55 minutes)
Purposeto provide the student with a comprehensive problem in a style that
the student has likely not encountered in the past. From a set of financial
statements including the statement of income, the cash flow statement, prepared
using the indirect format, and the opening balances from a statement of financial
position, the student must calculate the ending balances for the statement of
financial position. By working from this new perspective, the student has the
opportunity to practice reconciling all changes to the statement of financial
position, that are ultimately reported on the other financial statements that have
been provided. This should be a challenging problem for most students.

Problem 22-13 (Time 50-60 minutes)


Purposeto develop an understanding of the procedures involved in the
preparation of a statement of cash flows, including a schedule of non-cash
investing and financing activities. The student is required to prepare the
statement using the indirect method, and consider the proper treatment of an
extraordinary item. A memorandum of the highlights of the cash flow activity for
the year is also required. In the last part, the student is asked to determine how
operating, investing and financing sections of the statement of cash flows will
change under various situations.

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Edition

Intermediate Accounting, Tenth Canadian

SOLUTIONS TO PROBLEMS
PROBLEM 22-1
(a)
Jeopardy Inc.
Consolidated Statement of Cash Flows
For the Year Ended April 30, 2014
($000 omitted)
Cash flows from operating activities
Cash received from customers (1)
$84,476
Cash received for interest
1,310
Payments for goods and services (2)
48,952
Payments to and on behalf of
employees (3)
46,633
Interest paid
1,289
Income taxes paid (4)
0
Net cash used in operating activities
Cash flows from investing activities
Purchase of capital asset
Purchase of other investments
Proceeds from sale of property
plant and equipment
Payments for franchise fees (5)
Net cash used in investing activities

96,874
(11,088)

(2,290)
(1,516)
250
(2,686)
(6,242)

Cash flows from financing activities


Proceeds from bank term loans
Repayments of bank term loans (6)
Proceeds from sale of shares
Proceeds from sale of warrants
Net cash provided by financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, May 1, 2013
Cash and cash equivalents, April 30, 2014

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$85,786

22-81

2,200
(1,200)
14,393
899
16,292
(1,038)
(2,541)
$ (3,579)

Chapter 22

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued)


Cash and cash equivalents consist of cash on hand and
balances with banks, 60-day treasury bills and temporary bank
overdraft. Cash and cash equivalents included in the statement
of cash flows comprise the following statement of financial
position accounts (amounts in thousands of dollars):

Cash and 60-day treasury bills


Bank overdraft
Total cash and cash equivalents

2014
$ 3,265
(6,844)
$ (3,579)

2013
$ 3,739
(6,280)
$ (2,541)

(1) Cash received from customers


Operating revenue
Less: increase in accounts receivable
Cash received from customers

$ 89,821
(5,345)
$ 84,476

(2) Cash paid to suppliers for goods and services


Operating expenses
General and administrative expenses
Deduct: salaries and wages expense
Add: increase in inventory
Less: decrease in prepaid expenses
Add: decrease in accounts payable
Paid to suppliers for goods and services

$ 76,766
13,039
(46,624)
4,522
(211)
1,460
$ 48,952

(3) Cash paid to and on behalf of employees


Salaries and wages expense
Add: decrease in salaries and wages payable
Cash paid to and on behalf of employees

$ 46,624
9
$ 46,633

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued)


(4) Income taxes paid/collected
Income tax benefit
Add: increase in deferred tax asset
Add: increase in income tax receivable
Cash paid/received for income taxes

$(2,775)
2,630
145
$

Reconciliation of Property Plant and Equipment (net):


Opening Balance
$45,700
Additions given
2,290
Ending Balance given
(37,332)
Loss on disposal given
(394)
Proceeds on disposal given
(250)
Depreciation expense force
10,014
Total depreciation and amortization recorded
Less depreciation for capital assets (above)
Amortization for franchises

$10,220
(10,014)
$ 206

(5) Reconciliation of Franchises (net):


Opening Balance
Amortization recorded (above)
Ending Balance given
Additions force

$ 1,911
(206)
(4,391)
$(2,686)

(6) Reconciliation of Bank Loans:


Opening Balance
New loans during the year
Ending Balance given
Repaid during the year ($100 X 12)

$3,200
2,200
(4,200)
$1,200

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued)


Reconciliation of Share Capital:
Opening Balance
Proceeds from sale of shares
Proceeds from sale of warrants
Stock dividend
Ending Balance

$ 62,965
14,393
899
1,000
$ 79,257

(b)
Jeopardy Inc.
Consolidated Statement of Cash Flows (partial)
For the Year Ended April 30, 2014
($000 omitted)
Cash flows from operating activities
Net loss
$(23,057)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense
$10,014
Amortization expense
206
Loss on impairment of goodwill
12,737
Loss on sale of capital assets
394
Loss on equity investment
2,518
Increase in accounts receivable
(5,345)
Increase in inventory
(4,522)
Increase in income tax receivable
(145)
Decrease in prepaid expenses
211
Decrease in accounts payable
(1,469
and accrued liabilities
)
Increase in deferred tax asset
(2,630)
11,969
Net cash used by operating activities
$(11,088)

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued)


(c)

Memo to President

Jeopardy Inc. is experiencing a severe cash crunch in spite of


having acceptable liquidity ratios and several non-cash
expenses on its income statement. The following is a list of
factors, which have contributed to this problem:
1. There are disturbing trends in the management of working
capital. This is evidenced from the operating activities of
the statement of cash flows prepared using the indirect
format. Jeopardy had significant increases in accounts
receivable and inventory combined of ($9,867) while at the
same time reduction in accounts payable of $1,469 were
achieved. This represents a deterioration amounting to
$11.3 million in working capital position in one fiscal year.
2. Significant purchases of long-term investments, reported
at amortized cost were made during the year ($1,516),
although investments did generate some cash from
interest. We should look carefully at the rates of interest
earned on these investments, compared to the rates of
interest paid on our debt.
3. Although the company recorded income tax benefits on the
income statement from its losses, and the corresponding
additions to deferred tax assets on the statement of
financial position ($2,630), we were unable to recover in
cash any taxes paid in the past. The carryback of losses
was disallowed because of the continued losses incurred
in the past.
4. The majority of the cash obtained from selling shares and
warrants to shareholders was consumed in operating
activities. Closer attention to costs will have to be paid in
order to restore profitability and corresponding positive
cash flows from operations.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2
(a)
Mann Corp.
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net earnings
$240,000
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation expense (1)
$181,000
Loss on sale of equipment (2)
2,000
Equity in earnings of Bligh Corp. (3)
(22,000)
Increase in accounts receivable
(79,700)
Increase in inventory
(42,600)
Decrease in accounts payable
(61,000)
Decrease in income tax payable
(9,000)
(31,300)
Net cash provided by operating activities
208,700
Cash flows from investing activities:
Proceeds from sale of equipment
Loan to TMC Corp.
Principal collected of loan receivable
Net cash used by investing activities

42,000
(285,000)
33,500
(209,500)

Cash flows from financing activities:


Increases in bank loan
Dividends paid
Net cash used by financing activities

69,700
(85,000)
(15,300)

Net decrease in cash


Cash, January 1, 2014
Cash, December 31, 2014

(16,100)
44,400
$28,300

Non-cash investing and financing activities:


Issuance of lease obligation for equipment

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (Continued)


Additional disclosures:
During the year Mann Corp. had the following operating cash
flows relating to interest:
Interest paid on operating line of credit
and finance lease:
$14,900
Interest collected on loans to TMC Corp.
9,400
Income taxes paid during the year
151,000
(1) Calculation of depreciation expense:
Original cost of equipment sold
Carrying amount of equipment sold
Accumulated depreciation equipment sold
Accumulated depreciation Jan. 1, 2014
Accumulated depreciation Dec. 31, 2014
Depreciation expense

$ 70,000
(44,000)
26,000
(1,010,000)
1,165,000
$ 181,000

(2) Calculation of gain on disposal of equipment:


Proceeds on sale of equipment
Carrying amount of equipment sold
Loss on disposal of equipment

$ 42,000
(44,000)
$ 2,000

(3) Calculation of undistributed earnings of Bligh Corp.


Net income of Bligh Corp.
$ 88,000
Percentage owned by Mann Corp.
25%
Undistributed earnings of Bligh Corp.
$ 22,000

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (Continued)


(b)
('000 $)
Prop, plant, and equipment
Accumulated depreciation

Depreciation expense
Loss on sale of equipment
Proceeds on sale of equipment
Non-cash finance lease

(c)

2014
$3,066.4
(1,165.0)
1,901.4

2013
$2,866.4
(1,010.0)
1,856.4

chang
e

$45

181
2
42
225
(270)
$(45)

At first glance, a financial statement reader of the cash flow


statement might come to the quick conclusion that all of the
cash flows generated from operations were used up in
investing activities; this is really not the case. The cash
generated from operations is almost exactly the amount as
the cash used in investing activities. This makes it appear as
if Mann Corp. is leaving itself very little cash to allow it any
flexibility in dealing with future cash demands. The
reconciliation brings into the view the non-cash financing
investing transaction of the finance lease of $270,000. This
can then be easily compared with the amount of the
depreciation on property plant and equipment recorded
during the year. This comparison is often used to assess if
management is properly dealing with the timely replacement
of ageing capital assets.

(d) Since Mann Corp. follows IFRS, interest paid and received
can be recognized as operating flows on the basis they are
included in determining net income. Alternatively, interest
paid could be a financing outflow while interest and received
could be considered investment flows. Once the choice is
made, it is applied consistently from period to period .
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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (Continued)


(d) (Continued)
Had Mann Corp. classified interest paid as financing
activities, and interest received as investing activities, those
amounts would need to become adjustments to the
operating activities section of the statement of cash flows
prepared using the indirect format as those amount were
included in net earnings. These amounts are fairly small
(interest paid $14,900 and interest received $9,400) and
would increase the cash flows from operations by $5,500.
Correspondingly, the investing activities net outflow of cash
would decrease by $9,400 and financing activities outflow
would increase by $14,900. These changes are minor, and
would not impact conclusions reached concerning Manns
liquidity position and ability to generate cash.
(e)

Mann Corp. has very low cash positions at its statement of


financial position dates. It also appears as if some large
current liabilities must be paid, in amounts that are far larger
than the amount of cash on hand. That being the case, Mann
remains able to meet these obligations because it has
secured a line of credit which has an upper limit of $600,000.
It is never the intention of management to use the line of
credit to the limit, but rather use it for the short term
financing of operating needs. The balances of the term line
at the statement of financial position dates are not out of
line when compared to other important balances such as the
amount of accounts receivable. In fact the accounts
receivable are likely securing the operating line of credit.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3
(a) Preliminary calculations and reconciliations:
A. Reconciliation of long-term investment at equity:
Opening Balance
$400,000
Equity in earnings of investee
62,000
Dividend received (derived)
(44,000)
Ending Balance
$418,000
B. Reconciliation of investment income:
Total investment income on income statement
Less: Equity in earnings of investee
Interest income on investments
C. Reconciliation of Equipment:
Opening Balance
Original cost of equipment sold
Ending balance
Purchases of equipment (derived)

$90,000
(62,000)
$28,000
$640,000
(46,000)
(632,000)
($38,000)

D. Reconciliation of accumulated depreciation equipment:


Opening Balance
($135,000)
Accumulated depreciation of equipment sold
32,000
Ending balance
160,000
Derive depreciation for year
$57,000
E. Carrying amount of equipment sold
Proceeds on sale of equipment (derived)
Loss on disposal

($14,000)
3,000
($11,000)

F. Reconciliation of common shares:


Opening balance
Stock dividends
Shares issued during year (derived)
Ending balance

$666,000
18,000
62,000
$746,000

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (Continued)


(a) (Continued)
G. Reconciliation of retained earnings:
Opening balance
Add net income
Less stock dividends
Cash dividends declared (derived)
Ending balance

$294,000
195,000
(18,000)
(51,000)
$420,000

H. Reconciliation of dividends payable


Opening balance
Add dividends declared (G)
Cash dividends paid (derived)
Ending balance

