Reporting and Analyzing Cash Flows: Learning Objectives - Coverage by Question

Chapter 4
Reporting and Analyzing Cash Flows

Learning Objectives coverage by question
LO1 Explain the purpose of the
statement of cash flows and how it
complements the income statement
and balance sheet.
LO2 Construct and explain the
statement of cash flows.
LO3 Compute and interpret ratios
that reflect a companys liquidity and
solvency.
LO4 Appendix 4A: Use a
spreadsheet to construct the
statement of cash flows.
MiniExercises
Exercises
Problems
Cases and
Projects
21, 22, 24
38, 39, 44
47, 51, 54
57 - 59
21 - 31
34 - 44
45 - 56
57 - 59
32, 33,
46, 48, 50,
35, 43
52, 55, 56
59
55
Cambridge Business Publishers, 2014

Solutions Manual, Chapter 4
4-1
DISCUSSION QUESTIONS
Q4-1.
Cash equivalents are short-term, highly liquid investments that firms acquire
with temporarily idle cash to earn interest on these excess funds. To qualify as
a cash equivalent, an investment must (1) be easily convertible into a known
cash amount and (2) be close enough to maturity so that its market value is not
sensitive to interest rate changes (generally, investments with initial maturities
of three months or less). Three examples of cash equivalents are treasury bills,
commercial paper, and money market funds.
Q4-2.
Cash equivalents are included with cash in a statement of cash flows because
the purchase and sale of such investments are considered to be part of a firm's
overall management of cash rather than a source or use of cash. Similarly, as
statement users evaluate cash flows, it may matter very little to them whether
the cash is on hand, deposited in a bank account, or invested in cash
equivalents.
Q4-3.
Operating activities
Inflow: Cash received from customers
Outflow: Cash paid to suppliers
Investing activities
Inflow: Sale of equipment
Outflow: Purchase of stocks and bonds
Financing activities
Inflow: Issuance of common stock
Outflow: Payment of dividends

4-2
Financial Accounting, 4th Edition
Q4-4.
a. Investing; outflow.
b. Investing; inflow.
c. Financing; outflow.
d. Operating (direct method, not shown separately under indirect method);
inflow.
e. Financing; inflow.
f. Operating (direct method, not shown separately under indirect method);
inflow.
g. Operating (direct method, not shown separately under indirect method);
outflow.
h. Operating (direct method, not shown separately under indirect method);
inflow.
Q4-5.
This is a noncash investing and financing event. It must be reported in a

supplementary schedule to the statement of cash flows.
Q4-6.
Noncash investing and financing transactions are disclosed as supplemental

information to a statement of cash flows because a secondary objective of cash
flow reporting is to present information about investing and financing activities.
Noncash investing and financing transactions, generally, affect future cash
flows. Issuing bonds payable to acquire equipment, for example, requires future
cash payments for interest and principal on the bonds. On the other hand,
converting bonds payable into common stock eliminates future cash payments
related to the bonds. Knowledge of these types of events, therefore, should be
helpful to users of cash flow data who wish to assess a firm's future cash flows.
Q4-7.
A statement of cash flows helps external users assess the amount, timing, and
uncertainty of future cash flows to the enterprise. These assessments help
users evaluate their own future cash receipts from their investments in, or loans
to, the firm. A statement of cash flows shows the periodic cash effects of a
firm's operating, investing, and financing activities. Distinguishing among these
different categories of cash flows helps users compare, evaluate, and predict
cash flows. With cash flow information, creditors and investors are better able
to assess a firm's ability to settle its liabilities and pay its dividends. Over time,
the statement of cash flows permits users to observe and analyze
management's investing and financing policies. A statement of cash flows also
provides information useful in evaluating a firm's financial flexibility (which is its
ability to generate cash to respond to unanticipated needs and opportunities).
Q4-8.
The direct method presents the net cash flow from operating activities by
showing the major categories of operating cash receipts and cash payments
(such as cash received from customers, cash paid to employees and suppliers,
cash paid for interest, and cash paid for income taxes). The indirect (or
reconciliation) method, in contrast, presents the net cash flow from operating
activities by applying a series of adjustments to the accrual net income to
convert it to a cash basis.
4-3
Q4-9.
Under the indirect method, depreciation is added to net income because, as a

noncash expense, it was deducted in computing net income. Adding
depreciation to net income, therefore, eliminates it from the cash-basis income
amount. Amortization and depletion expenses are handled the same way.
Q4-10. Under the indirect method, the $98,000 cash received from the sale of the land
will appear in the cash flows from investing activities section of the statement of
cash flows. In addition, the $28,000 gain from the sale will be deducted from
net income as one of the adjustments made to determine the net cash flow
from operating activities.
Q4-11. Net income $ 88,000
Add (deduct) items to convert net income to cash basis
Depreciation expense
Subtract change in accounts receivable
Subtract change in inventory
Add change in accounts payable
Add change in income tax payable
Net cash provided by operating activities
6,000
13,000
(9,000)
(3,500)
1,500
$ 96,000
Q4-12. The separate disclosures required for a company using the indirect method in
the statement of cash flows are (1) cash paid during the year for interest (net of
amount capitalized) and for income taxes, (2) all noncash investing and
financing transactions, and (3) the policy for determining which highly liquid,
short-term investments are treated as cash equivalents.
Q4-13. The statement of cash flows will show a positive net cash flow from operating
activities if operating cash receipts exceed operating cash payments. This
could happen, for example, if noncash expenses (such as depreciation and
amortization) exceed the net loss. It would also happen if operating cash
receipts exceed sales by more than the loss or if operating cash payments are
less than accrual expenses by more than the loss (or some combination of
these events).
Q4-14. Sales
+ Accounts receivable decrease
= Cash received from customers
$925,000
14,000
$939,000
Q4-15. Wages expense

+ Wages payable decrease
= Cash paid to employees
$ 86,000
1,100
$ 87,100
Q4-16.
Advertising expense
+ Prepaid advertising increase
= Cash paid for advertising
$ 43,000
1,600
$ 44,600
Q4-17. Under the direct method, the $5,100 cash received from the sale of equipment
will appear in the cash flows from investing activities section of the statement of
cash flows.

4-4
Q4-18. The separate disclosures required for a company using the direct method in the
statement of cash flows are (1) a reconciliation of net income to net cash flow
from operating activities, (2) all noncash investing and financing transactions,
and (3) the policy for determining which highly liquid, short-term investments
are treated as cash equivalents.
Q4-19. The operating cash flow to current liabilities ratio is calculated by dividing net
cash flow from operating activities by average current liabilities. This ratio is a
measure of a firm's ability to liquidate its current liabilities.
Q4-20. The operating cash flow to capital expenditures ratio is calculated by dividing a
firm's cash flow from operating activities by its annual capital expenditures. A
ratio below 1.00 means that the firm's current operating activities are not
providing enough cash to cover the capital expenditures. A ratio above 1.0 is
normally considered a sign of financial strength.

