Chapter 42

Statement of Cash Flows

PROBLEM 42-1: TRUE OR FALSE

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

PROBLEM 42-2: TRUE OR FALSE

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

PROBLEM 42-3: MULTIPLE CHOICE – THEORY

1. D 6. D 11. D
2. B 7. D 12. C
3. A 8. D 13. D
4. C 9. A 14. C
5. D 10. C 15. D

PROBLEM 42-4: THEORY & COMPUTATIONAL

1. D

2. D

3. A

4. B

5. D

6. B

7. C

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8. B

9. D

10. A

11. A

12. B

13. D

14. C

15. D

16. Solution:

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

Cash flows from operating activities:

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

Cash flows from financing activities:

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

(1)

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

end. 30,000

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17. Solution:

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

Cash flows from operating activities:

Net income .............................. ₱ 45,000
Adjustments:
- Gain on sale of investment in bonds ₱ (2,250)
- Gain on sale of equipment ........... (750)
+ Depreciation expense ................ 75,000
- Increase in accounts receivable ..... (3,750)
- Increase in merchandise inventory ... (24,000)
+ Decrease in prepaid insurance ....... 375
- Decrease in accounts payable ........ (82,875)
- Decrease in salaries payable ........ (7,500)
- Decrease in notes payable ........... (112,500) (158,250)
Net cash used in operating activities ... ₱(113,250)
Cash flows from investing activities:
Sale of investment in bonds ₱ 90,000
Sale of equipment ..................... 4,500
Purchase of equipment ................. (310,125)
Net cash used in investing activities ... (215,625)
Cash flows from financing activities:
Proceeds from bond issue .............. ₱375,000
Payment of cash dividends ............. (22,500)
Net cash provided by financing activities 352,500
Net increase in cash .................... ₱ 23,625
Cash at beginning of year ............... 63,750
Cash at end of year ..................... ₱ 87,375

18. Solution:

Top Ten Clothiers Inc.

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

Cash flows from operating activities:

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

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 Payment of dividends ................ (90,000)(1)
Net cash flow used in financing (150,000)
activities ..........................
Net decrease in cash .................. ₱ (197,000)
Cash at beginning of year ............. 240,000
Cash at end of year ................... ₱ 43,000

Computations:

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

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

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

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

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

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

Retained earnings
300,000 beg.
Net loss 5,000
Dividends 90,000
end. 205,000

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PROBLEM 42-5: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Profit 420,000
Gain on sale of equipment (7,000)
Depreciation expense 72,800
Net cash from operating activities 485,800

2. A
Solution:
The entry for the sale of the equipment is reconstructed as follows:
2002 Cash (squeeze) 25,200
Accumulated depreciation 16,800
Equipment 35,000
Gain 7,000

Selling price of equipment sold (see journal entry) 25,200

Cash payment for equipment purchased (28,000)
Net cash used in investing activities (2,800)

3. C
Accounts receivable
Jan. 1 108,000
Sales on account and Cash collections
cash sales 2,190,000 2,146,000 (squeeze)
152,000 Dec. 31
4. B
Solution:
Profit for the year 360,000
Amortization 20,000
Depreciation 60,000
Increase in accounts receivable (140,000)
Increase in inventory (48,000)
Decrease in accounts payable (76,000)
Increase in salaries payable 28,000
Net cash from operating activities 204,000

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

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

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

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

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

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

outflow under financing activities.

10. C

11. D
Solution:
Profit 450,000
Increase in accounts payable 9,000
Decrease in prepaid rent 12,600
Increase in accounts receivable, net (17,400)
Cash flow from operating activities 454,200

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12. D
Solution:
Inventory
beg. 22,500
Net purchases (squeeze) 142,500 135,000 Cost of goods sold
30,000 end.

Accounts payable
19,500 beg.
Payments (squeeze) 149,000 142,500 Net purchases
end. 13,000

13. A (See solution below)

14. B (See solution below)

15. A
Solution:
Cash receipts from customers 200,000
Cash receipts from dividends on long-term investments 30,000
Cash payments for wages and other operating
(120,000)
expenses
Cash payments for insurance (10,000)
Cash payments for taxes (40,000)
Cash flow from operating activities 60,000
Cash receipts from repayment of loan made to another
220,000
entity
Cash payment to purchase land (80,000)
Cash flow from investing activities 140,000
Cash receipts from the issuance of ordinary shares 400,000
Cash payments for dividends (20,000)
Cash flow from financing activities 380,000
Net cash flows for the period 580,000

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PROBLEM 42-6: EXERCISES – COMPUTATIONAL

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

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

2. Solutions:

Requirement (a):

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

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

Requirement (b):

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

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

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

Cash flows from operating activities:

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

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

5. Solutions:

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

Requirement (b):
Profit 15,000
Depreciation expense 30,000
Decrease in A/R 42,000
Decrease in Inventory 10,000
Decrease in A/P (30,000)
Cash flow from operating activities 67,000

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Requirement (c):
Collections from customers (260K + 490K - 218K) 532,000
Payments to suppliers (see requirement ‘a’ above) (370,000)
Other expenses (see solution below) (95,000)
Cash flow from operating activities 67,000

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

6. Solution:

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

Cash flows from investing activities:

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

Cash flows from financing activities:

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

7. Solution:

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

Cash flows from operating activities:

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

8. Solution:

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

Cash flows from operating activities:

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

9. Solution:

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

Forecasted,
Description 2002 12/31/03 Explanations
Sales ₱3,172,000 ₱6,000,000 Given.
Same percentage of sales
Cost of Goods 2,532,000 4,789,407 as last year.
Sold
Gross Margin 640,000 1,210,593
Depreciation Same percentage of
Expense 14,576 28,224 PP&E as last year.
Other Operating Same percentage of sales

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 Expenses 122,684 410,134 as last year.
Operating Profit 502,740 772,235
Interest Expense 142,740 119,400 Same as prior year: 15%
of bank loan
Income before
Taxes 360,000 652,835
Income Taxes 108,000 195,850 Same as prior year: 30%
of Income before Taxes
Net Income 252,000 456,985

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

Cash flows from operating activities:

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

Cash flows from investing activities:

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

Net increase in cash and cash equivalents .... ₱ 80,000

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

10. Solution:

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

Cash flows from operating activities:

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

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 Net cash flows from operating activities ... ₱4

Cash flows from investing activities:

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

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