$50,000
51,000
(81,000)
$20,000

Laflamme Inc.
Statement of Cash Flows (Indirect Method)
for the year ended December 31, 2014
Cash Flows from Operating Activities
Net Income
$195,000
Adjustments to reconcile net income
to
net cash provided by operating
activities:
Loss on sale of equipment
$11,000
Depreciation Buildings
40,000
Depreciation Equipment (D)
57,000
Amortization Patent
5,000
Amortization of bond discount
4,000
Equity in earnings in long-term investee (62,000)
Dividends received from LT investee (A) 44,000
Increase in accounts receivable
(77,000)
Decrease in prepaid insurance
19,000
Increase in inventory
(48,000)
Decrease in supplies
4,000
Increase in accounts payable
15,000
Decrease in income tax payable
(9,000)
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Edition

Intermediate Accounting, Tenth Canadian

Increase in accrued liabilities


Net cash provided by operating activities
PROBLEM 22-3 (Continued)

16,000

19,000
214,000

(a) (Continued)
Cash Flows from Investing Activities
Purchase of land
Purchase of building
Purchase of equipment (C)
Proceeds from sale of equipment
Net cash used in investing activities

$(40,000)
(30,000)
(38,000)
3,000
(105,000)

Cash Flows from Financing Activities


Proceeds from issuance of
preferred shares
Proceeds from issuance of
common shares (F)
Repayment of long-term notes principal
Dividend paid (H)
Net cash used in financing activities

24,000 *
62,000
(40,000)
(81,000)
(35,000)

Increase in cash and cash equivalents


Cash and cash equivalents balance Dec. 31, 2013
Cash and cash equivalents balance Dec. 31, 2014
Cash and Cash Equivalents:
Cash
Cash equivalents
Temporary bank overdrafts

2014
$46,000
36,000
0
$82,000

74,000
8,000
$82,000
2013
$56,000
45,000
(93,000)
$8,000

Note X: During the year the Laflamme Inc. obtained land having
a fair value of $100,000 for its preferred shares.
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
$91,000
Income taxes
$105,000
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* (Increase of $124,000 less Note X non-cash financing


investing above of $100,000 = $24,000)

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (Continued)


(b)
Laflamme Inc.
Statement of Cash Flows (Direct Method)
for the year ended December 31, 2014
Cash Flows from Operating Activities
Cash received from customers (1)
Cash received from interest short term (B)
Cash received from dividends long term (A)
Payments to suppliers for goods and services (2)
Payments to and on behalf of employees (3)
Interest paid (4)
Income taxes paid (5)
Net cash flows provided by operating activities
1. Cash collected from customers:
Sales revenue
Increase in accounts receivable

$999,000
(77,000)
$922,000

2. Payments to suppliers for goods for resale:


Cost of goods sold
Increase in inventory
Increase in accounts payable
Operating expenses
Less:
Depreciation Buildings
Depreciation Equipment
Amortization Patent
Decrease in prepaid insurance
Increase in accrued liabilities
Decrease in supplies

Solutions Manual

$922,000
28,000
44,000
(372,000)
(212,000)
(91,000)
(105,000)
$214,000

22-94

$314,000
48,000
(15,000)
166,000
(40,000)
(57,000)
(5,000)
(19,000)
(16,000)
(4,000)
$372,000

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (Continued)


(b) (Continued)
3. Payments to and on behalf of employees:
Sales commission expense
Salaries and wages expense

$108,000
104,000
$212,000

4. Interest paid:
Interest expense
Amortization of bond discount

$95,000
(4,000)
$91,000

5. Income taxes paid:


Income tax expense
Decrease in income tax payable
(c)

$96,000
9,000
$105,000

Laflamme follows ASPE and so does not have choices.


Companies that adopt IFRS do have some choices. Under
IFRS, interest paid and received and dividends paid and
received can be recognized as operating flows.
Alternatively, interest paid can be recognized as a
financing outflow while interest and dividends received can
be recognized as investing inflows. A choice is permitted
for dividends paid: a financing outflow as a return to equity
holders, or an operating outflow as a measure of the ability
of operations to cover returns to shareholders.

(d) Had the cash equivalents not been included in cash and
cash equivalents, transactions of purchases and maturities
of principal of these investments would have been treated
as investing activities on the statement of cash flows.
Had the temporary bank overdrafts not been included in
cash and cash equivalents, transactions of loans and cash
advances by the bank and repayments of these loans would
be treated as financing activities on the statement of cash
flows.
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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-4
(a)
Jensen Limited
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income
$76,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense*
$20,000
Gain on FV-NI investments
(24,000)
Loss on sale of equipment
3,000
Increase in accounts receivable (net)
(17,500)
Increase in inventory
(14,000)
Decrease in deferred tax asset
4,500
Increase in accounts payable
12,500
Decrease in accrued pension liability
(2,500)
Increase in income tax payable
2,000 (16,000)
Net cash provided by operating activities
60,000
Cash flows from investing activities
Purchase of FV-NI investments **
Purchase of equipment
Proceeds on sale of FV-NI investments
Proceeds on sale of equipment
Net cash provided by investing activities

(5,000)
(32,000)
50,000
3,000

Cash flows from financing activities


Payment of long-term notes payable
Dividends paid
Proceeds on issuance of common shares
Net cash used by financing activities

(8,000)
(74,000)
35,000

16,000

(47,000)

Net increase in cash


29,000
Cash, January 1, 2014
51,000
Cash, December 31, 2014
$80,000
* $21,000 + $4,000 $14,000 + $37,000 $28,000 = $20,000
** $59,000 $24,000 + $50,000 $80,000 = $5,000
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Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (Continued)


Non-cash investing and financing activities
Issuance of common shares for land

$15,000

Additional disclosures:
During the year Jenson Limited had the following operating cash
flows relating to interest and income taxes:
Interest paid
$10,000
Income taxes paid
38,500
(b)
Net Cash Provided by Operating Activities
Cash received from customers (1)
Cash paid to suppliers for goods and
services (2)
Cash paid to and on behalf of
employees (3)
Interest paid
Income taxes paid (4)
Net cash provided by operating
activities
(1) Cash received from customers
Sales
Less increase in accounts receivable
Cash received from customers

Solutions Manual

$940,500
$618,80
0
213,20
0
10,000
38,500

880,500
$ 60,000

$ 960,000
(19,500)
$ 940,500

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Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (Continued)


(2) Cash paid to suppliers for goods and services
Cost of goods sold
Deduct: direct labour
Deduct: pension expense
Add: increase in inventory
Deduct: increase in accounts payable
Payment to suppliers for goods for resale
Operating expenses
Deduct: salaries and wages expense
Deduct: pension benefits expense
Deduct: depreciation expense
Deduct: bad debt expense
Paid to suppliers for goods and services

$ 600,000
(115,000)
(11,700)
14,000
(12,500)
474,800
250,000
(76,000)
(8,000)
(20,000)
(2,000)
$ 618,800

(3) Cash paid to and on behalf of employees


Direct labour
Salaries and wages expense
Pension benefits expense
Add: decrease in accrued pension liability
Cash paid to and on behalf of employees

$ 115,000
76,000
19,700
2,500
$ 213,200

(4) Income taxes paid


Income tax expense
Deduct: decrease in deferred tax asset
Deduct: increase in income tax payable
Income taxes paid

$ 45,000
(4,500)
(2,000)
$ 38,500

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (Continued)


(c)

Under IFRS, interest paid and received and dividends paid


and received can be recognized as operating flows.
Alternatively, interest paid can be recognized as a
financing outflow while interest and dividends received can
be recognized as investing inflows. A choice is permitted
for dividends paid: a financing outflow as a return to equity
holders, or an operating outflow as a measure of the ability
of operations to cover returns to shareholders.

(d)

In spite of a very large dividend paid during the year


that was almost as large as net income, the company
managed to generate significant amounts of cash from
operations and from the sale of some of its investments.
The issuance of additional common shares helped finance
the purchase of equipment and the acquisition of land.

(e)
The dividend payout ratio for the year ending
December 31, 2014 can be easily calculated using amounts
reported on the statement of cash flows. The payout ratio
is 97% [$74,000 (dividends paid) divided by $76,000, (net
income)]. From the perspective of an investor, this might
be a welcomed ratio, as investors are recipients of this
extremely high return on investment. On the other hand,
paying out more dividends than the cash flow from
operations might be worrisome, and a shareholder should
not expect that to continue. The $50,000 proceeds on the
sale of investments might be part of the reason for such a
large payout this year, but again, this is not usually a
replicable (continuing type of) cash flow. It would be
unrealistic to expect the company to sustain this additional
source of cash in the future.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5
(a)
Ashley Limited
Statement of Cash Flows
For the Year Ended December 31, 2014
(Direct Method)
Cash flows from operating activities
Cash received from customers (1)
Dividends received
Proceeds on sale of FV-NI
investments*
Cash paid to suppliers for goods and
services (2)
Cash paid to and on behalf of
employees (3)
Income taxes paid (4)
Interest paid
Net cash provided by operating activities

$1,159,450
2,400

Cash flows from investing activities


Proceeds from sale of land**
Purchase of equipment
Net cash used by investing activities

14,000
(889,35
0)
(90,00
0)
(33,400)
(51,750)
$111,350
58,000
(125,000)
(67,000)

Cash flows from financing activities


Proceeds from issuance of common
shares
Principal payment on long-term debt
Dividends paid
Net cash used by financing activities

22,5
00
(10,000)
(19,450)
(6,950)

Net increase in cash and cash equivalents


Cash and cash equivalents January 1, 2014
Cash and cash equivalents, December 31, 2014

37,400
(12,000)
$25,400

* Decrease in FV-NI investments $10,000 + gain of $4,000


** Decrease in land of $50,000 + gain of $8,000
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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (Continued)


Cash and cash equivalents consist of cash on hand and
balances with banks, and temporary bank overdrafts. Cash and
cash equivalents included in the statement of cash flows
comprise the following statement of financial position accounts:
Cash
Temporary bank overdraft
Total cash and cash equivalents

2014
$ 25,400

$ 25,400

(1) Sales Revenue


Less increase in accounts receivable
Cash received from customers

2013

$ (12,000)
$ (12,000)
$1,160,000
(550)
$1,159,450

(2) Cash paid to suppliers for goods and services


Cost of goods sold
Add increase in inventory
Less increase in accounts payable
Cash paid to suppliers for goods for resale
Add selling expenses
Add administrative expenses
Less decrease in prepaid rent
Add increase in prepaid insurance
Add increase in office supplies
Cash paid to suppliers for goods and services
(3) Salaries and wages expense
Less increase in salaries and wages
payable
Cash paid to and on behalf of employees
(4) Income tax expense
Less increase in deferred tax liability
Less increase in income tax payable
Income taxes paid
Solutions Manual

$748,000
7,000
(2,000)
753,000
19,200
124,700
(9,000)
1,200
250
$889,350
$92,000
(2,000)
$90,000
$39,400
(5,000)
(1,000)
$33,400

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (Continued)


Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense
Amortization expense
Gain on sale of land
Gain on sale of FV-NI investments
Proceeds from sale of FV-NI
investments
Decrease in prepaid rent
Increase in income tax payable
Increase in salaries and wages payable
Increase in accounts receivable
Increase in inventory
Increase in prepaid insurance
Increase in office supplies
Increase in accounts payable
Increase in deferred tax liability
Net cash provided by operating activities
(b)

$58,850
$35,500
5,000
(8,000)
(4,000)
14,000
9,000
1,000
2,000
(550)
(7,000)
(1,200)
(250)
2,000
5,000

52,500
$111,350

Ashley Limited follows ASPE and so does not have


choices. Companies that adopt IFRS do have some
choices. Under IFRS, interest paid and received and
dividends paid and received can be recognized as
operating flows. Alternatively, interest paid can be
recognized as a financing outflow while interest and
dividends received can be recognized as investing inflows.
A choice is permitted for dividends paid: a financing
outflow as a return to equity holders, or an operating
outflow as a measure of the ability of operations to cover
returns to shareholders.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (Continued)


(c)

Memo
Ashley has managed to generate sufficient cash from
operations in the current year to overcome a cash and
cash equivalent deficiency while at the same time making
substantial investments in equipment and paying out
dividends of 33% of net income for the year. Additional
increases in cash came from the sale of land and FV-NI
investments as well as further investments from
shareholders through the issuance of shares.

