Chapter 14

Statement of Cash Flows

Solutions to Questions

14-1 The statement of cash flows 14-6 Transactions involving accounts

highlights the major activities that impact payable are not considered to be financing
cash flows and hence affect the overall activities because such transactions relate
cash balance. to a company’s day-to-day operating
activities rather than to its financing
14-2 Cash equivalents are short-term, activities.
highly liquid investments such as Treasury
bills, commercial paper, and money 14-7 The repayment of $300,000 and
market funds. They are included with cash the borrowing of $500,000 must both be
because investments of this type are shown “gross” on the statement of cash
made solely for the purpose of generating flows. That is, the company would show
a return on temporarily idle funds and $500,000 of cash provided by financing
they can be easily converted to cash. activities and then show $300,000 of cash
used by financing activities.
14-3 (1) Operating activities: Include
cash inflows and outflows related to 14-8 The direct method reconstructs the
revenue and expense transactions that income statement on a cash basis by
affect net income. restating revenues and expenses in terms
(2) Investing activities: Include of cash inflows and outflows. The indirect
cash inflows and outflows related to method starts with net income and adjusts
acquiring or disposing of noncurrent it to a cash basis to determine the net
assets. cash provided by operating activities.
(3) Financing activities: Include
cash inflows and outflows related to 14-9 Depreciation is not a cash inflow,
borrowing from and repaying principal to even though it is added to net income on
creditors and completing transactions with the statement of cash flows. Adding
the company’s owners. depreciation to net income to compute the
amount of net cash provided by operating
14-4 The company’s specific activities creates the illusion that
circumstances should be considered when depreciation is a cash inflow. It isn’t.
interpreting the statement of cash flows.
The relationships among numbers should 14-10 An increase in the Accounts
also be considered rather than evaluating Receivable account must be subtracted
each number in isolation. from net income under the indirect
method because this is an increase in a
14-5 Since the entire cash proceeds noncash asset.
from the sale of a noncurrent asset appear
as a cash inflow from investing activities, 14-11 A sale of equipment for cash would
the gain must be deducted from net be classified as an investing activity. Any
income to avoid double counting a portion transaction involving the acquisition or
of those proceeds. disposition of noncurrent assets is
classified as an investing activity.

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Solutions Manual, Chapter 14 1
14-12 Free cash flow is net cash provided
by operating activities minus capital
expenditures and dividends.

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2 Managerial Accounting, 14th Edition

The Foundational 15

1. The net decrease in cash and cash equivalents would equal

the $9,000 decrease in the cash balance (from $57,000 to
$48,000) as shown on the balance sheet.

2. The basic equation for stockholders’ equity accounts can be

applied to the Retained Earnings account to compute the net
income of $2,000 as follows:
Beginning balance – Debits + Credits = Ending balance
$61,000 – $6,000 + Credits = $57,000
$55,000 + Credits = $57,000
Credits = $2,000

3. The basic equation for contra-asset accounts can be applied

to the Accumulated Depreciation account to compute the
depreciation of $19,000 that needs to be added to net income
as follows:
Beginning balance – Debits + Credits = Ending balance
$35,000 – $4,000 + Credits = $50,000
$31,000 + Credits = $50,000
Credits = $19,000

Note to Instructors: Questions 4-9 are intended to help

students move past strict memorization to better understand
the underlying reasons for the adjustments in step 2 of the
indirect method.

4. The completed T-account is as follows:

Accounts Receivable
Beg. Bal. 44,000
Sales on 600,00 Cash 603,00
account 0 collections 0
End. Bal. 41,00
0
The total amount of credits recorded in accounts receivable is
$603,000. This amount represents the cash collections from
customers.

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Solutions Manual, Chapter 14 3
The Foundational 15 (continued)

5. The accounts receivable balance decreased by $3,000;

therefore, the $3,000 decrease is added to net income. This
adjustment reflects the fact (as depicted in the solution to
question 4) that cash collections from customers of $603,000
were $3,000 higher than the credit sales of $600,000 included
in the income statement.

6. The completed T-accounts are as follows:

Inventory
Beg. Bal. 50,000
Purchases 405,00 Goods sold 400,00
0 0
End. Bal. 55,00
0
Accounts Payable
Beg. Bal. 57,000
Supplier 430,00 Purchases 405,00
payments 0 0
End. Bal. 32,000
The total amount of inventory purchases debited to inventory
and credited to accounts payable is $405,000. Therefore, the
total amount of the debits to accounts payable is $430,000.
The amount of the debits to accounts payable represents to
total cash paid to suppliers.

7. The inventory balance increased by $5,000; therefore, this

amount is subtracted from net income. The accounts payable
balance decreased by $25,000; therefore, this amount is also
subtracted from net income. The combined amount of these
adjustments is a $30,000 deduction from net income. This
adjustment reflects the fact (as shown in the solution to
question 6) that cash paid to suppliers of $430,000 is $30,000
higher than the cost of goods sold of $400,000 included in the
income statement.

8. The completed T-account is as follows;

Income Taxes Payable
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4 Managerial Accounting, 16th Edition
Beg. Bal. 28,000
Tax payments 3,700 Taxes payable 700
End. Bal. 25,000
The total amount of debits recorded in income taxes payable
is $3,700. This amount represents the cash paid for income
taxes.
The Foundational 15 (continued)

9. The income taxes payable balance decreased by $3,000;

therefore, the $3,000 decrease is subtracted from net income.
This adjustment reflects the fact (as depicted in the solution
to question 8) that cash paid for income taxes of $3,700 is
$3,000 higher than the income tax expense of $700 included
in the income statement.

10. The operating activities section of the statement of cash flows

would contain an adjustment related to a gain on the sale of a
piece of equipment. The equipment was sold for $3,000 and it
had a book value at the time of its sale of $2,000 (= $6,000
original cost − $4,000 of accumulated depreciation);
therefore, the company would record a $1,000 gain on the
sale (= $3,000 cash proceeds – $2,000 book value). This
amount would be subtracted from net income in the operating
activities section of the statement.

11. The net cash provided by (used in) operating activities would
be computed as follows:
Net income........................................................ $ 2,000
Adjustments to convert net income to a
cash basis:
Depreciation....................................................
$19,000
Decrease in accounts receivable..................... 3,000
Increase in inventory....................................... (5,000)
Decrease in accounts payable......................... (25,000)
Decrease in income taxes payable.................. (3,000)
Gain on sale of equipment.............................. (1,000) (12,000)

Net cash provided by (used in) operating $(10,00

activities.......................................................... 0)

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Solutions Manual, Chapter 14 5
12. The gross cash outflows of $16,000 can be computed by
applying the basic equation for assets to the Property, Plant,
and Equipment account as follows:
Beginning balance + Debits – Credits = Ending balance
$140,000 + Debits – $6,000 = $150,000
Debits = $150,000 – $140,000 + $6,000
Debits = $16,000
The Foundational 15 (continued)

13. The net cash provided by (used in) investing activities is

$(13,000). This amount includes the $(16,000) cash outflow
related to the purchase of property, plant, and equipment (as
computed in question 12) and the $3,000 cash inflow from the
sale of equipment.

14. The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
financing cash flows as follows:
Increase Decreas
in e in
Account Account
Balance Balance
Liabilities and Stockholders’
Equity
Bonds payable...................................... +
10,000
Common stock..................................... +
10,000

Because Ravenna did not retire any bonds or repurchase any

of its own common stock during the year, the corresponding
amounts in the table above represent the gross cash inflows
that are included in financing section of the statement of cash
flows.

