Solution manual financial accounting 8th by harrison CH10

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Chapter 12
The Statement of Cash Flows
Short Exercises
(10 min.)

S 12-1

The statement of cash flows helps investors and creditors:
a. Predict future cash flows by reporting past cash receipts
and payments, which are reasonably good predictors of
future cash receipts and payments.

b. Evaluate management decisions by reporting on how
managers got cash and how they used cash to run the
business.

Chapter 12

The Statement of Cash Flows

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(10-15 min.)

DATE:

_______________

TO:

Managers of U.S. Rondeau Inc.

FROM:

Student Name

S 12-2

SUBJECT: Purposes of the statement of cash flows
The statement of cash flows is designed to help predict the
future cash flows of a business. The statement of cash flows
measures past cash flows, which are a reasonably good
predictor of future cash flows. Net income is an important
measure of management performance, but it takes cash to pay
the bills. Also, a manager’s performance should be evaluated
on how well he or she uses cash. This information is given in
the statement of cash flows.
In evaluating the ability to repay a loan, a creditor examines the
statement of cash flows to learn how the borrower has gained
and spent cash. As U.S. Rondeau’s situation indicates, income
may increase while cash decreases. Therefore, the statement of
cash flows should be used in conjunction with the income
statement and the balance sheet in evaluating a company.

Student responses may vary.

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S 12-3
Three things that could cause operating cash flows to be
positive (under the indirect method) are:
1.

Increase in net income

2.

Decreases rather than increases in current assets other

than cash
3.

Increases rather than decreases in current liabilities

4.

Depreciation and amortization

Students need to identify 3 items.

Chapter 12

The Statement of Cash Flows

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(15-30 min.)

DATE:

_______________

TO:

Managers of Tranquility Inns

FROM:

Student Name

S 12-4

SUBJECT: Assessment of 2010 and Outlook for the Future
2010 was not a good year. Most of the increase in net income
resulted from the extraordinary gain on the insurance proceeds
from fire damage to a building, which means that normal
operations were not very profitable. This is confirmed by the
increase in receivables, which hints that collections are

lagging.
The cash-flow data paint a similar picture. Operating activities
used cash, which is bad news. Over the long run, operations
should provide the bulk of the cash if the business expects to
succeed.

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(continued)

S 12-4

During 2010, the insurance recovery helped investing activities
produce a net cash inflow. Ordinarily, investing activities
should produce net cash outflows as the business invests in
new assets. Growth is usually indicated by investments in new
assets, but during 2010 net cash flows from investing activities
were positive, which means that net investments were negative.
Although the net cash flow provided by investing activities may
be temporary, it does not reflect especially well on the
company. It means that, in part at least, the company is
maintaining its cash position by liquidating fixed assets. This is
a bad sign.
Financing activities provided a net cash inflow, which is
normal. However, coupled with the net cash used for

operations and the net cash provided by investing activities,
the additional debt created in 2010 may be hard to pay back.
Unless next year turns out to be much better than 2010, the
outlook for the company is not bright.
Student responses may vary. The key conclusion is that 2010
was not a good year, and the outlook is not bright.

Chapter 12

The Statement of Cash Flows

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(5-10 min.)

Cash flows from operating activities:
Net income………………………………………………..
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation…………………………………………...
Loss on sale of land………………………………….
Decrease in accounts receivable, inventory,
and prepaid expenses ($58,000 − $55,000)…...
Increase in current liabilities ($32,000 − $20,000).
Net cash provided by operating activities:…...

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S 12-5

$12,000

8,000
2,000
3,000
12,000
$37,000


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(10 min.)

O+ a. Increase in accounts
payable
I b. Purchase of
equipment
O+ c. Decrease in prepaid
expense
N
d. Collection of cash
from customers
O+ e. Net income
N f. Retained earnings
F g. Payment of dividends

S 12-6

O− h. Decrease in accrued
liabilities
F i. Issuance of common
stock
O− j. Gain on sale of
building
O+ k. Loss on sale of land
O+ l. Depreciation expense
O− m. Increase in inventory
O+ n. Decrease in accounts
receivable

(10 min.)