(d)
Cash payments to suppliers for goods for resale:
Cost of goods sold
Add: Increase in inventory
Less: Increase in accounts payable
Cash paid to suppliers for goods for resale

$748,000
7,000
(2,000)
$753,000

Cash paid to suppliers for services:


Selling expenses
Administrative expenses
Less: Decrease in prepaid rent
Add: Increase in prepaid insurance
Add: Increase in office supplies
Cash paid to suppliers for services

Solutions Manual

$19,200
124,700
(9,000)
1,200
250
$136,350

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-6
(a)
Common Shares (4,000 X $34.20).................
136,800
Contributed Surplus (Common Shares).......
22,700
Retained Earnings.......................................... 18,100
Cash (4,000 X $44.40).............................

177,600

Land.................................................................
Cash.........................................................
Common Shares (5,000 X $41.50).........

240,500
33,000
207,500

Unrealized Gain or Loss - OCI.......................


FV-OCI Investments................................

3,650
3,650

Original cost of shares..............$68,400


Fair value adj. to beg. of year.... (2,350)
Carrying amount beg. of year.....66,050
Fair value date of declaration.....62,400
Fair value adjust. required..........$3,650
Loss on Sale of Investments.........................
Unrealized Gain or Loss - OCI...............
(Reclassification $2,350 + $3,650)

6,000

Retained Earnings..........................................
Dividends Payable..................................

62,400

Dividends Payable..........................................
FV-OCI Investments................................

62,400

Retained Earnings..........................................
Common Stock Dividends Distributable
85,752
(43,200 X 5% X $39.70)

85,752

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6,000

62,400
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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-6 (Continued)


Common Stock Dividends Distributable......
Common Shares.....................................

85,752

Land.................................................................
Contributed Surplus - Donated Land....

42,000

Share Subscriptions Receivable...................


Cash ($385,000 X 10%)...................................

346,500
38,500

85,752
42,000

Common Shares Subscribed.................


(10,000 X $38.50)
Dividend Expense..........................................
Dividends Payable..................................
(b)
Cash provided by (used in) operations
Add back: non-cash expenses:
Loss on sale of investments..................
Changes in non-cash working capital:
Dividends payable, term preferred shares

385,000
3,800
3,800

$6,000
3,800

Cash provided by (used in) investing activities


Purchase of land (Note x)......................

(33,000)

Cash provided by (used in) financing activities


Collection of subscription for shares...
Common shares repurchased...............

38,500
(177,600)

Note X: During the year Gao Limited purchased land with a fair
value of $240,500 in exchange for cash of $33,000 and 5,000
common shares.

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Intermediate Accounting, Tenth Canadian

PROBLEM 22-6 (Continued)


Additional disclosures:
A property dividend in the amount of $62,400, charged to
retained earnings, was declared and distributed to preferred
shareholders.
A 10% stock dividend for $85,752 was declared and
distributed to the common shareholders.
During the year, a shareholder donated land at an appraised
value of $42,000.
(c) If Gaos investment in Trivex was accounted using the fair
value through income model, the changes in fair value
would have been included in net income, instead of being
reported in other comprehensive income. There would be
no Accumulated other comprehensive income on the
statement of financial position at October 31, 2014, and
therefore no reclassification entry would be needed
following the declaration of the property dividend. As
for
the statement of cash flows, the amounts reported would
not change, but the captions and descriptions would
change to FV-NI, instead of FV-OCI.
(d) If Gao were using ASPE, it would be not be allowed to follow
the FV-OCI model.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-7
(a)
Net Cash Flow from Operating Activities
Cash received from customers (1)
Cash paid to suppliers for goods and
services (2)
Income taxes paid (3)
Net cash provided by operating activities

$627,850
$545,92
5
40,500

(586,425)
$ 41,425

(1) Cash received from customers


Sales revenue
$ 640,000
Less increase in accounts receivable *
(12,150)
Cash received from customers
$ 627,850
* $67,500 + $60,000 + $2,250 $1,500 $5,400 expense
(2) Cash paid to suppliers for goods and services
Cost of goods sold
Add: increase in inventory
Deduct: increase in accounts payable
Payment to suppliers for goods for resale
Increase in accrued liabilities
Operating expenses
Deduct: depreciation expense
Deduct: bad debt expense
Paid to suppliers for goods and services
(3) Income taxes paid
Income tax expense
Add: decrease in income tax payable
Income taxes paid

Solutions Manual

$ 380,000
6,000
(5,250)
380,750
(1,250)
180,450
(8,625)
(5,400)
$ 545,925

$ 40,000
500
$ 40,500

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-7 (Continued)


(b)
Secada Inc.
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash flows from operating activities
Net income
$37,750
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense
$ 8,625
Loss on FV-NI investments
1,000
Loss on sale of machinery
800
Increase in accounts receivable (net)
(6,750)
Increase in inventory
(6,000)
Increase in accounts payable
5,250
Increase in accrued liabilities
1,250
Decrease in income tax payable
(500)
3,675
Net cash provided by operating activities
41,425
Cash flows from investing activities
Purchase of investments*
Purchase of machinery**
Addition to buildings
Proceeds from sale of investments
Proceeds from sale of machinery
Net cash used by investing activities

(7,500)
(15,000)
(11,250)
23,750
2,200
(7,800)

Cash flows from financing activities


Principal payments on long-term
note payable
Dividends paid
Net cash used in financing activities

(5,000)
(25,375)
(30,375)

Net increase in cash


Cash, January 1, 2014
Cash, December 31, 2014
* $24,750 + $23,250 $40,500 = $7,500
** $18,750 $3,750 $30,000

Solutions Manual

3,250
33,750
$37,000

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-7 (Continued)


(c)

Memo
Fellow investment club members:
The following is a short summary of the highlights from a
cursory review of the operations of Secada Inc., which the
club is considering for investment.
From an investors perspective, we are interested in the
profitability, financial stability and dividend paying ability of
Secada. Based on the performance for the year ending
December 31, 2014, Secada has demonstrated an extremely
strong dividend paying ability. In fact the company was able
to distribute 67% of the net earnings as cash dividends
($25,375 $37,750). This is a very high dividend payout ratio.
Over and above the cash dividends paid out, Secada also
distributed a 20% stock dividend. Although this dividend did
not provide cash to the shareholders, it did allow them to
receive additional common shares, which they can choose to
sell. The statement of cash flows demonstrates some positive
trends, particularly in the cash flows generated from
operations. Secada managed to increase its cash position by
the end of the fiscal year, while making some substantial
investments in machinery and in buildings.

(d)
Cash paid to suppliers for goods for resale
Cost of goods sold
Add: Increase in inventory
Less: Increase in accounts payable
Payment to suppliers for goods for resale

$ 380,000
6,000
(5,250))
$ 380,750

Cash paid to suppliers for services


Operating expenses
Less: Increase in accrued liabilities
Less: Depreciation expense
Less: Bad debt expense
Payments to suppliers for services

180,450
(1,250)
(8,625)
(5,400)
$ 165,175

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-8
(a)
Cash flows from operating activities
Net income
$145,000
Adjustments to reconcile net income to
to net cash provided by operating activities:
Depreciation expense
$38,000
Loss on sale of equipment
16,500
Gain on sale of investment at fair value
with gains and losses in net income
(5,500)
Decrease in accounts receivable
15,000
Income from investment accounted
using the equity method
(10,800)
Dividends received from investment
accounted using the equity method
1,120
54,320
Net cash provided by operating activities
$199,320
Other comments:
No. 1 the proceeds from the sale of the equipment will be shown
as cash received from investing activities, but the loss or
$16,500 ($23,500 $7,000) must be an added back to income.
No. 2 is shown as a cash inflow from investing activities of
$20,000 (sale of 100 Lontel Corporation shares at $200 per
share) and the gain of $5,500 is deducted from net income in the
operating section.
No. 3 does not affect the statement of cash flows as it does not
involve nor does it affect cash.
No. 4 is a non-cash expense (Bad Debt Expense) in the income
statement. Bad debt expense is not handled separately when
using the indirect method. It is part of the change in net
accounts receivable.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-8 (Continued)


No. 5 is a significant non-cash investing and financing activity.
No. 6 depreciation is added to income when using the indirect
method.
No. 7 and 8 the equity pick-up is deducted and the dividends
received are added to net income. Another alternative is to net
the Companys pro-rata share of the dividend against the income
from equity method amount reported in the cash flows from
operating activities.
No. 9 is not shown on a statement of cash flows.
No. 10 dividends of $2,500 on term preferred shares properly
represent cash outflows in the operating activities, included in
the calculation of net income, while the remaining dividends of
$7,500 would be shown as outflows in the financing activities
section of the statement of cash flows.
(b)

If Neilson Corp. were following IFRS, there would be


choices available on the treatment of dividends and
interest paid or received. Under IFRS, interest paid and
received and dividends paid and received can be
recognized as operating flows. Alternatively, interest paid
can be recognized as a financing outflow while interest and
dividends received can be recognized as investing inflows.
A choice is permitted for dividends paid: a financing
outflow as a return to equity holders, or an operating
outflow as a measure of the ability of operations to cover
returns to shareholders. However management views these
specific flows, once the choice is made, it is applied
consistently from period to period.

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-9
(a)
Reconciliation of transactions to Fair Value through Other
Comprehensive Income (FV-OCI) Investments account:
Balance Jan. 1, 2014 at fair value
(cost $40,000 unrealized loss to date $2,400)
Unrealized gain to date of sale ($40,000 $37,900)
Proceeds from sale of all shares
Purchase of new shares as investment
Unrealized gain to December 31, 2014
Balance Dec. 31, 2014

$37,900
2,100
(40,000)
23,600
400
$24,000

Reconciliation of transactions to Accumulated Other


Comprehensive Income:
Balance Jan. 1, 2014 - unrealized loss
($37,900 - $40,300)
Unrealized gain to date of sale ($40,000 $37,900)
Transfer to Retained Earnings realized loss
Unrealized gain to December 31, 2014
Balance Dec. 31, 2014
(b)
Operating activities:
Cash received for dividends
Loss on sale of fair value through other
comprehensive income investments

Direct
$200

Indirect

$300

Investing activities:
Proceeds from sale of fair value through
other comprehensive income investments
Purchase of fair value through other
comprehensive income investments

Solutions Manual

$(2,400)
2,100
300
400
$ 400

22-112

$40,000

$40,000

(23,600)

(23,600)

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-9 (Continued)


(c) If MFI Inc.s investments were accounted using the fair
value through net income (FV-NI) model, the amounts
reported on the statement of financial position would
remain the same, but their captions for description would
change accordingly. All of the investment income, including
the dividends received would have been included in net
income. The changes in fair value would also have been
included in net income, instead of being reported in Other
Comprehensive Income. There would be no Accumulated
Other Comprehensive Income on the statement of financial
position.
There would therefore be no need to reconcile the activity to
the Accumulated Other Comprehensive Income as given in
part (a) of the question.
As for part (b) of the question, the amounts in the statement
of cash flows would not change, but the captions and
descriptions would change to FV-NI, instead of FV-OCI.
(d) If MFI Inc were to follow ASPE, it would be not be allowed to
follow the FV-OCI model.