15. The cash inflows of $20,000 from the issuance of bonds and
common stock (as computed in question 14) minus the cash
dividend of $6,000 equals net cash provided by (used in)
financing activities of $14,000.

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6 Managerial Accounting, 16th Edition
Exercise 14-1 (15 minutes)

Activity
Operatin Investin Financin
Transaction g g g
a. Collected cash from customers..................... X
b. Paid cash to repurchase its own stock.......... X
c. Borrowed money from a creditor.................. X
d. Paid suppliers for inventory purchases......... X
e. Repaid the principal amount of a debt.......... X
f. Paid interest to lenders................................. X
g. Paid a cash dividend to stockholders............ X
h. Sold common stock....................................... X
i. Loaned money to another entity................... X
j. Paid taxes to the government....................... X
k. Paid wages and salaries to employees.......... X
l. Purchased equipment with cash................... X
m. Paid bills to insurers and utility providers..... X

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Solutions Manual, Chapter 14 7
Exercise 14-2 (15 minutes)

The guidelines from Exhibit 14-2 can be used to analyze the

changes in noncash balance sheet accounts that impact net
income as follows:

Increase Decrease
in in
Account Account
Balance Balance
Current Assets
Accounts receivable...... – 19,000
Inventory....................... – 33,000
Prepaid expenses.......... + 1,000

Current Liabilities
Accounts payable.......... + 15,000
Accrued liabilities.......... – 2,000
Income taxes payable... + 4,000

The net cash provided by (used in) operating activities is

computed as follows:

$35,00
Net income........................................................ 0
Adjustments to convert net income to a cash
basis:
Depreciation.................................................... $20,000
Increase in accounts receivable...................... (19,000)
Increase in inventory....................................... (33,000)
Decrease in prepaid expenses........................ 1,000
Increase in accounts payable.......................... 15,000
Decrease in accrued liabilities......................... (2,000)
(14,000
Increase in income taxes payable................... 4,000 )
Net cash provided by (used in) operating $21,00
activities.......................................................... 0

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8 Managerial Accounting, 16th Edition
Exercise 14-3 (5 minutes)

Free cash flow computation:

Net cash provided by operating
activities........................................... $ 34,000
Less:
Capital expenditures......................... $110,000
Dividends.......................................... 30,000 140,000
$(106,000
Free cash flow...................................... )

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Solutions Manual, Chapter 14 9
Exercise 14-4 (30 minutes)

Net cash provided by (used in) operating activities:

Step 1: The company did not sell or retire any plant and
equipment during the year (land is not depreciated); therefore,
the $60 increase in Accumulated Depreciation equals the credit
to the account that is added to net income.
Step 2: The guidelines from Exhibit 14-2 can be used to analyze
the changes in noncash balance sheet accounts that impact
net income as follows:
Increase in Decrease in
Account Account
Balance Balance
Current Assets
Accounts receivable..... – 110
Inventory...................... + 70
Prepaid expenses......... – 9

Current Liabilities
Accounts payable......... + 35
Accrued liabilities......... –4
Income taxes payable. . +8
Step 3: The gain on sale of investments ($10) is subtracted
from net income and the loss on the sale of land ($6) is added
to net income.

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10 Managerial Accounting, 16th Edition
Exercise 14-4 (continued)

The net cash provided by (used in) operating activities is

computed as follows:
Net income...................................................... $ 84
Adjustments to convert net income to a cash
basis:
Depreciation.................................................. $60
Increase in accounts receivable.................... (110)
Decrease in inventory................................... 70
Increase in prepaid expenses........................ (9)
Increase in accounts payable........................ 35
Decrease in accrued liabilities...................... (4)
Increase in income taxes payable................. 8
Gain on sale of long-term investments......... (10)
Loss on sale of land....................................... 6 46
Net cash provided by (used in) operating $130
activities.......................................................

2. Prepare a statement of cash flows for the year

Investing and Financing activities:
The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase Decreas
in e in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment............ – 185
Long-term investments........................ +6

Liabilities and Stockholders’

Equity
Bonds payable...................................... +150
Common stock..................................... – 80

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Solutions Manual, Chapter 14 11
Exercise 14-4 (continued)

Because Pavolik did not retire any bonds or issue any of its own
stock during the year, the corresponding amounts in the table
on the prior page represent the gross cash flows that are
included in the statement of cash flows. Property, plant, and
equipment, long-term investments, and retained earnings
require further analysis as follows:
Property, Plant, and Equipment
Addition 200 Sale of land 15
s
Change 185
The statement of cash flows must report the gross cash outflow
of $200 and the gross cash inflow related to the sale of land of
$9.
Long-Term Investments
Addition 0 Sale 6
s
Change 6
The statement of cash flows must report the gross cash inflow
related to the sale of the investment of $16. The company did
not purchase any long-term investments during the year.
Retained Earnings
Dividen 30 Net income 84
ds
Change 54
The statement of cash flows must report the dividend payment
of $30.

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12 Managerial Accounting, 16th Edition
Exercise 14-4 (continued)

Pavolik Company
Statement of Cash Flows
Operating activities:
$
13
Net cash provided by (used in) operating activities 0
Investing activities:
$
1
Proceeds from sale of long-term investments....... 6
Proceeds from sale of land.................................... 9
Additions to property, plant, & equipment............ (200)
Net cash provided by (used in) investing activities (175)
Financing activities:
Issuance of bonds payable.................................... 150
Purchase of common stock.................................... (80)
Cash dividends paid.............................................. (30)
Net cash provided by (used in) financing activities 40
Net decrease in cash and cash equivalents........... (5)
Beginning cash and cash equivalents.................... 90
Ending cash and cash equivalents......................... $ 85

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Solutions Manual, Chapter 14 13
Exercise 14-5 (10 minutes)

Subtrac
Item Amount Add t
Accounts receivable.............. $90,000 decrease X
$120,00
Inventory............................... 0 increase X
Prepaid expenses.................. $3,000 decrease X
Accounts payable.................. $65,000 decrease X
Accrued liabilities.................. $8,000 increase X
Income taxes payable........... $12,000 increase X
Sale of equipment................. $7,000 gain X
Sale of long-term
investments........................ $10,000 loss X

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14 Managerial Accounting, 16th Edition
Exercise 14-6 (30 minutes)

1. Prepare a statement of cash flows:

Operating activities:
Step 1: The following equation can be applied to the
Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$50 – $0 + Credits = $65
Credits = $65 – $50
Credits = $15
Step 2: The guidelines from Exhibit 14-2 can be used to analyze
the changes in noncash balance sheet accounts that impact
net income as follows:
Increase in Decrease in
Account Account
Balance Balance
Current Assets
Accounts receivable..... +2
Inventory...................... – 10

Current Liabilities
Accounts payable......... +4
Step 3: There were no gains or losses reported in the income
statement.

