Statement of Cash Flows

CHAPTER 13
STATEMENT OF CASH FLOWS

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB Item LO LOD Bloom’s CPA AACSB
True-False Statements
1. 1 E K F AN 12. 1 M K F AN 23. 3 M K F AN
2. 1 M K F AN 13. 1 M K F AN 24. 3 E K F AN
3. 1 M K F AN 14. 1 E K F AN 25. 3 E K F AN
4. 1 E K F AN 15. 1 E K F AN 26. 4 M C F AN
5. 1 E K F AN 16. 1 E K F AN *27. 5 M K F AN
6. 1 M K F AN 17. 1 M K F AN *28. 5 H C F AN
7. 1 M K F AN 18. 2 E C F AN *29. 5 M AP F AN
8. 1 M K F AN 19. 2 H K F AN *30. 5 E K F AN
9. 1 E K F AN 20. 2 M C F AN *31. 5 M C F AN
10. 1 M K F AN 21. 3 E K F AN *32. 5 M C F AN
11. 1 M K F AN 22. 3 E K F AN *33. 5 M C F AN
LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting
AACSB: AN = Analytic
*This topic is dealt with in an Appendix to the chapter.
Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
13 - 2 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(CONT’D)
LO Bloom’ CP AACS L LO Bloom’ CP AACS L LO Bloom’ CP
Item LO Item Item AACSB
D s A B O D s A B O D s A
Multiple Choice Questions
34. 1 M C F AN 63. 2 H C F AN 92. 3 M AP F AN
35. 1 E K F AN 64. 2 M C F AN 93. 3 M AP F AN
36. 1 E K F AN 65. 2 M C F AN 94. 3 E C F AN
37. 1 E C F AN 66. 2 M AP F AN 95. 3 M K F AN
38. 1 E K F AN 67. 2 M C F AN 96. 3 M K F AN
39. 1 E C F AN 68. 2 M C F AN 97. 3 M C F AN
40. 1 E K F AN 69. 2 M C F AN 98. 4 M C F AN
41. 1 E K F AN 70. 2 M AP F AN 99. 4 M K F AN
42. 1 M K F AN 71. 2 H AP F AN 100. 4 M C F AN
43. 1 M C F AN 72. 2 E K F AN 101. 4 M K F AN
44. 1 M K F AN 73. 2 E C F AN 102. 4 M AP F AN
45. 1 M K F AN 74. 2 E C F AN 103. 4 E K F AN
46. 1 E C F AN 75. 2 M C F AN *104. 5 M AP F AN
47. 1 E K F AN 76. 2 H C F AN *105. 5 M AP F AN
48. 1 E C F AN 77. 2 H C F AN *106. 5 M AP F AN
49. 1 H C F AN 78. 2 M C F AN *107. 5 M AP F AN
50. 1 M K F AN 79. 2 H C F AN *108. 5 M AP F AN
51. 1 M K F AN 80. 2 H C F AN *109. 5 M AP F AN
52. 1 E K F AN 81. 2 H C F AN *110. 5 M C F AN
53. 1 M K F AN 82. 2 M C F AN *111. 5 M AP F AN
54. 1 M C F AN 83. 2 H AP F AN *112. 5 E C F AN
55. 1 M C F AN 84. 2 H AP F AN *113. 5 M AP F AN
56. 1 E K F AN 85. 2 H AP F AN *114. 5 M AP F AN
57. 2 E K F AN 86. 2 M C F AN *115. 5 E C F AN
58. 2 M K F AN 87. 2 M C F AN *116. 5 M AP F AN
59. 2 H C F AN 88. 3 E C F AN *117. 5 M C F AN
60. 2 E C F AN 89. 3 M C F AN *118. 5 M AP F AN
61. 2 E C F AN 90. 3 E C F AN *119. 5 M K F AN
62. 2 H C F AN 91. 3 M AP F AN

Bloom’s: AP = Application C = Comprehension K = Knowledge
CPA: F = Financial Reporting
AACSB: AN = Analytic
13 - 3 Statement of Cash Flows

(CONT’D)
LO Bloom’ CP AACS LO Bloom’ CP AACS L LO Bloom’ CP
Item LO Item LO Item AACSB
D s A B D s A B O D s A
Exercises
120. 1 M C F AN 130. 2 H AP F AN 140. 4 M AP F AN
121. 1 M C F AN 131. 2 H AP F AN 141. 4 M AP F AN
122. 1 E C F AN 132. 2 M AP F AN 142. 4 M AP F AN
123. 2 E C F AN 133. 2,3 M AP F AN *143. 5 E AP F AN
124. 2 E AP F AN 134. 2,3 H AP F AN *144. 5 E AP F AN
2,3,
125. 2 M AP F AN *135. M AP F AN *145. 5 E AP F AN
5
126. 2 M AP F AN *136. 3,5
H AP F AN *146. 5 M AP F AN
127. 2 H AP F AN *137. 3,5
H AP F AN *147. 5 M AP F AN
128. 2 M AP F AN *138. 3,5
M AP F AN *148. 5 M AP F AN
129. 2 M C F AN *139. 3,5
M AP F AN *149. 5 H AP F AN
Matching
150. 2 E C F AN *151. 5 M C F AN
Short-Answer Essay
F,
152. 1 M C F AN *155. 2,5 E K F AN 158. 4 M C AN,E
E
*153 1,2,
M C F AN *156. 2,5 M C F AN 159. 4 H K F AN
. 5
154. 2 M C F AN *157. 2,5 E C F AN *160. 5 E C F AN
CPA Questions
161. 1–3 M C F AN 163. 2–4 M AN F AN *165. 5 M AN F AN
162. 2 M C F AN *164. 5 M K F AN

Bloom’s: AN = Analysis AP = Application C = Comprehension K = Knowledge
CPA: E = Professional and Ethical Behaviour F = Financial Reporting
AACSB: AN = Analytic E = Ethics
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 8. TF 15. TF 38. MC 45. MC 52. MC 122. Ex
2. TF 9. TF 16. TF 39. MC 46. MC 53. MC 152. SAE
3. TF 10. TF 17. TF 40. MC 47. MC 54. MC 153. SAE
4. TF 11. TF 34. MC 41. MC 48. MC 55. MC 161. CP
5. TF 12. TF 35. MC 42. MC 49. MC 56. MC
6. TF 13. TF 36. MC 43. MC 50. MC 120. Ex
7. TF 14. TF 37. MC 44. MC 51. MC 121. Ex
18. TF 62. MC 70. MC 78. MC 86. MC 129. Ex 153. SAE
19. TF 63. MC 71. MC 79. MC 87. MC 130. Ex 154. SAE
20. TF 64. MC 72. MC 80. MC 123. Ex 131. Ex 155. SAE
57. MC 65. MC 73. MC 81. MC 124. Ex 132. Ex 156. SAE
58. MC 66. MC 74. MC 82. MC 125. Ex 133. Ex 157. SAE
59. MC 67. MC 75. MC 83. MC 126. Ex 134. Ex 161. CP
60. MC 68. MC 76. MC 84. MC 127. Ex 135. Ex 162. CP
61. MC 69. MC 77. MC 85. MC 128. Ex 150. Ma 163. CP
21. TF 25. TF 91. MC 95. MC 134. Ex 138. Ex
22. TF 88. MC 92. MC 96. MC 135. Ex 139. Ex
23. TF 89. MC 93. MC 97. MC 136. Ex 161. CP
24. TF 90. MC 94. MC 133. Ex 137. Ex 163. CP
26. TF 99. MC 101. MC 103. MC 141. Ex 158. SAE 163. CP
98. MC 100. MC 102. MC 140. Ex 142. Ex 159. SAE
*Learning Objective 5
*27. TF *104. MC *111. MC *118. MC *143. Ex *151. Ma *165. CP
*28. TF *105. MC *112. MC *119. MC *144. Ex *153. SAE
*29. TF *106. MC *113. MC *135. Ex *145. Ex *155. SAE
*30. TF *107. MC *114. MC *136. Ex *146. Ex *156. SAE
*31. TF *108. MC *115. MC *137. Ex *147. Ex *157. SAE
*32. TF *109. MC *116. MC *138. Ex *148. Ex *160. SAE
*33. TF *110. MC *117. MC *139. Ex *149. Ex *164. CP
Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions
CHAPTER LEARNING OBJECTIVES
1. Describe the content and format of the statement of cash flows. The statement of cash flows provides
information about the cash receipts and cash payments resulting from the operating, investing, and financing
activities of a company during a specific period.
Operating activities include the cash effects of transactions that create revenues and expenses used in the
determination of net income. Operating activities are affected by noncash items in the income statement and
changes in certain current asset and current liability accounts in the statement of financial position. Investing
activities involve cash flows resulting from changes in non-current asset items. Financing activities involve
cash flows resulting from changes in non-current liabilities and shareholders’ equity items. These are general
guidelines, to which there are a few exceptions.
The statement of cash flows begins with the operating activities section, which can be prepared using either
the indirect or direct method. Both end up with the same net cash provided or used by operating activities but
differ in the detail provided in this section. Investing and financing activities follow. The statement concludes by
reporting the net change in cash for the period, and reconciles it to the beginning and ending cash (or cash and
cash equivalents) balances reported on the statement of financial position. Significant noncash transactions
are reported in a note to the financial statements.
2. Prepare the operating activities section of a statement of cash flows using the indirect method. The
first step in the preparation of a statement of cash flows is to determine the net cash provided (used) by
operating activities. In the indirect method, net income is converted from an accrual basis to a cash basis. To
do this, noncash expenses and losses, decreases in certain current asset accounts, and increases in certain
current liability accounts are added back to net income. Noncash revenues and gains, increases in certain
current asset accounts, and decreases in certain current liability accounts are deducted from net income..
3. Prepare the investing and financing activities sections and complete the statement of cash flows.
The second step in the preparation of a statement of cash flows is to analyze the changes in certain non-
current asset accounts and record them as investing activities, or disclose them as significant noncash
transactions. The third step is to analyze the changes in non-current liability (and any related current portions)
and equity accounts and record them as financing activities, or disclose them as significant noncash
transactions. In addition to this, changes in the Dividends Payable account should be considered in
determining the amount of dividends paid.
The fourth and final step in the preparation of a statement of cash flows is to determine the overall net cash
flow for the year and add it to the opening amount of cash (and cash equivalents) to determine the ending
amount. This result should agree to the cash (and cash equivalents) reported on the statement of financial
position.
4. Use the statement of cash flows to evaluate a company. When using the statement of cash flows to
appreciate the nature of a company, we must understand what phase of its corporate life cycle a company is
in. In the introductory and growth phases, financing cash flows are needed to offset the cash used in operating
and investing activities. However, by the time a company enters the maturity phase, operating cash flows are
usually sufficient to cover cash used in investing activities and to begin to pay down debt and use cash for
financing activities. When the company is in the decline phase, this trend continues but, as cash from operating
activities declines, so does the amount of cash used in investing and financing activities.
Free cash flow (net cash provided or used by operating activities minus net capital expenditures minus
dividends paid) is a measure of solvency. It indicates the amount of cash a company generated during the
period that is available for increases in the payment of dividends, expansion, or the reduction of debt.
5. Prepare the operating activities section of a statement of cash flows using the direct method
(Appendix 13A). In the direct method of determining net cash provided or used by operating activities, each
individual revenue and expense account is converted from an accrual basis to a cash basis. These cash flows
are then combined into the major classes of cash receipts and cash payments and reported in the operating
activities section.
TRUE-FALSE STATEMENTS
1. Cash flow information is useful in assessing a company’s ability to generate future cash flows.
2. For external reporting, a company must prepare either an income statement or a statement of cash flows,
but not both.
3. Cash equivalents can include both short-term and long-term investments.
4. Operating activities include the cash effects of transactions that create revenues and expenses.
5. The activity from the statement of financial position to be presented in the financing activities section of the
statement of cash flows is based on an analysis of shareholders’ equity only.
6. Noncash investing and financing activities must be reported in the body of a statement of cash flows.
7. Noncash investing and financing transactions, such as the exchange of common shares to purchase assets,
represent significant investing and financing activities and are reported in a note to the financial statements.
8. The acquisition of a building by issuing a mortgage payable would be considered an investing and financing
activity that did not affect cash and would be reported in the notes to the financial statements.
9. The statement of cash flows classifies cash receipts and payments as operating, non-operating, and
financial activities.
10. The sale of land for cash would be classified as a cash receipt from an investing activity.
11. Cash flow provided (used) by investing activities is considered the most important category on the
statement of cash flows because it is considered the best measure of expected net income.
12. Under IFRS, the receipt of dividends from equity investments may be classified as a cash receipt provided
(used) by investing activities.
13. Under ASPE, the payment of interest on a mortgage payable may be classified as a cash payment from
financing activities.
14. The statement of cash flows is a required statement for both public and private corporations.
15. Like the other financial statements, the statement of cash flows is prepared from an adjusted trial balance.
16. For a company using the direct method, both the operating activities and investing activities will report the
same net amounts provided or used as the indirect method, but the amount reported under financing activities
will be different.
17. If a company has combined cash equivalents with cash, it must disclose the components of the cash
equivalents, with a reconciliation of the amounts reported on the statement of cash flows with those reported
on the statement of financial position.
18. Cash provided by operating activities is generally the same as the net income reported on the income
statement.
19 A disadvantage of the indirect method of reporting cash flows provided (used) by operating activities is that
the difference between the net amount of cash flows from operating activities and net income is not
emphasized.
20. Under the indirect method, an increase in accounts payable during a period is deducted from net income in
calculating cash provided by operating activities.
21. Investing activities affect non-current asset accounts.
22. In the investing activities section of the statement of cash flows, all the cash payments for purchase of non-
current assets should be totalled and reported as one number.
23. A loss on sale of equipment is included in the investing activities on the statement of cash flows.
24. Preparing the financing activities section of the statement of cash flows requires the analysis of non-current
liability and equity accounts, as well as any short-term loans incurred for lending purposes rather than trade.
25. If accumulated other comprehensive income increases or decreases during the year, the change must be
reported in the financing activities section.
26. On the statement of cash flows of a growing company, the reader should expect to see cash provided by
its financing activities, not cash used.
*27. The direct method is considered to be more informative and easier to compare with the other financial
statements.
*28. Cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers
during a period.
*29. During the year, Income Tax Expense was $22,000 and Income Tax Payable increased by $3,000;
therefore, the cash paid for income tax was $19,000.
Solution: $(22,000) + $3,000 = $(19,000)
*30. In calculating cash flow provided (used) by operating activities using the direct method, each item in the
income statement is adjusted from the accrual basis to the cash basis.
*31. Under the direct method, an increase in inventory would be added to cost of goods sold to determine net
purchases for the period.
*32. Under the direct method, as an adjustment to operating expenses per the income statement, an increase
in accrued liabilities would be added to operating expenses to determine cash payments for operating
expenses.
*33. Under the direct method, as an adjustment to operating expenses per the income statement, a decrease
in prepaid expenses would be added to operating expenses to determine cash payments for operating
expenses.
ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 6. F 11. F 16. F 21. T 26. T 31. T
2. F 7. T 12. T 17. T 22. F 27. T 32. F
3. F 8. T 13. F 18. F 23. F 28. F 33. F
4. T 9. F 14. T 19. F 24. T 29. T
5. F 10. T 15. F 20. F 25. F 30. T
MULTIPLE CHOICE QUESTIONS
34. Which one of the following is false?

