ch 12

Chapter 12

The Cash Flow Statement

Questions

1. The cash flow statement reports the reasons for the changes in cash during the period. In the process, it shows the cash impact of the entity’s operating, investing, and financing activities.

2. Four purposes of the cash flow statement are to (a) predict future cash flows, (b) evaluate management decisions, (c) determine the company’s ability to pay dividends to shareholders and interest to creditors, and (d) show the relationship between net income and changes in cash.

3. a. Operating activities create revenues and expenses in the entity’s major line of business. Operating activities are related to the transactions that make up net income.

b. Investing activities increase and decrease the long-term assets of the business.

c. Financing activities obtain from investors and creditors the cash needed to launch and sustain the business.

4. The cash flow statement is dated “For the Period Ended 20XX” because it reports the reasons for the changes in cash that occurred during the period—for example, “For the Year Ended December 31, 2003” or “For the Month Ended June 30, 2005.”

Chapter 12 The Cash Flow Statement 879

5. The check figure for the cash flow statement is the change in cash during the period. This amount is obtained by subtracting the beginning cash balance from the ending cash balance (taken from the comparative balance sheet). The change in cash is compared to the net change in cash shown at the bottom of the cash flow statement. The two amounts should be equal.

6. The largest source of cash for most successful companies is operations.

7. Cash may decrease during a year when income is high because the entity may be using cash to invest in long-term assets. Cash may increase in a bad year because the entity may be borrowing heavily. The cash flow statement reports these activities to show where cash came from and how it was spent.

8. a. Financing activitiesb. Operating activitiesc. Operating activitiesd. Operating activitiese. Investing activities

9. An increase in another current asset is a decrease in cash.A decrease in another current asset is an increase in cash.An increase in a current liability is an increase in cash.A decrease in a current liability is a decrease in cash.

10. Net cash provided by operating activities = $64,000 ($38,000 + $22,000 + $13,000 – $9,000).

Financial Accounting Canadian Edition Instructor’s Solutions Manual880

11. Cash flows from operating activities:Net income………………………………………... $ XXXAdjustments to reconcile net income to netcash provided by operating activities:

Gain on sale of investments………………... (15,000)

Cash flows from investing activities:Sale of investments……………………………... $ 80,000

12. Acquisitions of capital assets ($X) are $29,000, computed as follows:

$193,000 + $X – $37,000 – $9,000 = $176,000$X = $176,000 – $193,000 +

$37,000 + $9,000$X = $29,000

This amount is reported as a cash payment under investing activities.

Capital Assets, NetBeginning balance 193,000 Amortization expense 37,000

ACQUISITIONS 29,000Book value of capital assets disposed of 9,000

Ending balance 176,000

13. Issuance of a note payable to purchase land should be reported as a noncash investing and financing activity. This category of transactions can be included in a schedule that accompanies the cash flow statement. Three other transactions in this category are issuance of shares to acquire a building, issuance of shares to pay long-term debt, and issuance of a note payable to repurchase shares. Note: Students may list other examples that are

acceptable.


14. OPERATING ACTIVITIES:

Cash Receipts Cash PaymentsCollections from customers Payments to suppliersReceipts of interest and Payments to employees

dividends on investments Payments of interest and taxesOther operating receipts Other operating payments

INVESTING ACTIVITIES:Cash Receipts Cash PaymentsSale of capital assets Acquisition of capital assetsSale of investments that Acquisition of investments that

are not cash equivalents are not cash equivalentsCash receipts on loans Making loans

receivable

FINANCING ACTIVITIES:Cash Receipts Cash PaymentsIssuing shares Payments of dividendsBorrowing money Repurchase of shares

Paying principal amounts ofdebts

15. Amortization expenses are not reported on a cash flow statement prepared by the direct method because they do not affect cash. They are reported on a statement prepared by the indirect method because the first item, net income, includes a deduction for them. Because they do not affect cash, they must be added back to net income to cancel the effect of their subtraction in computing income.

16. Net cash inflow from operations = $61,000 ($92,000 + $6,000 – $24,000 – $13,000). The dividend payments and the loan to another company are excluded because the dividends are a financing activity and the loan is an investing activity.