4-5
MINI EXERCISES
M4-21. (5 minutes)
a. Positive adjustment
b. Negative adjustment
c. Negative adjustment
d. Positive adjustment
e. Positive adjustment
M4-22. (10 minutes)
a.
Cash flow from an operating activity.
b.
Cash flow from an investing activity.
c.
d.
Cash flow from an operating activity.
e.
Cash flow from a financing activity.
f.
Cash flow from a financing activity.
g.
M4-23. (15 minutes)
1
2
3
4
5
6
7
8
9
10
11
DOLE FOOD COMPANY, INC.

Selected Items from the Cash Flow Statement
Long-term debt repayments
Change in receivables
Depreciation and amortization
Change in accrued liabilities
Dividends paid
Change in income taxes payable
Cash received from sales of assets and businesses
Net income
Change in accounts payable
Short-term debt borrowings
Capital expenditures
Financing
Operating
Operating
Operating
Financing
Operating
Investing
Operating
Operating
Financing
Investing

4-6
M4-24. (10 minutes)

a.
(3) Cash flow from a financing activity.
b.
(1) Cash flow from an operating activity.
c.
(4) Noncash investing and financing activity.
d.
e.
f.
(5) None of the above (a change in the composition of cash and cash equivalents).
M4-25. (30 minutes)

a.
Income Statement
Balance Sheet
+
Accts.
Receivable
(1)
+507,400 +
(2)
+91,500 +
(3)
Transaction
Cash
Asset
Contrib.
+
Capital
+507,400
+507,400 -
+507,400
+91,500
+91,500 -
+91,500
320,100 =
320,100
+320,100 =
320,100
(4)
63,400 =
63,400
+63,400 =
63,400
(5)
+351,600 =
+351,600 +
(6)
-47,700 +
+47,700 =
(7)
+483,400 +
483,400 +
(8)
340,200 +
340,200 +
(9)
-172,300 +
-172,300
+172,300 =
-172,300
Total
+14,700 +
+24,000 +
+15,800 =
+11,400 +
+43,100
+555,800 =
+43,100
Inventories
Accts.
Payable
Earned
Capital
Revenue
+598,900
- Expenses =
Net
Income
b. Net income was 43,100 (from the net income column), and cash flow from
operating activities was 14,700 (from the cash column).
c. 1. Accounts receivable increased by 24,000,
2. Inventories increased by 15,800, and
3. Accounts payable increased by 11,400.
continued next page

4-7
M4-25. concluded
d. The accounting equation is kept with every entry, so it is kept for the totals over the
period.
Cash flow + change in accounts receivable + change in inventory
= Change in accounts payable + net income.
This relationship can be presented in the following indirect method cash flow from
operating activities.
Net income
43,100
- Change in accounts receivable
24,000
- Change in inventories
15,800
+ Change in accounts payable
+11,400
Cash flow from operating activities
14,700
M4-26. (15 minutes INDIRECT METHOD)
Net income
Add back depreciation
Subtract gain on sale of investments
Subtract change in operating assets:
Accounts receivable
Inventory
Prepaid rent
Add change in operating liabilities:
Accounts payable
Income tax payable
$ 45,000
8,000
(9,000)
(9,000)
(6,000)
2,000
4,000
(2,000)
$ 33,000

4-8
M4-27. (30 minutes)

a.
Balance Sheet
Transaction
Cash
Asset
(1)
(2)
+46,200
(3)
Accts.
Receivable
+ +769,200
(4)
149,100
(5)
521,600
(6)
Prepaid
Rent
+149,100
117,900
Contr.
+
Capital
Earned
Capital
+769,200
+769,200 -
+769,200
+46,200
+46,200 -
+46,200
526,700
+526,700 =
526,700
+117,900 =
Accum.
Deprec.
Income Statement
Wages
Payable
+526,700
521,600
117,900
Revenue
- Expenses =
Net
Income
117,900
(7)
+724,100
+ 724,100
(8)
122,800
122,800
+122,800 =
122,800
+23,000
-23,000
+23,000 =
-23,000
+23,000
+25,000
+815,400 -
+790,400 =
+25,000
(9)
Total
23,200
+45,100
+31,200
+5,100
b. Net income was $25,000 (from the net income column), and cash flow from
operating activities was $23,200 (from the cash column).
c. 1. Accounts receivable increased by $45,100,
2. Prepaid rent increased by $31,200,
3. Accumulated depreciation (a contra-asset) increased by $23,000 due to
depreciation expense. and
4. Wages payable increased by $5,100.
d. The accounting equation is kept with every entry, so it is kept for the totals over the
period.
Cash flow + change in accounts receivable + change in prepaid rent
change in accumulated depreciation
= Change in wages payable + net income.
This relationship can be presented in the following indirect method cash flow from
operating activities.
Net income
$ 25,000
+ Depreciation expense
23,000
Change in accounts receivable
45,100
Change in prepaid rent
31,200
+ Change in wages payable
+5,100
Cash flow from (used in) operating activities
($ 23,200)

4-9
M4-28. (15 minutesINDIRECT METHOD)

Net loss
Add (deduct) items to convert net loss to cash basis
Add back depreciation
Subtract change in operating assets:
Accounts receivable
Inventory
Prepaid expenses
Add change in operating liabilities:
Accounts payable
Accrued liabilities
$(21,000)
8,600
9,000
3,000
3,000
4,000
(2,600)
$ 4,000
Weber Company's 2013 operating activities provided $4,000 cash. The dividend paid to
shareholders affects cash flows from financing activities.
M4-29. (20 minutes)
A + indicates that the amount is added and a - indicates that it is subtracted when
preparing the cash flow statement using the indirect method.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
NORDSTROM, INC.
Consolidated Statement of Cash Flows Selected Items
Increase in accounts receivable
Operating
Capital expenditures
Investing
Proceeds from long-term borrowings
Financing
Increase in deferred income tax net liability
Operating
Principal payments on long-term borrowings
Financing
Increase in merchandise inventories
Operating
Decrease in prepaid expenses and other assets
Operating
Proceeds from issuances under stock compensation plans
Financing
Increase in accounts payable
Operating
Net earnings
Operating
Payments for repurchase of common stock
Financing
Increase in accrued salaries, wages and related benefits
Operating
Cash dividends paid
Financing
Depreciation and amortization expenses
Operating
+
+
+
+
+
+
+
+

4-10
M4-30. (15 minutesDIRECT METHOD)

a.
Rent expense
Prepaid rent decrease
= Cash paid for rent
$ 60,000
(2,000)
$ 58,000
Balance Sheet
Transaction
Cash
Begin
Balance
Make rent
payment
+
+
-X
Record rent
expense
End Balance
Noncash
Assets
10,000
Prepaid
rent
+X
Prepaid
Rent
-60,000
Prepaid
Rent
8,000
Income Statement
= Liabilities +
Contr.
+
Capital
Earned
Surplus
Revenue
Expenses
-60,000
Retained
Earnings
60,000
Rent
Expense
Net
Income
-60,000
X must equal $58,000 to make the FSET balance.

