Solution manual financial accounting 6th kieso kimmel ch13

The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during a perio

CHAPTER 13

Statement of Cash Flows

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives Questions

Brief Exercises Exercises

A Problems

B Problems BYP

1 Describe the purpose

and content of the

statement of cash flows

statement of cash flows

using one of two

2B, 3B, 6B, 7B, 8B

2B, 3B, 6B, 7B

4B, 6B, 7B, 8B, 11B

5B, 6B, 7B, 8B, 11B

1, 6, 7

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Difficulty Level

Time Allotted (min.)

2A Prepare operating activities section—indirect and

direct methods

Moderate 30-40

3A Prepare operating activities section—indirect and

direct methods—and discuss methods

Moderate 30-40

4A Calculate and classify cash flows for property, plant,

and equipment

Moderate 20-30

5A Calculate and classify cash flows for shareholders’

equity

Moderate 20-30

6A Prepare statement of cash flows—indirect and direct

methods

Moderate 30-40

7A Prepare statement of cash flows—indirect and direct

methods

Moderate 50-60

8A Prepare statement of cash flows (indirect method)

and answer questions

Complex 40-50

9A Calculate and evaluate liquidity and solvency Moderate 20-30

10A Evaluate liquidity and solvency Moderate 20-30 11A Compare cash flows for three companies Moderate 20-30

3B Prepare operating activities section—indirect and

direct methods—and discuss methods

Moderate 50-60

4B Calculate and classify cash flows for property, plant,

and equipment

Moderate 20-30

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Difficulty Level

Time Allotted (min.) 6B

Prepare statement of cash flows—indirect and direct

methods

Moderate 30-40

7B Prepare statement of cash flows—indirect and direct

methods

Moderate 50-60

8B Prepare statement of cash flows (indirect method)

and answer questions

Complex 40-50

9B Calculate and evaluate liquidity and solvency Moderate 20-30

10B Evaluate liquidity and solvency Moderate 20-30 11B Compare cash flows for three companies Moderate 20-30

ANSWERS TO QUESTIONS

1 The statement of cash flows reports the cash receipts, cash payments, and net change

in cash resulting from the operating, investing, and financing activities of a company during a period, in a format that reconciles the beginning and ending cash balances The statement of cash flows is useful because it helps investors, lenders and other creditors, as well as other users, assess the following aspects of a company’s financial position:

• the reasons for the difference between profit and cash provided (used) by operating activities

• the cash investing and financing transactions during a period

• the company’s ability to generate future cash flows

2 Cash equivalents are short-term, highly-liquid investments that are readily convertible to known amounts of cash Generally, only debt investments with original maturities of three months or less qualify under this definition Bank overdrafts that are repayable on demand are also included (deducted from) cash equivalents

The statement of cash flows may be prepared using cash, or cash and cash equivalents

as its base If the latter, cash equivalents must be clearly defined

3 Operating activities include the cash flow activities arising from a company’s principal revenue-producing activities and all other activities that are not investing or financing activities

Investing activities are those arising from the acquisition and disposal of non-current assets

Financing activities include those resulting in changes in the size and composition of the equity and borrowings of a company

4 Companies following ASPE classify interest paid, interest revenue, and dividend revenue, as part of operating activities because they are disclosed on the income statement as part of profit Dividend payments are classified as financing activities This

is the most common practice for both publicly traded and private companies Companies following IFRS may classify interest and dividend revenue as either investing activities or operating activities; and interest and dividend payments as either financing activities or operating activities Companies select where these payments and receipts will be presented and must apply the presentation consistently

Answers to Questions (Continued)

(3) The income statement is required to obtain the elements of operating activities, which will be converted from the accrual basis to the cash basis The income statement is also required to identify noncash revenues and expenses such as depreciation and amortization expenses and accounting gains and losses

(4) The statement of comprehensive income is needed to reconcile certain fair-valued assets (e.g., revaluation of the fair value of land) and equity (e.g., accumulated other comprehensive income) accounts appearing in the statement of financial position However, changes in comprehensive income do not affect cash and are not reported on the statement of cash flows