17. Payments to employees ($X) are $59,000, computed as follows:


$10,000 + $51,000 – $X = $2,000– $X = $2,000 – $10,000 – $51,000– $X = –$59,000 $X = $59,000

This amount is reported as a cash payment under operating activities.

Salary Payable

Payments to employees 59,000 Beginning balance 10,000

Salary expense 51,000


18. Free cash flow is the amount of cash available from operations after paying for planned investments in capital assets and other long-term assets.


Check Points

(10 min.) CP 12-1

The cash flow statement helps investors and creditors:

a. Predict future cash flows by reporting past cash receipts

and payments, which are a reasonably good predictor of

future cash receipts and payments.

b. Evaluate management decisions by reporting on managers’

investments. Wise investments help companies prosper.

Unwise investments cause businesses to suffer financially.

c. Predict the company’s ability to pay dividends and interest

by reporting where its cash came from and how the cash

was spent. This information helps investors and creditors

predict whether the business can make dividend and debt

payments.


(5 min.) CP 12-2

Four strong points about TransCanada Pipelines Limited’s cash flows are:

1. Operating activities are TransCanada’s main source of cash.

2. TransCanada is investing in long-term assets.3. The company is able to obtain financing by issuing shares.4. The company is not borrowing but rather repaying debt.

Note: Students are required to identify only three strong points.

(5-10 min.) CP 12-3

Four things that could cause operating cash flows to be negative (under the indirect method) are:

1. Net loss2. A large gain on the sale of assets3. Increases in current assets other than cash4. Decreases in current liabilitites

Notes: a. Students need to identify only three items.b. Amortization cannot cause operating cash flows to be

negative because in the indirect method amortization is added back as a positive amount.


(5-10 min.) CP 12-4

Cash flows from operating activities:Net income……………………………………………….. $81,000Adjustments to reconcile net income to net cash provided by operating activities:

Amortization…………………………………………... 9,000Gain on sale of land…………………………………. (4,000)Increase in accounts receivable, inventory,

and prepaid expenses ($78,000 – $65,000)…... (13,000)Decrease in current liabilities ($42,000 – $40,000). (2,000 )

Net cash provided by operating activities:…... $71,000

(10 min.) CP 12-5

O+ a. Loss on sale of land O+ h. Increase in accounts O+ b. Amortization expense payable O– c. Increase in inventory N i. Sales revenue O+ d. Decrease in prepaid F j. Payment of dividends

expense O– k. Decrease in accrued O+ e. Decrease in accounts liabilities

receivable F l. Issuance of common I f. Purchase of shares

equipment O– m. Gain on sale of N g. Collection of cash building

from customers N n. Retained earnings


(10 min.) CP 12-6

Labrador Resources Inc.Cash Flow Statement (partial)

For the Year Ended June 30, 2005Cash flows from operating activities:

Net income........................................................ $ 60,000*Adjustments to reconcile net income tonet cash provided by operating activities:Amortization...................................................... $ 15,000

Increase in current assets other thancash........................................................... (30,000)

Decrease in current liabilities..................... (5,000 ) (20,000 )Net cash provided by operating

activities............................................... $ 40,000

_____*$210,000 – $100,000 – $35,000 – $15,000 = $60,000


(15 min.) CP 12-7

Labrador Resources Inc.Cash Flow Statement


Net income……………………………………….. $60,000*Adjustments to reconcile net income tonet cash provided by operating activities:

Amortization…………………………………... $ 15,000Increase in current assets other than

cash…………………………………………. (30,000)Decrease in current liabilities……………… (5,000 ) (20,000 )

Net cash provided by operating activities….. 40,000

Cash flows from investing activities:Purchase of equipment………………………… $(40,000)Proceeds from sale of land……………………. 60,000 Net cash provided by investing activities….. 20,000

Cash flows from financing activities:Proceeds from issuance of common shares $ 20,000Payment of note payable………………………. (30,000)Payment of dividends………………………….. (6,000)Repurchase of treasury shares………………. (5,000 )Net cash used for financing activities………. (21,000 )

Net increase in cash……………………………….. $39,000

_____*$210,000 – $100,000 – $35,000 – $15,000 = $60,000


(10 min) CP 12-8

a. Acquisitions of capital assets = $100,000, as follows:Capital Assets, net

Beg.+ Acquisitions – Amortization –

Book value of=

End.bal. assets sold bal.