b.
Interest income
Interest receivable increase
= Cash received as interest
$ 16,000
(700)
$ 15,300
Balance Sheet
Transaction
Cash
Begin
Balance
Record
interest
income
Receive
interest
payment
End Balance
+
+
+X
Noncash
Assets
3,000
Interest
receivable
+16,000
Interest
receivable
Income Statement
= Liabilities +
Contr.
+
Capital
Earned
Surplus
+16,000
Retained
Earnings
Revenue
Expenses
+16,000
Interest income
-X
3,700
Net
Income
+16,000
X must equal $15,300 to make the FSET balance.

continued next page

4-11
M4-30. concluded
c.
Cost of goods sold

+ Inventory increase
+ Accounts payable decrease
= Cash paid for merchandise purchased
$ 98,000
3,000
4,000
$105,000
Balance Sheet
Income Statement
Noncash
Assets
= Liabilities
Contr.
+
Capital
Begin
Balance
19,000
Inventory
11,000
Accounts
Payable
Purchase
inventory
+X
+X
-Y
Accounts
Payable
Transaction
Pay
supplier
Cash
-Y
Recognize
Cost of
Goods Sold
End Balance
-98,000
Inventory
22,000
7,000
Earned
Surplus
Revenue
-98,000
Retained
Earnings
Expenses
98,000
Cost of
Goods
Sold
Net
Income
-98,000
To make the inventory account work properly, X (purchases) must equal $101,000. If
purchases were $101,000, then Y (payments to suppliers) must equal $105,000.
M4-31. (15 minutesDIRECT METHOD)
Operating cash flow + change in operating assets
= net income + change in operating liabilities
or
Net income - change in operating assets + change in operating liabilities
= operating cash flow
Effect of sales on net income
Change in accounts receivable

= Effect of customers on cash
Effect of cost of goods sold on net income
- Change in inventory
= Effect of merchandise purchases on cash
$825,000
(11,000)
$814,000
($550,000)
(13,000)
(6,000)
($569,000)
Howell Company received $814,000 in cash from its customers and paid $569,000
in cash to its suppliers.
4-12
EXERCISES
E4-32. (20 minutes)
(All dollar amounts in millions)
a. Merck: $12,383/$15,943 = 0.78
Pfizer: $20,240/$28,353 = 0.71
Abbott Labs: $8,970/$16,371 = 0.55
Johnson & Johnson: $14,298/$22,942 = 0.62
b. Merck: $12,383 ($1,723 $0) = $10,660
Pfizer: $20,240 ($1,660 $0) = $18,580
Abbott Labs: $8,970 ($1,492 $0) = $7,478
Johnson & Johnson: $14,298 ($2,893 1,342) = $12,747
c. None of the firms has sufficient cash flow to cover their current liabilities although
none of the ratios is of major concern. The industry ratios shown in Chapter 5 on
page 233 show that only Abbott Labs is below median. Pfizer is the largest of these
three companies and has relatively more cash left over after capital expenditures to
consider using on other activities that could strengthen the firms operating or
financial position. But all four have significant free cash flow that could be invested
or returned to shareholders in the form of dividends or stock repurchases. Given
that these firms are of different sizes and have different research program success,
it is difficult to generalize further.
E4-33. (20 minutes)
(All dollar amounts in millions)
a. Wal-Mart: $24,255/$60,452 = 0.40
Coca-Cola: $9,474/$21,396 = 0.44
ExxonMobil: $55,345/$70,069 = 0.79
b. Wal-Mart: $24,255 ($13,510 $580) = $11,325
Coca-Cola: $9,474 ($2,920 $101) = $6,655
ExxonMobil: $55,345 ($30,975 $7,533) = $31,903
c. All three companies are producing much more cash than needed for capital
expenditures. All of them are returning substantial amounts of cash to shareholders
through dividends and share repurchases (more than $11 billion for Wal-Mart,
almost $9 billion for Coca-Cola and more than $31 billion for ExxonMobil.
ExxonMobil appears to be in the best position with respect to OCFCL, but it is lower
than the industry average reported in Chapter 5 on page 233. Wal-Mart and CocaCola have lower ratios, and are also below the average ratio for their industries.
4-13
E4-34. (30 minutesINDIRECT METHOD)

MASON CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2013
Cash flows from operating activities
Cash received from customers
Cash received as interest
Cash paid to employees and suppliers
Cash paid as income taxes
Cash flows from investing activities
Sale of land
Purchase of equipment
Net cash used by investing activities
Cash flows from financing activities
Issuance of bonds payable
Acquisition of treasury stock
Payment of dividends
Net cash provided by financing activities
Net decrease in cash
Cash at beginning of year
Cash at end of year
$194,000
6,000
(148,000)
(11,000)
$ 41,000
40,000
(89,000)
(49,000)
30,000
(10,000)
(16,000)
4,000
(4,000)
16,000
$ 12,000
E4-35. (15 minutesINDIRECT METHOD)

a. Net income
Accounts receivable increase
Inventory decrease
Prepaid insurance increase
Accounts payable increase
Wages payable decrease
$113,000
(5,000)
6,000
(1,000)
4,000
(2,000)
$115,000
b. $115,000/[($31,000 + $29,000)/2] =3.83

4-14
E4-36. (15 minutesINVESTING ACTIVITIES)

The basic approach here is to use the beginning and ending balances and the
additional information to reconstruct what must have happened during 2013. Begin by
setting up the T-accounts for property, plant and equipment with the beginning and
ending balances.
+
Beg. balance
Property, plant and

equipment at cost (A)
1000
Ending balance
- Accumulated
depreciation (XA)
350
Beg. balance
390
Ending balance
1,200
At this point in the book, we know four entries that can affect these two accounts (1)
acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals,
and (4) depreciation expense. The journal entries for these entries are given below,
with amounts given in the problem filled in.
(1)
Property, plant and equipment at cost (+A)

Cash (-A)
300
300
To record purchase of property, plant and equipment with cash.
(2)

Mortgage payable (+L)
100
100
To record purchase of property, plant and equipment with financing.
(3)
Cash (+A)
Accumulated depreciation (-XA, +A)
Property, plant and equipment at cost (-A)
Gain on equipment disposal (+R, +SE)
100
Y
X
20
To record sale of used equipment.
(4)
Depreciation expense (+E, -SE)

Accumulated depreciation (+XA, -A)
Z
Z
To record depreciation expense.
The three unknowns in the journal entries correspond to the three questions in the
problem. We begin by putting the journal entry amounts into the T-accounts.
continued next page

4-15
E4-36. concluded
+
Beg. balance
(1)
(2)
(3)
Ending balance
Property, plant and