(a) The statement of cash flows can be prepared using cash and cash equivalents rather than just cash, as its
base.
(b) The statement of cash flows reports the sources and uses of cash during a specific period.
(c) The statement of cash flows shows the effects on net income of a company’s operating, investing, and
financing activities for an accounting period.
(d) The statement of cash flows explains the difference between net income, as shown on the income
statement, and the net cash flows generated from operating activities.
35. The statement of cash flows

(a) must be prepared on a daily basis.
(b) summarizes the operating, financing, and investing activities of a company.
(c) is another name for the income statement.
(d) is a special section of the income statement.
36. The primary purpose of the statement of cash flows is to

(a) provide information about the investing and financing activities during a period.
(b) prove that revenues exceed expenses if there is a net income.
(c) provide information about cash receipts and cash payments during a period.
(d) report to Canada Revenue Agency.
37. If a company reports a loss, it

(a) may still have a net increase in cash.
(b) will not be able to pay cash dividends.
(c) will not be able to get a loan.
(d) will not be able to make capital expenditures.
38. The statement of cash flows will not report the

(a) amount of cheques outstanding at the end of the period.
(b) sources of cash in the current period.
(c) uses of cash in the current period.
(d) change in the cash balance for the current period.
39. The acquisition of land by issuing common shares is

(a) a cash transaction and would be reported in the body of a statement of cash flows.
(b) a noncash transaction that is not reported in the body of a statement of cash flows.
(c) a noncash transaction but would be reported in the body of a statement of cash flows.
(d) only reported if the statement of cash flows is prepared using the direct method.
40. The order of presentation of activities on the statement of cash flows is

(a) operating, investing, and financing.
(b) operating, financing, and investing.
(c) financing, operating, and investing.

(d) financing, investing, and operating.
41. Generally, the first category shown on the statement of cash flows is cash flows provided (used) by
(a) operating activities.
(b) investing activities.
(c) financing activities.
(d) significant noncash activities.
42. Under IFRS, cash receipts from interest and dividends are classified as
(a) operating activities.
(b) investing activities.
(c) either operating or investing activities.
(d) either financing or investing activities.
43. Significant noncash transactions would not include

(a) conversion of preferred shares into common shares.
(b) asset acquisition through issue of a note payable.
(c) loans to other companies.
(d) exchange of equipment.
44. In preparing a statement of cash flows, preferred shares issued in exchange for land would be reported in
the
(a) financing activities section.
(b) investing activities section.
(c) operating activities section.
(d) notes to the financial statements.
45. In preparing a statement of cash flows, the conversion of bonds into common shares will be reported in the
(a) financing activities section.
(b) notes to the financial statements.
(c) investing activities section.
(d) shareholders' equity section.
46. Which one of the following transactions does not affect cash during a period?
(a) write-off of an uncollectible account receivable
(b) collection of an account receivable
(c) sale of common shares
(d) repayment of a bank loan
47. Which one of the following items is not generally used in preparing a statement of cash flows?
(a) adjusted trial balance
(b) comparative statements of financial position
(c) current income statement
(d) additional information
48. The indirect and direct methods of preparing the statement of cash flows are identical except for the
(a) significant noncash activity section.
(b) operating activities section.
(c) investing activities section.
(d) financing activities section.
49. In preparing a statement of cash flows,

(a) an increase in the Common Shares account during a period would be classified as an investing activity.
(b) the issue of debt should be reported separately from the retirement of debt.
(c) the net movement of loans and repayments are reported as a financing activity.
(d) the issue of shares to acquire land are reported as financing and investing, respectively.
Use the following information for questions 50–55.
Ingles Corp., a private company reporting under ASPE, engaged in the following transactions. For each
transaction, indicate where, if at all, it would be classified on the statement of cash flows.
50. Declaration and issue of a stock dividend:

(a) operating activities section
(b) investing activities section
(c) financing activities section
(d) does not represent a cash flow
51. Retirement of non-current debt (incurred for lending purposes) with cash:
52. Issue of preferred shares for cash:

53. Repurchase of Ingles’ own common shares on the open market:

54. Issue of common shares in exchange for equipment:


55. Purchase of land and building with a mortgage:

56. Of the items below, the one that appears before the others on the statement of cash flows is
(a) noncash investing and financing activities.
(b) net increase (decrease) in cash.
(c) cash at the end of the period.
(d) cash at the beginning of the period.
57. In preparing the operating activities section of the statement of cash flows, most companies in Canada prefer
to
(a) use the direct method.
(b) use the indirect method.
(c) present both the indirect and direct methods in their financial reports.
(d) prepare the operating activities section on the accrual basis.
58. In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use
of
(a) the adjusted trial balance.
(b) the current period's statement of retained earnings.
(c) a comparative statement of financial position.
(d) a comparative income statement.
59. Which of the following statements are false when using the indirect method?
(a) A loss on the sale of equipment is added to net income in calculating cash provided by operating activities.
(b) An increase in accounts receivable during a period is deducted from net income in calculating cash
provided by operating activities.
(c) An increase in accounts payable during a period is added to net income in calculating cash provided by
operating activities.
(d) A decrease in accumulated depreciation during a period is added to net income in calculating cash
provided by operating activities.
60. Ingles Corp., a private company reporting under ASPE, engaged in the following transactions. For each
transaction, indicate where, if at all, it would be classified on the statement of cash flows. Assume the indirect
method is used. Ingles Corp. experienced a decrease in accounts receivable in the
(a) operating activities section.
(c) financing activities section.
(d) does not represent a cash flow.
method is used. Ingles Corp. experienced an increase in inventory in the
method is used. Ingles Corp. experienced a payment of interest on a long-term bank loan in the
method is used. Ingles Corp. experienced a receipt of dividends on held for trading investments in the
64. Cash flows provided (used) by operating activities, prepared using the indirect method, would include
(a) receipts from the sale of investments.
(b) net income.
(c) payments for dividends.
(d) receipts from the issue of preferred shares.
65. If accounts receivable have increased during a period,

(a) revenues on an accrual basis are less than revenues on a cash basis.
(b) revenues on an accrual basis are greater than revenues on a cash basis.
(c) revenues on an accrual basis are the same as revenues on a cash basis.
(d) expenses on an accrual basis are greater than expenses on a cash basis.
66. Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at the beginning
and end of the year, respectively. Net income reported on the income statement for the year was $120,000.
Ignoring the effect of any other adjustments, the cash flow provided (used) by operating activities, prepared
using the indirect method, is
(a) $120,000.
(b) $125,000.
(c) $155,000.
(d) $115,000.
Solution: $120,000 – $5,000 = $115,000
67. If accounts payable have increased during a period,

(a) revenues on an accrual basis are less than revenues on a cash basis.
(b) expenses on an accrual basis are less than expenses on a cash basis.
(c) expenses on an accrual basis are greater than expenses on a cash basis.
(d) expenses on an accrual basis are the same as expenses on a cash basis.
68. In calculating cash flows provided (used) by operating activities using the indirect method, a gain on the
sale of equipment is
(a) added to net income.
(b) deducted from net income.
(c) ignored because it does not affect cash.
(d) not reported on a statement of cash flows.
69. In calculating cash flows provided (used) by operating activities using the indirect method, a loss on the
sale of equipment is
(a) added to net income.
(b) deducted from net income.
(c) ignored because it does not affect cash.
(d) not reported on a statement of cash flows.
70. Galaxy Corporation reported net income of $75,000 for the year. During the year, accounts receivable
increased by $6,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was
recorded. Using the indirect method, cash provided by operating activities for the year is
(a) $80,000.
(b) $78,000.
(c) $70,000.
(d) $71,000.
Solution: $75,000 – $6,000 – $3,000 + $5,000 = $71,000
71. Applegate Ltd. reported a loss of $10,000 for the year. During the year, accounts receivable decreased
$3,000, inventory increased $5,000, accounts payable increased by $11,000, and depreciation expense of
$6,000 was recorded. Using the indirect method, operating activities
(a) used net cash of $23,000.
(b) used net cash of $17,000.
(c) provided net cash of $5,000.
(d) provided net cash of $15,000.
Solution: $(10,000) + $3,000 – $5,000 + $11,000 + $6,000 = net cash provided of $5,000
72. Starting with net income and adjusting it for items that affected reported net income but not cash is called
the
(a) direct method.
(b) indirect method.
(c) working capital method.
(d) cost-benefit method.
73. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid
expenses during a period is
(a) deducted from net income.
(b) added to net income.
(c) ignored because it does not affect net income.
(d) ignored because it does not affect expenses.
74. Using the indirect method, depreciation expense for the period
(a) is deducted from net income.
(b) is ignored.
(c) causes cash to decrease.
(d) is added to net income.
75. Using the indirect method, which of the following would be subtracted from net income?
(a) depreciation expense
(b) increase in accounts receivable
(c) increase in accounts payable
(d) decrease in prepaid expenses
76. Using the indirect method, which of the following would be added to net income?
(a) increase in accounts receivable
(b) increase in prepaid expenses
(c) depreciation expense
(d) decrease in accounts payable
77. Using the indirect method, which of the following would not be an adjustment to net income?
(b) an increase in prepaid insurance
(c) an increase in inventories
(d) an increase in Land
78. In calculating cash flows provided (used) by operating activities using the indirect method, a loss on the
sale of equipment will appear as a(n)
(a) subtraction from net income.
(b) addition to net income.
(c) addition to cash flow from investing activities.
(d) subtraction from cash flow from investing activities.
79. Using the indirect method, which of the following adjustments to convert net income to net cash provided
by operating activities is correct?
Add to Net income Deduct from Net income
(a) Accounts Receivable increase decrease
(b) Prepaid Expenses increase decrease
(c) Inventory decrease increase
(d) Income Tax Payable decrease increase
by operating activities is incorrect?
Add to Net income Deduct from Net income
(a) Accounts Receivable decrease increase
(b) Prepaid Expenses increase decrease
(c) Inventory decrease increase
(d) Accounts Payable increase decrease
by operating activities is not added to net income?
(a) gain on Sale of Equipment
(b) Depreciation Expense
(c) loss on Sale of Equipment
(d) amortization of Bond Discount
82. Using the indirect method, if equipment is sold at a gain, the