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Solutions Manual, Chapter 14 15
Exercise 14-6 (continued)

Investing and Financing activities:

The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase Decreas
in e in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment........ – 40

Liabilities and Stockholders’

Equity
Common stock................................. +5
Because Carmono did not sell any plant and equipment and it
did not repurchase any of its own stock, the amounts above
represent gross cash flows.
The following equation can be applied to the Retained Earnings
account to compute the dividend payment (the debit to the
account):
Beginning balance – Debits + Credits = Ending balance
$39 – Debits + $35 = $60
$74 = $60 + Debits
Debits = $14

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16 Managerial Accounting, 16th Edition
Exercise 14-6 (continued)

Carmono Company
Statement of Cash Flows
For This Year Ended December 31
Operating activities:
Net income........................................................ $35
Adjustments to convert net income to a cash
basis:
Depreciation.................................................... $15
Decrease in accounts receivable..................... 2
Increase in inventory....................................... (10)
Increase in accounts payable.......................... 4 11
Net cash provided by (used in) operating 46
activities..........................................................
Investing activities:
Additions to property, plant, & equipment........ (40)
Net cash provided by (used in) investing (40)
activities..........................................................
Financing activities:
Issuance of common stock................................ 5
Cash dividends paid........................................... (14)
Net cash provided by (used in) financing (9)
activities..........................................................
Net decrease in cash and cash equivalents....... (3)
Beginning cash and cash equivalents................ 6
Ending cash and cash equivalents..................... $ 3

2. Free cash flow computation:

Net cash provided by operating $ 46
activities...........................................
Less:
Capital expenditures......................... $40
Dividends.......................................... 14 54
Free cash flow...................................... $(8)

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Solutions Manual, Chapter 14 17
Problem 14-7 (30 minutes)

1. Net cash provided by (used in) operating activities:

Step 1: The following equation can be applied to the

Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$85 – $16 + Credits = $93
Credits = $93 – $85 + $16
Credits = $24

Step 2: The guidelines from Exhibit 14-2 can be used to analyze

the changes in noncash balance sheet accounts that impact
net income as follows:
Increase Decrease
in in Account
Account Balance
Balance
Current Assets
Accounts receivable... – 100
Inventory.................... + 50
Prepaid expenses....... –4

Current Liabilities
Accounts payable....... + 80
Accrued liabilities....... – 12
Income taxes payable +6

Step 3: The gain on sale of investments ($7) is subtracted from

net income and the loss on the sale of equipment ($4) is added
to net income.

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18 Managerial Accounting, 16th Edition
Problem 14-7 (continued)

The net cash provided by (used in) operating activities is

computed as follows:
Net income.................................................... $ 63
Adjustments to convert net income to cash
basis:
Depreciation............................................. $24
Increase in accounts receivable................ (100)
Decrease in inventory............................... 50
Increase in prepaid expenses................... (4)
Increase in accounts payable................... 80
Decrease in accrued liabilities.................. (12)
Increase in income taxes payable............. 6
Gain on sale of investments..................... (7)
Loss on sale of equipment........................ 4 41
Net cash provided by (used in) operating $104
activities......................................................

2. Prepare a statement of cash flows.

Investing and Financing activities:
The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase Decreas
in e in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment.......... –140
Long-term investments...................... +3

Liabilities and Stockholders’

Equity
Bonds payable.................................... + 110
Common stock.................................... – 40

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Solutions Manual, Chapter 14 19
Problem 14-7 (continued)

The decrease in the long-term investments account ($3) equals

the cost of the long-term investment sold; therefore, Weaver
did not purchase any long-term investments during the year.
The proceeds from the sale of a long-term investment ($10)
should be recorded as a cash inflow in the investing activities
section of the statement.
Because Weaver did not retire any bonds during the year, the
corresponding amount in the table on the prior page (+110)
represents the gross cash inflow pertaining to a bond issuance.
The company repurchased $40 of its own stock, so the
corresponding amount on the prior page is reported as a cash
outflow in the financing activities section in the statement of
cash flows. Property, plant, and equipment and retained
earnings require further analysis as follows:
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$470 + Debits – $40 = $610
Debits = $610 – $470 + $40
Debits = $180
The additions to property, plant, and equipment ($180) are
recorded as a cash outflow and the proceeds from the sale of
equipment ($20) are recorded as a cash inflow.
Retained earnings:
Beginning balance – Debits + Credits = Ending balance
$74 – Debits + $63 = $107
$137 = $107 + Debits
Debits = $30
The dividend payment ($30) should be recorded as a cash
outflow in the financing activities section of the statement.

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20 Managerial Accounting, 16th Edition
Problem 14-7 (continued)

Weaver Company
Statement of Cash Flows
For This Year Ended December 31
Operating activities:
Net income...................................................... $ 63
Adjustments to convert net income to cash
basis:
Depreciation............................................... $ 24
Increase in accounts receivable................. (100)
Decrease in inventory................................. 50
Increase in prepaid expenses..................... (4)
Increase in accounts payable..................... 80
Decrease in accrued liabilities.................... (12)
Increase in income taxes payable.............. 6
Gain on sale of investments....................... (7)
Loss on sale of equipment.......................... 4 41
Net cash provided by (used in) operating 104
activities.......................................................
Investing activities:
Proceeds from sale of long-term investments. 10
Proceeds from sale of equipment.................... 20
Additions to property, plant, & equipment...... (180)
Net cash provided by (used in) investing (150)
activities.......................................................
Financing activities:
Issuance of bonds payable.............................. 110
Repurchase of common stock......................... (40)
Cash dividends paid........................................ (30)
Net cash provided by (used in) financing 40
activities.......................................................
Net decrease in cash and cash equivalents. . . . (6)
Beginning cash and cash equivalents............. 15
Ending cash and cash equivalents.................. $ 9

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Solutions Manual, Chapter 14 21
Problem 14-8 (20 minutes)

Operatin Investin Financin Cash Cash

Transaction g g g Inflow Outflow
a. Paid suppliers for inventory
purchases....................................... X X
b. Bought equipment for cash............... X X
c. Paid cash to repurchase its own
stock............................................... X X
d. Collected cash from customers......... X X
e. Paid wages to employees.................. X X
f. Equipment was sold for cash............ X X
g. Common stock was sold for cash to
investors......................................... X X
h. Cash dividends were declared and
paid................................................ X X
i. A long-term loan was made to a
supplier.......................................... X X
j. Income taxes were paid to the
government.................................... X X
k. Interest was paid to a lender............ X X
l. Bonds were retired by paying the
principal amount due..................... X X

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22 Managerial Accounting, 16th Edition
Problem 14-9 (60 minutes)

The forthcoming explanation is broken down into eight steps.

1. The statement of cash flows summarizes all of a company’s

cash inflows and outflows during a period, thereby explaining
the difference between its beginning and ending cash balance.

2. The statement is divided into three sections—operating

activities, investing activities, and financing activities. The
operating activities section summarizes the cash inflows and
outflows related to revenue and expense transactions that
affect net income. The investing activities section summarizes
the cash inflows and outflows related to acquiring or disposing
of noncurrent assets. The financing activities section
summarizes the cash inflows and outflows related to borrowing
from and repaying principal to creditors and completing
transactions with the company’s owners.

3. The indirect method of preparing the operating activities

section of the statement of cash flows begins with net income
and adjusts it to a cash basis. The first step in completing the
indirect method is to add depreciation to net income. The total
credits to Brock’s Accumulated Depreciation account equal
$140, so this amount is added to net income. Because Brock is
a merchandiser, the $140 corresponds to its depreciation
expense, which is a noncash expense that must be added to
net income to translate to a cash basis.

4. The second step is to analyze net changes in noncash balance

sheet accounts that impact the computation of net income. For
Brock, this includes Accounts Receivable, Inventory, Accounts
Payable, Accrued Liabilities, and Income Taxes Payable.
The accounts receivable balance increased by $24. This means
that Brock’s sales on account were greater than its cash
collections from customers by $24. Because the income
statement records sales and not cash collections from
customers, $24 must be subtracted from net income to
translate it to a cash basis.