1000
300
100
X
- Accumulated
depreciation (XA)
350
+
Beg. balance
Y
Z
390
1,200
(3)
(4)
Ending balance
a. The PPE at cost account will only balance if the value X equals 200. So, the original
cost of the used equipment that was sold is 200. We can put that amount in the Taccount (so it balances) and also in Journal entry (3).
b. Now, looking at journal entry (3), we see that there is only one unknown left the
depreciation that had accumulated on the used equipment. In order for the entry to
balance (with debits equal to credits), the accumulated depreciation must have been
120 (= Y). Cost of 200 and accumulated depreciation of 120 would produce a net
book value of 80, so when Meubles Fischer sold it for 100, they recorded a gain of
20 on the disposal.
c. Back at the Accumulated depreciation T-account, we can fill in the entry for (3),
leaving only the depreciation expense to determine for entry (4). Knowing that the
disposal reduced the contra-asset by 120, and that the contra-asset increased by 40
over the year, we can infer than the depreciation expense must have been 160 (=
Z).
E4-37. (15 minutesINVESTING ACTIVITIES)

The basic approach here is to use the beginning and ending balances and the
additional information to reconstruct what must have happened during 2013. Begin by
setting up the T-accounts for property, plant and equipment with the beginning and
ending balances.
+
Beg. balance
Ending balance
Property, plant and

175
183
- Accumulated
depreciation (XA)
78
Beg. balance
83
Ending balance
continued next page

4-16
E4-37. concluded
At this point in the course, we know four entries that can affect these two accounts (1)
acquisitions using cash, (2) acquisitions without cash (other financing), (3) disposals,
and (4) depreciation expense. The journal entries for these entries are given below,
with amounts given in the problem filled in.
(1)

Cash (-A)
28
28
To record purchase of property, plant and equipment with cash.
(2)

Mortgage payable (+L)
0
0
To record purchase of property, plant and equipment with financing.
(3)
Cash (+A)
Loss on equipment disposal (+E, -SE)
Property, plant and equipment at cost (-A)
Z
Y
5
X
To record sale of used equipment.
(4)
Depreciation expense (+E, -SE)

Accumulated depreciation (+XA, -A)
17
17
To record depreciation expense.
The three unknowns in the journal entries correspond to the three questions in the
problem. We begin by putting the journal entry amounts into the T-accounts.
+
Beg. balance
(1)
(2)
(3)
Property, plant and

175
28
0
X
Ending balance
183
- Accumulated
depreciation (XA)
78
Y
17
83
+
Beg. balance
(3)
(4)
Ending balance
a. The PPE at cost account will only balance if the value X equals 20. So, the original
cost of the used equipment that was sold is 20. We can put that amount in the Taccount (so it balances) and also in Journal entry (3).
b. The accumulated depreciation account will only balance if the value Y equals 12.
So, the accumulated depreciation on the used equipment sold must be 12, and that
amount can be entered into transaction (3) above.
c.
Now, looking at journal entry (3), we see that there is only one unknown left the
amount of cash received from disposal of the used equipment. In order for the entry to
balance (with debits equal to credits), the cash amount must have been 3 million (= Z).
Cost of 20 and accumulated depreciation of 12 would produce a net book value of 8, so
when Kasznik Ltd. sold it for 3, they recorded a loss of 5 on the disposal.
4-17
E4-38. (30 minutes)

a. The analysis on page ***160*** on the text shows that
Cash flow
(payments)
Change in
inventory
Change in accounts
payable
Net income
(COGS
expense)
666
(=8,044-7,378)
225
(=4,810-4,585)
-51,692
The solution to this is that X = -$51,692 666 + 225 = -$52,133. So, the payments to
suppliers reduced cash by $52,133 million in fiscal year 2011.
b. The net property and equipment account increased by $342 million (=$11,526
11,184). Depreciation expense would have decreased this balance by $809 million in
fiscal year 2011, so the net investment must have been $1,151 million (=$342 + 809)
to result in the ending balance of $11,526 million.
c. With the beginning balance of $16,848 million in retained earnings, net earnings of
$2,714 would have increased retained earnings to $19,562 million. But the ending
balance in retained earnings is $18,877 million, so Walgreens must have paid $685
million in dividends (=$19,562 - $18,877).
E4-39. (15 minutes)
a.
b.
Cash flows from investing activities will show:

Purchase of stock investments
Sale of stock investments
$ (80,000)
59,000
Cash flows from financing activities will show:

Issuance of bonds
Retirement of bonds
$130,000
(131,000)

4-18
E4-40. (20 minutes)

a. The net increase in property and equipment was $4,635,377 (= $84,767,771 $80,132,394), and the expenditures should have increased this by $5,559,183.
Therefore the original cost of the property and equipment sold must have been
923,806 (= $5,559,183 - $4,635,377).
Depreciation expense should have increased the accumulated depreciation account by
$3,174,956, but the account increased by only $2,268,583. The accumulated
depreciation on the property and equipment sold must account for the difference,
making it $906,373 (= $3,174,956 2,268,583).
b. The book value of the property and equipment sold was $17,433 (=$923,806
906,373), and the reported gain on sale of the property and equipment was $79,483.
Therefore, the cash proceeds must have been $96,916 (= $17,433 + 79,483), which is
the amount reported in Golden Enterprises cash flows from investing activities.
c.
Cash (+A)
Property and equipment, cost (-A)
Gain on sale of property and equipment
(+R, +SE)
$ 96,916
906,373
$ 923,806
79,483
d. Retained earnings increased by $1,547,261 (= $18,866,264 17,319,003), and net

income was $3,014,768. The difference would be accounted for by cash dividends
paid to shareholders, and the amount is $1,467,507.
E4-41. (20 minutesDIRECT METHOD)
a.
Advertising expense
+ Prepaid advertising increase
= Cash paid for advertising
$ 62,000
4,000
$ 66,000
b.
Income tax expense

+ Income tax payable decrease
= Cash paid for income taxes
$ 29,000
2,200
$ 31,200
c.
Cost of goods sold

Inventory decrease
= Cash paid for merchandise purchased
$180,000
(5,000)
(2,000)
$173,000

4-19
E4-42.
HOSKINS CORPORATION
Year ended December 31, 2013
Cash Flows from Operations:
Net income
$ 700
Adjustments:
Add back Depreciation
350
Change in Accounts Receivable
(900)
Change in Inventory
(100)
Change in Prepaid Expenses
250
+ Change in Accounts Payable
400
+ Change in Income Taxes Payable
(100)
Cash Flows from Operating Activities
Cash Flows from Investing:
Purchases of Equipment
Proceeds from Disposal of Equipment
Cash Flows from Investing Activities
(1,200)
600
Cash Flows from Financing:

Dividends Paid
Increase in Short-term Debt
Decrease in Long-term Debt
Cash Flows from Financing Activities
(250)
1,500
(1,000)
Net Change in Cash

Beginning Cash Balance
Ending Cash Balance
$ 600
(600)
250
250
300
$ 550

4-20
E4-43. (30 minutesDIRECT METHOD)

a.
Sales
Accounts Receivable Increase
= Cash Received from Customers
$750,000
(5,000)
$745,000
Cost of Goods Sold