(5) The statement of changes in equity will provide details of the changes in the share capital and retained earnings accounts From these, the cash effects of financing transactions with shareholders, such as the issue or reacquisition of shares and/or payment of dividends, can be determined and reported as financing activities on the statement of cash flows

7 Although the approaches and format are different, both the direct and indirect methods will produce the same net cash provided by operating activities

8 A number of factors could have caused net cash provided by operating activities to exceed profit These include (1) a high amount of collections of unearned revenue; (2) large amounts of depreciation or amortization; and (3) accounting losses These are non-cash items deducted in arriving at profit so they are now added back to profit when determining net cash flow provided by operating activities thereby making it higher than profit

Answers to Questions (Continued)

9 The indirect method involves converting accrual-based profit to net cash provided by operating activities This is done by starting with accrual-based profit from the income statement and adding or subtracting noncash items included in profit Examples of adjustments include adding back noncash expenses, such as depreciation, and removing any noncash gains or losses from profit Then changes in the balances of noncash current asset and current liability accounts from one period to the next are added or subtracted

10 Under the indirect method, depreciation and amortization expense is added back to profit to reconcile profit to net cash provided by operating activities because depreciation and amortization are expenses that have reduced profit, but do not result

in the use of cash Adding them back cancels the expenses reported in the income statement, as accrual profit is the starting point under the indirect method

Example: Profit before depreciation $5,000

Less: Depreciation expense (1,000)

12 Net cash provided by operating activities under the direct method is the difference between cash revenues and cash expenses The direct method adjusts the accrual-based revenues and expenses directly to reflect the cash-based revenues and expenses, which combine to equal "net cash provided by operating activities."

13 Depreciation and amortization expenses are not listed in the direct method operating activities section because they are not cash flow items—they do not affect cash Recall the journal entry to record depreciation: debit Depreciation Expense and credit Accumulated Depreciation The entry to record amortization is similar As you can see, there is no cash involved in this journal entry This is different from the indirect method, which uses profit as its starting point and must add back depreciation and amortization

as noncash items included in the determination of profit

Answers to Questions (Continued)

14 When a business invests money, it does so outside of its main revenue-generating operations It might have excess cash, which it wants to put to use in producing some interest or dividend revenue Since the intention is to earn a return on its investment, the buying and selling of investments is generally reported as investing activities in the statement of cash flows The exception occurs when the investments are held for trading purposes, in which case they are treated similar to inventory acquired for resale These types of investments are reported as operating activities

15 The gain on disposal of equipment and the loss on the sale of land would not appear on the statement of cash flows prepared using the direct method because these are not cash flow items However, the gross proceeds received when the assets are sold would

be reported in the statement of cash flows as investing activities

16 Short-term loans payable issued for trade purposes (e.g., instead of an accounts payable) are classified as operating activities However, short-term loans payable that are issued for borrowing purposes rather than for trade do not relate to operating activities The issue or repayment of such short-term loans payable are consequently classified as financing activities

17 A growing company would report low or negative cash flows from operating activities if

it just commenced its operations Later, as its sales grow, the cash from operating activities will become positive The company would also usually show cash used in investing activities as it invests in its productive capacity At this stage, the company will also usually show cash inflows in financing activities to finance the purchase of productive assets and to cover the shortfall from operating activities

18 The statement of cash flows is prepared from detailed information about the changes in account balances that occurred between two periods of time, as shown on the other financial statements Unlike the other financial statements, it is not prepared from an adjusted trial balance In particular, the information to prepare the statement of cash flows comes from a comparative statement of financial position, the income statement, the statement of changes in equity, and additional information

19 (a) The cash current debt coverage ratio is a cash-based ratio that measures liquidity

Liquidity can also be measured using the current ratio (accrual-based)

(b) Solvency can be measured by the cash total debt coverage ratio (cash-based) Solvency can also be measured using the debt to total assets ratio (accrual-based) Free cash flow is also a cash-based solvency measure, but there is not

Answers to Questions (Continued)