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Solutions Manual, Chapter 14 23
Problem 14-9 (continued)

The inventory balance decreased by $39. This means that

Brock’s inventory purchases were less than its cost of goods
sold by $39. Brock’s cost of goods sold was $2,980; therefore,
its inventory purchases were $2,941. The company’s accounts
payable balance decreased by $45. This means that Brock’s
inventory purchases were $45 less than its cash payments to
suppliers. Brock’s inventory purchases were $2,941; therefore,
its payments to suppliers must be $2,986. Because the income
statement records cost of goods sold ($2,980) and not cash
paid to suppliers ($2,986), $6 must be subtracted from net
income to translate it to cash basis. If the inventory and
accounts payable adjustments are combined it equals a $6
subtraction from net income.
The accrued liabilities balance decreased by $5. This means
that Brock’s accrued expenses are $5 less than its payments to
vendors. Because the income statement records accrued
expenses and not cash payments to vendors, $5 must be
subtracted from net income to translate it to a cash basis.
The income taxes payable balance increased by $6. This means
that Brock’s accrued income tax expense is $6 greater than its
tax payments to governmental bodies. Because the income
statement records income tax expense and not tax payments,
$6 must be added to net income to translate it to a cash basis.

5. The third step of the indirect method is to adjust for

gains/losses included in the income statement. This adjustment
is necessary because the cash realized from the sale of
noncurrent assets must be disclosed in the investing activities
section of the statement of cash flows. The adjustment in step
3 cancels the impact a gain or loss has on the computation of
net income. Because gains increase net income, we subtract
them from net income. Brock’s income statement includes a
gain of $4, so this amount must be subtracted from net
income.

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24 Managerial Accounting, 16th Edition
Problem 14-9 (continued)

6. The investing activities section of Brock’s statement of cash

flows records the gross cash flows related to its property, plant,
and equipment. The statement includes a $150 cash outflow
related to additions to property, plant, and equipment, and a
$19 cash inflow related to the proceeds from the sale of
property, plant, and equipment.

7. The financing activities section of Brock’s statement of cash

flows records the gross cash flows related to its bonds payable,
common stock, and dividends. The statement includes a $40
cash inflow related to the issuance of bonds. It also includes a
$4 cash inflow related to issuing common stock and a $35 cash
outflow related to paying dividends.

8. The net increase in cash and cash equivalents ($260) explains

the difference between the beginning and ending cash
balances.

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Solutions Manual, Chapter 14 25
Problem 14-10 (45 minutes)

1. Net cash provided by (used in) operating activities:

Step 1: The following equation can be applied to the
Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$120,000 – $30,000 + Credits = $132,000
Credits = $132,000 – $120,000 +
$30,000
Credits = $42,000
Step 2: The guidelines from Exhibit 14-2 can be used to analyze
the changes in noncash balance sheet accounts that impact
net income as follows:
Increase Decrease
in in
Account Account
Balance Balance
Current Assets
Accounts receivable........ – 80,000
Inventory......................... – 50,000
Prepaid expenses............ + 7,000

Current Liabilities
Accounts payable............ + 60,000
Accrued liabilities............ – 10,000
Income taxes payable..... + 3,000

Step 3: The gain on sale of equipment ($8,000) is subtracted

from net income.

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26 Managerial Accounting, 16th Edition
Problem 14-10 (continued)

The net cash provided by (used in) operating activities is

computed as follows:
Net income...................................................... $56,000
Adjustments to convert net income to cash
basis:
$ 42,00
Depreciation.................................................. 0
Increase in accounts receivable.................... (80,000)
Increase in inventory..................................... (50,000)
Decrease in prepaid expenses...................... 7,000
Increase in accounts payable........................ 60,000
Decrease in accrued liabilities....................... (10,000)
Increase in income taxes payable................. 3,000
Gain on sale of equipment............................ (8,000) (36,000)
Net cash provided by (used in) operating
activities........................................................ $20,000

2. Prepare a statement of cash flows.

Investing and Financing activities:
The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase Decreas
in e in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment. . –
110,000
Loan to Hymans Company.......... – 40,000

Liabilities and Stockholders’

Equity
Bonds payable............................. +
120,000
Common stock............................ + 30,000

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Solutions Manual, Chapter 14 27
Problem 14-10 (continued)

The loan to Hymans ($40,000) is recorded as a cash outflow in

the investing activities section of the statement. Because
Joyner did not retire any bonds during the year, the
corresponding amount in the table on the prior page
(+120,000) represents a cash inflow pertaining to a bond
issuance. Joyner did not repurchase any of its own stock during
the year, so the increase in common stock (+30,000) is
reported as a cash inflow in the financing activities section of
the statement. Property, plant, and equipment and retained
earnings require further analysis as follows:
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$400,000 + Debits – $40,000 = $510,000
Debits = $510,000 – $400,000 +
$40,000
Debits = $150,000
The additions to property, plant, and equipment ($150,000) are
recorded as a cash outflow and the proceeds from the sale of
equipment ($18,000) are recorded as a cash inflow.
Retained earnings:
Beginning balance – Debits + Credits = Ending balance
$83,000 – Debits + $56,000 = $124,000
$139,000 = $124,000 + Debits
Debits = $15,000
The dividend payment ($15,000) should be recorded as a cash
outflow in the financing activities section of the statement.

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28 Managerial Accounting, 16th Edition
Problem 14-10 (continued)

Joyner Company
Statement of Cash Flows
For Year 2
Operating activities:
$
56,00
Net income.................................................. 0
Adjustments to convert net income to cash
basis:
Depreciation.............................................. $ 42,000
Increase in accounts receivable................ (80,000)
Increase in inventory................................ (50,000)
Decrease in prepaid expenses.................. 7,000
Increase in accounts payable.................... 60,000
Decrease in accrued liabilities.................. (10,000)
Increase in income taxes payable............. 3,000
Gain on sale of equipment........................ (8,000) (36,000)
Net cash provided by (used in) operating
activities................................................... 20,000
Investing activities:
Proceeds from sale of equipment................ 18,000
Loan to Hymans Company........................... (40,000)
(150,000
Additions to property, plant, & equipment. . )
Net cash provided by (used in) investing (172,000
activities................................................... )
Financing activities:
Issuance of bonds payable.......................... 120,000
Issuance of common stock.......................... 30,000
Cash dividends paid.................................... (15,000)
Net cash provided by (used in) financing
activities................................................... 135,000
Net decrease in cash and cash equivalents. (17,000)
Beginning cash and cash equivalents......... 21,000
$
Ending cash and cash equivalents.............. 4,000

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Solutions Manual, Chapter 14 29
Problem 14-10 (continued)

3. Free cash flow computation:

Net cash provided by operating $ 20,00
activities......................................................... 0
Less:
$150,00
Capital expenditures...................................... 0
165,00
Dividends.......................................................
15,000 0
$(145,00
Free cash flow................................................... 0)

4. The relatively small amount of net cash provided by operating

activities during the year was largely the result of a large
increase in accounts receivable. (The large increase in
inventory was offset by a large increase in accounts payable.)
Most of the cash that was provided by operating activities was
paid out in dividends. The small amount that remained,
combined with the cash provided by the issue of bonds and the
issue of common stock, was insufficient to purchase a large
amount of equipment and make a loan to another company. As
a result, the cash on hand declined sharply during the year.

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30 Managerial Accounting, 16th Edition
Problem 14-11 (45 minutes)

To begin the problem, fill in the question mark pertaining to

item “a” using the following T-account:
Retained Earnings
Dividen 20,00 Net income 70,00
ds 0 0
Change 50,00
0
The change in the retained earnings balance is $50,000 and
the cash dividends are $20,000; therefore, the net income must
be $70,000.