(a) sale proceeds received are deducted in the operating activities section.
(b) sale proceeds received are added in the operating activities section.
(c) amount of the gain is added in the operating activities section.
(d) amount of the gain is deducted in the operating activities section.
83. Net income reported for the current year was $200,000. Depreciation expense was $35,000. During the
year, Accounts Receivable and Inventory increased $18,000 and $26,000, respectively. Prepaid Expenses and
Accounts Payable decreased $4,000 and $9,000, respectively. There was also a loss on the sale of equipment
of $6,000. Using the indirect method, how much cash was provided by operating activities?
(a) $182,000
(b) $192,000
(c) $210,000
(d) $244,000
Solution: $200,000 + $35,000 – $18,000 – $26,000 + $4,000 – $9,000 + $6,000 = $192,000
84. Net income reported for the current year was $222,000. Depreciation expense was $35,000. Accounts
Receivable and Inventories increased $4,000 and $7,000, respectively. Prepaid Expenses and Accounts
Payable decreased $3,000 and $9,000, respectively. Using the indirect method, how much cash was provided
by operating activities?
(a) $170,000
(b) $180,000
(c) $240,000
(d) $258,000
Solution: $222,000 + $35,000 – $4,000 – $7,000 + $3,000 – $9,000 = $240,000
85. Net income reported for the current year was $100,000. Depreciation expense was $25,000. Accounts
Receivable and Inventories decreased $5,000 and $15,000, respectively. Prepaid Expenses and Accounts
Payable increased, respectively, by $500 and $4,000. Using the indirect method, how much cash was provided
by operating activities?
(a) $101,500
(b) $123,500
(c) $140,500
(d) $148,500
Solution: $100,000 + $25,000 + $5,000 + $15,000 – $500 + $4,000 = $148,500
86. On a statement of cash flows using the indirect method, depreciation expense will
(a) be added to net income in the operating activities section.
(b) be deducted from net income in the operating activities section.
(c) appear a cash receipt in the investing activities section.
(d) be ignored.
87. Using the indirect method, which of the following would not be needed to determine net cash provided by
operating activities?
(b) change in accounts receivable
(c) payment of cash dividends
(d) change in prepaid expenses
88. In which section would the purchase of land for cash be classified on the statement of cash flows?
89. If a company has both a receipt and payment of cash related to the acquisition of equipment for $15,000
cash and the sale of machinery for $10,000 cash, the
(a) two cash effects can be netted and presented as one item in investing activities.
(b) cash receipt from the sale and cash payment for the acquisition should be reported separately in investing
activities.
(c) two cash effects can be netted and presented as one item in financing activities.
(d) cash receipt and cash payment should be reported separately in financing activities.
90. When equipment is sold for cash, the amount received is reflected as a cash
(a) receipt in the operating activities section.
(b) receipt in the financing activities section.
(c) receipt in the investing activities section.
(d) payment in the operating activities section.
91. If a gain of $30,000 is incurred in selling (for cash) office equipment that cost $120,000 and had
accumulated depreciation of $40,000, the total amount reported in investing activities is
(a) $90,000.
(b) $110,000.
(c) $130,000.
(d) $150,000.
Solution: $30,000 + $120,000 – $40,000 = $110,000
92. If a loss of $20,000 is incurred in selling (for cash) office equipment that cost $90,000 and had accumulated
depreciation of $22,500, then the actual cash proceeds must have been
(a) $47,500.
(b) $67,500.
(c) $70,000.
(d) $87,500.
Solution: $90,000 – $20,000 – $22,500 = $47,500
93. Land costing $65,000 was sold for $125,000 cash. The gain on the sale was reported on the income
statement as an operating expense. On the statement of cash flows, what amount should be reported as an
investing activity from the sale of the land?
(a) $5,000
(b) $60,000
(c) $65,000
(d) $125,000
Solution: $125,000 proceeds from sale
94. Which of the following items affecting retained earnings during a period could be reported in the financing
activities section of the statement of cash flows?
(a) cash dividends paid only
(b) net income for the period only
(c) both cash dividends paid and net income for the period
(d) neither cash dividends paid nor net income for the period
95. Financing activities involve

(a) lending money.
(b) acquiring investments.
(c) issuing debt.
(d) acquiring long-lived assets.
96. Investing activities include

(a) repayment of debts.
(b) obtaining cash from creditors.
(c) obtaining capital from investors.
(d) collecting the principal on loans receivable.
97. If $200,000 of new bonds are issued during the year and $120,000 of old bonds are retired during the year,
the financing activities section of the statement of cash flows will show
(a) a net increase in cash of $80,000.
(b) a net decrease in cash of $80,000.
(c) an increase in cash of $200,000 and a decrease in cash of $120,000.
(d) a net gain on retirement of bonds of $80,000.
98. The category that is generally considered to be the best measure of a company’s ability to continue as a
going concern is
(a) cash flows provided (used) by financing activities.
(b) cash flows provided (used) by investing activities.
(c) cash flows provided (used) by operating activities.
(d) usually different from year to year.
99. The statement of cash flows

(a) is prepared instead of an income statement under ASPE.
(b) is used to assess a company's ability to generate cash and the needs of the company in using the cash
flows.
(c) is prepared from a comparative income statement.
(d) reports basic earnings per share figures on a cash basis in the body of the statement.
transaction, indicate where, if at all, it would be classified on the statement of cash flows. Free cash flow
(a) is not a solvency-based measure that helps creditors and investors understand how much discretionary
cash flow a company has left from operating activities.
(b) is calculated as cash provided (used) by operating activities plus net capital expenditures and dividends
paid.
(c) helps creditors and investors understand how much discretionary cash flow a company has left from its
(d) helps to understand how much discretionary cash flow a company has left from its operating activities that
can be used to expand operations, increase debt, or pay additional dividends.
101. The statement of cash flows will not provide insight into
(a) why dividends were not increased.
(b) whether cash flow is greater than net income.
(c) the number of shares issued in a stock split.
(d) how the retirement of debt was accomplished.
102. Kate’s Fashions Ltd. produces and sells high fashion merchandise. For the year ended June 30, 2018,
the company reported $85,000 cash provided by operating activities, $18,000 by investing activities, and
$49,000 by financing activities. Kate’s Fashions paid $22,000 in dividends and spent $35,000 for new
equipment. Its free cash flow for 2018 was
(a) $95,000.
(b) $63,000.
(c) $50,000.
(d) $28,000.
Solution: $85,000 – $22,000 – $35,000 = $28,000
103. Free cash flow is a measure of

(a) solvency.
(b) profitability.
(c) liquidity.
(d) creativity.
*104. The income statement showed bond interest expense of $11,520 while the statement of financial position
showed that the carrying amount of the bonds payable had increased by $1,520. Assuming no other
transactions affected bonds during the period, the cash paid for bond interest was
(a) $13,040.
(b) $11,520.
(c) $10,000.
(d) $1,520.
Solution: $11,520 – $1,520 = $10,000
*105. During the year, Tristan Inc. reported a $6,000 increase in Inventory and a $4,000 increase in Accounts
Payable. Cost of goods sold for the year was $125,000. What were the cash payments made to suppliers
during the year?
(a) $135,000
(b) $127,000
(c) $115,000
(d) $123,000
Solution: $6,000 – $4,000 + $125,000 = $127,000
*106. During the year, Cost of Goods Sold was $65,000, Inventory decreased by $4,000, and Accounts
Payable decreased by $2,000. What were the cash payments for merchandise during the year?
(a) $63,000
(b) $65,000
(c) $67,000
(d) $71,000
Solution: $65,000 – $4,000 + $2,000 = $63,000
*107. During the year, Omega Limited reported credit sales of $600,000. Beginning Accounts Receivable was
$70,000 and ending Accounts Receivable was $160,000. What were the cash collections from customers
during the year?
(a) $830,000
(b) $690,000
(c) $510,000
(d) $370,000
Solution: $600,000 – ($160,000 – $70,000) = $510,000
*108. During the year, Rinks Corp. reported $510,000 in cash sales and $2,350,000 in credit sales. Beginning
Accounts Receivable was $360,000 and ending Accounts Receivable was $475,000. What was the total cash
collected from all customers during the year?
(a) $3,695,000
(b) $2,975,000
(c) $2,675,000
(d) $2,745,000
Solution: $510,000 + $2,350,000 – ($475,000 – $360,000) = $2,745,000
*109. The following information relates to Fenelon Corporation:

Prepaid insurance, December 31, 2017...................... $142,000
Prepaid insurance, December 31, 2018...................... 180,000
Insurance expense for 2018........................................ 620,000

What was the amount of cash paid for insurance during 2018?
(a) $942,000
(b) $658,000
(c) $582,000
(d) $298,000
Solution: $620,000 + ($180,000 – $142,000) = $658,000
*110. Cash receipts from customers are greater than sales revenues when there is a(n)
(a) increase in accounts receivable.
(b) decrease in accounts receivable.
(c) increase in cost of goods sold.
(d) decrease in cost of goods sold.
*111. During the year, Kawartha Corp. reported an increase in Inventory of $40,000. Cost of Goods Sold for
the year was $125,000, and there was an $6,000 decrease in Accounts Payable. What were the cash
payments to suppliers during the year?
(a) $79,000
(b) $91,000
(c) $159,000
(d) $171,000
Solution: $40,000 + $125,000 + $6,000 = $171,000
*112. Which of the following items does not appear in the operating activities section of the statement of cash
flows prepared under the direct method?
(a) cash payments to suppliers
(b) cash collections from customers
(c) depreciation expense
(d) cash payments for interest
*113. During the year, Flapps Inc. reported other operating expenses of $102,000. The Prepaid Expenses
decreased $8,500 during the year, and Accrued Liabilities increased by $11,000. What were Oak's cash
payments for operating expenses for the year?
(a) $121,500
(b) $ 99,500
(c) $ 104,500
(d) $ 82,500
Solution: $102,000 – $8,500 – $11,000 = $82,500
*114. During the year, Holistic Corp. reported Income Tax Expense of $36,000. There was a $3,000 decrease
in federal income tax payable and a $2,000 increase in provincial income tax payable during the year. What
were Holistic's cash payments for income tax for the year?
(a) $41,000
(b) $37,000
(c) $35,000
(d) $31,000
Solution: $36,000 + $3,000 – $2,000 = $37,000
*115. Which of the following would not appear in the operating activities section of a statement of cash flows
prepared using the direct method?
(a) cash receipts from customers
(b) cash paid for income taxes
(c) gain on sale of equipment
(d) cash paid to employees
*116. Dock Inc. reports the following:

End of Year Beginning of Year
Inventory $24,000 $38,000
Accounts Payable 27,000 20,000
If cost of goods sold for the year is $128,000, the amount of cash paid to suppliers is
(a) $113,000.
(b) $121,000.
(c) $149,000.
(d) $107,000.
Solution: $128,000 – ($38,000 – $24,000) – ($27,000 – $20,000) = $107,000
*117. On the statement of cash flows, the operating activities section prepared using the direct method would
include
(a) receipts from the issue of common shares.
(b) receipts from the sale of investments.
(c) payments for the acquisition of investments.
(d) cash receipts from sales activities.
*118. During the year, Salaries Payable decreased by $9,000. If Salary Expense was $155,000 for the year,
the cash paid to employees was
(a) $173,000.
(b) $164,000.
(c) $155,000.
(d) $146,000.
Solution: $155,000 + $9,000 = $164,000
*119. Which of the following statements concerning the statement of cash flows is true?
(a) The statement of cash flows is usually more accurate when using the indirect method.
(b) If the direct method is used, gains and losses on sale of equipment are not shown.
(c) The statement of cash flows reports basic earnings per share.
(d) The statement of cash flows is an optional financial statement for external reporting purposes.
ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
34. c 47. a 60. a 73. a 86. a 99. b 112. c
35. b 48. b 61. a 74. d 87. c 100. c 113. d
36. c 49. b 62. a 75. b 88. b 101. c 114. b
37. a 50. d 63. a 76. c 89. b 102. d 115. c
38. a 51. c 64. b 77. d 90. c 103. a 116. d
39. b 52. c 65. b 78. b 91. b 104. c 117. d
40. a 53. c 66. d 79. c 92. a 105. b 118. b
41. a 54. d 67. c 80. b 93. d 106. a 119. b
42. c 55. d 68. b 81. a 94. a 107. c
43. c 56. b 69. a 82. d 95. c 108. d
44. d 57. b 70. d 83. b 96. d 109. b
45. b 58. c 71. c 84. c 97. c 110. b
46. a 59. d 72. b 85. d 98. c 111. d
EXERCISES
Ex. 120
Selected transactions of Darwinder Inc., a private company reporting under ASPE, are listed below:
1. Common shares are sold for cash.
2. Bonds payable are purchased on the open market for cash at a premium.
3. Interest on a short-term note receivable is collected.
4. Merchandise is sold to customers for cash.
5. Inventory is purchased on account.
6. Equipment is purchased by signing a 3-year, 5% note payable.
7. Cash dividends on common shares are declared and paid.
8. One hundred Belton Inc. common shares are purchased for cash, as a held for trading investment.
9. Land is sold for cash at the carrying amount.
10. Recorded an increase in the fair value of the held for trading investment.
Instructions
Indicate in which section each of the above transactions would be reported (a) operating activity, (b) investing
activity, (c) financing activity, or (d) in the notes as a noncash investing and financing activity.
Solution 120 (10 min.)

1. (c) Financing activity
3. (a) Operating activity (Note 1)
4. (a) Operating activity
6. (d) Noncash activity
7. (c) Financing activity (Note 2)
8. (b) Operating activity
9. (b) Investing activity
10. (d) Operating activity
Note 1. If Darwinder were reporting under IFRS, the interest received may be classified as either an operating
or an investing activity.
Note 2. If Darwinder were reporting under IFRS, the dividends paid may be classified as either an operating or
a financing activity.
Ex. 121
Selected transactions of Yang Corp., a public company reporting under IFRS, are listed below:
1. Collected an account receivable.

2. Declared and paid dividends on common shares.
3. Sold long-term investments for cash.
4. Issued common shares in exchange for new equipment.
5. Repaid a five-year note payable.
6. Paid employee salaries.
7. Converted bonds payable to common shares.
8. Acquired a long-term investment with cash.
9. Sold buildings and equipment for cash.
10. Sold merchandise to customers.
Instructions
Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or
(d) a noncash investing and financing activity.

2. (c) Operating or financing activity
Ex. 122
(a) Identify how significant noncash activities are presented in the financial statements.
(b) Give three examples of significant noncash transactions.