$185,000 + X – $ 60,000 – $0 = $225,000

X = $225,000 – $185,000 + $60,000

X = $100,000

Capital Assets, netBeg. bal. 185,000Acquisitions 100,000 Amortization 60,000End. bal. 225,000

b. Proceeds from the sale of long-term investments = $15,000, as follows:Long-term investments

Beg. bal. + Purchases –Book value of

= End. bal.investments sold

$90,000 + 0 – X = $75,000

X = $90,000 – $75,000

X = $15,000

Since there was no gain or loss, the proceeds from the sale must be the same as the investments’ book value, $15,000.

Long-Term InvestmentsBeg. bal. 90,000 Book value of

investments sold 15,000End. bal. 75,000

(15 min.) CP 12-9


a. Payment of long-term note payable = $2,000 ($68,000 – $66,000)This is clear from the decrease in long-term debt.

b. Issuance of common shares = $3,000 ($40,000 – $37,000)This is clear from the increase in common shares.

c. Payment of dividends(same as amount of = $84,000, as follows:dividends declared)

BeginningNet

incomeDividend

declarations

Endingretained + – = retainedearnings earnings

$246,000 + $110,000 – X = $272,000

X = – $272,000 + $246,000 + $110,000

= $ 84,000

Retained EarningsDividend declarations Beg. bal. 246,000 (same amount paid) 84,000 Net income 110,000

End. bal. 272,000


(15 min.) CP 12-10

Premier Dental Laboratories Ltd.Cash Flow Statement

For the Year Ended December 31, 2004Cash flows from operating activities:

Collections from customers………………… $590,000Payments to suppliers and employees…… (410,000 )Net cash provided by operating activities.. $180,000

Cash flows from investing activities:Purchase of equipment……………………… $(140,000 )Net cash used for investing activities……. (140,000)

Cash flows from financing activities:Payment of dividends………………………... $ (50,000 )Net cash used for financing activities…….. (50,000 )

Net decrease in cash……………………………. $(10,000)Cash balance, beginning……………………….. 104,000 Cash balance, ending…………………………… $ 94,000


(5 min.) CP 12-11

Labrador Resources Inc.Cash Flow Statement (partial)


Collections from customers………………… $200,000Payments to suppliers……………………….. (80,000)Payments to employees……………………… (70,000)Payment of income tax………………………. (10,000 )Net cash provided by operating activities... $40,000


(15 min.) CP 12-12

Labrador Resources Inc.Cash Flow Statement


Collections from customers............................... $200,000Payments to suppliers........................................ (80,000)Payments to employees..................................... (70,000)Payment of income tax....................................... (10,000 )Net cash provided by operating activities........ $ 40,000

Cash flows from investing activities:Purchase of equipment...................................... $(40,000)Proceeds from sale of land................................ 60,000 Net cash provided by investing activities........ 20,000

Cash flows from financing activities:Proceeds from issuance of common shares. . . $20,000Payment of note payable.................................... (30,000)Payment of dividends......................................... (6,000)Repurchase of shares......................................... (5,000 )Net cash used for financing activities.............. (21,000 )

Net increase in cash................................................ $ 39,000


(15 min.) CP 12-13

a. Collections from customers = $704,000, as follows:

Collections=

Sales– Increase in Accounts Receivable

from customers Revenue

= $710,000 – $6,000 ($54,000 – $48,000)

= $704,000

Accounts ReceivableBeg. Bal. 48,000Sales 710,000 Collections 704,000End. Bal. 54,000

b. Payments for inventory = $331,000, as follows:

Payments forinventory

Cost ofDecrease ininventory

Increase inAccounts Payable

= goods – –sold

= $340,000 – $4,000 – $5,000($84,000 – $80,000) ($47,000 – $42,000)

