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Find more at www.downloadslide.com Chapter 12 The Statement of Cash Flows Short Exercises (10 min.) S 12-1 The statement of cash flows helps investors and creditors: a Predict future cash flows by reporting past cash receipts and payments, which are reasonably good predictors of future cash receipts and payments b Evaluate management decisions by reporting on how managers got cash and how they used cash to run the business Chapter 12 The Statement of Cash Flows 12-1 Find more at www.downloadslide.com (10-15 min.) S 12-2 DATE: _ TO: Managers of Bryant Inc FROM: Student Name SUBJECT: Purposes of the statement of cash flows The statement of cash flows is designed to help predict the future cash flows of a business The statement of cash flows measures past cash flows, which are a reasonably good predictor of future cash flows Net income is an important measure of management performance, but it takes cash to pay the bills Also, a manager’s performance should be evaluated on how well he or she uses cash This information is given in the statement of cash flows In evaluating the ability to repay a loan, a creditor examines the statement of cash flows to learn how the borrower has gained and spent cash As Bryant’s situation indicates, income may increase while cash decreases Therefore, the statement of cash flows should be used in conjunction with the income statement and the balance sheet in evaluating a company Student responses may vary 12-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5-10 min) S 12-3 Three things that could cause operating cash flows to be positive (under the indirect method) are: Increase in net income Decreases rather than increases in current assets other than cash Increases rather than decreases in current liabilities Depreciation and amortization Large loss on the sale of assets Students need to identify items Chapter 12 The Statement of Cash Flows 12-3 Find more at www.downloadslide.com (15-30 min.) S 12-4 DATE: _ TO: Managers of Harmony Inns FROM: Student Name SUBJECT: Assessment of 2012 and Outlook for the Future 2012 was not a good year Most of the increase in net income resulted from the extraordinary gain on the insurance proceeds from fire damage to a building, which means that normal operations were not very profitable This is confirmed by the increase in receivables, which hints that collections are lagging The cash-flow data paint a similar picture Operating activities used cash, which is bad news Over the long run, operations should provide the bulk of the cash if the business expects to succeed During 2012, the insurance recovery helped investing activities produce a net cash inflow Ordinarily, investing activities should produce net cash outflows as the business invests in new assets Growth is usually indicated by investments in new assets, but during 2012 net cash flows from investing activities were positive, which means that net investments were negative Although the net cash flow provided by investing activities may be temporary, it does not reflect especially well on the company It means that, in part at least, the company is maintaining its cash position by liquidating fixed assets This is a bad sign 12-4 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) S 12-4 Financing activities provided a net cash inflow, which is normal However, if the cash provided by financing activities is from debt, the additional debt could be difficult to repay since operating activities did not generate cash Unless next year turns out to be much better than 2012, the outlook for the company is not bright Student responses may vary The key conclusion is that 2012 was not a good year, and the outlook is not bright Chapter 12 The Statement of Cash Flows 12-5 Find more at www.downloadslide.com (5-10 min.) S 12-5 Cash flows from operating activities: Net income………………………………………………… $81,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………………… 4,000 Loss on sale of land…………………………………… 9,000 Increase in accounts receivable, inventory, and prepaid expenses ($49,000 − $48,000)… (1,000) Increase in current liabilities ($40,000 − $36,000)… 4,000 Net cash provided by operating activities… $97,000 12-6 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10 min.) S 12-6 O+ a Increase in accounts payable O− h Decrease in accrued liabilities I b Purchase of equipment