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PROBLEM 22-10
(a)
SAMSON INC.
Statement of Financial Position
December 31,
2014
Long-term Investments
Investments, at fair value with gains
and losses in OCI

2013

$ 872,245 $883,400

Shareholders Equity
Accumulated other comprehensive
income (loss)

$10,278 $(10,100)

(b)
SAMSON INC.
Income Statement
For the Year ended December 31, 2014
Other revenues and gains
Dividend revenue
Gain on sale of investments

$37,500
3,592

SAMSON INC.
Statement of Comprehensive Income
For the Year ended December 31, 2014
Net income (including items above)
Other comprehensive income:
Unrealized gains on FV-OCI
investments during year ($4,350 + $19,620)
Reclassification adjustment for realized gains
Other comprehensive income
Comprehensive income

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$23,970
(3,592)
20,378
$ x + 20,378

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-10 (Continued)


SAMSON INC.
Statement of Changes in Accumulated Other Comprehensive
Income
For the Year ended December 31, 2014
Accumulated other comprehensive income (loss),
January 1, 2014
$(10,100)
Other comprehensive income, 2014
20,378
Accumulated other comprehensive income (loss),
December 31, 2014
$ 10,278
(c)
June 30, 2014
Cash................................................................ 37,500
Dividend Revenue..................................
37,500
Dividends received from Anderson Corp.
August 15, 2014
Investment in Anderson Corp...................... 4,350
Unrealized Gain or Loss - OCI..............
Fair value adjustment for the 3,000 shares sold
Cash................................................................ 70,605
Investment in Anderson Corp...............

4,350

70,605

Sale of 3,000 Anderson Corp. shares


Unrealized Gain or Loss - OCI......................
Gain on Sale of Investment...................

3,592
3,592

Reclassification adjustment to transfer unrealized


gains to realized gains
November 3, 2014
Investment in Anderson Corp...................... 35,480
Cash........................................................
Purchase of 2,000 shares of Anderson Corp.

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PROBLEM 22-10 (Continued)


(d)
Operating activities:
Cash received for dividends
Gain on sale of fair value through other
comprehensive income investments

Direct
$37,500

Indirect

$(3,592)

Investing activities:
Proceeds from sale of fair value through
other comprehensive income investments
Purchase of fair value through other
comprehensive income investments

$70,605

$70,605

(35,480)

(35,480)

Samson could have adopted the practice of classifying the


dividends received as investing cash flows, so long as that
classification was followed consistently from year to year.
(e) If Samson Inc.s investments were accounted using the fair
value through net income model, the amounts reported on
the statement of financial position would remain the same,
but their captions for description would change accordingly.
All of the investment income, including the dividends
received would have been included in net income. The
changes in fair value would also have been included in net
income, instead of being reported in Other Comprehensive
Income. There would be no Accumulated Other
Comprehensive Income on the statement of financial
position.
As for part (d) of the question, the cash flow statement
would not change in amounts reported, but the captions
and descriptions would change to FV-NI, instead of FV-OCI.
(f)

If Samson Inc. were to follow ASPE, it would be not be


allowed to follow the FV-OCI model.

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PROBLEM 22-11
(a)
Davis Inc. should be reporting in the statement of cash flows the
change in cash and cash equivalents. Cash equivalents are
short-term, highly liquid investments that are readily convertible
to known amounts of cash and are subject to an insignificant
risk of change in value. The balances of cash equivalents for
Davis Inc. at the fiscal year ends follow.
March 31
2014
2013
Cash
$ 5,200
$4,400
Investments 30 day T-Bills
20,000
6,200
Total cash and cash equivalents
$25,200
$10,600
Davis Inc. will be explaining the increase in cash and cash
equivalents of $14,600 ($25,200 $10,600)

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PROBLEM 22-11 (Continued)


(b)
Davis Inc.
Statement of Cash Flows (Partial Indirect Method)
For the Year Ended March 31, 2014
Cash flows from operating activities
Net income
$72,650
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense
$7,500
Amortization of patents
1,500
Amortization of bond discount
750
Gain on retirement of bonds
(16,600)
Unrealized gain on FV-NI investments
(3,000)
Equity in earnings of Jessa Ltd.
(12,500)
Dividends received from Jessa Ltd.
2,000
Increase in accounts receivable
(2,800)
Increase in inventory
(6,200)
Decrease in prepaid expenses
150
Increase in prepaid rent
(4,000)
Decrease in accounts payable
(1,400)
Decrease in salaries and wages payable
(800)
Decrease in income tax payable
(16,500)
Increase in interest payable
1,500
Increase in accrued pension liability
1,600
Increase in deferred tax liability
10,300 (38,500)
$ 34,150
Net cash provided by operating activities

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PROBLEM 22-11 (Continued)


(c)
1. Cash payments to and on behalf of employees
Salaries and wages expense
Less: increase in pension liability
Add: decrease in salaries and wages payable
Cash paid to and on behalf of employees

$ 64,500
(1,600)
800
$ 63,700

2. Cash received from customers


Sales revenue
Less: increase in accounts receivable
Cash received from customers

$450,000
(2,800)
$447,200

3. Income taxes paid


Income tax expense
Add: decrease in income tax payable
Less: increase in deferred tax liability
Income taxes paid

$ 30,200
16,500
(10,300)
$ 36,400

4. Cash payments to suppliers for goods and services


Cost of goods sold
$260,000
Administrative expenses
21,000
Rent expense
18,000
Add: increase in inventory
6,200
Less: decrease in prepaid expenses
(150)
Add: increase in prepaid rent
4,000
Add: decrease in accounts payable
1,400
Payments to suppliers for goods and services
$310,450
5. Interest paid
Bond Interest expense
Less: increase in interest payable
Less: bond discount amortization
Interest paid

Solutions Manual

$ 6,750
(1,500)
(750)
$ 4,500

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PROBLEM 22-11 (Continued)


(d)
The sum of the cash flows arrived at in part (c) using the direct
method has one item omitted to arrive at net cash provided from
operating activities. This omission is for the dividends received
from Davis investee Jessa Ltd. in the amount of $2,000.
Cash received from customers
Payments to suppliers for goods and services
Cash paid to and on behalf of employees
Interest paid
Income taxes paid
Cash received from dividends
Cash provided from operating activities

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22-120

$447,200
(310,450)
(63,700)
(4,500)
(36,400)
32,150
2,000
$ 34,150

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-12
(a)
SORKIN CORPORATION
Statement of Financial Position Accounts
Comparative December 31, 2014 and 2013
($ in millions)
2014
Cash (from statement of cash flows)
$87

2013
$ 21

FV-NI investment (2)


Accounts receivable ($194 $4)

30
190

194

Inventory ($200 + $5)

205

200

10

12

Long-term inv. in shares of Stokes Inc. (1)

130

125

Land ($150 + $46 note 1 of statement of cash flows)


Buildings and equipment (3)
Accumulated depreciation (4)
Patents
Accumulated amortization
Goodwill ($60 $20)

196
412
(97)
60
(30)
40

150
400
(120)
60
(28)
60

Prepaid expenses ($12 $2)

Total assets
Accounts payable ($65 $15)

$1,233

$1,074

$50

$65

Salaries and wages payable ($11 $5)

11

Bond interest payable ($4 + $4)

Income tax payable ($14 $2)

12

14

Deferred tax liability ($8 + $3)

11

82
193

250

Lease obligation
Bonds payable ($250 $60 + $3)
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Note payable
Preferred shares
Common shares (5)
Contributed surplus (6)
Retained earnings (7)
Total liabilities and equity

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23
75
513

495

3
257
$1,233

227
$1,074

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Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-12 (Continued)


1.

Opening balance L. Term Invest. In Stokes


Investment income from L. Term Equity Inv.
Dividends received from Stokes
Balance December 31, 2014

2. Opening balance FV-NI investment


Purchased for cash
Unrealized gain for 2014
Balance December 31, 2014

$125
11
(6)
$130
$25
5
$ 30

3. Opening balance Buildings and equipment


Equipment acquired with finance lease
Equipment cost lost in flood
Balance December 31, 2014

$400
82
(70)
$ 412

4. Opening balance Accumulated depreciation


Acc. depr. of equipment lost in flood (below)
Depreciation expense on income statement
Balance December 31, 2014

($120)
42
(19)
($97)

Equipment cost lost in flood


Loss recorded
Proceeds obtained from damaged equipment
Acc. depreciation of equipment lost in flood

$70
(18)
(10)
$42

5. Opening balance Common shares


Stock dividend (4 M shares X $7.50 per share)
Price paid for shares repurchased
Balance December 31, 2014

$495
30
(12)
$ 513

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PROBLEM 22-12(Continued)
6. Opening balance Contributed surplus
Price paid for shares repurchased
Weighted average original cost of shares
Balance December 31, 2014

$(9)
12
$3

7. Opening balance Retained earnings


Net income
Dividends paid (none payable)
Stock dividend see item 5 above
Balance December 31, 2014

$227
67
(7)
(30)
$257

(b)
SORKIN CORPORATION
Statement of Cash Flows (Direct Method) Operating Activities
For the Year Ended December 31, 2014
Cash flows from operating activities
Cash receipts from customers (1)
Cash receipts for dividends (2)
Payments to suppliers for goods and services (3)
Payments to and on behalf of employees (4)
Payments for interest (5)
Income taxes paid (6)
Cash provided by operating activities

$414
6
(198)
(70)
(21)
(26)
$105

1. Sales
Decrease in accounts receivable

$410
4

$414

$11
(11)
6

$6

2. Investment income from LT Equity Inv.


Income from equity investment
Receipt of dividend from equity investment

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PROBLEM 22-12 (Continued)


(b) (Continued)

3. Cost of goods sold


Increase in inventory
Decrease in accounts payable
Administrative expenses
Decrease in prepaid expenses
4. Salaries and wages expense
Decrease in salaries and wages payable
5. Bond interest expense
Increase in bond interest payable
Amortization of bond discount
6. Income tax expense
Increase in deferred tax liability
Decrease in income tax payable

$158
5
15
22
(2)

$198

$65
5

$ 70

$28
(4)
(3)

$ 21

$27
(3)
2

$ 26

(c) If the seller of the land does not at the same time become
the creditor (by taking back a note for example) in the sale of
the land, then a third party, in this case the mortgage
company, would have become the creditor. A separate and
additional transaction would have been recorded for the
borrowing of $23 million in cash from the mortgage
company. That financing transaction would be reported on
the statement of cash flows directly as an inflow of cash
from financing activities. Entering into a financing
arrangement at the same time as buying property is often
confused as being combined. This is due to the fact that the
cash transactions involved flow through the trust account of
the lawyer handling the conveyance of the property. In the
case of Sorkin Corporation, only two entities were involved.
Consequently handling the transaction with a note
disclosure for the non-cash portion of the transaction is
appropriate.

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PROBLEM 22-13
(a)

Seneca Corporation
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014

Cash flows from operating activities


Profit (1)
$16,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of equipment (2)
$2,650
Gain from flood damage
(1,000)
Depreciation expense (3)
3,950
Patent amortization
1,250
Gain on sale of investment
(3,300)
Increase in accounts receivable (net)
(1,950)
Increase in inventory
(1,500)
Increase in accounts payable
1,100
Interest paid included in earnings
2,200
Dividends paid
(6,000) (2,600
)
Net cash flow provided by operating activities
14,100
Cash flows from investing activities
Proceeds on sale of FV-NI investments
Proceeds on sale of equipment
Purchase of equipment
Proceeds from flood damage to building
Net cash provided by investing activities
Cash flows from financing activities
Payment of interest
Payment of short-term note payable
Net cash used by financing activities
)

5,800
2,600
(17,000)
23,000

(2,200)
(600)

(2,800
25,700
13,000
$38,700

Increase in cash
Cash, January 1, 2014
Cash, December 31, 2014
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14,400

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Supplemental disclosures of cash flow information:


Cash paid during the year for:
Income taxes
5,600

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PROBLEM 22-13 (Continued)


Non-cash investing and financing activities:
Retired note payable by issuing common shares
Purchased equipment by issuing note payable

$10,000
15,500
$25,500

Supporting Computations:
1.

Ending retained earnings


Beginning retained earnings

$21,700
(5,000

)
Profit

$16,700

2. Cost of equipment sold


Accumulated depreciation (50% X $10,500)
)
Carrying amount of equipment sold
Proceeds from sale of equipment
)
Loss on sale of equipment

$10,500
(5,250
5,250
(2,600
$2,650

3. Accumulated depreciation on equipment sold


Decrease in accumulated depreciation
)
Depreciation expense
(b)
Buildings
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense
Loss on sale of equipment
Gain on flood damage
Proceeds on sale of equipment
Purchase of equipment
Proceeds on disposal of
building
Solutions Manual

2014

$40,500
(2,000)
$38,500

2013
$27,700
(5,700)
18,500
(3,300)
$37,200

$3,950
2,650
(1,000)
2,600
(17,000)
23,000
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$5,250
(1,300
$3,950
chang
e

$1,300

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Edition

Non-cash purchase of equip.