20 Leon’s cash current debt coverage was probably lower than its current ratio because its net cash flows provided by operating activities was significantly lower than its current assets and/or because the company’s average current liabilities for the year were higher than its current liabilities on the statement of financial position date Cash flows from operating activities could have been lower than current assets because of receivables, inventory, or prepaids which are included in current assets but do not increase cash

21 It is difficult to draw conclusions about the relative solvency of these companies, given the limited information provided For instance, one would want to know the composition

of the cash provided by operating activities and the debt of each of the companies In addition to this, the times interest earned ratio for each company would prove helpful Based on the information provided, Rogers reports a higher debt to total assets ratio than Shaw, which indicates a worse solvency However, Rogers also shows a higher debt coverage ratio than Shaw and this ratio indicates a better solvency as Rogers seems more able to pay its interest Consequently, Rogers would be considered more solvent

22 Creditors may be concerned about the company’s ability to repay its obligations over the long-term The company’s declining cash total debt coverage ratio indicates either a decline in cash from operating activities, an increasing dependence on borrowed funds,

or both Creditors may be reluctant to grant loans to the company if these trends persist

The lack of cash flows from operating activities may be of concern to investors for several reasons First, the decrease in cash flows may have an adverse effect on the company’s share price In addition, some investors may be concerned that the company will not generate enough cash to pay dividends in the future This concern is supported by the declining free cash flow, which also indicates the company is generating less cash from operating activities to pay future dividends and to expand the business

23 If net capital expenditures and dividends paid exceed cash provided by operating activities, then free cash flow will be negative

SOLUTIONS TO BRIEF EXERCISES

Year Ended March 31, 2015

Operating activities

Profit $275,000 Adjustments to reconcile profit to

net cash provided (used) by operating activities

Depreciation expense $60,000

Loss on disposal of land 15,000

Accounts receivable increase (20,000)

Merchandise inventory increase (5,000)

Prepaid expenses increase (2,000)

Accounts payable decrease (5,000)

Interest payable decrease (2,500)

Income tax payable increase 5,000 45,500 Net cash provided by operating activities $320,500

– Increase in accounts receivable

Thus, cash receipts from customers must have equalled = $160,000 [$170,000 – ($24,000 –

$14,000)]

BRIEF EXERCISE 13-7

(in USD millions)

+ Increase in inventory + Decrease in accounts payable Cash payments to

suppliers = Cost of goods – Decrease in inventory – Increase in accounts payable

Thus, the cash payments to suppliers must have equalled = $958,028 ($953,169 - $1,874 +

+ Increase in prepaid expenses – Decrease in prepaid expenses

and + Decrease in accrued expenses payable – Increase in accrued expenses payable Thus, the cash payments for operating expenses must have equalled = $92,000 ($100,000 –

$15,000 – $2,500 + $500 + $6,600 + $2,400)

BRIEF EXERCISE 13-9

(a)

Less: Increase in income tax payable (2,000)

Cash payments for income tax $88,000

(b)

Add: Decrease in income tax payable 2,000

Cash payments for income tax $92,000

For income tax 10,0005 747,000*

Net cash provided by operating activities $ 83,000*

BRIEF EXERCISE 13-11

Original cost of equipment sold $20,000

Less: Accumulated depreciation (5,500)

Carrying amount of equipment sold 14,500

Less: Loss on disposal (1,500)

Cash received from disposal of equipment $13,000

The following journal entry may be helpful in understanding this brief exercise:

BRIEF EXERCISE 13-12

($ in thousands)

Investing activities

Purchase of long-term investments ($150 – $100) $ (50)

Disposal of equipment 60 *

Purchase of equipment [$500 – ($400 – $100)] (200 )

Net cash used by investing activities $(190)

Equipment 400 XXX 100 500 *Cost of equipment sold $100

*Accumulated depreciation ($100 – carrying amount of $50) 50

*Carrying amount 50

*Gain on disposal 10)

*Cash proceeds from disposal $ 60)

BRIEF EXERCISE 13-13

($ in millions)

Beginning balance, retained earnings $3,686.4

Add: Profit 499.2

Less: Ending balance, retained earnings (4,074.4)