(a) Significant noncash transactions are not included in the body of the statement of cash flows, but are
presented in a separate note to the financial statements.
(b) 1. Issue of common shares to purchase assets

2. Conversion of bonds or preferred shares into common shares
3. Issue of notes or bank loans payable to purchase assets
4. Noncash exchanges of property, plant, and equipment
Ex. 123
Assume the indirect method is used to calculate the operating activities section of the statement of cash flows.
For each item listed below, indicate the effect on net income in arriving at cash flows provided (used) by
operating activities by choosing one of the following code letters:
Cash flows provided (used) by operating activities Code

Add to net income A
Deduct from net income D
1. Increase in accounts receivable ____

2. Increase in inventory ____
3. Decrease in prepaid expenses ____
4. Decrease in accounts payable ____
5. Decrease in accrued liabilities ____
6. Increase in income tax payable ____
7. Depreciation expense ____
8. Unrealized loss on held for trading investments ____
9. Gain on disposal of equipment ____
10. Patent amortization expense ____

1. D
2. D
3. A
4. D
5. D
6. A
7. A
8. A
9. D
10. A
Ex. 124
Using the indirect method, calculate the amount of cash flows provided (used) by operating activities from the
following data:
Net income.................................................................. $392,000
Beginning accounts receivable.................................... 54,000
Ending accounts receivable......................................... 43,000
Beginning prepaid expenses....................................... 8,000
Ending prepaid expenses............................................ 2,000

Beginning accounts payable........................................ 27,000
Ending accounts payable............................................ 17,000
Depreciation expense.................................................. 46,000

Net income......................................................................... $392,000
+ Decrease in accounts receivable..................................... 11,000
+ Decrease in prepaid expenses........................................ 6,000
– Decrease in accounts payable........................................ (10,000)
+ Depreciation expense...................................................... 46,000
Cash flows provided (used) by operating activities............. $445,000
Ex. 125
Tabele Limited reported a net income of $545,000 for the year ended December 31, 2018. Depreciation
expense recorded on buildings and equipment was $182,000 for the year. Balances of the current assets and
current liabilities accounts at the beginning and end of the year are as follows:

Cash $120,000 $108,000
Accounts receivable 16,500 22,500
Inventory 42,000 47,000
Prepaid expenses 8,500 4,000
Accounts payable 26,000 30,000
Income tax payable 1,200 900
Instructions
Using the indirect method, prepare the operating activities section of the statement of cash flows.

TABELE LIMITED
Statement of Cash Flows (partial)
Year Ended December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Operating activities
Net income.............................................................................................................. $545,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense...................................................................................... 182,000
Decrease in accounts receivable..................................................................... 6,000
Decrease in inventory...................................................................................... 5,000
Increase in prepaid expenses.......................................................................... (4,500)
Decrease in accounts payable......................................................................... (4,000)
Increase in income tax payable........................................................................ 300
Net cash provided by operating activities......................................................... $729,800
Ex. 126
Downwind Limited prepared the following information for the operating activities section of the statement of
cash flows using the indirect method for the year ended December 31, 2018:
Net income............................................................................................................. $250,000

Depreciation expense, $40,000...................................................................... ______
Increase in accounts receivable, $65,000...................................................... ______
Decrease in inventory, $12,500...................................................................... ______
Share of net income from an investment in associate, $5,250....................... ______
Increase in accounts payable, $7,500............................................................ ______
Decrease in interest receivable, $3,500......................................................... ______
Increase in prepaid expenses, $5,000............................................................ ______
Decrease in income tax payable, $1,250........................................................ ______
Gain on sale of land, $4,000........................................................................... ______
Net cash provided (used) by operating activities..................................... ______
Instructions
Fill in the missing blanks, indicating how each item should be reported in the operating activities section of the
statement of cash flows.

Net income.............................................................................................................. $250,000
Depreciation expense...................................................................................... 40,000
Increase in accounts receivable....................................................................... (65,000)
Decrease in inventory...................................................................................... 12,500
Share of net income from an investment in associate...................................... (5,250)
Increase in accounts payable........................................................................... 7,500
Decrease in interest receivable........................................................................ 3,500
Increase in prepaid expenses.......................................................................... (5,000)
Decrease in income tax payable...................................................................... (1,250)
Gain on sale of land......................................................................................... (4,000)
Net cash provided by operating activities.................................................. $233,000
Ex. 127
Presented below are Maginot Inc.’s operating activities section, prepared using the indirect method, of their
2018 statement of cash flows, and the current assets and liabilities sections of the statement of financial
position for 2017. The company is using its overdraft facility at June 30, 2018.
MAGINOT INC.
Year Ended June 30, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Net income.................................................................................... $34,000
Depreciation expense............................................................. 8,500
Loss on sale of investments.................................................... 4,200
Decrease in accounts receivable............................................ 8,500
Increase in inventory............................................................... (4,750)
Decrease in prepaid expenses................................................ 600
Decrease in accounts payable................................................ (3,250)
Increase in accrued expenses................................................ 1,200
Net cash provided by operating activities......................... $49,000
Assets
2018 2017
Cash..................................................................................................... $ $ 8,000
Accounts receivable............................................................................. 18,500
Inventory ......................................................................................... 41,500
Prepaid expenses................................................................................. 1,200
Total assets $69,200
Liabilities
Bank overdraft...................................................................................... $ $ 0
Accounts payable................................................................................. 12,300
Accrued expenses payable................................................................... 5,500
Total liabilities $17,800
Instructions
Complete the current assets and current liabilities sections of the 2018 statement of financial position.

MAGINOT INC.
Comparative Statements of Financial Position
June 30
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash................................................................................... $ –– $ 8,000
Accounts receivable........................................................... 10,000 18,500
Inventory............................................................................ 46,250 41,500
Prepaid expenses............................................................... 600 1,200
$56,850 $69,200
Liabilities
Bank overdraft (plug to balance)........................................ $ 2,550 $ —
Accounts payable............................................................... 9,050 12,300
Accrued expenses payable................................................ 6,700 5,500
($56,850 – $38,550)........................................................... $18,300 $17,800
Ex. 128
Condensed financial data of McKillop Corporation appear below:
MCKILLOP CORPORATION
December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash............................................................................................ $ 74,700 $ 35,000
Accounts receivable.................................................................... 104,000 67,000
Inventory...................................................................................... 100,000 112,000
Prepaid expenses........................................................................ 32,000 36,000

Long-term investments................................................................ 81,000 66,000
Property, plant, and equipment.................................................... 235,000 175,000
Accumulated depreciation........................................................... (65,000) (60,000)
Total..................................................................................... $561,700 $431,000
Liabilities and Shareholders' Equity
Accounts payable........................................................................ $ 93,000 $ 75,000

Accrued expenses payable......................................................... 29,000 24,000
Bonds payable............................................................................. 135,000 160,000
Common shares.......................................................................... 240,000 91,000
Retained earnings....................................................................... 64,700 81,000
Total..................................................................................... $561,700 $431,000
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales........................................................................................... $500,000
Expenses
Cost of goods sold................................................................ $295,000
Operating expenses............................................................. 65,000
Depreciation expense........................................................... 17,000
Interest expense................................................................... 18,000
Loss on sale of equipment.................................................... 3,000 398,000
Income before income tax........................................................... 102,000
Income tax expense.................................................................... 15,300
Net income.................................................................................. $ 86,700
Additional information regarding fiscal 2018:

1. New equipment costing $85,000 was purchased for cash.
2. Old equipment costing $25,000 was sold for $10,000 cash when the carrying amount was $13,000.
3. Bonds were originally issued at face value. Bonds with a face value of $25,000 were converted into
$25,000 of common shares during the year.
4. Cash dividends were declared and paid during the year.
5. Accounts payable pertain to merchandise purchases.
Instructions
Using the indirect method, prepare a statement of cash flows for the year ended December 31, 2018.
Solution 128
Statement of Cash Flows
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Net income ................................................................................ $86,700
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation expense ............................................................ $ 17,000

Loss on sale of old equipment................................................ 3,000
Increase in accounts receivable.............................................. (37,000)
Decrease in inventory............................................................. 12,000
Decrease in prepaid expenses................................................ 4,000
Increase in accounts payable.................................................. 18,000
Increase in accrued expense payable..................................... 5,000 _22,000
Net cash provided by operating activities......................... 108,700
Investing activities
Purchase of long-term investments......................................$(15,000) (1)
Purchase of equipment......................................................... (85,000)
Sale of equipment................................................................. 10,000
Net cash used by investing activities....................... (90,000)
Financing activities
Issue of common shares....................................................... $124,000 (2)
Payment of cash dividends................................................... (103,000) (3)
Net cash provided by financing activities................ 21,000
Net increase in cash.................................................................... 39,700
Cash, January 1.......................................................................... 35,000
Cash, December 31..................................................................... $ 74,700
Noncash investing and financing activities

Conversion of bonds payable into common shares............ $25,000
(1) $81,000 - 66,000 = 15,000

(2) $240,000 – 91,000 + 25,000 = 124,000
(3) $81,000 + 86,700 – 64,700 = 103,000
Ex. 129
Assume the indirect method is used to calculate the operating activities section of the statement of cash flows.
For each item listed below, indicate the reporting of the transactions and events by major categories on the
statement. Use the following code letters to indicate the appropriate category under which the item would
appear:
Code
Operating Activities OA
Add to net income +
Deduct from net income –
Investing Activities IA
Financing Activities FA
Category
1. Common shares are issued for cash. ______
2. Inventory increased during the period. ______
3. Depreciation expense is recorded for the period. ______
4. Building is purchased for cash. ______
5. Bonds payable are purchased and retired at their carrying value. ______
6. Accounts payable decreased during the period. ______
7. Prepaid expenses decreased during the period. ______
8. Common shares are reacquired for cash. ______

9. Land is sold for cash at an amount equal to carrying amount. ______
10. Cash dividends are paid. ______

Category
1. Common shares are issued for cash. FA
2. Inventory increased during the period. OA–
3. Depreciation expense is recorded for the period. OA+
4. Building is purchased for cash. IA
5. Bonds payable are purchased and retired at their carrying value. FA
6. Accounts payable decreased during the period. OA–
7. Prepaid expenses decreased during the period. OA+
8. Common shares are reacquired for cash. FA
9. Land is sold for cash at an amount equal to carrying amount. IA
10. Cash dividends are paid. FA
Ex. 130
Comparative statements of financial position for Anderson Inc. appear below:
ANDERSON INC.
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
Dec. 31, 2018 Dec. 31, 2017
Cash................................................................................... $ 29,000 $10,000
Prepaid expenses............................................................... 9,000 12,000
Inventory............................................................................ 37,000 54,000
Long-term investments....................................................... 0 53,000
Equipment.......................................................................... 110,000 48,000
Accumulated depreciation—equipment.............................. (26,000) (22,000)
Total assets................................................................. $187,000 $174,000

Accounts payable............................................................... $ 21,000 $ 9,000
Mortgage payable............................................................... 37,000 45,000
Common shares................................................................. 40,000 23,000
Retained earnings.............................................................. 89,000 97,000
Total liabilities and shareholders' equity...................... $187,000 $174,000

1. Net income for the year was $27,000.
2. Cash dividends of $35,000 were declared and paid during the year.
3. Long-term investments with a carrying amount of $53,000 were sold for $48,000 cash.
Instructions
Solution 130 (25–30 min.)

ANDERSON INC.
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Net income........................................................................................... $27,000
Adjustments to reconcile Net income to net cash provided by
operating activities:
Depreciation expense............................................................. $ 4,000
Loss on sale of long-term investment in bonds....................... 5,000
Decrease in prepaid expenses................................................ 3,000
Decrease in inventory............................................................. 17,000
Increase in accounts payable.................................................. 12,000 32,000
Sale of long-term investments....................................................... $48,000
Purchase of equipment.................................................................. (62,000)
Net cash used by investing activities....................................... (14,000)
Issue of common shares.................................................................... $ 17,000
Repayment of mortgage notes payable............................................. (8,000)
Payment of cash dividends................................................................ (35,000)
Net cash used by financing activities...................................... (26,000)
Net increase in cash............................................................................. 19,000
Cash, January 1................................................................................... 10,000
Cash, December 31.............................................................................. $29,000
Ex. 131
Comparative statements of financial position for Canford Corporation appear below:
CANFORD CORPORATION
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
Dec 31, 2018 Dec 31, 2017
Cash................................................................................... $ 78,000 $ 62,000
Prepaid insurance.............................................................. 38,000 34,000
Land................................................................................... 36,000 80,000
Equipment.......................................................................... 140,000 120,000
Accumulated depreciation—equipment.............................. (40,000) (26,000)
Total assets................................................................. $398,000 $390,000

Bonds payable................................................................... 54,000 38,000
Common shares................................................................. 280,000 230,000
Total liabilities and shareholders' equity...................... $398,000 $390,000
Additional information regarding fiscal 2018

1. A loss of $50,000 was reported for the year.
2. Cash dividends were declared and paid.
3. Land was sold for cash at a loss of $20,000. This was the only land transaction during the year.
4. Equipment with a cost of $30,000 and accumulated depreciation of $20,000 was sold for $10,000 cash.
5. The bonds were originally issued at face value. $24,000 worth of bonds were retired during the year at
their carrying amount.
6. Equipment was exchanged for common shares. The fair value of the shares at the time of the exchange
was $50,000.
Instructions

CANFORD CORPORATION
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Loss............................................................................................... $(50,000)
Depreciation expense (a)........................................................ $ 34,000
Loss on sale of land................................................................ 20,000
Increase in prepaid expenses................................................. (4,000)
Increase in accounts payable.................................................. 10,000 34,000
Net cash used by operating activities............................... (16,000)
Proceeds from the sale of land (b)................................................. $24,000
Proceeds from the sale of equipment............................................ 10,000
Net cash provided by investing activities.......................... 34,000
Retirement of bonds payable......................................................... $(24,000)
Issue of bonds payable (c)............................................................. 40,000
Payment of dividends (d)............................................................... (18,000)
Net cash used by financing activities............................... (2,000)
Increase in cash................................................................................... 16,000
Cash, January 1................................................................................... 62,000
Cash, December 31.............................................................................. $ 78,000

Purchase of equipment through issue of common shares............ $50,000
(a) Accumulated depreciation, Dec 31, 2017...................................... $26,000

Accumulated depreciation, Dec 31, 2018...................................... 40,000
Difference...................................................................................... 14,000
Add: accumulated depreciation on equipment sold........................ 20,000
Depreciation expense.................................................................... $34,000
(b) Cost of land sold............................................................................ $44,000

Less loss on sale of land................................................................ (20,000)
Proceeds from sale of land............................................................ $24,000
(c) Bonds payable, Dec 31, 2017........................................................ $38,000