Step 1: The following equation can be applied to the

Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$675,000 – $37,000 + Credits = $680,000
Credits = $680,000 – $675,000 + $37,000
Credits = $42,000
Step 2: The guidelines from Exhibit 14-2 can be used to analyze
the changes in noncash balance sheet accounts that impact
net income as follows:
Increase in Decrease in
Account Account
Balance Balance
Current Assets
Accounts receivable – 110,000
Inventory................. + 65,000
Prepaid expenses.... + 8,000

Current Liabilities
Accounts payable.... + 32,000
Accrued liabilities.... – 9,000
Income taxes + 16,000
payable.................

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Solutions Manual, Chapter 14 31
Problem 14-11 (continued)

Step 3: The company had a $2,000 gain on the sale of

equipment. The book value of the equipment was $13,000 (=
$50,000 – $37,000). The company sold the equipment for
$15,000, so its gain on the sale of $2,000 (= $15,000 –
$13,000) is subtracted from net income.
The net cash provided by (used in) operating activities can now
be calculated as follows:
Net income............................................. $ 70,000
Adjustments to convert net income to cash basis:
Depreciation......................................... $ 42,000
Increase in accounts receivable........... (110,000)
Decrease in inventory.......................... 65,000
Decrease in prepaid expenses............. 8,000
Increase in accounts payable............... 32,000
Decrease in accrued liabilities............. (9,000)
Increase in income taxes payable........ 16,000
Gain on sale of equipment................... (2,000) 42,000
Net cash provided by (used in) $112,00
operating activities.............................. 0

Investing and Financing activities:

The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase in Decrease
Account in Account
Balance Balance
Noncurrent Assets
Plant and equipment....................... – 220,000
Long-term investments................... – 80,000
Long-term loans to subsidiaries....... + 30,000

Liabilities and Stockholders’

Equity
Bonds payable................................. + 400,000
Common stock................................. – 170,00
0
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32 Managerial Accounting, 16th Edition
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Chapter 14 33
Problem 14-11 (continued)

As stated in item “f” in the problem, it is reasonable to assume

that the $80,000 increase in long-term investments
corresponds with a cash outflow that needs to be recorded in
the investing section of the statement. The $30,000 repayment
of loan received from a subsidiary corresponds with a cash
inflow that needs to be recorded in the investing section of the
statement. The increase in bonds payable (+400,000)
represents a cash inflow that needs to be recorded in the
financing section of the statement. The $170,000 decrease in
common stock represents a stock repurchase that needs to be
recorded as a cash outflow in the financing section of the
statement. The dividend of $20,000 is given in the problem;
therefore, property, plant, and equipment is the only account
that requires further analysis as follows:
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$1,580,000 + Debits – $50,000 = $1,800,000
Debits = $1,800,000 – $1,580,000 +
$50,000
Debits = $270,000
The additions to property, plant, and equipment ($270,000) are
recorded as a cash outflow and the proceeds from the sale of
equipment ($15,000) are recorded as a cash inflow.

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34 Managerial Accounting, 16th Edition
Problem 14-11 (continued)

Given the amounts above, the statement of cash flows would be

as follows:

Yoric Company
Statement of Cash Flows

Operating activities:
$
Net income.................................................... 70,000
Adjustments to convert net income to cash
basis:
Depreciation................................................ $ 42,000
Increase in accounts receivable.................. (110,000)
Decrease in inventory................................. 65,000
Decrease in prepaid expenses.................... 8,000
Increase in accounts payable...................... 32,000
Decrease in accrued liabilities..................... (9,000)
Increase in income taxes payable............... 16,000
Gain on sale of equipment.......................... (2,000) 42,000
Net cash provided by (used in) operating
activities...................................................... 112,000
Investing activities:
Decrease in long-term loan to subsidiary...... 30,000
Proceeds from sale of equipment.................. 15,000
Additions to long-term investments............... (80,000)
Additions to property, plant, & equipment... . (270,000)
Net cash provided by (used in) investing (305,000
activities...................................................... )
Financing activities:
Issuance of bonds payable............................ 400,000
Repurchase of common stock........................ (170,000)
Cash dividends paid...................................... (20,000)
Net cash provided by (used in) financing
activities...................................................... 210,000
Net increase in cash and cash equivalents.... 17,000
Beginning cash and cash equivalents............ 23,000
Ending cash and cash equivalents................. $
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
Solutions Manual, Chapter 14 35
40,000

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36 Managerial Accounting, 16th Edition
Problem 14-12 (45 minutes)

1 Prepare a statement of cash flows (all numbers in millions).

Operating activities:

Step 1: The following equation can be applied to the

Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$641 – $8 + Credits = $765
Credits = $765 – $641 + $8
Credits = $132

Step 2: The guidelines from Exhibit 14-2 can be used to analyze

the changes in noncash balance sheet accounts that impact
net income as follows:
Increase in Decrease in
Account Account
Balance Balance
Current Assets
Accounts receivable...... – 65
Inventory....................... – 45

Current Liabilities
Accounts payable.......... + 95
Accrued liabilities.......... + 25
Income taxes payable. . . +6

Step 3: The gain on sale of equipment ($3) is subtracted from

net income.

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Solutions Manual, Chapter 14 37
Problem 14-12 (continued)

As an intermediate step, the net cash provided by (used in)

operating activities can now be calculated as follows:
Net income.................................................. $115
Adjustments to convert net income to cash
basis:
Depreciation.............................................. $132
Increase in accounts receivable................ (65)
Increase in inventory................................ (45)
Increase in accounts payable.................... 95
Increase in accrued liabilities.................... 25
Increase in income taxes payable............. 6
Gain on sale of equipment........................ (3) 145
Net cash provided by (used in) operating
activities................................................... $260

Investing and Financing activities:

The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase Decreas
in e in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment........... – 49

Liabilities and Stockholders’

Equity
Bonds payable..................................... – 170

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38 Managerial Accounting, 16th Edition
Problem 14-12 (continued)

Burgess did not issue any bonds during the year; therefore, the
amount in the table on the prior page (–170) represents a cash
outflow pertaining to a bond retirement. Property, plant, and
equipment and retained earnings require further analysis as
follows:
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$1,466 + Debits – $13 = $1,515
Debits = $1,515 – $1,466 + $13
Debits = $62
The additions to property, plant, and equipment ($62) are
recorded as a cash outflow and the proceeds from the sale of
equipment ($8) are recorded as a cash inflow.
Retained earnings:
Beginning balance – Debits + Credits = Ending balance
$928 – Debits + $115 = $977
$1,043 = $977 + Debits
Debits = $66
The dividend payment ($66) should be recorded as a cash
outflow in the financing activities section of the statement.

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Solutions Manual, Chapter 14 39
Problem 14-12 (continued)

Burgess Company
Statement of Cash Flows

Operating activities:
Net income...................................................... $ 115
Adjustments to convert net income to cash
basis:
Depreciation................................................. $132
Increase in accounts receivable.................... (65)
Increase in inventory.................................... (45)
Increase in accounts payable........................ 95
Increase in accrued liabilities........................ 25
Increase in income taxes payable................. 6
Gain on sale of equipment............................ (3) 145
Net cash provided by (used in) operating
activities....................................................... 260

Investing activities:
Proceeds from sale of equipment.................... 8
Additions to property, plant, & equipment...... (62)
Net cash provided by (used in) investing
activities....................................................... (54)

Financing activities:
Retirement of bonds payable.......................... (170)
Cash dividends paid........................................ (66)
Net cash provided by (used in) financing
activities....................................................... (236)

Net decrease in cash and cash equivalents..... (30)

Beginning cash and cash equivalents............. 79
Ending cash and cash equivalents.................. $ 49

2. Burgess’s net income decreased by $20 million (= $135 million

– $115 million); however, its net cash provided by operating
activities increased by $110 million (= $260 million – $150
million) over the prior year. When net income and net cash
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40 Managerial Accounting, 16th Edition
provided by operating activities move in opposite directions it
warrants further inquiry. It appears that Burgess has inflated its
net cash provided by operating activities by delaying payments
to suppliers (see $95 million increase related to Accounts
Payable). The company’s accounts receivable balance has
increased substantially (+65 million) even though sales have
declined.
Problem 14-12 (continued)

This suggests that Burgess may be inflating its net income by

failing to record a growing amount of uncollectible accounts.
The company’s inventory has increased (+45 million) even
though sales have declined. This suggests that Burgess may be
inefficiently managing its inventory. The company’s
depreciation ($132 million) is much larger than its additions to
property, plant, and equipment ($62 million). This suggests
that the company is not making sufficient investments to
maintain its noncurrent assets.