Dividends paid $ 111.2

Retained Earnings

3,686.4 499.2 111.2

4,074.4 The answer would change if the Dividends Payable account increased during the year In this

BRIEF EXERCISE 13-14

($ in thousands)

Financing activities

Payment of cash dividends $(195 ) 1

Repayment of bank loan payable (200)2

Issue of common shares ($600 – $400) 200

Net cash used by financing activities $(195)

Note X to the Statement of Cash Flows: During the year, the company purchased equipment costing $500 by paying $200 cash and issuing a $300 bank loan payable 1 Beginning balance, retained earnings $500

Add: Profit 400

Less: Ending balance, retained earnings (700)

Dividends declared $200

Beginning balance, dividends payable $ 10

Add: Dividends declared (from above) 200

Less: Ending balance, dividends payable (15)

Dividends paid $195

2 Beginning balance, bank loan ($200 + $300) $500

Additional borrowings 300

800 Ending balance, bank loan ($200 + $400) (600)

Loan payments made $200

BRIEF EXERCISE 13-15

(a) Cash current debt

$325,000

= 1.5 times

$215,000

(b) Cash total debt

$325,000

= 0.9 times

$360,000

BRIEF EXERCISE 13-16

Both ratios are indicators of liquidity An increase in the two ratios indicates improving liquidity and an improvement in the company’s ability to pay current liabilities in the short-term A number of factors could have contributed to Big Rock Brewery’s improving liquidity A decrease in current liabilities during the year would cause both ratios to increase Alternatively, an increase in sales would cause an increase in cash flows from operating activities and cause an increase in current assets due to higher accounts receivable

BRIEF EXERCISE 13-17

A decrease in the debt to total asset ratio shows an improvement in solvency as more of the assets on hand have been financed by equity rather than by debt compared to the prior year The slight increase in the cash total debt coverage also indicates an improvement in solvency

as more cash is available to pay off total debts

SOLUTIONS TO EXERCISES

EXERCISE 13-1

(a) Cash Effect

(b) Classification

* Investing activity; Cash payment of $5,000

Also requires note disclosure of the $25,000 noncash transaction acquisition of machine in exchange for long-term note payable

** No effect on cash flows; increase in merchandise inventory offset by increase in accounts payable

EXERCISE 13-2

1 An impairment loss on goodwill involves the recording of a loss and a reduction of the asset account Goodwill This transaction does not involve cash in any way This would not be reported on the statement of cash flows when using the direct method but the impairment might be discussed in the accompanying notes (The amount would be shown as an adjustment to profit to reverse this loss in the operating activities section prepared using the indirect method.)

2 Depreciation is a cost allocation technique The cash transaction occurred with the purchase of the property, plant, and equipment Depreciation charges the cost to expense as the assets are being consumed This transaction does not involve cash This would not be reported on the statement of cash flows or in the accompanying notes (The amount would be shown as an adjustment to profit to reverse this expense

in the operating activities section prepared using the indirect method.)

3 The recording of the fair value adjustment through profit or loss for an unrealized gain

on a trading investment does not involve cash, but increases profit for the gain that is accrued and the carrying amount of the investment on the statement of financial position This would not be reported on the statement of cash flows if the direct method was used or shown in the accompanying notes (The amount would be shown

as reduction in profit in the operating activities section prepared using the indirect method.)

4 The purchase of a new vehicle by signing a bank loan payable does not involve cash Since this transaction does not involve cash directly, it is not reported on the statement

of cash flows This is, however, an example of a significant noncash investing (acquisition of vehicle) and financing (issue of the bank loan payable) activity and would be disclosed in the notes to the financial statements

5 A stock dividend results in the reduction of Retained Earnings and the increase of the share capital account and does not involve cash This would not be reported on the statement of cash flows or in the accompanying notes, but would be reported in the statement of changes in equity

6 A stock split results in additional shares being issued and does not involve cash in any way This would not be reported on the statement of cash flows or in the accompanying notes, but would be reported in the statement of changes in equity

7 The conversion occurs as a result of non-payment of the outstanding receivable and does not involve cash This would not be reported on the statement of cash flows or in the accompanying notes