Bonds payable, Dec 31, 2018........................................................ 54,000
Increase......................................................................................... 16,000
Add retirement of bonds................................................................. 24,000
New bonds issued......................................................................... $40,000
(d) Retained earnings, Dec 31, 2017.................................................. $110,000

Less loss for year........................................................................... (50,000)
Less retained earnings, Dec 31, 2018........................................... (42,000)
Dividends declared........................................................................ $ 18,000
Ex. 132
The following information is available for Bulls Bay Corporation for the year ended December 31, 2018:
Collection of principal on long-term loan to a supplier.................... $50,000
Purchase of equipment for cash.................................................... 24,000
Proceeds from the sale of long-term investment at carrying amount 56,000
Issue of common shares for cash.................................................. 47,000
Depreciation expense.................................................................... 38,000
Redemption of bonds payable at their carrying amount................. 66,000
Payment of cash dividends............................................................ 28,500
Net income.................................................................................... 103,500
Purchase of land by issuing mortgage payable.............................. 70,000
In addition, the following information is available from the comparative statements of financial position for Bulls
Bay at the end of 2018 and 2017:
Dec 31,2018 Dec 31, 2017
Cash............................................................................ $ 191,800 $32,000
Accounts receivable.................................................... 49,000 42,500
Prepaid insurance....................................................... 27,000 18,000
Total current assets..................................................... $267,800 $92,500
Accounts payable........................................................ $72,500 $67,000

Salaries payable.......................................................... 10,200 16,400
Total current liabilities.................................................. $82,700 $83,400
Instructions

BULLS BAY CORPORATION
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Net income.................................................................................... $103,500
Adjustments to reconcile net income to net cash provided by
operating activities.........................................................................
Depreciation.................................................................................. $38,000
Increase in accounts receivable..................................................... (6,500)
Increase in prepaid insurance........................................................ (9,000)
Increase in accounts payable........................................................ 5,500
Decrease in salaries payable......................................................... (6,200) 21,800
Net cash provided by operating activities................................ 125,300
Collection of long-term loan........................................................... $ 50,000
Proceeds from the sale of investment............................................ 56,000
Purchase of equipment.................................................................. (24,000)
Net cash provided by investing activities................................. 82,000
Issue of common shares................................................................ $47,000

Redemption of bonds..................................................................... (66,000)
Payment of dividends.................................................................... (28,500)
Net cash used by financing activities...................................... (47,500)
Increase in cash................................................................................... 159,800
Cash, January 1................................................................................... 32,000
Cash, December 31.............................................................................. $191,800

Purchase of land by issuing mortgage payable.............................. $70,000
Ex. 133
Use the following information to perform the calculations below. Clearly label the amount of each answer as
positive or negative and show all your calculations:
Net income $475,000 Beginning accounts payable $ 24,000

Depreciation expense 92,000 Ending accounts payable 41,000
Beginning accounts receivable 38,000 Purchase of equipment 525,000
Ending accounts receivable 41,500 Issue of long-term debt 145,000
Beginning inventory 23,000 Issue of shares for cash 80,000
Ending inventory 26,000 Issue of shares for land 140,000
Beginning prepaid expenses 3,700 Repurchase of issued shares 93,500
Ending prepaid expenses 3,100 Sale of long-term investment at cost 28,000
Instructions
(a) Calculate the amount of cash flows provided (used) by
operating activities, using the indirect method. ______________
(b) Calculate the amount of cash flows provided (used) by
investing activities. ______________
(c) Calculate the amount of cash flows provided (used) by
financing activities. ______________
(d) Calculate the net change in cash. ______________
(e) Identify any significant noncash investing or financing activities. ______________

(a) Operating activities
Net income.................................................................................... $475,000
Increase in inventory...................................................................... (3,000)
Decrease in prepaid expenses...................................................... 600
Cash flows provided (used) by operating activities........................ $578,100
(b) Investing activities

Purchase of equipment.................................................................. $(525,000)
Sale of long-term investment......................................................... 28,000
Cash flows provided (used) by investing activities......................... $(497,000)
(c) Financing activities

Issue of long-term debt.................................................................. $145,000
Issue of shares for cash................................................................. 80,000
Repurchase of issued shares........................................................ (93,500)
Cash flows provided (used) by financing activities......................... $131,500
(d) Net change in cash

Increase from operating activities.................................................. $578,100
Decrease from investing activities.................................................. (497,000)
Increase from financing activities................................................... 131,500
Net increase in cash...................................................................... $212,600
(e) Issue of shares for land................................................................. $140,000
Ex. 134
Condensed financial data of Primavera Corporation appear below. The company uses the indirect method to
prepare the operating activities section of its statement of cash flows.
PRIMAVERA CORPORATION
December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash................................................................................... $ 34,000 $ 18,000
Accounts receivable........................................................... A 32,000
Inventory............................................................................ B 70,000
Prepaid expenses............................................................... 2,500 C
Long-term investments....................................................... D 10,000
Property, plant, and equipment.......................................... 224,000 200,000
Accumulated depreciation.................................................. (50,000) (40,000)
Total assets................................................................. $ E $292,000
Accounts payable............................................................... $ F $ 34,000

Bonds payable................................................................... 130,000 100,000
Common shares................................................................. 50,000 75,000
Retained earnings.............................................................. 136,000 G
Total liabilities and shareholders’ equity...................... $364,000 $292,000
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales.................................................................................................... $500,000
Expenses
Cost of goods sold......................................................................... $290,000
Operating expenses (excluding depreciation)................................ H

Depreciation expense.................................................................... I
Interest expense............................................................................ 9,000
Loss on sale of property, plant, and equipment............................. J 408,000
Income before income tax.................................................................... 92,000
Income tax expense............................................................................. 17,000
Net income........................................................................................... K
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Net income....................................................................................................... $75,000
Depreciation expense............................................................................... 15,000
Loss on sale of property, plant, and equipment......................................... L
Increase in accounts receivable................................................................ (16,500)
Increase in inventory................................................................................. (20,000)
Increase in prepaid expenses................................................................... (500)
Increase in accounts payable.................................................................... 4,000
Decrease in accrued expenses................................................................. _____M
Net cash provided by operating activities........................................... _____N
Purchase of investments.................................................................................. (5,000)
Purchase of property, plant, and equipment..................................................... _____P
Net cash used by investing activities.................................................. _____Q
Reacquisition of common shares..................................................................... R
Issue of bonds.................................................................................................. S
Payment of cash dividends.............................................................................. _____T
Net cash used by financing activities.................................................. _____U
Net increase in cash............................................................................................... 16,000

Cash, January 1...................................................................................................... 18,000
Cash, December 31................................................................................................ $ V

1. New property, plant, and equipment costing $33,000 was purchased for cash.
2. Old property, plant, and equipment costing $9,000 was scrapped when the carrying amount was $4,000.
3. A cash dividend of $10,000 was declared and paid during the year.
4. The bonds were originally issued at face value.
Instructions
Solve for the missing amounts (note the letter O is not used).


December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash................................................................................... $ 34,000 $ 18,000
Inventory............................................................................ 90,000 70,000
Long-term investments....................................................... 15,000 10,000
Total assets................................................................. $364,000 $292,000

Bonds payable................................................................... 130,000 100,000
Common shares................................................................. 50,000 75,000
Total liabilities and shareholders’ equity...................... $364,000 $292,000
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales.................................................................................................... $500,000
Expenses
Cost of goods sold......................................................................... $290,000
Operating expenses (excluding depreciation)................................ 90,000
Interest expense............................................................................ 9,000
Loss on sale of property, plant, and equipment............................. 4,000 408,000
Income before income tax.................................................................... 92,000
Income tax expense............................................................................. 17,000
Net income........................................................................................... $ 75,000
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Net income........................................................................................... $75,000
Depreciation expense.................................................................... $ 15,000
Loss on sale of property, plant, and equipment............................. 4,000
Increase in Inventory..................................................................... (20,000)

Increase in prepaid expenses........................................................ (500)
Decrease in accrued expenses...................................................... (2,000) (16,000)
Net cash provided by operating activities................................ 59,000
Purchase of long-term investments................................................ $ (5,000)
Purchase of property, plant, and equipment.................................. (33,000)
Net cash used by investing activities......................................... (38,000)
Reacquisition of common shares................................................... $(25,000)
Issue of bonds............................................................................... 30,000
Payment of cash dividends............................................................ (10,000)
Net cash used by financing activities........................................ (5,000)
Net increase in cash............................................................................. 16,000

Cash, January 1................................................................................... 18,000
Cash, December 31.............................................................................. $34,000
Summary
A = $48,500 L = $4,000
B = $90,000 M = $(2,000)
C = $2,000 N = $59,000
D = $15,000 P = $(33,000)
E = $364,000 Q = $(38,000)
F = $38,000 R = $(25,000)
G = $71,000 S = $30,000
H = $90,000 T = $(10,000)
I = $15,000 U = $(5,000)
J = $4,000 V = $34,000
K = $75,000
*Ex. 135
The comparative statements of financial position for Malcolm Heights Inc. are presented below:
MALCOLM HEIGHTS INC.

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash................................................................................... $ 68,000 $ 36,000
Inventory............................................................................ 180,000 140,000
Investments........................................................................ 30,000 20,000
Total............................................................................. $728,000 $584,000

Bonds payable................................................................... 260,000 200,000
Common shares................................................................. 100,000 150,000
Total............................................................................. $728,000 $584,000
MALCOLM HEIGHTS CORPORATION

Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales.................................................................................. $1,000,000
Expenses
Cost of goods sold....................................................... $580,000
Operating expenses (excluding depreciation).............. 180,000
Interest expense.......................................................... 18,000
Loss on sale of property, plant, and equipment........... 8,000 816,000
Income before income tax.................................................. 184,000
Income tax expense........................................................... 34,000
Net income......................................................................... $ 150,000

5. Accrued expenses pertain to operating expenses.
Instructions
Prepare the operating activities section of the cash flow statement using the:
(a) indirect method
(b) direct method
*Solution 135
(a)
Statement of Cash Flows (partial indirect method)
Net income ................................................................................ $150,000
Depreciation expense ............................................................ $ 30,000
Loss on disposal of old equipment.......................................... 8,000
Increase in inventory............................................................... (40,000)
Increase in prepaid expenses................................................. (1,000)
Increase in accounts payable.................................................. 8,000
Decrease in accrued expense payable................................... (4,000) (32,000)
(b)
Statement of Cash Flows (partial direct method)
Cash receipts from customers ($1,000,000 – $33,000)........ $967,000
Cash payments
To suppliers ($580,000 + $40,000 – $8,000)................. $612,000
For operating expenses ($180,000 + $4,000 + $1,000). 185,000
For income tax............................................................... 34,000
For interest expense...................................................... 18,000 (849,000)
Net cash provided by operating activities 118,000
*Ex. 136
Condensed financial data of Primavera Corporation appear below. The company uses the direct method to
prepare the operating activities section of its statement of cash flows.
December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash................................................................................... $ 34,000 $ 18,000
Accounts receivable........................................................... A 32,000
Inventory............................................................................ B 70,000
Prepaid expenses............................................................... 2,500 C
Investments........................................................................ D 10,000
Total assets................................................................. $ E $292,000
Accounts payable............................................................... $ F $ 34,000

Bonds payable................................................................... 130,000 100,000
Common shares................................................................. 50,000 75,000
Total............................................................................ $364,000 $292,000
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales.................................................................................. $500,000
Expenses
Operating expenses (excluding depreciation).............. G
Depreciation expense.................................................. H
Loss on sale of property, plant, and equipment........... _______I 408,000
Net income......................................................................... $ J
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash receipts from customers............................................ $483,500
Cash payments
To suppliers................................................................. $306,000
For operating expenses............................................... K
For income tax............................................................. 17,000
For interest expense.................................................... 9,000 L
Net cash provided by operating activities.............. M
Purchase of long-term investments............................. $(5,000)
Purchase of property, plant, and equipment................ (33,000)
Net cash used by investing activities.................... (38,000)
Reacquisition of common shares................................. $(25,000)
Issue of bonds............................................................. 30,000
Payment of cash dividends.......................................... (10,000)
Net cash used by financing activities.................... (5,000)
Net increase in cash........................................................... 16,000

Cash, January 1................................................................. 18,000
Cash, December 31........................................................... $34,000


5. Accrued expenses pertain to operating expenses.
Instructions
Solve for the missing amounts (note the letter O is not used).
*Solution 136 (45 min.)