S 12-7

Ethan Corporation
Statement of Cash Flows (partial)
Year ended June 30, 2010
Cash flows from operating activities:
Net
income………………………………………..
Adjustments to reconcile net income to
net cash provided by operating activities:

$
68,000*

$ 11,000
Depreciation…………………………………...
Decrease in current assets other than
35,000
cash………………………………………….
Increase in current
liabilities………………
Net cash provided by operating
activities…..
Chapter 12

7,000
53,000
$
121,000
The Statement of Cash Flows

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_____
*$228,000 − $116,000 − $33,000 − $11,000 = $68,000

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(15 min.)

S 12-8

Ethan Corporation
Statement of Cash Flows
Year ended June 30, 2010
Cash flows from operating activities:
Net income………………………………………..
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation…………………………………... $ 11,000
Increase in current assets other than
cash………………………………………….
35,000
Decrease in current liabilities………………
7,000
Net cash provided by operating activities…..

$ 68,000*

53,000
121,000

Cash flows from investing activities:
Purchase of equipment………………………… $(43,000)
Proceeds from sale of land…………………….

29,000
Net cash provided by investing activities…..

(14,000)

Cash flows from financing activities:
Proceeds from issuance of common stock… $ 26,000
Payment of note payable………………………. (32,000)
Payment of dividends…………………………..
(5,600)
Purchase of treasury stock…………………….
(6,000)
Net cash used for financing activities……….
Net increase in cash………………………………..

(17,600)
$ 89,400

_____
*$228,000 − $116,000 − $33,000 − $11,000 = $68,000

Chapter 12

The Statement of Cash Flows

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S 12-9

(10 min)
a. Acquisitions of plant assets = $71,000, as follows:
Plant Assets, net
Beg.
bal.

+ Acquisitions − Depreciation −

$188,000 +

Book value of
=
assets sold

X

−

$ 30,000

−

X

=

$229,000 − $188,000 + $30,000

X

=

$ 71,000

$0

Plant Assets, net
Beg. bal.
188,000
Acquisitions
71,000 Depreciation
End. bal.
229,000

End.
bal.

= $229,000

30,000

b. Proceeds from the sale of long-term investments = $25,000,
as follows:
Long-term investments
Beg. bal.

+

Purchases

−

Book value of
investments sold

=

End. bal.

$79,000

+

0

−

X

=

$54,000

X

=

$79,000 − $54,000

X

=

$25,000

With no gain or loss, proceeds from the sale must be the
same as the book value of the investments sold, $25,000.

Beg. bal.
End. bal.
954

Long-Term Investments
79,000 Book value of
investments sold 25,000
54,000

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(15 min.)

S 12-10

a. New borrowing on long-term notes payable = $15,000
($69,000 − $54,000)

This is clear from the increase in long-term notes payable.
b. Issuance of common stock = $10,000 ($48,000 − $38,000)
This is clear from the increase in common stock.
c. Payment of dividends
(same as amount of
dividends declared)
Beginning
retained
earnings

= $196,000, as follows:

−

Dividend
declarations

=

Ending
retained
earnings

−

X

=

$241,000

+

Net
income

$237,000

+

$200,000

X

=

$237,000 + $200,000 − $241,000

X

=

$196,000

Retained Earnings
Dividend declarations
Beg. bal.
(same amount paid) 196,000 Net income
End. bal.

Chapter 12

237,000
200,000
241,000

The Statement of Cash Flows

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(15 min.)

S 12-11

a. Collections from customers = $759,000, as follows:
Collections
Sales
=
− Increase in Accounts Receivable
from customers
Revenue

= $770,000 − $11,000 ($54,000 − $43,000)
= $759,000

Beg. Bal.
Sales

End. Bal.

Accounts Receivable
43,000
770,000 Collections
54,000

759,000

b. Payments for inventory = $313,000, as follows:
Payments for
=
inventory

Cost of
Decrease in
Increase in
Goods −
−
inventory
Accounts Payable
Sold

= $330,000 −

$12,000

$5,000
($89,000 − $77,000) ($48,000 − $43,000)

= $313,000
Inventory
Accounts Payable
Beg. bal.
89,000
Beg. bal.
43,000
Payments for
Purchases 318,000 Cost of goods sold 330,000 inventory
313,000 Purchases 318,000
End. bal.
77,000
End. bal.
48,000

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(10 min.)

S 12-12

a. Payments to employees = $38,000, as follows:
Payments to
employees

Payments to
employees

=

Salary
expense

−

Increase in
Salary Payable

=

$40,000

−

$2,000
($26,000 − $24,000)

=

$38,000

Salary Payable
Beg. bal.
38,000 Salary expense
End. bal.