Intermediate Accounting, Tenth Canadian

14,200
(15,500)
$(1,300)

PROBLEM 22-13 (Continued)


(c)

At first glance, a financial statement reader of the statement


of cash flows might come to the quick conclusion that equal
amounts of cash flows were generated from operating and
investing activities; this is really not the case. The cash
generated from operations ($14,100) is almost exactly the
same amount as the cash generated from investing
activities ($14,400). This makes it appear as if Seneca is not
reinvesting into the business to replace ageing capital
assets. The reconciliation on the other hand takes into
account the non-cash investing and financing transaction of
the equipment of $15,500. Although some of the
replacements of assets were necessitated from the flood
damages, Seneca has demonstrated the ability to obtain the
financing to acquire the necessary capital assets.

(d) A portion of the profit came from the gain recorded on the
destruction of the building from a flood. The proceeds from
the insurance claim totalling $23,000 were classified as
investing activities, and gain had to be deducted from
income to arrive at cash flows from operating activities.
Similarly the gain on the sale of the investments must be
deducted from income as the proceeds from the sale of
investments are also classified as investing activities. These
two items help explain why the cash flow from operating
activities were lower than profit.
Cash flows from investing activities provided another large
cash increase for the year, as assets sold or destroyed were
not all replaced. The only significant outflow of cash for
investments was related to purchases of equipment.
Some refinancing from debt to equity took place as well, as
there was non-cash financing of further acquisitions of
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equipment. Outstanding dividends from the previous year


were paid.

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PROBLEM 22-13 (Continued)


(e) Under IFRS, interest paid and received and dividends paid
and received can be recognized as operating flows.
Alternatively, interest paid can be recognized as a financing
outflow while interest and dividends received can be
recognized as investing inflows. A choice is permitted for
dividends paid: a financing outflow as a return to equity
holders, or an operating outflow as a measure of the ability
of operations to cover returns to shareholders. However
management views these specific flows, once the
classification choice is made, it is applied consistently from
period to period.
(f)

(1)

For a severely financially troubled firm:


Operating:
Investing:
Financing:

Probably a small cash inflow or a cash


outflow.
Probably a cash inflow as assets are
sold to provide needed cash.
Probably a cash inflow from debt
financing (borrowing funds) as a source
of cash at high interest cost.

(2) For a recently formed firm which is experiencing rapid


growth:
Operating:
Probably a cash inflow.
Investing:
Probably a large cash outflow as the
firm expands.
Financing:
Probably a large cash inflow to finance
expansion.
For Seneca, excluding the unusual transaction of the flood,
the company is likely type (2), a company experiencing
growth.

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PROBLEM 22-13 (Continued)


(g) At first glance, an investor might come to the quick
conclusion that Senecas net cash flow provided by operating
activities ($14,100) is less than Senecas accrual basis profit
($16,700), and that the net cash flow provided by operating
activities does not support the amount of accrual basis profit
that the company has reported. Senecas reported profit, which
is affected by estimates and managements choice of accounting
policies, may be judged to be of lower quality and perhaps less
reliable. However upon analyzing Senecas net cash flow
provided by operating activities, the investor may note that a
significant return to shareholders (dividends paid of $6,000) is
classified as an operating activity and that the amount was not
deducted in the companys calculation of accrual basis profit.
The investor may conclude that Senecas quality of earnings
may be higher, with a lower margin of potential misstatement.

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CASES
Note: See the Case Primer on the Student website, as well as
the Summary of the Case Primer in the front of the text. Note
that the first few chapters in volume 1 lay the foundation for
financial reporting decision making.
CA 22-1 Papadopoulos Ltd.
Overview
-

The bank is the main user of the financial statements and will use them to
assist in determining whether a loan will be granted.

ASPE financial statements will enhance credibility and reliability.

The financial statements prepared will be different from the statements


prepared in the past (tax basis).

Further, the statement prepared by Tonya does not conform with ASPE
and must therefore be converted.

Recommendations and Analysis


Before any issues are dealt with, the statement must be redrafted as follows:
Papadopoulos Ltd.
Statement of Cash Flows
(for the year-ended December 31, 2014)
Cash from operations:
Sales
Purchases of inventory
Operating expenses (net of
depreciation)
Interest income
Interest on debt
Cash used in operating activities

Solutions Manual

$350,00
0
(250,000)
(90,000)
10,000
(30,000)
$(10,000)

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CA 22-1 (Continued)
Cash from investing:
Term deposit cashed in
Fixed asset purchases
Investment purchase
Truck purchase
Cash used in investing activities

$100,000
(100,000)
(55,000)
(50,000)
(105,000)

Cash from financing:


Shareholder loan
Truck financing
Cash from financing
activities
Net cash inflows

$150,000
50,000
200,000
$85,000

This statement shows that operations are not generating cash; rather,
cash is required to maintain operations.

This will be looked upon in a negative light by the bank, since internally
generated cash from operations is what the company should be using to
repay any loan granted.

However, since it is only the second year of operations, the company is


profitable, and the cash required to run operations is not that great, the
bank may be somewhat flexible.

That the company is liquidating what appear to be non-essential assets


(term deposit) and using the money to buy productive assets to be used to
generate income will be seen in a positive light.

That excess cash is being invested will also be seen in a positive light as
good management (i.e., will maximize return on excess cash by investing).

The excess cash is only present, however, due to a shareholder loan.

This is better than outside borrowings since the shareholders (all family)
may be more flexible if the company cannot make interest and principal
repayments on time.

In conclusion, when the financial statements are redrafted, PL will be seen in an


unfavourable light by the bank primarily because it is a new company and the
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cash flow from operations is negative. The only reason there is excess cash is
due to a shareholder loan.

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IC 22-1 Earthcom
Overview
- Public company and therefore IFRS is a constraint
-

Shares are declining in value due to the loss of one of the companys
major assets, therefore the pressure to make things look more positive
(potential for bias).

Loss of CFO auditors will have to be careful.

High risk for auditors who will have to ensure assets/income are not
overstated.

As controller (since CFO has left) it is better to be safe and provide


transparency during this time of crisis. Conservatism would be the safest
route especially since the share price has already plummeted.

Analysis and recommendations


Issue: Impairment of telecommunications lines
Leave as is
Recognize impairment
- Company is in the process of
- Severance of line represents an event
doing a substantial amount of
that reduces the potential future
work to recover the services.
benefits of the asset.
- Once this is done the asset
would retain its value.
- No reason to think that they
will not be able to find the
problem.
- Note disclosure would suffice.

- Cannot provide services to customers


and therefore not able to generate
future benefits.
- Customers have currently lost service.
- Company uncertain as to how long (if
at all) it will take to restore service as
do not have backup plan.
- They stand to lose customers over this
many customers threatening to sue.
- The company is already restoring
other lines using better and newer
technology and so these older lines
will likely be obsolete and receive less
and less use as time goes on.

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Recommendations: It is too early to tell if the asset is indeed impaired. Full note
disclosure should suffice at this point. Care should be taken at the next quarter
with this valuation since by then the company will have a better idea as to the
feasibility of restoring service.
Issue: How to treat the amounts spent on lawyers and consultants regarding
severed line.
Capitalize costs

Expense

- Without these expenditures,


significant goodwill will be lost.

- Expenditures do not add any future


value.

- Many customers may also leave


the company this is an
opportunity to show how the
company deals with a crisis.

- Really just maintaining reputation.


- Internally generated goodwill may
not be capitalized.

Recommendations: More conservative to expense as these costs are really to


maintain the status quo and do damage control.
Issue: How to account for expenditures to track down the problem
Capitalize costs
- May argue that the work being
done is creating an asset with
future benefits this will allow them
to deal with any problems in a
much more expedient way in the
future.
- As long as this has future benefit (it
does as noted above) it is
accounted for as an asset.

Solutions Manual

Expense
- Really being spent just to restore
service and put its assets back into
use.
- Is not an asset, i.e., it will not
necessarily make the service better
or more enhanced.
- With high tech equipment,
maintenance of the technology is
an ongoing cost of doing business
there is always a risk that the
technology will fail or become
outdated. The company must keep
on top of this on an annual basis.

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Recommendations: certain costs may add value (mapping) and may be
capitalized. Those costs that are being spent just to restore capacity to prior level
are maintenance and must be expensed.
Issue: How to present the funds spent on upgrading old telecommunications lines
Capitalize/treat as investing activity on
the statement of cash flows

Expense/treat as operating activity on


the statement of cash flows

- Must be able to argue that these


expenditures will provide future
benefit.

- All significant assets such as these


degrade over time and need to be
maintained.

- This sounds like it is a major


upgrade and given fast-paced
technology it could be argued that
this is an asset.

- This is merely part of the ordinary


ongoing activities of the company
to maintain the service potential of
its assets.

- May have to treat as separate


component for depreciation
purposes if the amount is
significant the expected life and
usage differs from the lines.

- This will show as an operating


activity on the cash flow statement
as this is a normal ongoing cost of
doing business that will likely recur
annually or frequently due to the
high tech nature of the assets.

- This will show as an investing


activity on the cash flow statement
as the company is investing in its
future.

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Recommendation: May be able to argue that these are capitalizable due to
changes in technology and therefore capitalization and presentation as investing
activity is acceptable.
Issue: Lawsuit
Accrue

Do not

- Company will want to settle quickly


to minimize uncertainty in
marketplace especially since the
company at present does not have
a leader.

- Too early to be able to assess


probability and measurement.

- May want to accrue a reasonable


amount for settlement so that it can
hire a new CFO and move forward
to deal with the crisis.

Recommendation: Too early to tell on this one. Do not recognize. There is no


lawsuit. The news will likely already be in the marketplace via newspapers, etc.
The company can best deal with this by putting a new CFO in place (not really a
financial reporting issue).

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TIME AND PURPOSE OF WRITING ASSIGNMENTS


WA 22-1(Time 3035 minutes)
Purposeto help the student identify and indicate whether a transaction creates
a cash inflow or a cash outflow. The student must also discuss the proper
reporting of the transaction under IFRS.

WA 22-2(Time 3035 minutes)


Purposeto help the student identify the appropriate treatment of some complex
transactions for the statement of cash flows under IFRS. The student is required
to indicate whether a transaction belongs in the investing, financing, or operating
section of the statement.

WA 22-3(Time 1520 minutes)


Purposeto provide the student the opportunity to provide advice to the
president on the effects of transactions, desperately arrived at as the means to
generate cash flows from operations in order to secure a loan. Ethical issues
must be considered by the student in arriving at the advice to the president.

WA 22-4(Time 3040 minutes)


Purposeto identify and explain reasons and purposes for preparing a
statement of cash flows and to identify the categories of activities reported in the
statement of cash flows. To identify and describe the two methods of reporting
cash flows from operations, and to describe the presentation of non-cash
transactions. The student is required to express a preference on which format he
or she believes to be preferable, and to comment on the cash flow statements
use from the perspective of an investor.

WA 22-5(Time 3040 minutes)


Purposeto provide the student with the opportunity to become familiar with the
current international accounting trends and issues. The student is required to
research IASB project and to identify discussions relevant to statements of cash
flows.

WA 22-6 (Time 1520 minutes)


Purposeto provide the student with an opportunity to understand the
differences between ASPE and IFRS and the conceptual reasons for any
differences.
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SOLUTIONS TO WRITING ASSIGNMENTS


WA 22-1
1.

2.

3.

4.

5.

6.

(a)

The earnings are treated as a source of cash and should be reported as


part of the net cash flow from operating activities in the statement of
cash flows.

(b)

There should be $800,000 of income shown in operating activities as the


first item on the statement of cash flows.

(a)

Neither.

(b)

Because depreciation is an expense it was deducted in the computation


of net income. Accordingly, the $315,000 must be added back to income
in the operating section. This is because it was deducted in determining
earnings, but it was not a use of cash.