Burgess’s free cash flow is $132 (= $260 – $62 – $66);

however, a skeptic would emphasize that this figure may be
artificially inflated because of the huge increase in accounts
payable and the insufficient investment in property, plant, and
equipment.

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Solutions Manual, Chapter 14 41
Problem 14-13 (45 minutes)

1. Net cash provided by (used in) operating activities:

Step 1: The following equation can be applied to the

Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$50,000 – $10,000 + Credits = $60,000
Credits = $60,000 – $50,000 + $10,000
Credits = $20,000

Step 2: The guidelines from Exhibit 14-2 can be used to analyze

the changes in noncash balance sheet accounts that impact
net income as follows:
Increase in Decrease in
Account Account
Balance Balance
Current Assets
Accounts
– 40,000
receivable.............
Inventory................. – 50,000
Prepaid expenses.... + 4,000

Current
Liabilities
Accounts payable.... +63,000
Accrued liabilities.... – 9,000
Income taxes + 8,000
payable.................

Step 3: The gain on sale of investments ($10,000) is subtracted

from net income. The loss on sale of equipment ($2,000) is
added to net income.

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42 Managerial Accounting, 16th Edition
Problem 14-13 (continued)

The net cash provided by (used in) operating activities can now
be calculated as follows:
$30,00
Net income.......................................... 0
Adjustments to convert net income to cash
basis:
$20,00
Depreciation...................................... 0
Increase in accounts receivable........ (40,000)
Increase in inventory......................... (50,000)
Decrease in prepaid expenses.......... 4,000
Increase in accounts payable............ 63,000
Decrease in accrued liabilities.......... (9,000)
Increase in income taxes payable..... 8,000
Loss on sale of equipment................ 2,000
(12,000
Gain on sale of investments.............. (10,000) )
Net cash provided by (used in) $18,00
operating activities........................... 0

2. Prepare a statement of cash flows.

Investing and Financing activities:
The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase in Decrease in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment........ – 130,000
Long-term investments.................... + 20,000

Liabilities and Stockholders’

Equity
Bonds payable.................................. + 70,000
Common stock.................................. +20,000

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Solutions Manual, Chapter 14 43
Problem 14-13 (continued)

The decrease in the long-term investments account ($20,000)

equals the cost of the long-term investment sold; therefore,
Rusco did not purchase any long-term investments during the
year. The proceeds from the sale of the long-term investment
($30,000) should be recorded as a cash inflow in the investing
activities section of the statement.
The company did not retire any bonds during the year, so the
amount on the prior page (+70,000) represents a cash inflow
from a bond issuance. The company did not repurchase any of
its own stock, so the amount on the prior page (+20,000)
represents a cash inflow from issuing common stock. Property,
plant, and equipment and retained earnings require further
analysis as follows:
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$300,000 + Debits – $20,000 = $430,000
Debits = $430,000 – $300,000 + $20,000
Debits = $150,000
The additions to property, plant, and equipment ($150,000) are
recorded as a cash outflow and the proceeds from the sale of
equipment ($8,000) are recorded as a cash inflow.
Retained earnings:
Beginning balance – Debits + Credits = Ending balance
$85,000 – Debits + $30,000 = $106,000
$115,000 = $106,000 + Debits
Debits = $9,000
The dividend payment ($9,000) should be recorded as a cash
outflow in the financing activities section of the statement.

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44 Managerial Accounting, 16th Edition
Problem 14-13 (continued)

Rusco Company
Statement of Cash Flows
For This Year Ended July 31
Operating activities:
Net income................................................. $ 30,000
Adjustments to convert net income to cash
basis:
$ 20,00
Depreciation............................................. 0
Increase in accounts receivable............... (40,000)
Increase in inventory............................... (50,000)
Decrease in prepaid expenses................. 4,000
Increase in accounts payable................... 63,000
Decrease in accrued liabilities................. (9,000)
Increase in income taxes payable............ 8,000
Loss on sale of equipment....................... 2,000
Gain on sale of investments..................... (10,000) (12,000)
Net cash provided by (used in) operating
activities.................................................. 18,000
Investing activities:
Proceeds from sale of long-term
investments............................................. 30,000
Proceeds from sale of equipment............... 8,000
(150,000
Additions to property, plant, & equipment. )
Net cash provided by (used in) investing
activities.................................................. (112,000)
Financing activities:
Issuance of bonds payable......................... 70,000
Issuance of common stock......................... 20,000
Cash dividends paid................................... (9,000)
Net cash provided by (used in) financing
activities.................................................. 81,000
Net decrease in cash and cash equivalents (13,000)
Beginning cash and cash equivalents........ 21,000
Ending cash and cash equivalents............. $ 8,000

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Solutions Manual, Chapter 14 45
Problem 14-13 (continued)

3. Free cash flow computation:

Net cash provided by operating $ 18,00
activities......................................................... 0
Less:
$150,00
Capital expenditures...................................... 0
159,00
Dividends.......................................................
9,000 0
$(141,00
Free cash flow................................................... 0)

4. Although the company reported $30,000 of net income for the

year, a smaller amount of cash was provided by operating
activities ($18,000) due to increases in accounts receivable and
inventory. The cash provided by operations, when added to the
cash provided by the sale of investments, the issue of bonds,
and the sale of common stock, was not sufficient to cover the
purchase of plant and equipment during the year. Note that the
company increased its investment in plant and equipment by
almost 50%. More care should have been taken in planning for
this major investment in plant assets. Also, the company
should get better control over its accounts receivable and
inventory.

© The McGraw-Hill Companies, Inc., 2018. All rights reserved.

46 Managerial Accounting, 16th Edition
Problem 14-14 (45 minutes)

1. Prepare a statement of cash flows.

Operating activities:

Step 1: The following equation can be applied to the

Accumulated Depreciation account to compute the depreciation
to add back to net income:
Beginning balance – Debits + Credits = Ending balance
$755,000 – $40,000 + Credits = $810,000
Credits = $810,000 – $755,000 + $40,000
Credits = $95,000

Step 2: The guidelines from Exhibit 14-2 can be used to analyze

the changes in noncash balance sheet accounts that impact
net income as follows:
Increase in Decrease in
Account Account
Balance Balance
Current Assets
Accounts receivable – 180,000
Inventory................. + 12,000
Prepaid expenses.... – 5,000

Current Liabilities
Accounts payable.... + 300,000
Accrued liabilities.... – 17,000
Income taxes + 15,000
payable

Step 3: The gain on sale of investments ($60,000) is subtracted

from net income. The loss on sale of equipment ($20,000) is
added to net income.

© The McGraw-Hill Companies, Inc., 2018. All rights reserved.