EXERCISE 13-3

Cash Provided (Used)

by Operating Activities

1 Sold merchandise inventory for

cash at a higher price than cost + +

2 Collected cash in advance from a

customer for a service to be

provided in the future

3 Purchased merchandise inventory

on account in a perpetual inventory

system

8 Recorded depreciation expense – NE

9 Paid an amount owing on account

10 Collected an amount owing from a

EXERCISE 13-4

Transaction

Operating Activities

Investing Activities

Financing Activities

Noncash Activities

1 Purchased merchandise inventory for

2 Sold merchandise inventory on

4 Recorded depreciation on equipment + NE NE NE

6 Recorded an unrealized loss on a

long-term equity investment carried at

fair value through profit or loss

7 Collected an account from a customer + NE NE NE

8 Signed and received a mortgage

EXERCISE 13-5

JUNO LTD

Statement of Cash Flows (Partial)—Indirect Method

Year Ended December 31, 2015 Operating activities

Profit $21,000 Adjustments to reconcile profit to net

cash provided (used) by operating activities

Depreciation expense $11,000

Loss on disposal of equipment 5,000

Decrease in accounts receivable 5,000

Increase in merchandise inventory (1,400)

Increase in prepaid expenses (500)

Increase in accounts payable 1,250

Increase in income tax payable 400

Increase in accrued liabilities 1,000 21,750 Net cash provided by operating activities $42,750 Note: The current portion of the bank loan payable was not included because this bank loan was issued for borrowing purposes rather than trade

(a) Add to (+) or Deduct from (–) Income Statement Account

(b) Related Cash Receipt or

+ Cash receipts from

dividends

3 Interest

revenue

Increase in interest receivable

– Cash receipts from

+ Cash payments for

operating expenses

8 Salaries

expense

Increase in salaries payable

+ Cash payments for

interest

10 Income tax

expense

Increase in income tax payable

– Cash payments for

income tax

EXERCISE 13-7

Add: Decrease in accounts receivable 2,000

Cash receipts from customers $162,000

Add: Decrease in accounts payable 800

Less: Increase in salaries payable (175)

Add: Decrease in accrued expenses payable 300

Less: Decrease in prepaid expenses (450)

Cash payments for operating expenses $49,850

net cash provided (used) by operating activities

Depreciation expense $21,000 Increase in accounts receivable

($50,000 – $42,000) (8,000 ) Increase in inventory ($168,000 – $143,000) (25,000) Increase in accounts payable ($45,000 – $35,000) 10,000 (2,000 ) Net cash provided by operating activities 60,000

Investing activities

Purchase of furniture ($163,000 – $80,000) $(83,000)

Net cash used by investing activities (83,000 )

Financing activities

Increase in bank loans ($103,000 + $10,000 – $76,000) $37,000

Repayment of bank loan (10,000 )

Issue of common shares ($60,000 – $55,000) 5,000

Net cash provided by financing activities 32,000

Net increase in cash 9,000 )

Cash, January 1 9,000 )

Cash, December 31 $18,000 )

The company was able to generate a sufficient amount of operating cash flows and to obtain bank financing and use both of these sources of cash to purchase additional furniture The net cash from operating activities seems sufficiently large enough to make any loan

payments in the future One needs to ask however, why the inventory rose as much as it did because it did lower cash from operating activities

net cash provided (used) by operating activities

Gain on disposal of furniture $ (2,000) Depreciation expense 19,000 Increase in accounts receivable

($76,000 – $50,000) (26,000 ) Increase in inventory ($219,000 – $168,000) (51,000) Increase in accounts payable ($58,000 – $45,000) 13,000 (47,000 ) Net cash used by operating activities (15,000 )

Investing activities

Disposal of furniture (see calculations below) $6,000

Net cash provided by investing activities 6,000

Financing activities

Payment of cash dividends

($173,000 + $32,000 – $146,000) $(5,000)

Repayment of bank loan ($103,000 – $100,000) (3,000)

Net cash used by financing activities (8,000 )