(a)

Neither.

(b)

An adjustment to income is only necessary if the net receivable amount


increases or decreases. Because the net receivable amount is the same
before and after the write-off, an adjustment to income would not be
made. Although bad debt expense is not usually treated as a separate
item to be added back to income from operations, it is accounted for by
analyzing the accounts receivable at the net amount and then making
the necessary adjustment to income based on the change in the net
amount of receivables.

(a)

The $9,000 gain realized on the sale of the machine is a gain to be


reported on the income statement. The gain itself does not involve any
cash flows, but the proceeds from the sale do involve cash inflows.

(b)

This $9,000 gain must be deducted from net income to arrive at net cash
provided by operations. The proceeds of $54,000 ($75,000 $30,000 +
$9,000) are shown as a cash inflow from investing activities.

(a)

The change in fair value is a non-cash event so it is neither a source nor


use of cash.

(b)

This is no adjustment required to the net income in the statement of cash


flows since this unrealized gain was allocated to OCI and not net
earnings.

(a)

Neither. The $45,000 loss in value is not a cash transaction.

(b)

The loss in fair value for investment properties would have been
deducted in the computation of net income. Accordingly, the $45,000
must be added back to income in the operating section. This is because
it was deducted in determining earnings, but it was not a use of cash.
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7.

8.

9.

(a)

$75,000 use of cash should be reported as a cash outflow from


investing activities.

(b)

The $200,000 issuance of common shares and the $425,000


issuance of the mortgage note, neither of which affects cash, should
be reported as non-cash financing and investing activities. Note
disclosure is required to explain this transaction detailing the asset
purchased and the nature and total of consideration paid.

(a)

Neither.

(b)

The conversion is a significant non-cash financing activity and should


be reported in a separate schedule or note.

(a)

This redemption is a use of cash in the amount of the redemption


price of 99.5 or $99,500.

(b)

The redemption will be reported under the operating activities section


of the statement as an adjustment to income for the loss experienced
on the conversion of $1,500 ($100,000 less balance of discount
$2,000 compared to the redemption price of $99,500). The loss will be
added back to income as that portion of the transaction does not
involve cash. In the financing activities section of the statement, the
outflow of $99,500 will appear.

10. (a)
(b)
11. (a)
(b)

The proceeds from issuing bonds are a source of cash.


The proceeds of $505,000 should be reported as a cash inflow from
financing activities.
Neither.
$49,000 of accrued expense will be added back to income because it
was deducted in determining earnings, but it was not a use of cash.

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(a)

Income earned as interest and dividends from these investments that are
purchased for trading purposes and have been classified at fair value
through net income is included in income for the year. Under IFRS, the
interest received and dividends received should be disclosed separately
on the statement of cash flow and shown as an operating activity as this
income relates to investments held for trading purposes. If the indirect
approach is used, then the interest income and dividend income will be
deducted from net earnings and the actual amount of interest and
dividends received will be shown separately. In addition, assuming the
indirect method is used, gains on disposals will have to be deducted from
income, just as losses will need to be added back. Any gains or losses
from disposals of these investments would be left out of the cash flow
statement, if the direct method were adopted. Amounts accrued for
unrealized gains and losses will require adjustment to income as they do
not involve cash. Any proceeds from sale or cash spent on these
investments would be reported as cash flows in the operating activities
section of the cash flow statement as these investments were acquired
for trading purposes.

(b)

Income earned from dividends on equity investments classified as fair


value through OCI would be included in net income for the year.
However, the amount of dividends received must be separately disclosed
and can be shown as either an operating or investing activity. Therefore,
if the indirect method is used, dividend income will be deducted from net
income in the operating activities and the dividends received can be
shown as either operating or investing. Any proceeds from the sale or
purchase of these investments are treated as investing flows. Amounts
accrued for unrealized gains and losses or gains or losses on disposal
will not require adjustment to income as they are not included in income
on the income statement; they are taken to OCI and never recycled to net
income.

(c)

An investment in bonds reported at amortized cost will have the interest


earned reported on the income statement using the effective interest
method. This amount will be deducted from net earnings under operating
activities if the indirect method is used. The actual amount of the interest
received can then be either reported as an investing or an operating
activity. Any cash used to buy these bonds will be reported as an
investing activity.

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(d)

Development costs incurred and paid would be reported as investing


activities outflows on the cash flow statement. The obligation for the
mines retirement increases both the mines carrying amount and the
asset retirement obligation. This amount is a non-cash investing and
financing transaction and would be disclosed in the notes. The interest
expense for the year (that increased the liability) would have to be added
back to net income in the operating activities section (under the indirect
method) as it was a non-cash expense.

(e)

Stock options granted as compensatory rewards to top executives would


require a charge on the income statement and a corresponding increase
in equity, although no cash was given up or received. Since the amount
appears on the income statement as an expense, the expense will be
added back to income as an adjustment if the indirect format of the cash
flow statement is used to report cash flows from operations. Details of
the transaction would nonetheless be reported in the notes to the
financial statements.

(f)

The total compensation expense would have been calculated on the


grant date, based on the fair value, and recognized during the service
period. At exercise date, there will be a cash inflow amounting to the
option price per share multiplied by the number of shares issued. This
would be reported as cash inflows in financing activities. Additional
disclosures regarding the stock options, such as values of options
exercised, would be made.

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(a)

Selling current assets, such as receivables to factors and selling raw


material inventories, will generate cash flows for the company although for
amounts less than their carrying values. The sale and leaseback of
equipment will not achieve the goal of increasing cash flow from
operations, required by the bank. Rather, this transaction will lead to the
reductions in future operating cash flows from the future payments of
rents. Cash obtained from selling off equipment will be reported as a cash
inflow from investing activities. Any gains generated from the sale will be
deferred and not help profitability immediately.

(b)

The transactions that are suggested by Laraine do not cure the systemic
cash problems for the organization. In short, it may be a bad business
practice to liquidate assets, thereby incurring expenses and losses, in
order to window dress the cash flow statement.
The ethical implications are that Durocher creates a short-term cash flow
at the longer-term expense of the companys operations and financial
position. Laraines idea creates the illusion that the company is
successfully generating positive cash flows.

(c)

Laraine Durocher should be told that if she executes her plan the
company may not survive. While the factoring of receivables and the
liquidation of inventory will indeed generate cash, the actual amount of
cash the company receives will be less than the carrying amount of these
assets. The sale and leaseback will also generate cash which may be
more or less than the related propertys carrying amount, depending on its
fair value less costs to sell. In addition, the company would still have the
future expenditure of replenishing its raw materials inventories at a cost
higher than the sales price, plus the additional expense of rent from the
lease of the equipment.
As the companys (ethical) accountant, it is your responsibility to work with
the companys chief financial officer to devise a coherent strategy for
improving the companys cash flow problems. One strategy may be to
downsize the organization by selling excess property, plant, and
equipment to repay long-term debt. In addition, Durocher Guitar may be a
good candidate for a partial reorganization.

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(a)

The primary purpose of the Statement of Cash Flows is to provide


information concerning the cash receipts (cash inflows) and cash payments
(cash outflows) of a company during the period. The information contained
in the statement, together with related disclosures in other financial
statements, may help investors and creditors:
1. assess the companys ability to generate future net cash inflows.
2. assess the companys ability to meet its obligations; e.g., pay dividends
and meet needs for external financing.
3. analyze the differences between net income and the associated cash
receipts and payments.

(b)

Cash is defined as cash on hand and demand deposits. Cash equivalents


includes highly liquid investments with maturity dates of 3 months or less
from their date of purchase, and that have insignificant risk of change in
value. These definitions are the same for IFRS and ASPE. Examples of
these types of investments would be treasury bills and commercial paper
and money market funds. ASPE does not allow any equity investment to be
included in cash equivalents. IFRS allows one type and that is a mandatory
redeemable preferred share that will be redeemed within 3 months of
acquisition date. Bank overdrafts may only be included in cash and cash
equivalents if they are an integral part of the companys cash management
policies and the overdraft fluctuates between negative and positive
balances throughout the year. If the bank overdraft has been in an overdraft
position for the entire year, it will not be allowed to be included in cash and
cash equivalents. This treatment is also the same under IFRS and ASPE.

(c)

The statement of cash flows classifies cash flows as those resulting from
operating activities, investing activities, and financing activities.
Cash inflows from operating activities include receipts from the sale of goods
and services, and interest and dividends that appear on the income
statement. Under IFRS, the organization may choose to report interest and
dividends received as either operating or investing activities. Also included
are all other receipts (for example from rents and royalties) that do not arise
from transactions defined as financing and investing activities. Cash
outflows from operating activities include payments to buy goods for
manufacture, resale payments to or on behalf of employees for services, tax
payments, and all other payments that do not arise from transactions defined
as financing and investing activities. Cash inflows and outflows related to the
sale and purchases of loans and equity securities that are purchased for
trading purposes are also included in operating activities. Payments to
creditors for interest can be included as a financing or operating activity

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under IFRS. Under ASPE, the interest paid will be an operating activity if the
debt is classified as a liability and a financing activity if the debt is classified
as equity. Under IFRS, dividends paid may be classified as an operating
activity or a financing activity. Under ASPE dividends paid are financing
activities if charged to retained earnings (operating if a dividend expense).
Cash inflows from investing activities include receipts from collections or
sales of debt instruments of other companies that are reported at amortized
cost, and receipts from the sales of various property, plant, and equipment.
Cash outflows for investing activities include payments for shares of other
companies, purchases of productive property, plant and equipment, and
debt instruments of other companies. Sales and purchases of debt
instruments or shares of other companies not purchased for trading
purposes are included in investing activities. Also under IFRS, investing
activities could include dividends and interest received on these
investments, if this choice is made.
Cash inflows from financing activities include proceeds from the company
issuing its own shares or its own debt. Cash outflows for financing activities
include payments to shareholders for dividends (unless these dividends
were reported as expenses on the income statement, in which case they
would be reported in operating activities) or payments to debt holders for
retirement of its own shares and bonds. Interest paid may also be classified
as a financing activity under IFRS. Additionally, under IFRS, the company
may report dividends paid as an operating activity. Under ASPE, only if the
debt is classified as equity, can the interest paid be reported under financing
activities.
Cash flow activities directly relate to the statement of financial position in
that the changes in the SFP accounts ultimately translate into the change in
cash over the business cycle of an entity.
(d)

Cash flows from operations may be presented using the direct method or
the indirect method. Under the direct method, the major classes of operating
cash receipts and cash payments are shown separately. The indirect
method involves adjusting net income to net cash flow from operating
activities by removing the effects of deferrals of past cash receipts and
payments, accruals of future cash receipts and payments, and non-cash
items from net income. Both are permitted under IFRS and ASPE, although
both standards strongly encourage the use of the direct method. In
addition, new standards being considered under IFRS would allow only the
direct method to be used.

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The information obtained from the indirect format can be easily linked back
to the statement of financial position and the income statement and
therefore is useful from this standpoint. On the other hand, the direct format
allows for better information on gross cash flows from customers, and to
suppliers and employees, which enables better forecasting of future cash
flows.
(e)

All significant non-cash investing and financing transactions are not


reported on the statement but are required to be disclosed elsewhere on the
financial statements. Examples of common non-cash transactions are the
conversion of debt to equity and the acquiring of assets by assuming
directly related liabilities or issuing equity. For transactions that are part
cash and part non-cash, only the cash portion should be reported in the
Statement of Cash Flows.

(f)

From the perspective of an investor, while it is true that it is difficult to


assess the impact of estimates and judgement used in the preparation of
the income statement, using the cash flow from operations of the statement
of cash flow alone is not recommended when making investment decisions.
A great deal of insight into the nature of the transactions reported on all
financial statements can be derived from reading the notes to the financial
statements. As well, financial statements must be viewed together in order
to properly assess performance, financial position, and ability to generate
income and cash into the future to best ensure a return on investment to the
shareholder. While cash flow from operating activities is a strong indicator
and a very good tool, it should not be used in isolation. Also note that
although net income is arrived at by using estimates, it is important to
consider the trade-off between relevance and reliability of financial
information. If net income were to be based solely on historic costs that can
be determined reliably, the relevance of this information to investors would
be poor in helping to determine the true value of the company.