F i Issuance of common stock O+ c Decrease in prepaid expense O− j Gain on sale of building N d Collection of cash from customers O+ k Loss on sale of land O+ l Depreciation expense O+ e Net income O− m Increase in inventory N f Retained earnings O+ n F g Payment of dividends Decrease in accounts receivable (10 min.) S 12-7 Eldred Corporation Statement of Cash Flows (partial) Year ended June 30, 2012 Cash flows from operating activities: Net income……………………………………… $63,000* Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………… $ 6,000 Increase in current assets other than cash………………………………………… Increase in current liabilities……………… Net cash provided by operating activities… _ (32,000) 11,000 (15,000) $48,000 *$222,000 − $114,000 − $39,000 − $6,000 = $63,000 Chapter 12 The Statement of Cash Flows 12-7 Find more at www.downloadslide.com (15 min.) S 12-8 Eldred Corporation Statement of Cash Flows Year ended June 30, 2012 Cash flows from operating activities: Net income……………………………………… $ 63,000* Adjustments to reconcile net income to net cash provided by operating activities: Depreciation………………………………… $ 6,000 Increase in current assets other than cash………………………………………… Increase in current liabilities……………… (32,000) 11,000 Net cash provided by operating activities… (15,000) 48,000 Cash flows from investing activities: Purchase of equipment………………………… $(37,000) Proceeds from sale of land…………………… 31,000 Net cash used for investing activities……… (6,000) Cash flows from financing activities: Proceeds from issuance of common stock… $ 15,000 Payment of note payable……………………… (29,000) Payment of dividends………………………… (5,500) Purchase of treasury stock…………………… (8,000) Net cash used for financing activities……… Net increase in cash……………………………… _ *$222,000 − $114,000 − $39,000 − $6,000 = $63,000 12-8 Financial Accounting 9/e Solutions Manual (27,500) $ 14,500 Find more at www.downloadslide.com (10 min) S 12-9 a Acquisitions of plant assets = $52,000, as follows: Plant Assets, net Beg Book value of + Acquisitions − Depreciation − = bal assets sold $180,000 + X − $10,000 − X = $222,000 − $180,000 + $10,000 X = $52,000 $0 Plant Assets, net 180,000 52,000 Depreciation 222,000 Beg bal Acquisitions End bal End bal = $222,000 10,000 b Proceeds from the sale of long-term investments = $23,000, as follows: Long-term investments Beg bal + Purchases − Book value of investments sold = End bal $75,000 + − X = $52,000 X = $75,000 − $52,000 X = $23,000 With no gain or loss, proceeds from the sale must be the same as the book value of the investments sold, $23,000 Long-Term Investments Beg bal 75,000 Book value of investments sold End bal 23,000 52,000 Chapter 12 The Statement of Cash Flows 12-9 Find more at www.downloadslide.com (15 min.) S 12-10 a New borrowing on long-term notes payable = $6,000 ($63,000 − $57,000) b Issuance of common stock = $11,000 ($47,000 − $36,000) c Payment (and declaration) of dividends = $112,000, as follows: Beginning retained earnings − Dividend declarations = Ending retained earnings − X = $237,000 + Net income $229,000 + $120,000 X = $229,000 + $120,000 − $237,000 X = $112,000 Retained Earnings Beg bal Dividends declared (paid) 12-10 229,000 Net income 120,000 End bal 237,000 112,000 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Challenge Exercises and Problem (20-30 min.) E 12-76 (All amounts in thousands) a Collections Decrease in Sales + Accounts Receivable = $25,113 = $25,118 + ($612 − $597) Increase in Cost Increase in − Accounts b Payments for of sales + Inventory Payable inventory = $18,248 = $18,162 + $267* − $181** *$3,100 − $2,833 = $267 **$1,549 − $1,368 = $181 c Payments for other = $3,582 = operating expenses d Payment of income tax = $529 e Proceeds from issuance of stock = $75 = Other Operating Expenses − $3,885 Tax Expense $537 = $1,675 ($939 − $636) Increase in − Income Tax Payable − ($198 − $190) Beg Common End Common Stock + Issuance = Stock = $443 + X = $518 X f Payment of dividends Increase in − Accrued Liabilities = $75 Beg Ret Net End Ret Earnings + Income − Dividends = Earnings $3,783 + $2,266 − X = $4,374 X Chapter 12 = $1,675 The Statement of Cash Flows 12-77 Find more at www.downloadslide.com (20 min.) E 12-77 a (All in thousands) Loss on sale of property and equipment = Book value of assets sold − Proceeds from sale of assets $485 = $1,305 − $820 Bal., 12/31/11 Capital expenditures Bal., 12/31/12 