Inventory Decrease
Accounts Payable Increase
= Cash Paid for Merchandise Purchased
$470,000
(6,000)
(4,000)
$460,000
Wages Expense
+ Wages Payable Decrease
= Cash Paid to Employees
$110,000
2,000
$112,000
Insurance Expense
+ Prepaid Insurance Increase
= Cash Paid for Insurance
$ 15,000
1,000
$ 16,000
Cash Flows from Operating Activities

Cash Received from Customers
Cash Paid for Merchandise Purchased
Cash Paid to Employees
Cash Paid for Rent
Cash Paid for Insurance
Net Cash Provided by Operating Activities
b.
$745,000
$460,000
112,000
42,000
16,000
630,000
$115,000
$115,000/[($31,000 + $29,000)/2] =3.83
E4-44. (15 minutes)

1.
True
---
2.
False
$25
3.
False
$10
4.
False
$0

4-21
PROBLEMS
P4-45. (20 minutes)
Net income ...........................................................................................
$135,000
Adjustments to reconcile net income to operating cash flows

Add back depreciation expense ...................................................... $25,000
Gain on sale of assets
(5,000)
Subtract changes in:

Accounts receivable........................................................................ (10,000)
Prepaid expenses ...........................................................................
3,000
Add changes in:

Accounts payable ...........................................................................
6,000
Wages payable ............................................................................... (4,000)
Net cash provided from operating activities .........................................
15,000
$150,000
P4-46. (45 minutesINDIRECT METHOD)

a. Cash, December 31, 2013........................................................ $11,000
Cash, December 31, 2012........................................................
5,000
Cash increase during 2013....................................................... $ 6,000
continued next page

4-22
P4-46. concluded
b. STATEMENT OF CASH FLOWS (INDIRECT METHOD)
WOLFF COMPANY
Net Cash Flow from Operating Activities
Net Income
Add (Deduct) Items to Convert Net Income to Cash Basis
Depreciation
Accounts Receivable Increase
Inventory Increase
Prepaid Insurance Decrease
Accounts Payable Decrease
Wages Payable Increase
Income Tax Payable Decrease
Net Cash Provided by Operating Activities
Purchase of Plant Assets
Issuance of Bonds Payable
Payment of Dividends
Net Cash Provided by Financing Activities
Net Increase in Cash
Cash at Beginning of Year
Cash at End of Year
$56,000
17,000
(9,000)
(30,000)
2,000
(3,000)
3,000
(1,000)
$35,000
(55,000)
55,000
(29,000)
26,000
6,000
5,000
$11,000
c. (1) $35,000/(($23,000 + $24,000)/2) = 1.49

(2) $35,000/$55,000 = 0.64
Wolffs cash flow ratios indicate that, while the company has sufficient cash flow to
cover its current obligations, it must rely on external financing to pay for capital
expenditures.

4-23
P4-47. (30 minutes)

a.
Adjustments to Convert Income Statement Items to Operating Activity Cash Flows
Net income
$ 56,000
Sales
revenue
=
$635,000
Cost of
goods sold
Wage
expenses
Insurance
expense
Depreciation
expense
Interest
expense
430,000
86,000
8,000
17,000
9,000
+Gains
Losses
Income
tax expense
29,000
Adjustments:
+Depreciation
expense
Add back
depreciation
expense
+17,000
Gains
0
Subtract (add)
non-operating
gains (losses)
+Losses
0
Subtract the
change in
operating
assets
(operating
investments)
change
in
accounts
receivable
-9,000
Add the
change in
operating
liabilities
(operating
financing)
change
in
inventory
change in
prepaid
insurance
-30,000
-(-2,000)
+change in
accounts
payable
+change in
wages
payable
+change in
income tax
payable
+(-3,000)
+3,000
+(-1,000)
Cash
from
operations
Receipts
from
=
customers
Payments
for
merchandise
Payments
for
Wages
Payments
for
insurance
$ 35,000
$626,000
-463,000
-83,000
-6,000
(zero)
0
Payments
for
interest
-9,000
(zero)
+0
(zero)
0
Payments
for
income tax
30,000
b. Computing cash flows from operating activities using the direct method provides
additional detail about the specific cash flows that occurred during the period. For
example, the indirect method does not reveal that Wolff paid $463,000 for merchandise
during 2013, or $83,000 for wages. Because this detail is missing, the FASB requires
supplemental disclosure of two specific (and important) cash payments interest and
taxes if the indirect method is used.

4-24

a. Cash, December 31, 2013
Cash, December 31, 2012
Cash increase during 2013
$49,000
28,000
$21,000

ARCTIC COMPANY
Net Loss
Add (Deduct) Items to Convert Net Loss
to Cash Basis
Depreciation
Gain on Sale of Land
Accounts Receivable Decrease
Inventory Decrease
Prepaid Advertising Decrease
Accounts Payable Decrease
Interest Payable Increase
Net Cash Used by Operating Activities
Sale of Land
Purchase of Equipment
Net Cash Used by Investing Activities
Issuance of Bonds Payable
Purchase of Treasury Stock
Net Cash Provided by Financing Activities
Net Increase in Cash
Cash at Beginning of Year
Cash at End of Year
$ (42,000)
22,000
(25,000)
8,000
6,000
3,000
(14,000)
6,000
$ (36,000)
70,000
(183,000)*
(113,000)
200,000
(30,000)
170,000
21,000
28,000
$ 49,000
* The sum of the increase in PPE assets account ($138,000) and the book value of the land sold ($45,000).
c. - $36,000/(($23,000 + $31,000)/2) = -1.33

- $36,000/$183,000 = -0.20
Arctics operating cash flows are negative, primarily because the firm reported a net
loss for the year. As a consequence, its cash flow ratios indicate insufficient cash
flows to fund operations and capital expenditures.

4-25
P4-49. (30 minutes)

a.
Adjustments to Convert Income Statement Items to Operating Activity Cash Flows
Net income
(loss)
$ 42,000
Sales
revenue
$728,000
Cost of
goods sold
534,000
Wage
expenses
190,000
Advertising
expense
31,000
Depreciation
expense
22,000
Interest
expense
18,000
+Gains
Losses
+25,000
Income tax
expense
0
Adjustments:
Add back
depreciation
expense
+Depreciation
expense
+22,000
Gains
25,000
Subtract (add)
non-operating
gains (losses)
Subtract the
change in
operating
assets
(operating
investments)
+Losses
0
change
in accounts
receivable
-(-8,000)
Add the
change in
operating
liabilities
(operating
financing)
Cash
from
operations
$ 36,000
Receipts
from
=
customers
$736,000
change
in
inventory
-(-6,000)
change in
prepaid
advertising
-(-3,000)
+change in
accounts
payable
+(-14,000)
+change in
wages
payable
+0
Payments
for
merchandise
542,000
Payments
for
Wages
190,000
+change in
interest
payable
+6,000
Payments
for
advertising
28,000
(zero)
0
Payments
for
interest
12,000
+change in
income tax
payable
+0
(zero)
+0
(zero)
0
Payments
for income
tax
0
b. Computing cash flows from operating activities using the direct method provides
additional detail about the specific cash flows that occurred during the period. For
example, the indirect method does not reveal that Arctic paid $542,000 for
merchandise during 2013, or $28,000 for advertising. Because this detail is missing,
the FASB requires supplemental disclosure of two specific (and important) cash
payments interest and taxes if the indirect method is used.

