PA-6.

Suggested solution:
Item Transaction Categorization on the statement of cash flows
1. Sale of land at a loss C
2. Gain on the sale of equipment G (deducted from net income in the operating
activities section when the indirect method is used)
3. Repurchasing own shares F
4. Receipt of interest H (cash inflow from operating activities or
investing)
5. Purchase of an at fair value through I (this forms part of cash and cash equivalents, the
profit or loss investment designated change of which must be explained)
as a cash equivalent
6. Depreciation expense G (added to net income in the operating activities
section when the indirect method is used)
7. Equipment acquired under a G (if significant, reported in the notes to the
financing lease financial statements)
8. Payment of dividends H (cash outflow from operating activities or
financing)
9. Other comprehensive income G
10. Impairment loss on a patent G (added to net income in the operating activities
section when the indirect method is used)

PA-10. Suggested solution:

a.
Hobnob Corp.
Cash Flow Statement (partial)
Year Ended December 31, 2018
Cash flows from operating activities
Net income $125,000
Adjustments for:
Depreciation 8,000
Gain on sale of investment acquired for trading purposes (2,000)
Loss on sale of investment acquired for other than trading
1,000
purposes
Goodwill impairment loss 10,000
Decrease in accounts receivable 32,000
Sale of investment acquired for trading purposes 12,000
Decrease in interest receivable 3,000
Net cash from operating activities $189,000

b.
The stock dividend is a non-cash activity and is not reported on the cash flow statement. Note
disclosure is appropriate.
The $8,000 proceeds from the sale of the securities acquired for other than trading purposes is reported
as an increase in the cash flows from investing section.
The $32,000 in cash dividends paid ($20,000 $12,000) is reported as a cash outflow from financing.
PA-11. Suggested solution:

a.
Jill K. Ltd.
Statement of Cash Flows (partial)
Year Ended December 31, 2018

Cash flow from operating activities

Cash receipts from customers $ 630,000 $650,000 sales $20,000 increase in AR
$325,000 COGS + $15,000 decrease in
Cash paid to suppliers (320,000)
inventory $10,000 decrease in AP
Selling and administrative
(200,000)
expenses paid
Cash generated from operating
110,000
activities
$12,000 interest expense + $1,000 increase
Interest paid* (11,000)
in interest payable account
Income taxes paid (30,000)
Dividends paid* (10,000)
Net cash from operating
$ 59,000
activities

* Note that while interest paid and dividends paid can also be recorded as a financing activity, Jill
has adopted a policy of reporting this type of transaction as an operating activity.
b.
The sale of the at fair value through other comprehensive income investment will be
recorded as an $8,000 cash inflow from investing. The $1,000 loss on sale does not
involve cash and is not reported on the statement of cash flows prepared using the
direct method.
Depreciation expense does not involve cash and is not reported on the statement of
cash flows prepared using the direct method.

PA-37. Suggested solution:

a.
Golf Is Great Corp.
Statement of Cash Flows
Year Ended December 31, 2018

Cash flows from operating activities

Net income $27,000
Adjustments for:
Depreciation 20,000
Loss on sale of at fair value through other comprehensive income
3,000
investment
Increase in inventory (10,000)
Increase in accounts payable 10,000
Net cash from operating activities $50,000

Cash flows from investing activities

Sale of at fair value through other comprehensive income securities 19,000
Net cash from investing activities 19,000

Cash flows from financing activities

Dividends paid (25,000)
Issued preferred shares 20,000
Bank loan payment (10,000)
Cash flow used in financing activities (15,000)

Net increase in cash 54,000

Cash, January 1, 2018 30,000
Cash, December 31, 2018 $84,000

b. The issuance of bonds to acquire land will be disclosed in the notes to the financial
statements if deemed to be material.

c.
Golf Is Great Corp.
Balance Sheet
As at December 31, 2018

Cash $ 84,000 Accounts payable $ 30,000

Inventory 60,000 Other current liabilities 60,000
Other current assets 60,000 Bank loans 40,000
Investmentsat fair value 18,000 Bonds payable 200,000
through other comprehensive
income
Plant and equipment (net) 80,000 Share capital 30,000
Land
180,000 Retained earnings 122,000
$482,000 $482,000

d. Cash paid as dividends may alternatively be shown as a cash outflow from operating
activities. Had Golf adopted this method of presentation, net cash from operating
activities would have decreased $25,000 to $25,000 and net cash flows from financing
activities would have increased $25,000 from a $15,000 outflow to a $10,000 inflow. The
net increase in cash would remain unchanged at $54,000.
PA-44. Suggested solution:

a.
Zippo Ltd.
Statement of Cash Flows
Year Ended December 31, 2016

Cash flows from operating activities Explanation

Net income $ 289,100
Adjustments for:
Depreciation 334,400
Intangibles amortization 9,000
Deferred development cost amortization 1 65,000
Interest expense 75,000
Income tax expense 300,000
1,072,500
Gain on sale of fixed assets 2 (23,000)
Decrease in accounts receivable 3 70,000
Increase in inventory (77,000)
Decrease in accounts payable (3,000)
Cash generated from operating activities 1,039,500
Income taxes paid 4 (290,000)
Net cash from operating activities $749,500