Property & Equipment, Net 9,640 Depreciation 4,175 Book value of property and equipment sold 10,600 1,910 X =1,305 b Repayment 12-78 Long-Term Notes Payable Bal., 12/31/11 140 Proceeds from issuance LT debt issued for something other than cash Bal 12/31/12 Financial Accounting 9/e Solutions Manual 3,000 1,220 X = 320 4,400 Find more at www.downloadslide.com P 12-78 Assets: Cash and cash equivalents Accounts receivable (net) Inventory Prepaid expenses December 31, 2011 $11,000 December 31, 2012 $63,000 Given 92,000 82,000 ($92,000 – $10,000) 103,000 110,000 ($103,000 + $7,000) 6,000 5,000 ($6,000 – $1,000) Land 69,000 64,000 [$69,000 – ($11,000 – $6,000)] Machinery and equipment (net) 59,000 44,000 [59,000 + $25,000 – ($9,000 + $15,000) – $16,000] Total assets $340,000 $368,000 Liabilities: Accounts payable $66,000 Unearned revenue 1,000 2,500 ($1,000 + $1,500) Dividends payable -0- 2,000 ($7,000 - $5,000) 4,000 1,500 ($4,000 – $2,500) 75,000 59,000 ($75,000 – $16,000) Income taxes payable Long-term debt Total liabilities Stockholders’ equity: Common stock, no par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity 146,000 $78,000 ($66,000+ $12,000) 143,000 26,000 46,000 ($26,000 + $20,000) 168,000 179,000 ($168,000 + $18,000 – $7,000) 194,000 225,000 $340,000 $368,000 Chapter 12 The Statement of Cash Flows 12-79 Find more at www.downloadslide.com Decision Cases (45-60 min.) Decision Case Req (indirect method for operating activities) T-Bar-M Camp, Inc Statement of Cash Flows Year Ended December 31, 2012 Cash flows from operating activities: (Thousands) Net income………………………………………………… $ 97 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation……………………………………….… $ 46 Amortization of patents…………………………… 11 Increase in accounts receivable ($72 − $61)…… (11) Increase in inventories ($194 − $181)………….…… (13) Increase in accounts payable ($63 − $56)……… Decrease in accrued liabilities ($17 − $12)………… (5) 35 Net cash provided by operating activities…………… 132 Cash flows from investing activities: Purchase of property, plant, and equipment ($369 − $259)………………………….… $(110) Purchase of long-term investments ($31 − $0)……… (31) Net cash used for investing activities………….… (141) Cash flows from financing activities: Issuance of common stock ($149 − $61)……………… $ 88 Payment of cash dividends ($156 + $97 − $213)…… (40) Payment of long-term notes payable ($264 − $179)… (85) Net cash used for financing activities……… …… Net (decrease) in cash………………………….…………… Cash balance, December 31, 2011………………………… Cash balance, December 31, 2012………………………… (37) $ (46) 63 $ 17 12-80 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) Decision Case Req The cash balance at the end of 2012 is low because: The camp paid $110,000 to buy new property, plant, and equipment The camp paid off $85,000 of notes payable Req Year 2012 was a good year Net income was $97,000, and operations were the largest source of cash Also, the company increased its property, plant, and equipment by $110,000 and paid off $85,000 of debt On this basis, business appears to have been successful Chapter 12 The Statement of Cash Flows 12-81 Find more at www.downloadslide.com (15-25 min.) Decision Case Four-Star Catering looks like the better investment because: Operations provide far more cash for Four-Star than for Applied Technology Operations should be the main source of cash for a healthy company Four-Star is investing more in long-term plant assets than Applied is Four-Star is laying a more solid foundation in revenue-producing assets than Applied is Applied Technology’s main source of cash is the sale of plant assets This trend cannot continue for long without hurting the company’s ability to produce revenue Four-Star is raising more cash by selling stock than Applied is This gives Four-Star more cash to invest in research and development of new products and other innovations to enhance the company’s competitiveness Applied, on the other hand, is paying off debt That is not necessarily bad for Applied, but Four-Star appears to be a step ahead in terms of financing its operations with owners’ equity and investing the cash in income-producing assets 12-82 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Ethical Issue Req Cash flows from operating activities: Net income…………… Increase in accounts receivable…………… Net cash (used for) provided by operating activities… Without Reclassification $ 37,000 With Reclassification $37,000 (80,000) — $(43,000) $37,000 Columbia looks better with the reclassification because net cash flow from operations is positive Req The issue is whether or not it is ethical to reclassify accounts receivable from current assets to long-term assets Req and Req The stakeholders are Columbia, its officers, directors and employees, as well as their present and future creditors Economic analysis: The plan to reclassify accounts receivable would have an immediate positive impact on Columbia and its employees because it might enable Columbia to obtain the loan it desperately needs However, this might be to the detriment of present and future creditors, because if Columbia can’t collect the receivables, it may not be able to pay off its loans to creditors Legal analysis: To reclassify receivables when, in fact, they are not truly collectible, even in the long run, might leave the company open later to a Chapter 12 The Statement of Cash Flows 12-83 Find more at www.downloadslide.com (continued) Ethical case lawsuit for damages suffered by creditors who loan Columbia money based on false information Ethical analysis: To reclassify receivables when, in fact, they are not truly collectible in the long run, deprives the banks of accurate information they need to make sound financial decisions Reclassification would be unethical if Columbia expects to collect within the current period In that case, the reclassification would appear to be designed to create a false picture of cash flow from operations It is not truthful and not ethical In the long run, no one benefits from this shortsighted decision Req The receivables should be classified in the way that best describes their collectability In reality, most bank loan officers who know financial accounting (and most do) will closely examine these receivables classify them as long-term for their own lender analysis Req The reclassification would be ethical if Columbia expects to collect the receivables beyond the current operating cycle, or one year if longer 12-84 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Focus on Financials: Amazon.com, Inc (40-50 min.) Req Amazon.com uses the indirect method to report operating cash flows You can tell because the statement begins with net income Req (Amounts in millions) a Note provides the balance of Allowance for Doubtful accounts Gross Accounts Receivable, Vendors and Customers Beg Bal ($988 + $72) 1,060 Sales (income statement) 34,204 Write-offs (see below) 171 Collections ($1,060 + $34,204 - $1,659) 33,434 End Bal ($1,587 + $72) 1,659 Allowance for Doubtful Accounts Beg Bal Write-offs ($72 + $171 - $72) Doubtful accounts expense: 171 ($34,204 x 005) 72 171 End Bal Chapter 12 72 The Statement of Cash Flows 12-85 Find more at www.downloadslide.com (continued) Amazon.com b Using the format provided in Exhibit 12-15: (Amounts in millions) Payments for Cost of = + inventory sales $25,146 = $26,561 + Increase in Inventory − Increase in Accounts Payable $1,031 − $2,446 ($3,202 − $2,171) ($8,051 - $5,605) c (Amounts in millions) From Note and the Statement of Cash Flows: Beg Bal Gross Fixed Assets 1,915 Capital spending (investing section, SCF) 979 Retirement of fixed 405 assets (difference) 172 Acquired under capital leases Acquired under build-to-suit leases End Bal 215 3,256 Accumulated Depreciation Beg Bal (Note 3) Retirement of fixed assets 183 Depreciation (Note 3) (Difference) End Bal Item 12-86 Account Dr Fixed Assets……………………………………… Cash…………………………………………… 979 Fixed Assets Under Capital Leases………… Lease Liability………………………………… 405 Financial Accounting 9/e Solutions Manual 625 400 842 Cr 979 405 Find more at www.downloadslide.com (continued) Amazon.com Fixed Assets Under Build-to-Suit Leases…… Lease Liability………………………………… 172 Depreciation Expense…………………………… Accumulated Depreciation……………… 400 Accumulated Depreciation…………………… Loss on Retirement……………………………… Fixed Assets…………………………………… 183 32 172 400 215 The loss on retirement of fixed assets equals the remaining net book value of the fixed asset retired This loss would be reported in the income statement as part of other income (expense) e In 2010, for Amazon.com, Inc., Net income increased from 2009 by $250 million ($1,152 − $902) Total assets increased from 2009 by $4,984 million ($18,797 − $13,813) Stockholders’ equity increased from 2009 by $1,607 million ($6,864 − $5,257) Cash flow from operations increased from 2009 by $202 million ($3,495 − $3,293) Overall, 2010 was a very good year for Amazon.com, Inc Chapter 12 The Statement of Cash Flows 12-87 Find more at www.downloadslide.com Focus on Analysis: RadioShack Corporation (20-30 min.) (All amounts are in millions) Req The main source of cash is operating activities ($155.0) This indicates that RadioShack, Corp.’s basic operations are generating significant cash for the company to finance current operations, acquire new fixed assets, and buy treasury stock The main use of cash is purchase of treasury stock ($398.8) This indicates that RadioShack is generating cash from operations and using it to provide a return directly to the stockholders (similar to paying dividends) RadioShack believes that the way to improve shareholder value is to buy its own stock back from stockholders Req The three most significant differences between net income and net cash provided by operations are: A deduction from net income for a change in accounts payable, accrued expenses, income taxes payable and other $(85) indicates that net cash provided by operating activities was less than net income because RadioShack paid more than it expensed 12-88 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) RadioShack An addition to net income for depreciation and amortization, $84.2 million, indicates cash flow provided by operations was greater than net income Depreciation reduces income but not cash and is added back to net income An deduction from net income for an increase in inventories, $60 million, indicates that the company’s purchases of inventory were more than cost of goods sold Req In 2010, RadioShack’s additions to property, plant, and equipment were less than previous years’ additions This is evident in the investing section of the statement of cash flows where additions to property, plant and equipment in 2010 ($80.1) were less than in 2009 ($81.0) and 2008 ($85.6) Req The largest two items in RadioShack, Corp.’s financing section of their consolidated statement of cash flows are purchases of treasury stock and payment of dividends Both of these represent ways to give value back to shareholders This reveals that the company strategy is primarily to return capital to its shareholders rather than investing that capital back into its business or expanding through additional long-term debt or stock issuances Chapter 12 The Statement of Cash Flows 12-89 Find more at www.downloadslide.com (continued) RadioShack Req In evaluating RadioShack, Corp by using its cash flows, it is important to compare the three different classifications of cash flows in the cash flow statement: operating, investing and financing Operating cash flows have decreased as a source of cash in from +$274.6 million in 2009 to +$155.0 million in 2010 During the same time period, net income improved from $189.4 million to $206.1 million Investing cash flows have decreased as a use of cash, from -$124.3 million in 2008 to $80.8 million in 2009 to $80.0 million in 2010 Financing cash flows have become increasingly negative Financing cash flows provided cash in 2008 ($154.8) but used cash in 2009 ($71.6 million) and in 2010 ($413.8 million) Overall it appears that RadioShack has been declining in the last two years The change in cash flows would suggest that RadioShack’s operations are producing less cash and RadioShack is returning capital to its shareholders rather than investing that cash in assets It would be beneficial to consider industry standards and also other ratios for liquidity and profitability 12-90 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com Group Projects (2-3 hours) Student responses will vary on this assignment Chapter 12 The Statement of Cash Flows 12-91 ... and the balance sheet in evaluating a company Student responses may vary 12-2 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (5-10 min) S 12-3 Three things that... maintaining its cash position by liquidating fixed assets This is a bad sign 12-4 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (continued) S 12-4 Financing activities... ($40,000 − $36,000)… 4,000 Net cash provided by operating activities… $97,000 12-6 Financial Accounting 9/e Solutions Manual Find more at www.downloadslide.com (10 min.) S 12-6 O+ a Increase in accounts
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