4-26

a. Cash, December 31, 2013................................................
Cash, December 31, 2012................................................
Cash increase during 2013...............................................
$27,000
18,000
$ 9,000

DAIR COMPANY
Net Income
Add (deduct) items to convert net income
to cash basis
Depreciation
Amortization of intangible assets
Loss on bond retirement
Inventory decrease
Prepaid expenses increase
Interest payable decrease
Income tax payable decrease
Sale of equipment
Retirement of bonds payable
Issuance of common stock
Net cash used by financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
$ 85,000
22,000
7,000
5,000
(5,000)
6,000
(2,000)
6,000
(3,000)
(2,000)
$119,000
17,000
(125,000)
24,000
(26,000)
(127,000)
9,000
18,000
$ 27,000
continued next page

4-27
P4-50. concluded
c. (1) Supplemental cash flow disclosures
Cash paid for interest ............................................................................
Cash paid for income taxes...................................................................
*
Interest expense
+ Interest payable decrease
Cash paid for interest
Income tax expense
Cash paid for income taxes
$10,000
3,000
$13,000
$36,000
2,000
$38,000
(2) Schedule of noncash investing and financing activities

Issuance of bonds payable to acquire equipment.................................
d. (1)
(2)
(3)
$ 13,000*
$ 38,000
$ 60,000
$119,000/[($42,000 + $41,000)/2] = 2.87.

The firm did not spend any cash on capital investments. The firm did issue debt
for equipment, but this is not a capital expenditure.
$119,000 + $17,000 = $136,000
P4-51. (45 minutes)

a. Depreciation and amortization are a noncash expenses that are deducted in the
computation of net income. The depreciation and amortization add-back zeros these
expenses out of the income statement to focus on cash profitability. The positive
amount for depreciation and amortization does not mean that the company is
generating cash from depreciation and amortization, a common misconception. It is
merely an adjustment to remove these expenses from the computation of profit.
b. The adjustments must be interpreted relative to the amounts included in net income.
The $(73,670,000) adjustment for receivables means that Staples collected this much
less than it recognized as revenue. The adjustment for accrued expenses implies that
Staples paid $117,389,000 more than the expenses already recognized in net income.
c. Acquisition of property and equipment are less than the depreciation and amortization
recognized for the year. Unless the prices for property and equipment are falling, that
relationship implies that Staples may not be replacing its capacity. A growing company
will have capital expenditures that exceed the depreciation on its existing property and
equipment.
continued next page

4-28
P4-51. concluded
d. Staples operates businesses in 26 countries outside of the U.S. including businesses
in Europe, Asia, South America, Australia, and Canada. This means that some of its
cash transactions occur in currencies other than the U.S. dollar. This fact requires the
company to hold cash in other currencies that may be revalued relative to the dollar
from one period to the next. When foreign cash balances are revalued in foreign
exchange markets relative to the U.S. dollar, the dollar value of the companys cash
balance changes even though there was no actual cash flow. Hence, this exchange
rate effect is listed in the cash flow statement to explain the change in the cash
balance.
e. Although net cash decreased during the period, Staples presents a healthy cash flow
picture for the year. It generated almost $1.6 billion of operating cash flow. Most of this
amount was returned to lenders and shareholders, rather than being used to grow the
business. Staples returned over $900 million to shareholders in the form of dividends
and share repurchases, plus it reduced its net borrowings by about $500,000.
a. Cash and cash equivalents, December 31, 2013............................ $19,000
Cash and cash equivalents, December 31, 2012............................ 25,000
Cash and cash equivalents decrease during 2013.......................... $ 6,000
b.
See the cash flow statement provided on the following page.
c. (1)
(2)
Supplemental Cash Flow Disclosures

$ 12,000*
$ 46,000
* Interest expense
- Interest payable increase
$13,000
(1,000)
$12,000
Income tax expense

$44,000
2,000
$46,000
Schedule of noncash investing and financing activities

Issuance of preferred stock to acquire patent
$ 25,000
d. (1) $101,000/[($34,000 + $31,000)/2] = 3.11.

(2) $101,000/($185,000) = 0.55.
(3): $101,000 ($90,000 + $95,000 - $14,000) = -$70,000

4-29
P4-52. concluded
b.
RAINBOW COMPANY
Net cash flow from operating activities
Net income
Add (deduct) items to convert net income
to cash basis
Depreciation
Patent amortization
Loss on sale of equipment
Gain on sale of investments
Inventory increase
Interest payable increase
Sale of investments
Purchase of land
Improvements to building
Sale of equipment
Net cash used by investing activities
Issuance of bonds payable
Issuance of common stock
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year .
Cash and cash equivalents at end of year
$ 90,000
39,000
7,000
5,000
(3,000)
(10,000)
(26,000)
(4,000)
4,000
1,000
(2,000)
$101,000
60,000
(90,000)
(95,000)
14,000
(111,000)
30,000
24,000
(50,000)
4,000
(6,000)
25,000
$ 19,000

4-30
P4-53. (35 minutes)

a. Cash and cash equivalents, December 31, 2013 ..
Cash and cash equivalents, December 31, 2012 ..
Cash and cash equivalents decrease during 2013 ..
$19,000
25,000
$ 6,000
b.
RAINBOW COMPANY
Statement of Cash Flows (Direct Method)
Cash received from customers
$740,000
Cash received as dividends ..
15,000
Cash paid for merchandise purchased ..
462,000
Cash paid for wages and other operating expenses
134,000
Cash paid for interest ..
12,000
46,000
Net cash provided by operating activities ..
Sale of investments ..
Purchase of land
Improvements to building
Sale of equipment ..
Net cash used by investing activities ...
60,000
(90,000)
(95,000)
14,000

Issuance of bonds payable .
Issuance of common stock .
30,000
24,000
(50,000)
Net decrease in cash and cash equivalents ..