= $331,000

Inventory Accounts PayableBeg. bal. 84,000 Payments for Beg. bal. 42,000Purchases 336,000 Cost of goods sold 340,000 inventory 331,000 Purchases 336,000End. bal. 80,000 End. bal. 47,000


(10 min.) CP 12-14

a. Payments to employees = $48,000, as follows:

Payments to=

Salary–

Increase inemployees expense Salary Payable

= $50,000 – $2,000(23,000 – $21,000)

= $48,000

Salary PayablePayments to Beg. bal. 21,000

employees 48,000 Salary expense 50,000End. bal. 23,000

b. Payments for other expenses = $154,000, as follows:

Payments of other

expenses

Otherexpenses

Increase in Decrease in= + prepaid + accrued

expenses liabilities

= $150,000 + $1,000 + $3,000 ($3,000 – $2,000) ($11,000 – $8,000)

= $154,000


Exercises

(10-15 min.) E 12-1

DATE: _______________

TO: Managers of BizMart Stores Inc.

FROM: Student Name

SUBJECT: Purposes of the cash flow statement

The cash flow statement is designed to help management predict the future cash flows of a business. The cash flow statement measures historical cash flows, which are a 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 in part on the basis of how well he or she uses cash, information given in the cash flow statement.

In evaluating a borrower’s ability to repay a loan, a creditor examines the cash flow statement to learn how the borrower has gained and spent cash. As BizMart’s situation indicates, income may increase while cash decreases, so the cash flow statement should be used in conjunction with the income statement and the balance sheet in evaluating a company.

Note: Student responses may vary.


(10-15 min.) E 12-2

O+ a. Amortization of intangible NIF k. Acquisition of equipmentassets by issuance of note

payable

F+ b. Issuance of long-term note F– l. Payment of long-term debtpayable to borrow cash

O+ c. Amortization of equipment NIF m. Acquisition of building byissuance of common shares

F– d. Repurchase of shares N n. Accrual of salary expense

F+ e. Issuance of common I– o. Purchase of long-termshares for cash investment

O+ f. Increase in accounts O+ p. Decrease in merchandisepayable inventory

O+ g. Net income O– q. Increase in prepaid expenses

F– h. Payment of cash dividend I+ r. Cash sale of land

I+ i. Sale of long-term O– s. Decrease in accrued Investment liabilities

O+ j. Loss on sale of land


(5-10 min.) E 12-3

a. Investing activities g. Noncash investing andfinancing activities

b. Investing activitiesh. Financing activities

c. Financing activitiesi. Financing activities

d. Noncash investing andfinancing activities j. Operating activities

e. Operating activities k. Investing activities

f. Financing activities l. Operating activities


(10-15 min.) E 12-4

Cash flows from operating activities:Net income…………………………………. $ 22,000Adjustments to reconcile net income to net cash used for operating activities:

Amortization…………………………….. $ 12,000Loss on sale of land…………………… 5,000Increase in current assets other

than cash……………………………… (27,000)Decrease in current liabilities………... (20,000 ) (30,000 )

Net cash used for operatingactivities…………………………………….. $ (8,000)

Evaluation: Operating cash flow is weak, as shown by the net

cash used for operating activities.


(15-20 min.) E 12-5

Cash flows from operating activities:Net income…………………………………….. $69,000Adjustments to reconcile net income tonet cash provided by operating activities:

Amortization………………………………. $ 3,000 Decrease in accounts receivable……... 4,000 Increase in inventory……………………. (2,000) Increase in accounts payable…………. 5,000 Decrease in accrued liabilities………… (3,000 ) 7,000

Net cash provided by operatingactivities………………………………………… $76,000

Mud Lake Trading Co. shows no sign of trouble collecting

receivables or selling inventory. There is no large build-up in

either account.