Net decrease in cash (17,000) Cash, January 1 18,000 )

Cash, December 31 $ 1,000 )

EXERCISE 13-9 (Continued)

Calculations:

Transactions involving Furniture:

Furniture Dec 31, 2014 163,000 Disposal 33,000

Dec 31, 2015 130,000

Accumulated Depreciation—Furniture

Dec 31, 2014 45,000 Disposal (derived) 29,000 Depreciation 19,000

Dec 31, 2015 35,000 Cost of equipment sold (derived) $33,000

Accumulated depreciation 29,000

Net carrying amount (derived) 4,000

Add: Gain on disposal of furniture 2,000

Cash proceeds from disposal $ 6,000

Cash 6,000

Accumulated Depreciation—Furniture 29,000

Gain on Disposal 2,000

Furniture 33,000

In 2015, Degenais suffered a significant decline in cash This decline was principally caused

by the mismanagement of current assets including accounts receivable and merchandise inventories The increase in accounts receivable is most likely attributable to difficulty in collecting these receivables and the increase in inventory has probably occurred because of slowing inventory turnover Under the circumstances, management should have postponed the payment of dividends This year the negative cash from operations may have lead to the disposal of furniture in an attempt to generate cash to finance day to day operations When a company cannot generate positive cash flows from its operating activities and drains its cash balances, bankruptcy will follow without the support of creditors like a bank or the support of shareholders who are willing to provide more equity to the company

EXERCISE 13-10

JUNO LTD

Statement of Cash Flows (Partial)—Indirect Method

Year Ended December 31, 2015 Operating activities

Cash receipts from customers $195,000 1Cash payments

Payment of cash dividends (4,000)

*Cost of equipment sold $39,000

net cash provided (used) by operating activities

Gain on disposal of land $ (5,000) Depreciation expense 34,000 Increase in accounts receivable

($80,000 – $76,000) (4,000 ) Decrease in inventory ($189,000 – $185,000) 4,000 Decrease in accounts payable ($47,000 – $39,000) (8,000 ) 21,000 Net cash provided by operating activities 136,000

Repayment of bank loan (50,000 )

Issue of common shares 25,000

Net cash used by financing activities (75,000 )

Net increase in cash 31,000 )

Cash, January 1 22,000 )

Cash, December 31 $ 53,000 )

Repayment of bank loan (50,000 )

Issue of common shares 25,000

Net cash used by financing activities (75,000 )

Net increase in cash 31,000)

Cash, January 1 22,000 Cash, December 31 $ 53,000)

EXERCISE 13-13

Company A is clearly in a better financial condition than company B and C Company C had

a loss for the year While all three companies experienced exactly the same increases in cash for the year, it should be noted that Company A’s cash flow comes from its operations, while company B’s cash was acquired through financing, as evidenced by the large amount

of cash generated through financing activities Company C appears to be in the weakest financial position since not only did it have a loss for the year, it also depended on the sale of investments or property, plant and equipment to generate cash By contrast, Company A appears to be able to buy investments or property, plant, and equipment and is also paying down debt, as its cash flow from financing activities is negative Essentially, Company A appears to be more self-sustaining compared to Company B and C

EXERCISE 13-14

Corporation

Les Corporation

Cash current debt coverage $50,000

(b) Ria’s liquidity is better than Les’s In particular, Ria’s cash current debt coverage ratio

is three times as high as that of Les’s This ratio indicates that Ria is substantially more liquid than Les

Ria’s solvency, as measured by the cash total debt coverage ratio, is the same as Les’s However, Ria has a slightly higher free cash flow than Les, which would better enable the company to invest in new opportunities without having to obtain outside financing So, Ria has better overall liquidity and solvency than Les

SOLUTIONS TO PROBLEMS

PROBLEM 13-1A

Transaction

(a) Classification

(b) Cash Receipt or Payment

(c) Profit

(gain increases profit)

3 Purchased a building by making a

down payment in cash and signing

a mortgage payable for the balance

I (for the cash down-payment)

NC (for the exchange)

– (for the cash down-payment)