Cash and cash equivalents at beginning of year .
Cash and cash equivalents at end of year .
$755,000
(654,000)
101,000
(111,000)
4,000
(6,000)
25,000
$ 19,000
continued next page

4-31
P4-53. concluded
c. (1) Reconciliation of net income to net cash flow from operating activities
Net income
Depreciation
Patent amortization
Loss on sale of equipment
Gain on sale of investments
Inventory increase
Interest payable increase
$ 90,000
39,000
7,000
5,000
(3,000)
(10,000)
(26,000)
(4,000)
4,000
1,000
(2,000)
$101,000
(2) Schedule of noncash investing and financing activities

Issuance of preferred stock to acquire patent
$ 25,000
P4-54. (30 minutes)

Operating cash flow + change in operating assets
= net income + change in operating liabilities
or
Net income - change in operating assets + change in operating liabilities
= operating cash flow
a. Apples adjustment for accounts receivable is (plus) $143 million. This adjustment
represents minus the change in receivables, so Apples accounts receivable must have
gone down by $143 million.
($ millions)
Net sales
- Change in accounts receivable
+ Change in deferred revenue
Cash collected from customers ..
b. ($ millions)
- Cost of goods sold .
- Change in inventories ..
- Cash paid for purchases of inventories
$108,249
+143
+1,654
$110,046
($64,431)
+275
2,515
($61,641)
continued next page

4-32
P4-54. concluded
c. ($ billions)
Property, plant and equipment, ending balance
- Purchases of property, plant and equipment
+ Book value of PPE assets sold ...
+ Depreciation of property, plant and equipment
Property, plant and equipment, beginning balance
$7.8
(4.3)
none
1.6
$5.1
d. Stock-based compensation expense is deducted when calculating net income similar

to cash compensation. The only difference is that the compensation is paid in shares
of stock (or stock options) instead of cash. Because stock-based compensation does
not require the payment of cash, it is treated as a noncash expense, much like
depreciation, and added back to net income when the indirect method is used in the
cash flow statement. Generally speaking, compensation cost is classified as part of
operating activities whether or not the compensation is paid in cash.
P4-55. (75 minutes)
a.

4-33
P4-55. concluded
b. The following statement of cash flows from operations combines the effects of the
income tax asset and liability and combines the effects of the deferred tax asset and
liability. In addition, the effects of changes in current and noncurrent salary
continuation plan liabilities have been combined in the operating cash flow.
GOLDEN ENTERPRISES, INC.
Consolidated Statement of Cash Flows
Year ended June 3, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
Deferred income taxes
Gain on sale of property and equipment
- Change in receivables, net
- Change in inventories
- Change in prepaid expenses
- Change in cash surrender value of insurance
- Change in other assets
+ Change in accrued expenses
+ Change in salary continuation plan
+ Change in accrued income taxes
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
$ 3,014,768
3,174,956
1,329,868
(79,483)
(685,678)
(94,964)
(230,574)
364,240
(167,256)
186,036
138,626
(92,506)
(1,103,498)
5,754,535
(5,559,183)
96,916
(5,462,267)
CASH FLOWS FROM FINANCING ACTIVITIES:

Debt proceeds
Debt repayments
Change in checks outstanding in excess of bank balances
Purchase of treasure shares
Cash dividends paid
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
38,903,745
(36,328,583)
(85,126)
(36,960)
(1,467,507)
985,569
1,277,837
1,443,801
$ 2,721,638
c. OCFCL = $5,754,535 [(14,216,457 + 14,212,044) 2] = 0.40

OCFCX = $5,754,535 5,559,183 = 1.04

4-34
P4-56. (20 minutes)

a. The positive adjustment of $314,872 thousand (say, $315 million) is caused by the
change in the amount that Groupon owes its merchants. When a customer
purchases, Groupon gets the cash quickly and then waits to pay the merchants
(recognizing the accrued merchant payable liability). If we add the fact that Groupon
is growing very quickly, it means that the accrued merchant payable grows over the
period. The adjustment reflects the fact that the merchant share of the amount
collected from customers is $315 million more than the amount that Groupon paid to
the merchants.
Will this continue into the future? Only if Groupon continues to grow and if its
payment terms to merchants remain unchanged. If Groupons growth went to zero,
then the accrued merchant payable would level out and the change would go to
zero. Likewise, if competitors forced Groupon to speed up its payments to
merchants, the accrued merchant payable liability would decrease, and the
companys ability to generate a positive cash flow from operations would be
impaired.
In the risk factors section of the SEC document, Groupon states Our operating cash
flow and results of operations could be adversely impacted if we change our
merchant payment terms or our revenue does not continue to grow.
b. While Groupon used $121 million in cash for investing activities, most of this was for
acquisitions of businesses and investments, rather than for capital expenditures
(only about $30 million). The OCFCX ratio was $129,511 $29,825 = 4.34.
Groupon appears to be growing more by acquisition than by organic growth.
c. Groupon used $353,550 thousand to repurchase its own common stock and another
$35,221 to redeem its own preferred stock, a total of about $389 million. This might
prompt a financial statement reader to look at the related party transactions section
of the companys filing with the SEC prior to its initial public offering. For example, in
December 2010 and January 2011, Groupon issued new preferred stock in
exchange for $942.2 million in cash. Of this amount, $132.4 million was retained in
the company. The remaining $809.8 million was used to redeem shares of common
and preferred stock, mostly from current and former board members and from
entities that they control.
In the use of proceeds section of the SEC document, Groupon states Based on our
current cash and cash equivalents, together with cash generated from operations,
we do not expect that we will utilize any of the net proceeds of this offering to fund
operationsduring the next twelve months.

4-35
CASES AND PROJECTS

C4-57. (30 minutes)
The required debt to equity ratio allows for total liabilities to be up to $477 million. That is
$477 / ($125+$148) =1.747 < 1.75. This implies total short-term borrowing of $107 million
and an ending cash balance of $70 million.
LAMBERT CO.
Statement of Cash Flows (projected)
Cash from operations
Net income
Depreciation expense
Increase in accounts receivable .
Decrease in inventory
Increase accounts payable ..
Decrease in income taxes payable .
Cash provided by (used in) operations ..
Cash from investing
Acquisitions of property, plant and equipment
Disposal proceeds ..
Cash provided by (used in) investing .
Cash from financing
Issue long-term debt ..
Repay long-term debt ..
Common stock issue ..
Shareholder dividends
Increase (decrease) in short-term borrowing
Cash provided by (used in) financing ..
Net change in cash ..
Beginning cash balance .
Ending cash balance ..
18
120
(40)
20
30
(10)
$ 138
(225)
75
(150)
80
(100)
25
(30)
57
32
20
50
70

4-36
C4-58. (45 minutes)

a.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Accounts receivable (+A)

Sales revenue (+R,+SE)
3,800
Cash (+A)
Accounts receivable (-A)
3,500
Cost of goods sold (+E,-SE)

Inventory (-A) .
1,800
Inventory (+A)
Accounts payable (+L) ....
1,200
Accounts payable (-L) ..

Cash (-A) ...
1,100
3,800
3,500
1,800
1,200
1,100
Salaries and wages expense (+E,-SE) .

Salaries and wages payable (+L) .
700
Salaries and wages payable (-L)

Cash (-A) ....
730
Rent expense (+E,-SE).

Prepaid rent (-A) ..
200
Prepaid rent (+A) ..

Cash (-A) ...
600
Depreciation expense (+E,-SE) .

Accumulated depreciation (+XA,-A) .
150
700
730
200
600
150
Cash (+A) .
Accumulated depreciation (-XA,+A)
Fixtures and equipment (-A)
10
70
Fixtures and equipment (+A) ..