(20-30 min.) E 12-6

Req. 1

Lion’s Head Marina Ltd.Cash Flow Statement

For the Year Ended June 30, 2005Cash flows from operating activities: Net income…………………………………………... $38,000 Adjustments to reconcile net income to net cash provided by operating activities: Amortization……………………………………...$ 29,000 Decrease in accounts receivable……………. 15,000 Increase in inventory…………………………... (6,000) Increase in prepaid expenses………………… (1,000) Increase in accounts payable………………… 13,000 Decrease in accrued liabilities……………….. (8,000 ) 42,000 Net cash provided by operating activities…. 80,000

Cash flows from investing activities: Acquisition of capital assets ………………….... $(101,000) Proceeds from sale of land……………………….. 24,000 Net cash used for investing activities………. (77,000)

Cash flows from financing activities: Proceeds from issuance of common shares… $ 30,000 Payment of long-term note payable…………….. (15,000) Payment of dividends …………………………….. (11,000 ) Net cash provided by financing activities….. 4,000 Net increase in cash…………………………………… $ 7,000Cash balance, June 30, 2004………………………… 20,000 Cash balance, June 30, 2005………………………… $27,000

Noncash investing and financing activities:

Acquisition of capital assets by issuing note payable $15,000


(continued) E 12-6

Req. 2

Evaluation: Lion’s Head Marina Ltd.’s cash flows look fairly

strong. Operations are the main source of cash.

The company is investing in new capital assets

without having to borrow. It was able to issue

shares and pay off a long-term note payable—both

financing transactions. All of these signs are

favourable.

(5-10 min. E 12-7

Case A Issuing shares generated the cash to acquire capital assets.

Case B A combination of operations and issuing shares generated most of the cash for acquisition of capital assets.

Case C The sale of capital assets generated the cash needed to acquire new capital assets.

Most healthy financially - Case B

Mid-range - Case A

Least healthy financially - Case C


(10-15 min.) E 12-8

a. Cash dividend payments = $26,000

$45,000 + $62,000 – $8,000 – Cash dividends (X) = $73,000– Cash dividends = $73,000 – $45,000 – $62,000 + $8,000

Cash dividends = $26,000

Retained Earnings

Stock dividends 8,000 Beginning balance 45,000

Cash dividends 26,000 Net income 62,000


b. Cash proceeds of sale = Book value of asset sold, $7,000*– Loss on sale, $1,000= $6,000

_____*$103,000 + $27,000 – $16,000 – Book value sold (X) = $107,000 – Book value sold = $107,000 – $103,000 – $27,000 + $16,000

Book value sold = $7,000

Capital Assets, Net

Beginning balance 103,000 Amortization 16,000

Purchases 27,000 Book value sold 7,000



(10-15 min.) E 12-9

O+ a. Collection of account NIF k. Acquisition of equipmentReceivable by issuance of note

payable

F+ b. Issuance of long-term note F– l. Payment of long-term debtpayable to borrow cash

N c. Amortization of equipment NIF m. Acquisition of building byissuance of common shares

F– d. Repurchase of common shares

N n. Accrual of salary expense

F+ e. Issuance of common I– o. Purchase of long-termShares for cash investment

O– f. Payment of account O– p. Payment of wages topayable employees

F+ g. Issuance of preferred O+ q. Collection of cash interest shares for cash

F– h. Payment of cash dividend I+ r. Cash sale of land

I+ i. Sale of long-term N s. Distribution of share investment dividend

N j. Amortization of bonddiscount


(5-10 min.) E 12-10

a. Investing activities h. Operating activities

b. Investing activities i. Financing activities

c. Financing activities j. Financing activities

d. Noncash investing and k. Not reportedfinancing activities

e. Operating activities l. Operating activities

f. Financing activities m. Investing activities

g. Noncash investing and n. Operating activitiesfinancing activities


(10-15 min.) E 12-11

Cash flows from operating activities:Receipts:

Collections from customers($93,000 + $9,000)…………………. $ 102,000

Collection of dividend revenue……. 7,000 Total cash receipts……………….. 109,000

Payments:To suppliers…………………………… $(54,000)To employees…………………………. (34,000)For interest……………………………. (16,000)For income tax………………………... (13,000 )

Total cash payments……………... (117,000 )Net cash used for operating activities. $ (8,000)

Evaluation: Operating cash flow is weak, as shown by the net

cash used for operating activities.