December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash................................................................................... $ 34,000 $ 18,000
Inventory............................................................................ 90,000 70,000
Investments........................................................................ 15,000 10,000
Total............................................................................. $364,000 $292,000

Bonds payable................................................................... 130,000 100,000
Common shares................................................................. 50,000 75,000
Total............................................................................. $364,000 $292,000
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales.................................................................................. $500,000
Expenses
Operating expenses (excluding depreciation).............. 90,000
Loss on sale of property, plant, and equipment........... 4,000 408,000
Net income......................................................................... $ 75,000

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash receipts from customers ($500,000 – $16,500)........... $483,500
Cash payments
To suppliers ($290,000 + $20,000 – $4,000)................. $306,000
For operating expenses ($90,000 + $2,000 + $500)...... 92,500
For income tax............................................................... 17,000
For interest expense...................................................... 9,000 (424,500)
Net cash provided by operating activities................ 59,000
Purchase of long-term investments...................................... $ (5,000)
Purchase of property, plant, and equipment......................... (33,000)
Net cash used by investing activities............................. (38,000)
Reacquisition of common shares.......................................... $(25,000)
Issue of bonds...................................................................... 30,000
Payment of cash dividends................................................... (10,000)
Net cash used by financing activities............................. (5,000)
Cash, January 1.......................................................................... 18,000
Cash, December 31..................................................................... $ 34,000
Summary
A = $48,500
B = $90,000
C = $2,000
D = $15,000
E = $364,000
F = $38,000
G = $90,000
H = $15,000
I = $4,000
J = $75,000
K = $92,500
L = $(424,500)
M = $59,000
*Ex. 137
Presented below is the comparative trial balance and additional information for Hipsters Inc., which has a
calendar year end. Credit balances are shown in brackets.
2018 2017
Cash..................................................................................... $ 19,800 $ (10,000)
Accounts Receivable............................................................ 48,200 40,000
Inventory............................................................................... 10,000 14,000
Prepaid Expenses................................................................ 2,000 1,000
Equipment............................................................................ 84,000 70,000
Accumulated Depreciation.................................................... (20,000) (14,000)
Accounts Payable................................................................. (34,000) (20,000)
Salaries Payable................................................................... (6,000) 0
Income Tax Payable............................................................. (2,000) 0
Bank Loan Payable.............................................................. (20,000) (24,000)
Common Shares................................................................... (10,000) (8,000)
Retained Earnings................................................................ (49,000) (29,800)
Dividends.............................................................................. 10,000 10,000
Revenue............................................................................... (354,000) (290,000)
Cost of Goods Sold.............................................................. 116,000 86,000
Salaries Expense.................................................................. 138,000 110,000
Operating Expenses............................................................. 52,000 53,000
Depreciation Expense........................................................... 10,000 5,000
Interest Expense................................................................... 1,000 1,200
Income Tax Expense............................................................ 6,000 5,600
Gain on Disposal of Equipment............................................ (2,000) 0

3. A cash dividend of $10,000 was paid during the year.
Instructions
Using the direct method, prepare a statement of cash flows for the year ended December 31, 2018.

HIPSTERS INC.
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash receipts from customers [$354,000 – ($48,200 – $40,000)] $345,800
Cash payments
To suppliers ($116,000 + ($10,000 – $14,000)
– ($34,000 – $20,000)).................................................. $98,000
For operating expenses ($52,000 + ($2,000 – $1,000). . 53,000

For salaries ($138,000 – $6,000)................................... 132,000
For income tax ($6,000 – $2,000).................................. 4,000
For interest expense...................................................... 1,000 288,000
Proceeds from sale of equipment......................................... $ 4,000
Net cash used by investing activities............................. (16,000)
Issue of common shares....................................................... $2,000
Repayment of bank loan....................................................... (4,000)
Payment of cash dividends .................................................. (10,000)
Cash, January 1.......................................................................... (10,000)
Cash, December 31..................................................................... $ 19,800
*Ex. 138
The financial statements of Weighting Limited appear below:
WEIGHTING LIMITED
December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash............................................................................................ $ 118,000 $ 46,000
Inventory...................................................................................... 40,000 30,000
Total..................................................................................... $280,000 $252,000

Income tax payable..................................................................... 26,000 16,000
Mortgage payable........................................................................ 18,000 66,000
Common shares.......................................................................... 78,000 48,000
Total..................................................................................... $280,000 $252,000
WEIGHTING LIMITED
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales....................................................................................................................... $760,000
Cost of goods sold.................................................................................................. 580,000

Gross profit............................................................................................................. 180,000
Operating expenses................................................................................................ 72,000
Interest expense..................................................................................................... 8,000
Income before income tax....................................................................................... 100,000
Income tax expense................................................................................................ 20,000
Net income.............................................................................................................. $ 80,000

1. Dividends declared and paid were $28,000.
2. During the year, equipment was sold for $24,000 cash. This equipment cost $56,000 originally and had a
carrying amount of $24,000 at the time of sale.
3. Depreciation expense is included in operating expenses.
4. All sales and purchases are on account.
5. Accounts payable pertain to merchandise suppliers.
6. All operating expenses except for depreciation were paid in cash.
Instructions
WEIGHTING LIMITED
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash receipts from customers ($760,000 + $6,000)............. $766,000
Cash payments:
To suppliers................................................................... $606,000 (1)
For operating expenses................................................. 48,000 (2)
For interest expense...................................................... 8,000
For income tax ($20,000 – $10,000).............................. 10,000 672,000
Sale of equipment................................................................. $24,000
Net cash provided by investing activities....................... 24,000
Repayment of mortgage....................................................... $(48,000)
Issue of common shares....................................................... 30,000
Payment of cash dividend..................................................... (28,000)
Cash, January 1.......................................................................... 46,000
Cash, December 31..................................................................... $ 118,000
(1) Cost of goods sold................................................................ $580,000

Add: Increase in inventory................................................... 10,000
Purchases............................................................................ 590,000
Add: Decrease in accounts payable.................................... 16,000

Cash payments to suppliers................................................. $606,000
(2) Operating expenses............................................................. $72,000

Less: Depreciation expense................................................ (24,000)*
Cash payments for operating expenses............................... $48,000
*$48,000 – $32,000 = $16,000 balance in accumulated depreciation after sale.

Ending balance, $40,000 – $16,000 = $24,000 depreciation expense.
*Ex. 139
Condensed financial data of McKillop Corporation appear below:
December 31
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Assets
2018 2017
Cash............................................................................................ $ 74,700 $ 35,000
Inventory...................................................................................... 100,000 112,000
Prepaid expenses........................................................................ 32,000 36,000
Long-term investments................................................................ 81,000 66,000
Total..................................................................................... $561,700 $431,000

Accrued expenses payable......................................................... 29,000 24,000
Bonds payable............................................................................. 135,000 160,000
Common shares.......................................................................... 240,000 91,000
Total..................................................................................... $561,700 $431,000
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales........................................................................................... $500,000
Expenses
Cost of goods sold................................................................ $295,000
Operating expenses............................................................. 65,000
Depreciation expense........................................................... 17,000
Interest expense................................................................... 18,000
Loss on sale of equipment.................................................... 3,000 398,000
Income before income tax........................................................... 102,000
Income tax expense.................................................................... 15,300

Net income.................................................................................. $ 86,700

3. Bonds were originally issued at face value. Bonds with a face value of $25,000 were converted into
$25,000 of common shares during the year.
4. Cash dividends were declared and paid during the year.
Instructions
*Solution 139 (25–30 min.)

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash receipts from customers ($500,000 – $37,000).................. $463,000
Cash payments:
To suppliers................................................................... $265,000 (1)
For operating expenses................................................. 56,000 (2)
For income tax............................................................... 15,300
For interest.................................................................... 18,000 354,300
Purchase of long-term investments...................................... $(15,000)
Sale of equipment................................................................. 10,000
Net cash used by investing activities....................... (90,000)
Issue of common shares....................................................... $124,000
Payment of cash dividends................................................... (103,000) (3)
Net cash provided by financing activities................ 21,000
Cash, January 1.......................................................................... 35,000
Cash, December 31..................................................................... $ 74,700

Conversion of bonds payable into common shares............ $25,000
(1) Cost of goods sold................................................................ $295,000

Deduct: Decrease in inventory............................................. (12,000)
Purchases............................................................................ 283,000
Deduct: Increase in accounts payable................................. (18,000)
Cash payments to suppliers................................................. $265,000
(2) Operating expenses............................................................. $65,000

Deduct: Decrease in prepaid expenses............................... (4,000)
Deduct: Increase in accrued expenses payable.................. (5,000)
Cash payments for operating expenses............................... $56,000
(3) Retained earnings, Dec 31, 2017......................................... $ 81,000

Add: Net income for 2018..................................................... 86,700
Less: Retained earnings, Dec 31, 2018................................ (64,700)
Dividends declared............................................................... $ 103,000
Ex. 140
Select data for the following two companies is identified below:
Wizards Corp. Blazer Inc.
Profit $21,575 $10,200
Cash provided/(used) by operating activities (9,820) 6,490
Cash provided/(used) by investing activities* 14,385 (1,195)
Cash provided/(used) by financing activities (2,400) (6,058)
Dividends paid 0 2,500
*Assume cash provided/(used) by investing activities reflects net capital expenditures.
Instructions
(a) Calculate the free cash flow for each company.
(b) Which company is in a stronger financial position?
Solution 140
(a) Free cash flow = Cash provided by operating activities – Net capital expenditures – Dividends paid
Wizards = $(9,820) + $14,385 – $0 = $4,565; Blazer = $6,490 – $1,195 – $2,500 = $2,795
(b) Wizards Corp. has more free cash flow to finance new investments, reduce debt or pay more dividends in
the future relative to Blazer Inc. Wizards Corp. has cash provided rather than used by investing activities,
which indicates that the company may be selling some of its long-lived assets to offset cash used by
operating activities. In addition, Wizards did not pay out any dividends. Blazer Inc., on the other hand, had
cash used by investing activities in addition to paying out dividends, which are the primary reasons why its
free cash flow was lower than Wizards Corp.
Ex. 141
Healthy Eater Inc. reported the following selected information:
2018 2017 2016

Net cash provided/(used) by operating $14,650 $(2,100) $ (8,500)
Net cash used by investing activities (5,100) (11,200) (8,400)
Net cash provided by financing 2,000 7,000 5,500
Dividends 4,500 0 0
Instructions
(a) In each of the years shown above, what phase of the corporate life cycle do you think the company is in?
(b) Calculate the company’s free cash flow for 2018 and 2017. Use net cash used by investing activities as a
proxy for capital expenditures.
Solution 141
(a) Healthy Eater appears to be in the introductory stage in Years 2016 and 2017as evidenced by the
negative cash from operating activities, cash used by investing activities and positive cash generated in
financing activities. This is indicated by the issuance of debt and equity to pay for investments and cover
the operating activities shortfall. In 2018 they appear to be moving into the growth stage given the positive
cash from operating activities and lower cash used in investing activities.
(b) Free cash flow = Cash provided by operating activities – Net capital expenditures – Dividends paid
2018 = $14,650 – $5,100 – $4,500 = $5,050; 2017 = $–2,100 – $11,200 – $0 = $(13,300)
Ex. 142
Merlin Marketing Ltd. produces the following information from their latest financial statements:
Net income........................................................................... $ 21,000
Dividends paid...................................................................... 5,000
Average total assets............................................................. 210,000
Current assets...................................................................... 150,000
Current liabilities................................................................... 100,000
Cash provided by operating activities................................... 19,000
Net capital expenditures....................................................... 10,000
Net sales.............................................................................. 150,000
Total liabilities....................................................................... 105,000
Total assets.......................................................................... 175,000
Cash used in investing activities........................................... 12,000
Instructions
(a) Calculate the free cash flow.
(b) Explain the importance of the free cash flow calculation.

(a) Free cash flow = Cash provided by operating activities – Net capital expenditures – Dividends paid =
$19,000 – $10,000 – $5,000 = $4,000
(b) Free cash flow is a measure of solvency that helps external stakeholders understand how much
discretionary cash flow Merlin Marketing has left after paying for net capital expenditures and paying
dividends. It indicates the company’s potential to finance new investments or expansion, reduce debt, or
even pay more dividends in future.
*Ex. 143
Greenbriar Sales Inc. reported total operating expenses of $320,000 in 2018, which included depreciation
expense of $75,000. Also, during 2018, prepaid expenses increased by $17,000 and accrued expenses
decreased by $16,500.
Instructions
Using the direct method, calculate the amount of cash payments for operating expenses in 2018

Operating expenses........................................................... $320,000
Less: Depreciation expense............................................... (75,000)
Add: Increase in prepaid expenses.................................... 17,000
Add: Decrease in accrued liabilities.................................... 16,500
Cash payments for operating expenses............................. $278,500
*Ex. 144
For all instances below, assume the direct method of preparing the operating activities section of the statement
of cash flows is used.
(a) Sales = $640,280; accounts receivable increased by $23,450. Calculate cash receipts from sales.
(b) Cost of goods sold = $1,640,000; inventory decreased by $52,000; accounts payable decreased by
$28,500. Calculate cash payments for purchases.
(c) The income statement shows $10,450 for income tax expense. The statement of financial position shows
an increase in income tax payable of $2,525. Calculate the cash paid for income tax.
(d) Operating expenses total $102,500; depreciation expense = $37,200; prepaid expenses increased by
$16,300; accrued liabilities decreased by $4,900. Calculate cash payments for operating expenses.

(a) $616,830 (640,280 – 23,450)
(b) $1,616,500 (1,640,000 – 52,000 + 28,500)
(c) $7,925 (10,450 – 2,525)
(d) $86,500 (102,500 – 37,200 + 16,300 + 4,900)
*Ex. 145
For all instances below, assume the direct method of preparing the operating activities section of the statement
of cash flows is used.
(a) Sales = $1,025,000; accounts receivable decreased by $162,000. Calculate cash receipts from sales.
(b) Cost of goods sold = $444,000; inventory increased by $12,000; accounts payable increased by $32,750.
Calculate cash payments for purchases.
(c) The income statement shows $32,900 for income tax expense. The statement of financial position shows
a decrease in income tax payable of $2,250. Calculate the cash paid for income tax.
(d) Operating expenses total $272,000; depreciation expense = $41,200; prepaid expenses decreased by
$15,750; accrued liabilities increased by $6,000. Calculate cash payments for operating expenses.

(a) $1,187,000 (1,025,000 + 162,000)
(b) $432,250 (444,000 + 12,000 – 32,750)
(c) $35,150 (32,900 + 2,250)
(d) $209,050 (272,000 – 41,200 – 15,750 – 6,000)
*Ex. 146
The general ledger of Argyle Limited provides the following information:
Accounts Receivable............................ $ 142,000 $ 206,000
Inventory............................................... 686,000 524,000
Accounts Payable................................. 90,000 132,000
The company's net sales for the year were $4,600,000 and cost of goods sold was $3,275,000.
Instructions
Assuming the company uses the direct method of preparing the operating activities section of its statement of
cash flows, calculate the following:
(a) Cash receipts from customers.
(b) Cash payments to suppliers.