24,000
40,000
26,000

b. Payments for other expenses = $174,000, as follows:
Payments
of other
expenses

Other
=
+
expenses

Increase in
prepaid
expenses

+

Decrease in
accrued
liabilities

= $170,000 +

$1,000

+

$3,000

($6,000 − $5,000) ($19,000 − $16,000)

= $174,000

Chapter 12

The Statement of Cash Flows

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(15 min.)

S 12-13

Horse Heaven Horse Farm, Inc.
Statement of Cash Flows
Year 2010
Cash flows from operating activities:
Collections from customers…………………
Payments to suppliers and employees……
Net cash provided by operating activities..

$ 480,000
(310,000)

$ 170,000

Cash flows from investing activities:
Purchase of equipment……………………… $(136,000)
Net cash used for investing activities…….
Cash flows from financing activities:
Issued note payable to borrow money…….
Payment of dividends………………………...
Net cash used for financing activities……..
Net increase in cash…………………………...
Cash balance, beginning………………………..
Cash balance, ending……………………………

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(136,000)

$ 26,000
(49,000)
(23,000)
$ 11,000
170,000
$ 181,000


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(5 min.)

S 12-14

Middleton Golf Club, Inc.
Statement of Cash Flows (partial)
Year ended September 30, 2010
Cash flows from operating activities:
Collections from customers………………… $203,000
Payments to suppliers………………………..
(90,000)
Payments to employees……………………… (75,000)
Payment of income tax……………………….
(14,000)
Net cash provided by operating activities...
$24,000

Chapter 12

The Statement of Cash Flows

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(15 min.)

S 12-15

Middleton Golf Club, Inc.

Statement of Cash Flows
Year ended June 30, 2009
Cash flows from operating activities:
Collections from customers…………………….. $203,000
Payments to suppliers…………………………… (90,000)
Payments to employees…………………………. (75,000)
Payment of income tax…………………………... (14,000)
Net cash provided by operating activities…….
$ 24,000
Cash flows from investing activities:
Purchase of equipment………………………….. $ (42,000)
Proceeds from sale of land………………………
61,000
Net cash provided by investing activities…….

19,000

Cash flows from financing activities:
Proceeds from issuance of common stock….. $ 16,000
Payment of note payable………………………… (15,000)
Payment of dividends…………………………….
(8,000)
Purchase of treasury stock……………………...
(5,700)
Net cash used for financing activities…………
(12,700)
Net increase in cash………………………………….
$ 30,300

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Exercises
Group A
(

I+

a. Sale of long-term
investment

(10-15 min.)

E 12-16A

F– k. Payment of long-term debt

F+ b. Issuance of long-term note N
payable to borrow cash
I+
O- c. Increase in prepaid
expenses
I–

l.

Accrual of salary expense

m. Cash sale of land
n. Purchase of long-term
investment

F– d. Payment of cash dividend
I–

o. Acquisition of building by
cash payment

F–

p. Purchase of treasury stock

F+

q. Issuance of common stock
for cash

O–

r.

O+

s. Depreciation of equipment

O+ e. Loss on the sale of

equipment
O+ f. Decrease in merchandise
inventory
NIF g. Acquisition of equipment
by issuance of note
payable
O+ h. Increase in accounts
payable

Decrease in accrued
liabilities

O+ i. Amortization of intangible
assets
O+ j. Net income

Chapter 12

The Statement of Cash Flows

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(5-10 min.)

a. Operating

h. Operating

b. Financing

i.

Financing

c. Investing

j.

Financing

d. Investing

k.

Financing

e. Operating

l.

Operating

f.

m. Investing

Investing

g. Noncash investing and
financing

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E 12-17A


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(10-15 min.)

Cash flows from operating activities:
Net income………………………………….
Adjustments to reconcile net income to
net cash used for operating activities:
Depreciation……………………………..
Loss on sale of land……………………
Increase in current assets other
than cash………………………………
Decrease in current liabilities………...
Net cash provided by operating
activities……………………………………..

E 12-18A

$ 38,000

$ 17,000
22,000
(24,000)
(19,000)

(4,000)
$34,000

Evaluation: Operating cash flow is positive, but relatively weak,
as shown by the fact that net cash provided by
operating activities was less than net income.
Normally, cash provided by operations is more than
net income because of the depreciation add-back.

Chapter 12

The Statement of Cash Flows

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(15-20 min.)