Cash flows from investing activities

Proceeds from sale of capital assets 422,000
Acquired capital asset for cash 5 (708,000)
Payment of deferred development costs (212,000)
Net cash used in investing activities (498,000)

Cash flows from financing activities

Interest paid 6 (89,500)
Dividends paid 7 (100,000)
Net cash used in financing activities (189,500)
Net increase in cash 62,000
Cash and cash equivalents January 1, 2016 110,000
Cash and cash equivalents December 31, 2016 $172,000

Explanations
1. It is instructive to use a T-account to help determine the amortization expense pertaining to the
deferred product development costs during the year:

Deferred Product Development Costs

Opening balance 417,000
Given (expenditure) 212,000
Solve for amortization expense 65,000
Closing balance 564,000
2. To determine the gain or loss on sale we must first ascertain the net book value of the asset
disposed of. We are given the cost hence we must determine the accumulated depreciation on the
asset. Again, it is instructive to use a T-account:

Accumulated
Depreciation
Opening balance 487,000
Given (depreciation expense) 334,400
Solve for accumulated depreciation on asset sold 171,000
Closing balance 650,400

$570,000 cost $171,000 accumulated depreciation = $399,000 net book value. $422,000 sales
proceeds $399,000 net book value = $23,000 gain on sale

3. Net accounts receivable declined [($375,000 $15,000) ($300,000 $10,000)] = $70,000

4. Income tax expense less the increase in the income tax payable account [$300,000 ($12,000
$2,000)] = $290,000

5. Using a T-account

Capital Assets
Opening balance 1,396,000
Exchange of shares for equipment 450,000
Givenequipment sold 570,000
Solve for cost of capital assets acquired 708,000
Closing balance 1,984,000

6. $75,000 interest expense + $14,500 amortization of bond premium = $89,500 cash paid

7. Using a T-account

Retained Earnings
Opening balance 969,000
Net income 289,100
Solve for dividends paid 100,000
Closing balance 1,158,100

b. Zippo should disclose that it issued shares to acquire equipment.

c. Before making a decision as to whether to invest in Zippo, I would review its past results for
purposes of trend analysis as well as compare this years results to that of their competitors. As an
investor I am interested in the profitability, growth rate, and financial stability of Zippo. Its
dividend payout ratio is not that important to me as I am not currently in need of investment
income. This aspect may be important to other classes of investors, such as retirees, however.

Also, a fundamental question that needs to be answered is how much Zippos shares are selling
for. What is the price/earnings ratio? What is the dividend yield based on market values?
For the year ended December 31, 2016, Zippos cash from operating activities of $749,500 on
sales of $2.511 million was extremely strong and is a positive indicator. A possible detracting
factor is that of the $212,000 cash outflow related to funding the deferred development costs.
Further investigation is required to ascertain how close this project is to completion and the
downstream impact on cash flow. Cash used in financing activities are nominal, which reflects the
companys low financial leverage (debt to equity) level. The dividend payout ratio of 35%
($100,000 / $289,100) is healthy, even more so considering that the companys cash position
improved during the year.

Initial indicators are positive. However, as stated above, further analysis is required with respect
to the companys historical performance; its performance relative to its peer group; the prospects
and cash flow implications of the product undergoing development; and the price of the
companys shares.

PA-45. Suggested solution:

Zippo Ltd.
Statement of Cash Flows (partial)
Year Ended December 31, 2016

Cash flows from operating activities

Cash receipts from customers ($2,511,100 sales + $70,000 decrease $2,581,100
in AR)
Cash paid to suppliers ($1,256,000 COGS $3,000 decrease in (1,336,000)
AP $77,000 increase in inventory)
Other expenses ($256,600 $23,000 gain on sale + $65,000 (205,600)
product development amortization + $9,000 intangibles
amortization)
Cash generated from operating activities 1,039,500
Income taxes paid ($300,000 income tax expense + $10,000 (290,000)
increase in deferred income taxes payable)
Net cash from operating activities $749,500