NE

4 Made a principal repayment on the

mortgage

7 Purchased shares of another

company to be held as a long-term

non-strategic investment

9 Sold merchandise inventory on

account, at a price greater than

cost The company uses a perpetual

inventory system

PROBLEM 13-1A (Continued)

(d) Because of the accrual basis of accounting, it is not surprising that transactions can impact cash and profit differently For example, in transaction #6 above, cash was received from the issue of common shares without profit being affected in any way In transaction #9 above, revenue and profit were affected by the sale of merchandise inventory but because it was sold on account, cash was not affected

PROBLEM 13-2A

Statement of Cash Flows (Partial)—Indirect Method

Year Ended November 30, 2015

Operating activities

Profit $600,000 Adjustments to reconcile profit to net cash

provided (used) by operating activities

Depreciation expense $ 75,000

Impairment loss on property, plant,

and equipment 100,000 Increase in accounts receivable (190,000)

Decrease in inventory 50,000

Increase in prepaid expenses (40,000)

Decrease in accounts payable (180,000)

Decrease in accrued liabilities (90,000)

Decrease in interest payable (10,000)

Decrease in unearned revenue (17,000)

Increase in income tax payable 20,000 (282,000) Net cash provided by operating activities $318,000

Statement of Cash Flows (Partial)—Direct Method

Year Ended November 30, 2015

PROBLEM 13-2A (Continued)

(2) Cash payments to suppliers

Deduct: Decrease in inventories (50,000)

Add: Decrease in accounts payable 180,000

(3) Cash payments for operating expenses

Deduct: Depreciation expense (75,000)

Operating expenses, net of

depreciation and impairment 1,825,000 Add: Increase in prepaid expenses $40,000

Decrease in accrued expenses payable 90,000 130,000 Cash payments for operating expenses $1,955,000

(4) Cash payments for interest

Add: Decrease in interest payable 10,000

(5) Cash payments for income tax

Deduct: Increase in income tax payable (20,000)

PROBLEM 13-2A (Continued)

(b) The answer would remain the same if Whistler were a private company As a publicly traded company following IFRS, Whistler has the choice to disclose interest expense as part of financing activities rather than in operating activities We have chosen to report this in the operating activities section above, which is the usual practice for a publicly-traded company and also the practice that would be followed by a private company

PROBLEM 13-3A

Statement of Cash Flows (Partial)—Indirect Method

Year Ended December 31, 2015

Operating activities

Profit $111,750 Adjustments to reconcile profit to net cash

provided (used) by operating activities

Depreciation expense $50,000

Amortization expense 15,000

Loss on disposal of equipment 26,000

Increase in accounts receivable (10,000 )

Decrease in prepaid expenses 3,000

Decrease in accounts payable (5,000 )

Decrease in salaries payable (500 )

Increase in unearned revenue 3,000

Increase in interest payable 1,250

Decrease in income tax payable (5,250) 77,500 Net cash provided by operating activities $189,250

Statement of Cash Flows (Partial)—Direct Method

Year Ended December 31, 2015

PROBLEM 13-3A (Continued)

(2) Cash payments for operating expenses

Add: Decrease in accounts payable ($41,000 – $36,000) 5,000 Deduct: Decrease in prepaid expenses ($12,000 – $15,000) (3,000) Cash payments for operating expenses $112,000

(3) Cash payments to employees

Add: Decrease in salaries payable ($20,000 – $19,500) 500

(4) Cash payments for interest expense

Interest expense per income statement $75,000 Deduct: Increase in interest payable ($6,250 – $5,000) (1,250)

(5) Cash payments for income tax

Income tax expense per income statement $37,250 Add: Decrease in income tax payable ($4,000 – $9,250) 5,250

(b) Both methods are acceptable under both IFRS and ASPE I would recommend that the company use the direct method to prepare its operating activities section Users usually find this method to be more informative because it shows cash receipts from customer and other sources and cash payments for major categories It is also the preferred

Proceeds from disposal of equipment 8,000*

* Cost of equipment sold: $240,000 + $75,000 – $300,000 = $15,000

Accumulated depreciation of equipment sold