Solutions Manual, Chapter 14 47
Problem 14-14 (continued)

The net cash provided by (used in) operating activities can now
be calculated as follows:
Net income.......................................... $170,000
Adjustments to convert net income to cash basis:
Depreciation...................................... $ 95,000
Increase in accounts receivable........ (180,000)
Decrease in inventory....................... 12,000
Increase in prepaid expenses............ (5,000)
Increase in accounts payable............ 300,000
Decrease in accrued liabilities.......... (17,000)
Increase in income taxes payable..... 15,000
Loss on sale of equipment................ 20,000
Gain on sale of investments.............. (60,000) 180,000
Net cash provided by (used in)
operating activities........................... $350,000

Investing and Financing activities:

The guidelines from Exhibit 14-3 can be used to analyze the
changes in noncash balance sheet accounts that impact
investing and financing cash flows as follows:
Increase Decrease
in in
Account Account
Balance Balance
Noncurrent Assets
Property, plant, and equipment......... – 570,000
Long-term investments..................... + 50,000
Long-term loans to subsidiaries......... – 44,000

Liabilities and Stockholders’

Equity
Bonds payable................................... +
220,000
Common stock................................... + 90,000
The decrease in the long-term investments account ($50,000)
equals the cost of the long-term investment sold; therefore,
Lomax did not purchase any long-term investments during the
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
48 Managerial Accounting, 16th Edition
year. The proceeds from the sale of the long-term investment
($110,000) should be recorded as a cash inflow in the investing
activities section of the statement.

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Solutions Manual, Chapter 14 49
Problem 14-14 (continued)

Lomax’s subsidiaries did not repay any loans during the year,
therefore, the amount in the table on the prior page (– 44,000)
represents a cash outflow pertaining to a new loan. The
company did not repurchase any of its own stock, so the
amount on the prior page represents a $90,000 cash inflow
related to a stock issuance. Property, plant, and equipment,
bonds payable, and retained earnings require further analysis
as follows:
Property, plant, and equipment:
Beginning balance + Debits – Credits = Ending balance
$2,600,000 + Debits – $130,000 = $3,170,000
Debits = $3,170,000 – $2,600,000 +
$130,000
Debits = $700,000
The additions to property, plant, and equipment ($700,000) are
recorded as a cash outflow and the proceeds from the sale of
equipment ($70,000) are recorded as a cash inflow.
Bonds Payable:
Beginning balance – Debits + Credits = Ending balance
$600,000 – 350,000 + Credits = $820,000
Credits = $820,000 – $600,000 + 350,000
Credits = $570,000
Retained earnings:
Beginning balance – Debits + Credits = Ending balance
$478,000 – Debits + $170,000 = $573,000
$648,000 = $573,000 + Debits
Debits = $75,000
The dividend payment ($75,000) should be recorded as a cash
outflow in the financing activities section of the statement.

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50 Managerial Accounting, 16th Edition
Problem 14-14 (continued)

Lomax Company
Statement of Cash Flows

Operating activities:
$170,00
Net income.................................................... 0
Adjustments to convert net income to cash
basis:
$ 95,00
Depreciation................................................ 0
(180,000
Increase in accounts receivable.................. )
Decrease in inventory................................. 12,000
Increase in prepaid expenses...................... (5,000)
Increase in accounts payable......................300,000
Decrease in accrued liabilities..................... (17,000)
Increase in income taxes payable............... 15,000
Loss on sale of equipment........................... 20,000
Gain on sale of investments........................ (60,000) 180,000
Net cash provided by (used in) operating
activities...................................................... 350,000
Investing activities:
Proceeds from sale of long-term
investments.............................................. 110,000
Proceeds from sale of equipment................ 70,000
Loans to subsidiaries................................... (44,000)
(700,000
Additions to property, plant, & equipment. . )
Net cash provided by (used in) investing (564,000
activities.................................................... )

Financing activities:
Issuance of bonds payable.......................... 570,000
Issuance of common stock.......................... 90,000
(350,000
Retirement of bonds payable....................... )
Cash dividends paid.................................... (75,000)

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Solutions Manual, Chapter 14 51
Net cash provided by (used in) financing
activities.................................................... 235,000
Net increase in cash and cash equivalents.. 21,000
Beginning cash and cash equivalents.......... 40,000
$
61,00
Ending cash and cash equivalents............... 0
Problem 14-14 (continued)

2. The large amount of cash provided by operating activities is

traceable for the most part to the $300,000 increase in
accounts payable. If the accounts payable had remained
basically unchanged, the same as inventory, then operating
activities would have provided very little cash and the company
might have experienced serious cash problems.
Note particularly that the cash provided by operating activities
was used to purchase plant and equipment. Thus, the company
is using cash derived from a short-term source (buildup of
accounts payable) to finance long-term asset acquisitions. In
short, although the company is generating substantial cash
from operating activities, the quality of this source is open to
question.
Also, note the substantial increase in accounts receivable.
Apparently, the company’s collections from customers are
lagging, perhaps because of sales to customers whose credit is
weak. This may be the result of trying to increase sales so fast
that proper credit checks are not being made. Again, this can
lead to serious cash problems if the trend continues.
In the company’s financing activities, it appears that long-term
debt sources, rather than equity sources, are being used to
provide for expansion. Although companies frequently use debt
to finance expansion, the level of debt in this company is
increasing rapidly. (See Chapter 15 for a discussion of the Debt-
to-Equity ratio and other financial ratios.)

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52 Managerial Accounting, 16th Edition
Appendix 14A
The Direct Method of Determining the Net
Cash Provided by Operating Activities

Exercise 14A-1 (15 minutes)

Sales...................................................... $700
Adjustments to a cash basis:
Increase in accounts receivable........ – 110 $590
Cost of goods sold................................. 400
Adjustments to a cash basis:
Decrease in inventory....................... – 70
Increase in accounts payable........... – 35 295
Selling and administrative expenses..... 184
Adjustments to a cash basis:
Increase in prepaid expenses........... +9
Decrease in accrued liabilities.......... +4
Depreciation..................................... – 60 137
Income tax expense.............................. 36
Adjustments to a cash basis:
Increase in income taxes payable..... –8 28
Net cash provided by (used in)
operating activities............................. $130
Note that the $130 “net cash provided” figure agrees with the
indirect method presented in Exercise 14-4.

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Solutions Manual, Appendix 14A 53
Exercise 14A-2 (15 minutes)

1. Sales......................................................... $150,000
Adjustments to a cash basis:
Increase in accounts receivable........... – 10,000 $140,000
Cost of goods sold.................................... 90,000
Adjustments to a cash basis:
Increase in inventory........................... + 9,000
Increase in accounts payable.............. – 7,000 92,000
Selling and administrative expenses........ 40,000
Adjustments to a cash basis:
Increase in prepaid expenses.............. + 2,000
Decrease in accrued liabilities............. + 3,000
Depreciation........................................ – 7,500 37,500
Income taxes............................................ 8,000
Adjustments to a cash basis:
Decrease in income taxes payable...... + 500 8,500

Net cash provided by (used in)

operating activities................................ $ 2,000

2. Gains and losses on the sale of assets would have no effect on

the computations in (1). The reason is that these items are not
part of sales, cost of goods sold, selling and administrative
expenses, or income taxes. Thus, gains and losses on the
income statement are ignored under the direct method.