E 12-19A

Cash flows from operating activities:
Net income……………………………………..

$20,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation………………………………. $ 5,000
Increase in accounts receivable……... (100,000)
Increase in inventory……………………. (102,000)
Increase in accounts payable…………. 111,000
Decrease in accrued liabilities…………
(6,000) (92,000)
Net cash used by operating
activities…………………………………………
$(72,000)

Wilderness seems to be having a very difficult time collecting
receivables and selling its inventory. There are large build-ups
in both Accounts Receivable and Inventory. All of the inventory
buildup is being financed by those companies supplying the
inventory as reflected in the growth of accounts payable. While
Wilderness is earning net income, cash flow from operations is
negative.

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(20-30 min.)

E 12-20A

Req. 1
Newbury Travel Products, Inc.
Statement of Cash Flows
Year Ended December 31, 2010
Cash flows from operating activities:
Net income…………………………………………...
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation……………………………………... $
Decrease in accounts receivable…………….
Decrease in inventory…………………………..
Increase in prepaid expenses…………………
Increase in accounts payable…………………
Decrease in accrued liabilities………………..
Net cash provided by operating activities….

$ 68,900

26,000
17,000
61,000
(700)
11,000
(81,000)

33,300
102,200

Cash flows from investing activities:
Acquisition of plant assets ……………………….. $(160,000)
Proceeds from sale of land………………………..
27,000
Net cash used for investing activities……….

(133,000)

Cash flows from financing activities:
Proceeds from issuance of common stock…… $ 80,000
Payment of long-term note payable…………….. (17,000)
Payment of dividends ……………………………..
(13,000)
Net cash provided by financing activities…..
Net increase in cash……………………………………
Cash balance, December 31, 2009…………………..
Cash balance, December 31, 2010…………………..

50,000
$ 19,200
10,800
$ 30,000

Noncash investing and financing activities:
Acquisition of plant assets by issuing note payable

Chapter 12

$ 52,000

The Statement of Cash Flows

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(continued)

E 12-20A

Req. 2
Evaluation: Newbury’s cash flows look strong. Operations are
the main source of cash. The company is investing
in new plant assets without having to borrow. It was
able to issue stock and pay off a long-term note
payable — both financing transactions. All of these
signs are favorable.

(5-10 min.)

E 12-21A

Case A

- Issuing stock generated the cash to acquire plant
assets. Operations used cash while in cases B and
C operations provided cash.

Case B

- A combination of operations and issuing stock
generated most of the cash for acquisition of plant
assets. Operations provided more cash than did
cases A or C.

Case C

- The sale of plant assets generated the cash needed
to acquire new plant assets.

Most healthy financially

- Case B

Mid-range

- Case C

Least healthy financially - Case A

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(10-15 min.)

E 12-22A

a. Cash proceeds of sale = Book value of asset sold, $28,000*
− Loss on sale, $4,000
= $24,000
_____
*$110,000 + $33,000 − $9,000 − Book value sold (X) = $106,000
Book value sold = $28,000

Plant Assets, Net
Beginning balance 110,000 Depreciation
Purchases
Ending balance

33,000 Book value sold

9,000
28,000

106,000

b. Cash dividend payments = $26,000
$49,000 + $58,000 − $7,000 − Cash dividends (X) = $74,000
Cash dividends = $26,000

Retained Earnings
Stock dividends
Cash dividends

7,000 Beginning balance

26,000 Net income
Ending balance

Chapter 12

49,000
58,000
74,000

The Statement of Cash Flows

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(10-15 min.)

Cash flows from operating activities:
Receipts:
Collections from customers
($50,000 + $33,000)………………..
Collection of dividend revenue…….
Total cash receipts………………..
Payments:
To suppliers……………………………
To employees………………………….
For interest…………………………….
For income tax………………………...
Total cash payments……………...

Net cash used by operating activities.

E 12-23A

$ 83,000
10,000
93,000

$(58,000)
(35,000)
(17,000)
(24,000)
(134,000)
$ (41,000)

Evaluation: Operating cash flow is weak as shown by the net
cash used by operating activities.

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(5-10 min.)

E 12-24A

Salary Payable — Report cash payments to employees as an

operating cash flow.
Buildings — Report acquisitions of buildings and the proceeds
from sales of buildings as investing cash flows.
Notes Payable — Report issuance and payments of notes
payable as financing cash flows.

Chapter 12

The Statement of Cash Flows

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