(a) Cash receipts from customers
Sales + decrease in Accounts Receivable
$4,600,000 + $64,000 = $4,664,000
(b) Cash payments to suppliers

Cost of Goods Sold + increase in Inventory + decrease in Accounts Payable
$3,275,000 + $162,000 + 42,000 = $3,479,000
*Ex. 147
The income statement of Packer Inc. for the year ended December 31, 2018, reported the following condensed
information:
Revenue from fees.................................... $585,000
Operating expenses.................................. 340,000
Income from operations............................. 245,000
Income tax expense.................................. 61,250
Net income................................................ $183,750
Packer's statement of financial position contained the following comparative data at December 31:
2018 2017
Accounts receivable.................................. $52,500 $45,000
Accounts payable...................................... 34,000 41,000
Income taxes payable............................... 5,500 3,000
The corporation has no depreciable assets. Accounts payable pertain to operating expenses.
Instructions
Using the direct method, prepare the operating activities of the statement of cash flows for the year ended
December 31, 2018.

PACKER INC.
Year Ending December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash receipts from customers ($585,000 – $7,500)............. $577,500
Cash payments:
For operating expenses ($340,000 + $7,000)................ $347,000
For income taxes ($61,250 – $2,500)............................ 58,750 405,750
Net cash provided by operating activities...................... $171,750
*Ex. 148
The income statement of Northumberland Corporation is shown below:
NORTHUMBERLAND CORPORATION
Income Statement
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Sales........................................................................................... $8,500,000
Cost of goods sold....................................................................... 5,200,000
Gross profit.................................................................................. 3,300,000
Operating expenses.................................................................... $1,250,000
Depreciation expense.................................................................. 140,000 1,390,000
Net income.................................................................................. $1,910,000
Additional information:
1. Accounts receivable increased $420,000 during the year.
2. Inventory increased $250,000 during the year.
3. Prepaid expenses increased $215,000 during the year.
4. Accounts payable to merchandise suppliers increased $290,000 during the year.
5. Accrued expenses payable increased $160,000 during the year.
Instructions
Using the direct method, prepare the operating activities section of the statement of cash flows for the year
ended December 31, 2018.
NORTHUMBERLAND CORPORATION
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash flows provided (used) by operating activities
Cash receipts from customers............................................... $8,080,000 (1)
Cash payments:
To suppliers...................................................................$5,160,000 (2)
For operating expenses................................................. 1,305,000 (3) 6,465,000
Net cash provided by operating activities................ $1,615,000
(1) Sales.................................................................................... $8,500,000

Deduct: Increase in accounts receivable.............................. 420,000
Cash receipts from customers.............................................. $8,080,000
(2) Cost of goods sold................................................................ $5,200,000

Add: Increase in inventory.................................................... 250,000
Purchases............................................................................ 5,450,000
Deduct: Increase in accounts payable.................................. 290,000
Cash payments to suppliers................................................. $5,160,000
(3) Operating expenses............................................................. $1,250,000

Add: Increase in prepaid expenses....................................... 215,000
Deduct: Increase in accrued expenses payable................... (160,000)
Cash payments for operating expenses............................... $1,305,000
*Ex. 149
Below is select information from Houston Enterprise:
2018 2017
Dividends payable $36,000 $30,000
Retained earnings 391,500 171,000
Net Income 295,500
Instructions
(a) Calculate cash dividends declared.
(b) Calculate cash payments for dividends.
*Solution 149
(a) Cash dividends declared = 2018 retained earnings – net income – 2017 retained earnings : $391,500 –
$295,500 – $171,000 = $75,000
(b) Cash payments for dividends = Cash dividends declared – increase in dividends payable: $75,000 –
$6,000 = $69,000
MATCHING QUESTIONS SET 1
150. For each of the following items, indicate by using the appropriate code letter, how the item should be
reported in the statement of cash flows, using the indirect method (ASPE).
A. Added to net income

B. Deducted from net income
C. Cash payment—investing activity
D. Cash receipt—investing activity
E. Cash payment—financing activity
F. Cash receipt—financing activity
G. Significant noncash investing and financing activity
____ 1. Increase in accounts payable during a period
____ 2. Declaration and payment of a cash dividend
____ 3. Gain on sale of land
____ 4. Increase in accounts receivable during a period
____ 5. Redemption of bonds for cash
____ 6. Proceeds from sale of equipment at carrying amount
____ 7. Issue of common shares for cash
____ 8. Purchase of a building for cash
____ 9. Acquisition of land in exchange for common shares
____ 10. Decrease in inventory during a period
ANSWERS TO MATCHING SET 1

1. A
2. E
3. B
4. B
5. E
6. D
7. F
8. C
9. G
10. A
MATCHING QUESTIONS SET 2
*151. For each of the following items, indicate by using the appropriate code letter, how the item should be
reported in the statement of cash flows, using the direct method.
A. Added in determining cash receipts from customers

B. Deducted in determining cash receipts from customers
C. Added in determining cash payments to suppliers
D. Deducted in determining cash payments to suppliers
E. Cash payment—investing activity
F. Cash receipt—investing activity
G. Cash payment—financing activity
H. Cash receipt—financing activity
I. Significant noncash investing and financing activity
J. Is not shown
____ 1. Increase in accounts payable during a period
____ 2. Purchase of a long-term investment
____ 3. Decrease in accounts receivable during a period
____ 4. Depreciation expense
____ 5. Conversion of bonds payable into common shares
____ 6. Increase in inventory during a period
____ 7. Sale of equipment for cash at carrying amount
____ 8. Issue of preferred shares for cash
____ 9. Purchase of land for cash
____10. Loss on sale of equipment
ANSWERS TO MATCHING SET 2

1. D
2. E
3. A
4. J
5. I
6. C
7. F
8. H
9. E
10. J
SHORT-ANSWER ESSAY QUESTIONS
S-A E 152
You are having coffee with Maxwell Smart, the CEO of Smart Shoe Technology Inc. Your conversation turns to
the company's recent financial statements. Mr. Smart feels that he understands the basics of the financial
statements but is puzzled by the need for an income statement and a statement of cash flows. In particular he
wonders about the operating activities in the statement of cash flows. He asks you to explain to him why both
are needed and the difference between them.
Instructions
In point form, list the items you would include in your response to Mr. Smart.
Solution 152
 The income statement uses accrual accounting to measure the profitability of the business.
 The statement of cash flows focuses on the receipt, payment and change in cash for the period.
 The operating activities on the statement of cash flows are similar to the income statement but they are
focused on cash rather than accrual accounting.
 Both cash flow and net income are important to users of the financial statements. The income statement
helps assess and predict profitability while the statement of cash flows allows a user to assess and predict
future cash flows.
*S-A E 153
(a) The statement of cash flows is the only required financial statement that is not prepared from an adjusted
trial balance. What are the sources of information for preparing a statement of cash flows?
(b) Explain how the accrual basis of accounting affects the operating activities section of the statement of
cash flows.
*Solution 153
(a) The information used to prepare the statement of cash flows usually comes from three sources, which are:
(1) a comparative statement of financial position, (2) a current income statement, and (3) additional
information.
(b) The accrual basis of accounting requires that revenues be recorded when earned and that expenses be
recorded in the same period the revenue was generated. Thus, net income may include earned revenues
for which cash has not yet been collected and include incurred expenses which have not yet been paid for
in cash. These noncash revenues and noncash expenses do not affect the cash balance. Therefore, the
noncash revenues and noncash expenses must be eliminated to determine the net cash provided by
S-A E 154
When preparing a statement of cash flows using the indirect method explain the following.
(a) Why is depreciation added back to net income in the operating activities section?
(b) Why are gains/(losses) deducted/added back to net income in the operating activities section?
(c) Why are the proceeds from sale reported in the investing activities section rather than the operating
activities section?
Solution 154
(a) The indirect method begins with net income based on accrual accounting, which includes depreciation
expense. However, depreciation expense does not represent a cash payment and thus, to convert
accrual-based net income to cash-based net income, it must be added back to net income to “cancel” the
expense. As a result, depreciation will not be included in the calculation of cash flows provided (used) by
(b) The indirect method begins with net income based on accrual accounting, which includes gains/(losses).
However, gains/(losses) do not represent a cash receipt or cash payment and thus, to convert accrual-
based net income to cash-based net income, gains must be deducted from net income to “cancel” the
income and losses must be added to net income to “cancel” the loss. As a result, gains/(losses) will not be
included in the calculation of cash flows provided/(used) by operating activities.
(c) The proceeds from sale are reported in the investing activities section as selling equipment is not part of
the company’s primary activities. There is therefore no cash receipt or payment from operating activities.
*S-A E 155
Standard setters recommend using the direct method for preparing a statement of cash flows, yet the indirect
method is still widely used in Canada, even by corporations reporting under IFRS. Why do you think this is?
*Solution 155
Standard setters recommend the direct method since it is considered to be more informative for users, and is
easier to compare with other financial statements. It does not contain references to noncash items and
changes to current asset and liability accounts (as the indirect method does). However, the indirect method,
which has been used for many years, continues to be in wide use because it is easier to prepare and reveals
less company information to competitors. Proponents of the indirect method (who are thus opponents of the
direct method) maintain that the costs of modifying accounting systems to obtain the data required for the
direct method outweigh the benefits, i.e., it would not be cost-beneficial.
*S-A E 156
How is it possible for a company to record a loss for a given year, yet produce a positive cash flow provided
(used) by operating activities?
*Solution 156
A loss means that accrual-based expenses exceeded accrual-based revenues for the period. However, if you
eliminate the effect of noncash expenses such as depreciation by adding them back, it is possible to produce a
positive net cash flow from operations. Increasing payables (not paying all expenses incurred this period) and
decreasing receivables (collecting more receivables than sales) would also cause cash flow to be higher than
accrual-based net income or loss.
*S-A E 157
The operating activities section of the statement of cash flows can be calculated using the indirect or direct
method. Describe how the two methods differ, yet arrive at the same information about the cash flows provided
(used) by operating activities.
*Solution 157
The indirect method starts with net income and converts it to the net cash provided by operating activities.
There are two types of adjustments: (1) changes in current assets and current liabilities and (2) noncash
charges and credits. For example, an increase in accounts receivable is deducted from net income and an
increase in accounts payable is added to net income. Similarly, noncash expenses such as depreciation
expense are added back to net income. The adjustments are the difference between net income and the net
cash provided by operating activities.
Under the direct method, net cash provided by operating activities is calculated by adjusting each individual
revenue and expense item in the income statement from the accrual to the cash basis. Within the operating
activities section, only major classes of operating cash receipts and cash payments are reported. The
difference between these major classes is the net cash provided (used) by operating activities.
The same adjustments are made in both methods, regardless of whether net income is adjusted or individual
revenues and expenses are adjusted. Therefore, both methods arrive at the same result.
S-A E 158
Forest Mountain Trading Corporation's most recent financial statements showed a dismal performance. There
was a loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories—
operating, investing, and financing activities. The company president, Mr. Forest, called all the managers
together and asked them to do all they could to make sure the next quarter's performance was better.
Sam Sidhu, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified
several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack.
This saved the company money, since part-time workers do not have the same insurance and other benefits
as full-time workers.
Gloria Renton, the controller, immediately suspended payments on all accounts payable except those on which
interest would accrue. She also instituted aggressive collection procedures for accounts receivable.
Instructions
(a) Were Sam Sidhu’s actions ethical? Explain.
(b) Were Gloria Renton's actions ethical? Explain.
(c) Were Mr. Forest’s actions ethical? Explain.
Solution 158
(a) There is no clear-cut answer as to whether Sam Sidhu's actions were ethical or not. Both points of view
could be considered correct. On the one hand, he was probably within his legal rights to reclassify the
workers. He also might be commended for allowing more workers to have jobs than was previously the
case. On the other hand, however, he has removed a very real benefit from the former full-time workers,
and he has done it fairly arbitrarily. He may have harmed morale, and harmed the company if the workers
quit and new workers have to be hired.
(b) Gloria Renton's actions all appear to be ethical.
(c) Mr. Forest may have placed undue pressure on the employees to show better results. The managers may
feel that they need to sacrifice the long-term goals of the firm for short-term benefits.
S-A E 159
The corporate life cycle consists of four phases: introductory, growth, maturity, and decline. Each phase helps
to understand what to expect for a company’s cash flow from its operating, investing, and financing activities.
Instructions
(a) During which phase(s) and within which activity(ies) should a company not expect to generate positive
cash flows and why?