Cash (-A) ..
800
Interest expense (+E,-SE) ....

Cash (-A) ..
16
Bank loan payable (-L) ...

Cash (-A) ..
1,600
Cash (+A) ..
Long-term loan payable (+L)
2,000
80
800
16
1,600
2,000
continued next page

4-37
C4-58. continued
16
17
18
Income tax expense (+E,-SE) .

Taxes payable (+L) ..
374
Retained earnings (-SE) .

Cash (-A)
80
Revenue (-R) .
Cost of goods sold (-E) .
Salaries and wages expense (-E)
Rent expense (-E)
Depreciation expense (-E)
Interest expense (-E) ..
Income tax expense (-E)
Retained earnings (+SE)
3,800
374
80
1,800
700
200
150
16
374
560
Entry 18 closes revenue and expense accounts to retained earnings.

b.
+
2
11
15
Bal
Cash (A)
600
3,500
1,100
5
730
7
600
9
10
800
12
16
13
1,600
14
2,000
80
17
1,184
- Accounts Payable (L) +

3,000
5
1,100
1,200
4
3,100 Bal
- Salaries and Wages +

Payable (L)
100
7
730
700
6
70 Bal
+
4
Bal
Inventory (A) 2,400

1,200
1,800
1,800
- Retained Earnings (SE)+

1,300
17
80
560
18
1,780 Bal
+ Accounts Rec. (A) 6,500

1
3,800
3,500
2
Bal
6,800
- Common Stock (SE) +

4,600
4,600 Bal
Taxes Payable (L)

0
374
374
+
16
Bal
- Bank Loan Payable (L) +

1,600
14
1,600
0 Bal
- Long-term Loan (L) +
0
2,000
15
2,000 Bal
18
Revenue (R) +
3,800
1
3,800
0 Bal
+ Cost of Goods Sold (E) 3

1,800
1,800
18
Bal
0
+ Salaries & Wages (E) 6
700
700
18
Bal
0
continued next page

4-38
C4-58. concluded
+ Prepaid Rent (A) 0
9
600
200
Bal
400
+
12
Bal
+
8
8
Fixtures and
Equipment (A)
1,900
800
80
11
2,620
- Accum. Deprec. (XA) +

800
11
70
150
10
880 Bal
Bal
Rent Expense (E)

200
200
0
18
+ Depreciation Exp. (E) 10

150
150
18
Bal
0
+ Interest Expense (E) 13
16
16
18
Bal
0
+ Income Tax Exp (E) 16
374
374
18
Bal
0
C4-59. (30 minutes)

a. Depreciation and amortization are noncash expenses that are deducted in the
computation of net income. The depreciation and amortization add-back zeros these
expenses out of the income statement to focus on operating cash flow. The positive
amount for depreciation and amortization does not mean that the company is
generating cash from depreciation and amortization, a common misconception. It is
merely an adjustment to remove these expenses from net income to convert profit to
cash flow.
b. Gains on disposals of asset are the result of investing activity, not operating activity,
but these gains are recognized in net income. When we start with net income in an
indirect method cash from operations, subtracting the gain removes this investing item
from the determination of cash from operations.
Daimler reports cash proceeds from disposals of PPE and intangible assets of 252
million. If the recognized gain is 102 million, then the book value of the assets
disposed would be 150 million (= 252 million 102 million).
c. It does not. The adjustments can only be interpreted relative to the amounts that are
included in net income. The negative 2,328 million inventory adjustment means that
Daimlers cost to acquire inventory for the year exceeded its cost of goods sold for the
year by 2,328 million.
continued next page

4-39
C4-59. concluded
d. Free cash flow ( millions): 696 $(4,158 252) = -4,602.
Daimlers operating cash flow is negative, as is its free cash flow. We did not include
acquisition of intangible assets in the calculation. Doing so would have reduced free
cash flow by another 1.7 billion. Daimler financed its investing activities by additions
to long-term financing.
e. Daimlers cash flow from operating activities is negative, as is its cash flow from
investing activities. It generated a positive cash flow of 5,842 million from financing
activities. As a result, the net decrease in cash was 1,327million. Daimler appears
to be strong enough to withstand a reduction in cash of this magnitude, especially
given that it has a record (in 2010 and 2009) of reporting very positive cash flows
from operations.
To be thorough in analyzing Daimlers liquidity and solvency, one would want to ask
why operating cash flows were negative. A closer look at the companys business
segments reveals that the Industrial Business had cash from operations of 7.3
billion and free cash flow of about 3.4 billion. Daimler Financial Services had cash
from operations of (8.0) billion, resulting from large increases in financial services
receivables and vehicles on operating leases. In its analysis of cash flows, Daimler
reports that The positive effect from the improvement in net profit before income
taxes was reduced in particular by increased new business in leasing and sales
financing as well as by significantly higher allocations to the pension funds.

4-40

Reporting and Analyzing Cash Flows: Learning Objectives - Coverage by Question

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Chapter 4

Reporting and Analyzing Cash Flows

46, 48, 50,

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

This is a noncash investing and financing event. It must be reported in a

Noncash investing and financing transactions are disclosed as supplemental

Solutions Manual, Chapter 4

Under the indirect method, depreciation is added to net income because, as a

Q4-15. Wages expense

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

Cambridge Business Publishers, 2014

Cash flow from an operating activity.

Cash flow from an investing activity.

Cash flow from an investing activity.

Cash flow from an operating activity.

Cash flow from a financing activity.

Cash flow from a financing activity.

Cash flow from an investing activity.

M4-23. (15 minutes)

DOLE FOOD COMPANY, INC.

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M4-24. (10 minutes)

(3) Cash flow from a financing activity.

(1) Cash flow from an operating activity.

(4) Noncash investing and financing activity.

(1) Cash flow from an operating activity.

(1) Cash flow from an operating activity.

M4-25. (30 minutes)

Cambridge Business Publishers, 2014

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M4-27. (30 minutes)

Cambridge Business Publishers, 2014

M4-28. (15 minutesINDIRECT METHOD)

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

M4-30. (15 minutesDIRECT METHOD)

X must equal $58,000 to make the FSET balance.

X must equal $15,300 to make the FSET balance.

Cambridge Business Publishers, 2014

Cost of goods sold

Change in accounts receivable

Financial Accounting, 4th Edition

E4-34. (30 minutesINDIRECT METHOD)

E4-35. (15 minutesINDIRECT METHOD)

b. $115,000/[($31,000 + $29,000)/2] =3.83

Cambridge Business Publishers, 2014

Financial Accounting, 4th Edition

E4-36. (15 minutesINVESTING ACTIVITIES)

Property, plant and

Property, plant and equipment at cost (+A)

To record purchase of property, plant and equipment with cash.

Property, plant and equipment at cost (+A)

To record purchase of property, plant and equipment with financing.

To record sale of used equipment.

Depreciation expense (+E, -SE)

To record depreciation expense.

Cambridge Business Publishers, 2014

Property, plant and