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Readers should also be aware that accounting policies can affect the cash
flows from operations. Consider a company that defers much capital-type
expenditure versus another company that expenses many similar ones. The
first company ends up reporting the cash outflow as an investing flow
whereas the other reports lower operating cash flows. This reinforces the
fact that cash flow from operations can be influenced by accounting policy
choice. Another example is the treatment of leases. Operating lease
payments are reflected as an operating outflow, but payments on capital
leases are shown partially as an operating outflow (the interest portion) and
partially as a financing outflow (the principal portion of the payment).
Securitization of receivables is another example. When receivables are
securitized, the cash inflows are reported as operating activities and will
result in an increase in operating cash flows. This is, of course, not
sustainable cash flow since the sale of receivables has only resulted from
hastening the collection of the receivables and the change in receivables
cannot recur annually.

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The Discussion Paper proposes that the statement of financial position,
statement of comprehensive income and statement of cash flows should
have similar categories as outlined below.
Statement of Financial
Position
Business
Operating assets and
liabilities
Investing assets and
liabilities
Financing
Financing assets
Financing liabilities

Statement of
Comprehensive Income
Business
Operating income and
expenses
Investment income and
expenses
Financing
Financing asset income
Financing liability
expenses

Income Taxes

Income Taxes on
continuing operations
(business & financing)
Discontinued
operations, net of tax
Other Comprehensive
Income, net of tax

Discontinued
operations
Equity

Statement of Cash Flows


Business
Operating cash flows
Investment cash flows
Financing
Financing asset cash
flows
Financing liability cash
flows
Income Taxes
Discontinued
operations
Equity

This consistency across all the statements will assist users in providing a
clearer picture of the organization in the financial statements, and a more
cohesive picture of the organizations activities.

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The Statement of Cash Flows
The following is a list of the changes and format proposed for the statement of
cash flows:
The direct method would be used (no longer would there be a choice to
use the indirect approach). The reasons for deciding that this method was
the best were: to improve user understandability; to provide better
predictive value; to increase transparency; and to enable users to see
trends that were not clear under the indirect method.
The classification would still be operating, investing and financing, but
would be based on the classification that was used for the related assets
and liabilities on the statement of financial position.
The statement of cash flow would reconcile the beginning and ending
balance of cash (and not cash and cash equivalents).
Cash receipts and payments are to be disaggregated within each section
to provide information for users. Cash flows are to be disaggregated
based on the purchase or sale of assets based on their nature, and the
issuance or settlement of liabilities, based on their nature.
In a later Staff paper, dated February 12, 2010, the Board decided that the
cash flow line items did not have to line up exactly with the line items on
the statement of comprehensive income.
Reconciliation of the Statement of Cash Flows to the Statement of
Comprehensive Income
An entity would present a schedule that reconciles the line items on the
statement of cash flows to the line items on the statement of comprehensive
income. That schedule would include the line-item captions for each of those
statements and disaggregate the differences in amounts into components that
have different predictive values, as explained below. As illustrated on pages 138
and 139 of the Discussion Paper, the resulting schedule would be a multi-column
reconciliation.
This schedule is to disaggregate the comprehensive income into the following
components:
Cash received or paid ( excluding cash transactions with owners);
Accruals and systematic allocations such as depreciation;
Recurring changes in fair value or other recurring valuation changes;
Other - which might include non-recurring valuation adjustments.
This schedule would be provided in the notes.
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There are only some minor differences between IFRS and ASPE with respect to
the statement of cash flows. Primarily, ASPE has been written using historical
Canadian practice, and has not adopted some of the differences under IFRS.
The following highlights the major differences:

Cash equivalents exclude all equity investments under ASPE. In contrast,


IFRS allows preferred shares that will be redeemed within three months
from the time of purchase to be included in cash equivalents.
Interest and dividends received are included in operating cash flows under
ASPE. IFRS allows a choice for interest and dividends received to be
either operating or investing. Also, IFRS requires that these amounts be
disclosed separately.
Under ASPE, interest and dividends paid are operating cash flows only if
recognized in net income; otherwise they are included in financing cash
flows as a result of being charged to retained earnings. If these amounts
are included in financing, then separate line disclosure is required. Under
IFRS, companies have a choice to report interest and dividends paid as
either operating or financing cash flows and these amounts must be
shown as separate line items on the statement.
IFRS requires that income tax paid be disclosed separately. ASPE does
not have this requirement but requires supplemental disclosure.
Under both ASPE and IFRS, the amount of restricted cash must be
disclosed. IFRS requires additional disclosure explaining the restrictions.
ASPE does not require this, as the goal is to reduce required disclosure in
private enterprises financial statements.

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RESEARCH AND FINANCIAL ANALYSIS


RA22-1

Shopper Drug Mart

(a) A comparison of the major categories of sources and uses of cash for 2011
and 2010 is provided below.
(CDN$ in thousands)
Net cash from operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase in cash
Cash beginning of the year
Cash at end of year

2011
973,838
(349,172)
(570,454)

2010
828,201
(424,675)
(383,563)

54,212
64,354
118,566

19,963
44,391
$64,354

The cash flows from operations have been very steady over the past two years
with minor fluctuations in amount. In 2010, the company had a positive cash
flow and in 2011, this remained positive. The main reason for this is steady
cash inflows from net earnings, and the adjustments related to non-cash
charges for depreciation and amortization.
Cash flows for investing activities were negative in both years. In 2011, in
particular, the net cash outflow from investing activities was $349,172
thousand compared to $424,675 thousand in 2010. The main reason for this is
due to the fact that SDM made fewer acquisitions and development of property
and equipment.
As for the financing activity outflow increase in 2011, it is almost entirely
explained by the companys repurchase of common shares for a total of
$206,779 thousand.
In 2011 and 2010, with strong positive operating cash flows that were able to
cover investing and finance outflows, the company was able to increase net
cash by $54,212 and $19,963 thousand.

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RA22-1 (Continued)
(b)

SDM uses the indirect method to report operating cash flows in the
statement of cash flows. The indirect approach is useful in giving the user
information about how the net earnings of the company translate into cash.
The indirect method provides adjustments to net income and arrives at a
single cash flow from operations line. It does provide a useful link between
the statement of cash flows and the income statement and balance sheet.
This format is the most commonly used format for public companies and
has the advantage of being a familiar format to users. In contrast, the direct
approach would provide more detailed information on the various sources of
cash flows in operations, and provide more predictive value and more
transparency to users.

(c)

Using the details of the changes in working capital accounts taken from
Note 27 to the financial statement, the amounts can be calculated as below.

(CDN$ in
thousands)
Trade
receivable
Inventories
Accounts
payable and
accrued
liabilities

January 1,
2011
balances
432,089 DR
1,957,525 DR
990,244

CR

2011 Cash
inflow
(outflow)
(36,242)

Dec. 31, 2011


Balances
Calculated

Dec. 31,
2011
Balances
Actual

468,331

DR

493,338

(84,242) 2,041,767

DR

2,042,302

119,891 1,110,135 CR

1,109,444

There are insignificant differences between the calculated amounts and the
actual balances at December 31, 2011, except for accounts receivable, as
follows:
The calculated balance of trade receivables is lower by $25,007, likely due
to the change in the allowance for doubtful accounts.
The calculated balance of inventories is lower by $535;
The actual balance of accounts payable and accrued liabilities is lower by
$691.

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RA22-1 (Continued)
(d)

The interest paid must be deducted and the finance costs must be added
back to net income because the statement of cash flows must disclose the
actual interest paid. As seen in SDMs statement of cash flow, the interest
paid has been classified as operating cash flows and the amount of finance
expense is net of amounts capitalized based on SDPs weighted average
cost of borrowing (the capitalized amount is attributed to those items of PPE
which meet the definition of a qualifying asset that takes a substantial
period of time to get ready for its intended use).

(e)

Based only on the information provided in the financing section of the cash
flow statement, it is not possible to be sure whether the debt-to-equity ratio
increased or decreased in 2011 or 2010. This is because, although the
increase or decrease in debt from cash transactions can be determined
from this information, the net increase or decrease in equity involves other
amounts such as net income. Also, because the statement of cash flows
does not show non-cash financing transactions, this information is not
sufficient on its own to determine whether the debt to equity ratio increased
or decreased. In addition, although there was $206,779 thousand cash paid
to repurchase the companys own shares, this amount does not correspond
exactly to the amount of the reduction in share capital that appears in the
consolidated balance sheet.

(f)

SDMs operating capability was expanding in 2011 in two ways: by


acquiring businesses (minimal amount) and by purchasing or developing
property and equipment and intangible assets. In 2010, the amount of
capital expenditures on property, plant and equipment was higher but not by
a significant amount and SDM would still be considered to be expanding its
operational capability.
These investments are likely to increase the companys future operating
cash flows as the company can produce higher revenues leading to higher
income from operations. The Company acquired properties that will be
utilized as stores in the future, further contributing to future cash inflows,
offset somewhat by expected outflows for repayment of debt used to
finance the expansion, as financing cash outflows.

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RA22-1 (Continued)
(g)

The Debt to Total Assets ratio is a solvency ratio that measures the
percentage of total assets provided by creditors (2011 =
(3,032,480/7,300,310 = 41.5%]. It provides a measurement of whether a
company could add to its debt financing if needed. In addition Free Cash
Flow can be used to assess SDMs financial flexibility, based on cash
provided by operating activities in comparison to capital expenditures and
dividends [973,838 (10,496 + 341,868 + 53,836) 211,479]. Overall the
free cash flow is quite significant at $356,159 thousand and the debt/total
assets ratio seems quite reasonable. It is also relatively easy to assess
SDMs financial solvency and financial flexibility in general terms, as the
financial performance and cash flows have been quite steady the past two
years. In 2010 and 2011, the cash flows from operations were positive and
in substantial amounts which means that it was able to cover the capital
expenditures of the company.
In addition to solvency, it appears that the companys liquidity did not
change significantly from 2010 to 2011. In 2010 the current ratio was 1.66
and in 2011 the ratio reduced to 1.52. The decline in the ratio is primarily
due to a current portion of long-term debt in the amount of $249,971
thousand coming due in the next year. The current ratio remains strong and
demonstrates that the company has flexibility to meet short term obligations
as they come due in spite of large amounts of debt coming due in the next
fiscal year. From an overall solvency perspective, the amount of total
liabilities continue to be much lower than the total amount of shareholders
equity.

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Intermediate Accounting, Tenth Canadian

BOMBARDIER INC

(a) Bombardier Inc. manufactures and sells state-of-the-art trains and airplanes.
As a result, they have a long manufacturing and cash cycle. As described in
note 2:
Revenues from long-term contracts related to designing, engineering or
manufacturing specifically designed products (including rail vehicles and
component overhaul) and service contracts are recognized using the
percentage-of-completion method.
Revenues from the sale of commercial aircraft are recognized when the
aircraft has been delivered, risks and rewards of ownership have been
transferred, the amount of revenue can be reliably measured, and collection
of the related account receivable is reasonably assured.
Revenues from the sale of aircraft fractional shares are considered together
with the related service agreement. So, revenues from these sales are
recognized over the period during which the related services rendered to the
customer, generally five years. At the time of sale, the proceeds from the
sale are initially recorded in other liabilities.
Revenues from sale of pre-owned aircraft and spare parts are recognized
when the goods have been delivered, risks and rewards of ownership have
been transferred to the customer, the amount of revenue can be reliably
measured, and collection of the related receivable is reasonably assured.
As can be seen from the above, there may be significant timing differences
between the time that cash is received on a sale or from billings on long-term
construction contracts and the time revenue is recognized. In addition, there will
also be significant differences in timing as to when cash payments are made for
costs and costs are reported in net income.