(b) During which phase(s) and within which activity(ies) should a company expect to generate positive cash
flows and why?
(c) When might a company not experience the traditional phases of a corporate life cycle?
Solution 159
(a) In the introductory and growth phases, we don’t usually expect to see a company generate positive cash
from its operating activities. Because the company is making significant investments in its long-lived
assets, cash will be used by investing activities. As companies move to the maturity phase they can start
to declare and pay dividends, retire debt, and/or buy back shares, so their cash flows from financing
activities move toward the negative. In the decline phase, cash from operating activities decreases.
(b) In the introductory and growth phases, cash generated by financing activities is usually positive because
debt and equity are issued to pay for the investments and cover the operating activities shortfall.
Companies are usually able to generate positive cash from operating activities as they reach maturity
which is used to cover investing activities. Cash from investing activities is positive as the company sells
off its excess assets before starting to decline. Cash is used for financing activities as the company
continues to pay off its debt.
(c) When a company is undergoing financial difficulties cash provided by operating activities is usually
declining (or negative with cash used by operating activities) because cash needs to be used for, rather
than provided by, financing activities. This is because lenders require repayments of loans and provide no
new financing to the company. At times like this, a company may need to sell off non-current assets to
obtain the cash to make these payments to lenders.
*S-A E 160
When preparing a statement of cash flows using the direct method, why must the sales revenue figure be
adjusted to arrive at cash receipts from sales?
*Solution 160
Sales revenue (from the income statement) is an accrual-based figure that includes both cash and credit sales
for the period. The statement of cash flows reports cash collections only, regardless of whether the sales arose
in the current period or whether the credit sales have or have not been collected. An adjustment based on the
change in accounts receivable accomplishes this conversion.
OBJECTIVE FORMAT QUESTIONS
161. Choose whether the item would be shown in the operating (O), investing (I), or financing (F) activities on
the statement of cash flows, or if the transaction would not be shown (NS) on the statement of cash flows. The
company reports under ASPE and uses the indirect method to prepare the operating activities section of the
(a) Depreciation expense totalling $35,000
(b) Interest received from bond investments totalling $4,000
(c) Interest paid totalling $6,500 on long-term debt
(d) An increase of $32,000 in income tax payable
(e) Reacquired common shares for $44,000
(f) Declared and distributed a stock dividend
(g) Proceeds from the sale of land totalled $35,000
(h) A gain on the sale of land totalling $4,500
Solution 161
(a) Operating. Depreciation expense is a noncash expense but it is shown on the statement as an addition to
net income because it was deducted in arriving at net income. By adding it back to net income we negate
its effect on cash flows..
(b) Operating. Under ASPE, interest earned is recorded as an operating activity. It is not shown as a separate
item but is included in net income which is the first amount shown under operating activities. If a company
reports under IFRS, they have the option to record this as an operating activity or an investing activity.
(c) Operating. Under ASPE, interest paid is recorded as an operating activity. It is not shown as a separate
item but is included in net income which is the first amount shown under operating activities. If a company
reports under IFRS, they have the option to record this as an investing activity or an operating activity.
(d) Operating. An increase in income tax payable during the year indicates a difference between the income
tax expense incurred and the income tax actually paid during the year. It means that income tax expense
was not fully paid in cash so cash provided by operating activities is higher than net income with regard to
this effect. Therefore, when net income is adjusted to the operating cash flow, the increase in income tax
payable is added to net income.
(e) Financing. If a company reacquires shares, the amount of cash paid to reacquire the shares would be
reported as a cash payment in the financing activities section of the statement of cash flows.
(f) Not Shown. Stock dividends do not require a cash payment and are not shown on the statement of cash
flows.
(g) Investing. The cash proceeds received from the disposal of land are shown in their entirety in the investing
activities section. Any gain or loss on the disposal of land would be reported under operating activities.
These gains and losses are not cash flows but were included in net income which is the first amount
shown in the operating activities section. Because they are not cash flows we deduct the gains or add the
losses back to net income so that their effect is excluded from operating activities
(h) Operating. Since the gain on sale the land will impact the net income reported on the income statement
but does not reflect an increase in cash, it is deducted from net income in the operating activities section of
the statement. .
162. Identify all of the following statements that are correct with regard to the indirect method of preparing the
operating activities section of the statement of cash flows.
(a) There is an in inverse relationship between the impact of changes in current assets and current liabilities
on cash flows.
(b) The reason depreciation and amortization are added to net income is because they were subtracted from
revenue to calculate net income. They are noncash expenses and must be added back to net income to
reverse the effect.
(c) When accounts receivable increase during the year, cash collected from customers is greater than the
amount of sales to those customers and the change in accounts receivable should be subtracted from net
income.
(d) Unrealized losses on investments (i.e. losses that are recorded when the carrying amount of an
investment is adjusted to fair value but it is not sold) are added back to net income.
(e) Changes in all working capital accounts need to be either added back to net income or subtracted from net
income.
(f) An increase in the unearned revenue account is subtracted from net income and a decrease in the
unearned revenue account is added to net income.
(g) A loss or gain on the sale of a long-term asset is added to or subtracted from net income, respectively.
This is because the full cash proceeds from the sale are recorded under investing activities on the
(h) If the amount of income tax payable increases during a year, the increase is added to net income to show
that the cash paid during the period for income tax is higher than the income tax expense deducted on the
accrual-based income statement.
Solution 162
(a), (b), (d), and (g) are correct.
(c) When accounts receivable increase during the year, cash collected from customers is less than the
amount of sales to those customers and the change in accounts receivable should be subtracted from net
income.
(e) Changes in some non-cash working capital accounts need to be added back or subtracted from net
income. However, some working capital accounts affect the investing or financing activities on the
statement of cash flows and would not be shown in the determination of operating cash flows. For
instance, changes in working capital accounts relating to loans, notes, and dividends payable are not
included in the operating activities section. The issue and repayment of loans or notes for investment
purposes are shown in the investing section of the statement of cash flows. Similarly, the receipt and
repayment of short-term loans or notes payable that have been used for borrowing purposes are shown in
the financing section of the statement of cash flows. Payments of dividends, which can affect the dividends
payable account, are shown in the financing section of the statement of cash flows.
(f) An increase in the unearned revenue account is added to net income because it represents cash received
from customers not yet shown in sales on the income statement. A decrease in the unearned revenue
account is subtracted from net income as it represents a portion of revenue that was not received in cash
in a prior period, not the current one.
(h) If the amount of income tax payable increases during a year, the increase is added to net income but not
for the reason specified in the question. This is done to show that the income tax expense deducted on the
accrual-based income statement is higher than the cash paid during the period for income tax.
163. Dragon Light Company Inc. prepared the following statement of cash flows for 2018:
Dragon Light Company Inc.

Net income $78,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation expense $ 8,500
Loss on disposal of equipment (1,245)
Increase in accounts receivable (4,500)
Decrease in inventory 1,785
Increase in accounts payable (780)
Increase in income tax payable (7,450) (3,690)
Purchase of equipment (57,840)
Proceeds from disposal of equipment 6,750
Net cash used by investing activities (51,090)
Repayment of mortgage payable (34,580)
Payment of cash dividend 6,575
Net cash used by financing activities (28,005)
Net decrease in cash (4,785)
Cash, January 1 4,250
Cash, December 31 $(535)
As a consultant for Dragon Light, you have been asked to review the statement of cash flows for any errors
and make corrections. Once you have completed this, indicate all of the following statements that are correct:
(a) Dragon Light has free cash flow of $29,795.
(b) Net cash provided from operations should be $93,260.
(c) Net cash used by investing activities is correctly stated.
(d) Dragon Light is likely in the introductory/growth phase of the corporate life cycle.
(e) Net cash used by financing activities should be $41,155.
(f) Cash, December 31 should be $5,265.
(g) The net decrease in cash should be $17,935.
(h) Overall, cash flows have declined from January 2018 to December 2018.
Solution 163
The following is the corrected statement of cash flows for Dragon Light Company Inc.
Dragon Light Company Inc.

Net income $78,000
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation expense $8,500
Loss on disposal of equipment 1,245
Increase in accounts payable 780
Increase in income tax payable 7,450 15,260
Purchase of equipment (57,840)
Proceeds from disposal of equipment 6,750
(51,090
Net cash used by investing activities
)
Repayment of mortgage payable (34,580)
Payment of cash dividend (6,575)
Net cash used by financing activities (41,155)
Net increase in cash 1,015
Cash, January 1 4,250
Cash, December 31 $5,265
Based on the above, statements (b), (c), (e), and (f) are correct.
(a) The free cash flow should be $35,595.
FreeCash Flow=Cash provided by operating activities−net capital expenditures−cash dividends

FreeCash Flow=$ 93,260−$ 51,090−$ 6,575=$ 35,595
(d) Dragon Light is not likely in the introductory/growth phase. During this phase, cash from operations is
generally negative. Dragon Light is more likely in the maturity phase as they are experiencing positive
cash flows from operations and are paying dividends.
(g) As shown above, the net increase in cash should be $1,015.
(h) Overall the cash flows have increased in January.
*164. Choose all statements that describe the direct method of preparing cash flows from operating activities
on the statement of cash flows:
(a) Adjustments will include adjusting individual revenue and expense balances on the income statement from
an accrual to a cash basis.
(b) Increases in accounts receivable are subtracted from cash flows on the statement of cash flows.
(c) Depreciation expense must be added to cash flows as it is a noncash expense.
(d) Most companies find this the more difficult method to apply in practice.
(e) Cash receipts from customers are determined by adjusting sales for changes in accounts receivable and
unearned revenues.
(f) May include noncash expenses or revenues.
(g) Net income is reported in the operating activities section of the statement of cash flows.
(h) In the operating section of the statement of cash flows, cash flows are combined into the major classes of
cash receipts and cash payments.
*Solution 164
Statements (a), (d), (e), and (h) describe the direct method; (b), (c), (f), and (g) do not describe the direct
method.
(b) For the direct method, changes in accounts receivable are not shown on the statement of cash flows.
Rather, changes in accounts receivable are used to adjust the sales figure on the income statement to
determine cash receipts from customers.
(c) Depreciation expense is simply excluded from the cash payments on the statement of cash flows, unlike
the indirect method where it is added back to net income to reflect the noncash nature of depreciation.
When using the direct method, we do not begin to prepare the statement by listing net income so there is
no need to add back to this amount, non-cash items like depreciation.
(f) Noncash expenses and revenues are simply excluded from the statement of cash flows when the direct
method is used.
(g) Net income is not reported under the operating activities section when the direct method is used. The
direct method adjusts each individual revenue and expense item in the income statement so that the result
looks like a cash basis income statement rather than a list of adjustments to net income.
*165. Aircon Ltd. Reported the following net income on its income statement for the month ended April 30,
2018:
Aircon Ltd.
Income Statement
Month Ended April 30, 2018
Sales revenue $ 35,700
Cost of goods sold 12,500
Gross profit 23,200
Operating expenses
Salaries expense $ 5,200
Administrative expenses 890

Depreciation expense 1,200 7,290
Income from operations 15,910
Interest expense 545
Income before income tax 15,365
Income tax expense 3,025
Net income $ 12,340
During the month, Aircon’s accounts receivable increased by $1,350 and accounts payable increased by $245.
The company also received payments for unearned revenue of $250. Merchandise inventory decreased by
$1,345. Administrative costs reported on the income statement do not include prepaid expenses of $450.
Income taxes payable increased in total by $3,025. The company has no other accrued liabilities. Aircon uses
the direct method when preparing the statement of cash flows.
Based on the above information, identify all of the following statements that are correct:
(a) Net cash provided by operating activities is $16,605.
(b) Cash receipts from customers is $34,350.
(c) Cash payments for interest are $545.
(d) Cash payments for operating expenses are $6,090.
(e) Cash payments to suppliers is $11,360.
(f) Cash payments to suppliers is $10,910.
(g) Cash payments for income tax are zero.
(h) Net cash provided by operating activities is $16,355.
*Solution 165
Statements (a), (c), (f), and (g) are correct
In order to answer this question, students will want to prepare a partial statement of cash flows for the month
ended April 30, 2018 using the direct method.
Aircon Ltd.
Cash receipts from customers $ 34,600
Cash payments
To suppliers $10,910
For operating expenses 6,540
For interest 545
For income tax ________ 17,995
Net cash provided by operating activities $16,605
Calculations:
Cash receipts from customers = $35,700 – $1,350 + 250 = $34,600

Cash payments to suppliers = $12,500 – $1,345 – $245 = $10,910
Cash payments for operating expenses = $5,200 + $890 + 450 = $6,450
Cash payments for interest = $545
Cash payments for income tax = $3,025 – $3,025 = 0
Students could also check their work by preparing a statement of cash flows using the indirect method as
follows:
Aircon Ltd.
Net income $12,340
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation expense $1,200
Increase in prepaid expenses (450)
Increase in accounts payable 245
Increase in unearned revenue 250
Increase in income tax payable 3,025 4,265
Net cash provided by operating activities $16,605
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Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
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CHAPTER 13

STATEMENT OF CASH FLOWS

LOD: E = Easy M = Medium H = Hard

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

LOD: E = Easy M = Medium H = Hard

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

LOD: E = Easy M = Medium H = Hard

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

*This topic is dealt with in an Appendix to the chapter.

CHAPTER LEARNING OBJECTIVES

3. Cash equivalents can include both short-term and long-term investments.

21. Investing activities affect non-current asset accounts.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

34. Which one of the following is false?

35. The statement of cash flows

36. The primary purpose of the statement of cash flows is to

37. If a company reports a loss, it

38. The statement of cash flows will not report the

39. The acquisition of land by issuing common shares is

40. The order of presentation of activities on the statement of cash flows is

(c) financing, operating, and investing.

43. Significant noncash transactions would not include

49. In preparing a statement of cash flows,

Use the following information for questions 50–55.

50. Declaration and issue of a stock dividend:

52. Issue of preferred shares for cash:

53. Repurchase of Ingles’ own common shares on the open market:

54. Issue of common shares in exchange for equipment:

(b) investing activities section

55. Purchase of land and building with a mortgage:

65. If accounts receivable have increased during a period,

67. If accounts payable have increased during a period,

82. Using the indirect method, if equipment is sold at a gain, the

95. Financing activities involve

96. Investing activities include

99. The statement of cash flows

103. Free cash flow is a measure of

*109. The following information relates to Fenelon Corporation:

Insurance expense for 2018........................................ 620,000

*116. Dock Inc. reports the following:

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Solution 120 (10 min.)

2. (c) Financing activity

3. (a) Operating activity (Note 1)

4. (a) Operating activity

5. (a) Operating activity

6. (d) Noncash activity

7. (c) Financing activity (Note 2)

8. (b) Operating activity

9. (b) Investing activity

10. (d) Operating activity

1. Collected an account receivable.

Solution 121 (10 min.)

2. (c) Operating or financing activity

3. (b) Investing activity

4. (d) Noncash activity

5. (c) Financing activity

6. (a) Operating activity