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54 Managerial Accounting, 16th Edition
Exercise 14A-3 (15 minutes)

Sales..................................................... $275
Adjustments to a cash basis:
Decrease in accounts receivable..... + 2 $277
Cost of goods sold................................ 150
Adjustments to a cash basis:
Increase in inventory....................... + 10
Increase in accounts payable.......... – 4 156
Selling and administrative expenses.... 90
Adjustments to a cash basis:
Depreciation.................................... – 15 75
Net cash provided by (used in)
operating activities............................ $ 46

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Solutions Manual, Appendix 14A 55
Exercise 14A-4 (15 minutes)

Sales......................................................... $ 350,000
Adjustments to a cash basis:
$331,00
Increase in accounts receivable........... – 19,000 0
Cost of goods sold.................................... 140,000
Adjustments to a cash basis:
Increase in inventory........................... + 33,000
Increase in accounts payable............... – 15,000 158,000
Selling and administrative expenses........ 160,000
Adjustments to a cash basis:
Decrease in prepaid expenses............. – 1,000
Decrease in accrued liabilities............. + 2,000
Depreciation........................................ – 20,000 141,000
Income taxes............................................ 15,000
Adjustments to a cash basis:
Increase in income taxes payable........ – 4,000 11,000
Net cash provided by (used in)
operating activities................................ $ 21,000
Note that the $21,000 above agrees with the amount provided by
operating activities under the indirect method in Exercise 14-2.

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56 Managerial Accounting, 16th Edition
Problem 14A-5 (45 minutes)

1.The income statement adjusted to a cash basis:

Sales...................................................... $500,000
Adjustments to a cash basis:
Increase in accounts receivable....... – 40,000 $460,000
Cost of goods sold................................. 300,000
Adjustments to a cash basis:
Increase in inventory........................ + 50,000
Increase in accounts payable........... – 63,000 287,000
Selling and administrative expenses..... 158,000
Adjustments to a cash basis:
Decrease in prepaid expenses.......... – 4,000
Decrease in accrued liabilities.......... + 9,000
Depreciation..................................... – 20,000 143,000
Income taxes......................................... 20,000
Adjustments to a cash basis:
Increase in income taxes payable.... – 8,000 12,000
Net cash provided by (used in)
operating activities............................. $ 18,000

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Solutions Manual, Appendix 14A 57
Problem 14A-5 (continued)

2. Rusco Company
Statement of Cash Flows
For This Year Ended July 31
Operating activities:
Cash received from customers.................. $460,000
Less cash disbursements for:
Cost of merchandise purchased.............. $287,000
Selling and administrative expenses...... 143,000
Income taxes.......................................... 12,000
Total cash disbursements.......................... 442,000
Net cash provided by (used in) operating
activities................................................. 18,000
Investing activities:
Proceeds from sale of investments............ 30,000
Proceeds from sale of equipment.............. 8,000
Additions to property, plant, &
equipment.............................................. (150,000)
Net cash provided by (used in) investing
activities................................................. (112,000)
Financing activities:
Issuance of bonds payable........................ 70,000
Issuance of common stock........................ 20,000
Cash dividends paid.................................. (9,000)
Net cash provided by (used in) financing
activities................................................. 81,000
Net decrease in cash and cash
equivalents............................................. (13,000)
Beginning cash and cash equivalents....... 21,000
Ending cash and cash equivalents............ $ 8,000

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58 Managerial Accounting, 16th Edition
Problem 14A-5 (continued)

3. There are two reasons for the sharp decline in cash. First, note
that a relatively small amount of cash was provided by
operations during the year. This is due to a build-up in accounts
receivable and inventory, which together have grown by
$90,000 (= $40,000 + $50,000); the build-up of receivables
reduced the amount of cash received from customers, and the
build-up of inventory increased the amount of cash required to
purchase goods.
Second, the company paid out in dividends half of the cash
provided by operations, while at the same time increasing its
investment in plant and equipment by almost 50%. These uses
of cash far outstripped the amount of cash available through
operations and the sale of bonds, common stock, and
investments, resulting in a sharp decrease in the amount of
cash available.

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Solutions Manual, Appendix 14A 59
Problem 14A-6 (30 minutes)

1. Sales................................................................ $800
Adjustments to a cash basis:
Increase in accounts receivable.................. – 100 $700
Cost of goods sold........................................... 500
Adjustments to a cash basis:
Decrease in inventory................................. – 50
Increase in accounts payable..................... – 80 370
Selling and administrative expenses............... 213
Adjustments to a cash basis:
Increase in prepaid expenses..................... +4
Decrease in accrued liabilities.................... + 12
Depreciation............................................... – 24 205
Income taxes................................................... 27
Adjustments to a cash basis:
Increase in income taxes payable.............. –6 21
Net cash provided by (used in) operating
activities....................................................... $104

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60 Managerial Accounting, 16th Edition
Problem 14A-6 (continued)

2. Weaver Company
Statement of Cash Flows
For This Year Ended December 31
Operating activities:
Cash received from customers............................ $700
Less cash disbursements for:
Cost of merchandise purchased........................$370
Selling and administrative expenses................. 205
Income taxes..................................................... 21
Total cash disbursements.................................... 596
Net cash provided by (used in) operating
activities........................................................... 104
Investing activities:
Proceeds from sale of long-term investments..... 10
Proceeds from sale of equipment........................ 20
(180
Additions to property, plant, & equipment.......... )
Net cash provided by (used in) investing
activities........................................................... (150)
Financing activities:
Issuance of bonds payable.................................. 110
Repurchase of common stock.............................. (40)
Cash dividends paid............................................ (30)
Net cash provided by (used in) financing
activities........................................................... 40
Net decrease in cash and cash equivalents......... (6)
Beginning cash and cash equivalents................. 15
Ending cash and cash equivalents...................... $ 9

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Solutions Manual, Appendix 14A 61
Problem 14A-7 (45 minutes)

1. Sales......................................................... $900,000
Adjustments to a cash basis:
Increase in accounts receivable........... – 80,000 $820,000
Cost of goods sold.................................... 500,000
Adjustments to a cash basis:
Increase in inventory........................... + 50,000
Increase in accounts payable.............. – 60,000 490,000
Selling and administrative expenses........ 328,000
Adjustments to a cash basis:
Decrease in prepaid expenses............. – 7,000
Decrease in accrued liabilities............. + 10,000
Depreciation........................................ – 42,000 289,000
Income taxes............................................ 24,000
Adjustments to a cash basis:
Increase in income taxes payable....... – 3,000 21,000
Net cash provided by (used in)
operating activities................................ $ 20,000

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62 Managerial Accounting, 16th Edition
Problem 14A-7 (continued)

2. Joyner Company
Statement of Cash Flows
For Year 2
Operating activities:
Cash received from customers................... $820,000
Less cash disbursements for:
Cost of merchandise purchased...............$490,000
Selling and administrative expenses........ 289,000
Income taxes............................................ 21,000
Total cash disbursements........................... 800,000
Net cash provided by (used in) operating
activities.................................................. 20,000
Investing activities:
Proceeds from sale of equipment............... 18,000
Loan to Hymans Company.......................... (40,000)
Additions to property, plant, & equipment
(150,000)
Net cash provided by (used in) investing
activities.................................................. (172,000)
Financing activities:
Issuance of bonds payable......................... 120,000
Issuance of common stock......................... 30,000
Cash dividends paid................................... (15,000)
Net cash provided by (used in) financing
activities.................................................. 135,000
Net decrease in cash and cash
equivalents.............................................. (17,000)
Beginning cash and cash equivalents........ 21,000
Ending cash and cash equivalents............. $ 4,000

3. The decline in cash occurs largely because the company only

generated $20,000 from operating activities. This small amount
is due primarily to the buildup of accounts receivable. Even
though an additional $150,000 was obtained from an issue of
bonds and an issue of common stock ($120,000 + $30,000 =
$150,000), the cash available was not sufficient to expand the
plant, make a substantial loan to another company, and pay a
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Solutions Manual, Appendix 14A 63
cash dividend. As a result, cash declined during the year.

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64 Managerial Accounting, 16th Edition