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RA22-2 (Continued)
(b) The schedule below shows the net income and operating cash flows for each
year. Note the change in year end from January 31, to December 31, will
affect comparisons.
In US$ millions

2012

2011
(11 months for
some parts of
Bombardiers
business)

Net income

598

837

1,348

243

750

(594)

Year over year percentage increases


(decreases) in net earnings

(29%)

8%

Year over year percentage increases


(decreases) in operating cash flows

455%

(86%)

Net cash flow from operating activities


Difference

For 2012 and 2011, the net earnings were higher/lower than the operating cash
flows by US$750 million and US$594 million, respectively. It appears that
operating cash flows do not trend by the same amount or in the same direction
as earnings as can been seen through the volatile figures. From 2010 to 2011,
although net income increased by 8%, operating cash flows actually declined by
86%. From 2011 to 2012, both net income and operating cash flows
declined/increased by significant amounts, (29%) for net income and 455% for
operating cash flows.
These large differences can be explained in part by the exceeding large
decrease in Net change in non-cash balances in the 2011 statement of cash
flows (an amount of over US $1 Billion). As explained in note 28 to the December
31, 2011 financial statements this amount is made up in large part by a single
change related to the balances of advances and progress billings, in excess of
related long-term contract inventories.

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RA22-2 (Continued)
(c) The schedule below highlights the causes of significant differences between
net income and operating cash flows. Note 29 (2012 financial statements)
provides information for major differences in the non-cash balances.
US$ millions

2012

2011

Net income

598

837

775

Amortization

371

410

371

Total of Other Non-cash items

(17)

89

89

Changes in non cash working capital

396

(1,028)

457

1,348

243

1,692

Significant changes period over period


(Note below):

2012

2011

Jan.
31,2011

Change in inventories

(205)

(148)

303

Change in trade and other payables

348

156

143

Advances and progress billings in excess


of related long term contract inventories

102

(436)

392

Advances on aerospace programs

599

(128)

(247)

Retirement benefits liability

(88)

(178)

(209)

(360)

(294)

75

396

(1,028)

457

Net cash flow from operating activities

Jan.
31,2011

Changes in non cash working capital:

Total of other items


Net change in non-cash balances.

Note: Often the change in the balance sheet account will not agree to the
change as reported in the cash flow statement due to non-cash transactions that
might take place.
As can be seen from the above schedule, there are significant changes in
inventories, accounts payable, advances and billings in excess of long term
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contracts and advances on aerospace programs. All of these accounts are


impacted by the timing of recognizing revenue (and related costs) and cash
receipts from customers and payments for expenses. These large variations
each year indicate that cash flows for this particular company from operating
activities are very different from reported earnings.

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RA22-2 (Continued)
(d) As seen from the above analysis, predicting of cash flows will be extremely
difficult given the large variations from year and year, with little tie to net
earnings trends. In this case, a direct approach might be more helpful, given
that the cash flows from customers and payments to suppliers and
employees would be more transparent. Using the indirect approach, it is not
possible to calculate the cash receipts and cash payments from normal
operating activities.

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AltaGas INC

(a)
In thousand of $
Cash inflow from operations
Cash used in investing activities
Cash provided by financing activities

2012

2011

146,357

185,402

(1,624,464)

(564,358)

1,487,141

380,808

9,034

1,852

Net change in cash and cash equivalents

Altagas Inc. is not financing its capital investments using cash flow from
operations. As discussed in note 3 to the financial statements, cash in the
amount of $771,315 was spent during the fiscal year ending December 31,
2012 for the acquisition of Semco. This acquisition was financed by the
issuance of long-term debt and the issuance of common and preferred
shares.
The cash flow from operations are similar to the amount of dividends paid
during the year to the common and preferred shareholders. Dividends paid
totaled $145,333 thousand.
To the extent that AltaGas can obtain the necessary financing from the
issuance of debt and shares to finance expansion, it can continue to acquire
other business and pay out dividends to its shareholders.

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RA22-3 (Continued)
(b)
In thousands of $

Opening balance for property, plant and equipment

2,486,050

Depreciation, depletion and amortization from income


statement

(102,128)

Acquisition of property, plant and equipment from


statement of cash flows

768,651

Business acquisitions (per statement of cash flows;


includes acquisition of Semco (note 3)

806,014

Calculated balance

3,958,587

Unreconciled difference

(9.421)

Closing balance on Consolidated Balance Sheet

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RA22-4
(a)

Intermediate Accounting, Tenth Canadian

ALLON THERAPEUTICS INC. VERSUS


ONCOTHYREON INC. COMPARATIVE ANALYSIS

Allon Therapeutics and Oncothyreon are in the biotechnology and


pharmaceutical industries. Their primary objective is the discovery and
development, through research, of new drugs and products for the
treatment of diseases. As such they are not manufacturers or distributors
of product and so their sources of revenue (if any) are from the sale of
patents or technology developed through their efforts. During the many
years in which the investment of the research is performed, very little
revenue might be generated. The statements of operations of
Oncothyreon reveal revenue from collaborative and licensing of some of
its technology to other research firms or to pharmaceutical companies.
The only source of income on the statement of operations for Allon
Therapeutics Inc. is from interest and other income.
Because of the modest amounts of revenue realized compared to the
significant research and development costs expended, predictably, these
companies experience continued losses. Since the majority of the activity
is basic research, the expenditures do not qualify to be capitalized and
later amortized. The conditions under which this would be allowed are
very restrictive and are usually only applicable at the end of the
development phase of a product or process.
In general, investors in this industry know and expect the operating results
to be negative. They continue to invest in these companies on the hopes
of realizing a substantial return on their investment in the future when a
powerful and lucrative drug is developed and sold to the giant
pharmaceutical firms for subsequent sale and distribution.
The large and continued losses on the statements of operations are
therefore not a surprise to anyone and are not a sign of failure. Success is
measured rather in the progress towards the development of lucrative
products, which can bring large royalties or gains from the sale of the
product and/or technology itself.

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RA22-4 (Continued)
(b)

In order to finance what are expected to be several years of losses,


biotechnology companies must obtain long-term financing. Since debt is
impractical considering the risks surrounding the companys future ability
to repay debt, the sources of financing are generally from equity. Large
sums of cash are obtained from the sale of shares. Share offerings are
done every few years to replenish cash and cash equivalents to fund the
company for the next few years. Per the statement of cash flows of Allon
Therapeutics, large cash inflows occurred in fiscal year 2010 of $9.9
million from proceeds from convertible royalty and revenue agreement.
These inflows assisted in offsetting the cash outflows from operations of
2010 and 2009 of $13.0 million.
This approach to financing is similar for Oncothyreon, which had large
amounts of cash received from shares and warrants issues of $13.7
million in 2010. The statement of financial positions of both companies
show high levels of cash and short-term investments and capital stock.
For Oncothyreon, the warrants issued in 2010 are reported as liabilities as
they have a price that may vary under certain circumstances and may be
required to be settled in cash. The high levels of capital stock are needed
to offset the huge deficits that have been accumulated over the years.

(c)

For both companies, in the last two fiscal years, it appears cash was
mainly used for operations.
Since these companies do not make substantial investments in property,
plant, and equipment, their investment activities are mostly restricted.
Oncothyreon invested cash from the issuance of common shares in shortterm investments and later liquidated to fund operations. In 20108
Oncothyreon had large cash inflows from the issue of common shares and
warrants. In both years, small amounts were invested in property, plant
and equipment, representing $324 thousand in 2010, $1.4 million in 2009
and $744 thousand in 2008. In both years, Allon invested small amounts in
property and equipment, totalling $13,195 in 2010 and $22,533 in 2009.
For both companies, financing activities are principal sources of cash.
Cash generated from the sale of common shares is used to finance
current and future years operations. It appears that Allon invested the
cash from the issue of common shares in highly liquid short-term
investments, which were classified as cash and cash equivalents (e.g.
short-term investments with terms to maturity when acquired for three
months or less), as the statement of financial position shows the large
balance of cash and cash equivalents and no account for short-term
investments.

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RA22-4 (Continued)
(d)

Due to the nature of the operations and the expectations of shareholders,


biotechnology companies do not have substantial investments in property,
plant, and equipment. Their ability to obtain debt financing is restricted by
the risk involved concerning the companys ability to repay debt from
future operations. Therefore, equipment might be financed through capital
leases or from the sale of equity instruments. Facilities are rented instead
of owned. This provides more flexibility to the companies involved
although the overall costs might be higher. This strategy is confirmed by
the modest amounts of property and equipment reported on the balance
sheets.
Other businesses that are able to generate cash from operations and
demonstrate an ability to service debt can expect to be financed partially
with debt. They can therefore obtain the financing necessary to make
long-term investments in plant and facilities. In those industries it would
not be surprising to find balance sheets with higher amounts in both
property, plant and equipment assets and long-term debt.

(e)

Because of the continued commitment on the part of shareholders to


provide the necessary equity financing required by these companies to
continue their research activity, Allon and Oncothyreon are in fact very
liquid companies. They ensure that the amounts of cash and cash
equivalents and short-term investments are at a level adequate to
continue operating well into the future to reach their goals. So long as the
biotech firms can demonstrate progress toward reaching the discovery
and development of new products, investors will continue to fund these
businesses by purchasing more common shares and warrants. This
explains why investors are not necessarily as concerned about the
financial condition of the company in which they invest as they are about
the progress reports concerning research results provided by the firms on
a regular basis.

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Intermediate Accounting, Tenth Canadian

NESTL GROUP

(a) The amounts of cash inflows and outflows at the sub-total level in 2012 and
2011 are presented below.
(in millions of Swiss Francs or CHF)
Operating
Investing
Financing
Currency translations
Net increase/decrease
Cash and Cash Equivalents, beginning of the year
Cash and Cash Equivalents, end of the year

2012

2011

15,772
(14,587)
(57)
(226)
902
4,938

10,180
(4,508)
(8,810)
19
(3,119)
8,057

5,840

4,938

The operating cash flows in 2012 were enough to cover cash outflows from
both investing and financing activities. During 2012 major investments were
made in the acquisition of businesses. After considering an outflow due to
currency translations, the net impact was an increase of CHF 902 million in
cash and cash equivalents. The major reason for the decrease in the cash
outflows from financing activities came from the purchase of treasury shares
in 2011 (5,480 CHF) vs. 2012 (532 CHF) (together with the impact of the
issuance in 2012 of bonds and other non-current financial debt of 5,226 CHF
vs. 688 CHF in 2011)
For both 2011 and 2012, the company is using excess cash flows from
operations, after including the impact of investing cash flows to buy back
shares and pay dividends to shareholders.

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RA22-5 (Continued)
(b) Information is taken from the statement of cash flows and note 17.
In millions of CHF

2012

2011

Profit for the year (Note 17.1)

11,060

9,804

Share of results of associates

(1,060)

(866)

Depreciation and amortization

3,150

2,925

268

(1,280)

(219)

(628)

Trade payables

807

497

Other current assets

122

(733)

1,010

161

634

300

15,772

10,180

Inventories
Trade receivables

Other current liabilities


Total of other smaller amounts
Operating cash flow

As can be seen from the above schedule, the profit each year and the large
amounts of depreciation, and amortization add backs resulted in significant
operating cash flow in 2011 and 2012, and accounted for much of the
increase in operating cash flow.

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RA22-5 (Continued)
(c) Investing activities presented on Nestls statements of cash flows show the
details of investing cash transactions for 2012. The major items are capital
expenditures and business acquisitions, the latter being substantially higher in
2012 when compared to 2011. There was a small amount of inflow from the
disposal of a business and sale of assets and financial investments. Much of
the investment activity outflows made in 2011 were funded by the sale of
short-term financial investments in 2011.
The majority of the recurring outflows from financing activities occurred for the
payment of dividends. Sources of cash came from the issuance of bonds and
other non-current financial debt, particularly in 2012. There were also sales
and repurchases of treasury shares, the latter being much more significant
during 2011.
(d) As indicated in note 17 and cash flow statement, the company paid or
received the following amounts:
In millions of CHF
Finance expense (not necessarily amount
paid)
Financing income (not necessarily
amount received)
Taxes paid
Dividends received from associates
Dividends paid

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Amount Classification
(591)

Operating

110

Operating

(3,201)

Operating

446

Operating

(6,417)

Financing

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