(5-10 min.) E 12-12

Dividends Receivable — Report cash receipts of dividends as

an operating cash flow.

Investment in Land — Report acquisitions of investments and

the proceeds from sales of investments* as investing cash

flows.

Long-Term Debt — Report issuance and payments of long-term

debt as financing cash flows.

_____*Amount of sale proceeds is not determinable. We would need

the gain or loss to combine with the book value of

investments sold.


(20-30 min.) E 12-13Req. 1

Lion’s Head Marina Ltd.Cash Flow Statement

For the Year Ended June 30, 2005Cash flows from operating activities: Receipts: Collections from customers ($229,000 + $15,000)............................................. $ 244,000 Dividends received on investments in shares 8,000 Total cash receipts............................................... 252,000 Payments: To suppliers ($103,000 + $11,000 + $1,000)............ $(115,000) To employees ($45,000 + $1,000)............................. (46,000) For income tax........................................................... (9,000) For interest................................................................. (2,000 ) Total cash payments............................................ (172,000 ) Net cash provided by operating activities.............. 80,000

Cash flows from investing activities: Acquisition of capital assets......................................... $(101,000) Proceeds from sale of land........................................... 24,000 Net cash used for investing activities..................... (77,000))

Cash flows from financing activities: Proceeds from issuance of common shares............... $ 30,000 Payment of long-term note payable............................. (15,000) Payments of dividends.................................................. (11,000 ) Net cash provided by financing activities.............. 4,000 Net increase in cash............................................................ $ 7,000Cash balance, June 30, 2004.............................................. 20,000 Cash balance, June 30, 2005.............................................. $ 27,000

Noncash investing and financing activities: Acquisition of capital assets by issuing note payable. $ 15,000


(continued) E 12-13

Req. 2

Evaluation: Lion’s Head Marina’s cash flows look fairly strong.

Operations are the main source of cash. The

company is investing in new capital assets without

having to borrow. It was able to issue shares and

pay off a long-term note payable—both financing

transactions. All of these signs are favourable.


(10-15 min.) E 12-14

$4,000 decrease ina. Cash collections = $81,000 + Accounts Receivable

($22,000 – $18,000)

= $85,000

b.Cash paymentsfor inventory

$4,000 decrease in $3,000 decrease in= $90,000 – Inventory + Accounts Payable

($25,000 – $21,000) ($11,000 – $8,000)

= $89,000


(20-30 min.) E 12-15

(All amounts in millions)Increase in

a. Collections = $3,521 =Revenues – Accounts Receivable

$3,586 – ($231 – $166)

Cost OfGoodsSold,

b. Payments for

$3,407 =

Operatingand

GeneralExpenses +

Increasein

InventoryOther

+ Expenses

Increase inAccounts

– Payable

inventory,operating,and general

=expenses $3,317 + $167* + $16 – $93**_____*$515 – $348 = $167 **$296 – $203 = $93

Income Decrease inc. Payment of Tax Expense + Income Tax Payable

income tax = $77 = $70 + ($17 – $10)

Beg. Real Real EstateEstate and and

d. Acquisitions ofCapital

Assets, Net + Acquisitions – Amort.Capital

= Assets, Netreal estate and capital assets

= $270 = $407 + X – $43 = $634

X = $270

e. Short-termBeg. Short-

TermEnd. Short-

Termborrowing Borrowing + Borrowing = Borrowing(Bank overdraft and bank loans)

= $20 = $26 + X

X = $20

= $46

Beg. End.LT Liab. + Borrowing – Repaid = LT Liab

f. Long-term = $357 = $145 + X = $357 – $145 = $357debt


(continued) E 12-15

g. Proceeds from Beg. Common End. CommonIssuance of Shares + Issuance = Sharesshares = $6 = $198 + X = $204

X = $6

Beg. Ret. Net End. Ret.h. Payment of Earnings + Income – Dividends = Earnings

cash dividends

= $21 = $603 + $140 – X = $722

X = $21


(20 min.) E 12-16

Req. 1

(All in millions)

Loss on sale ofProceeds from

dispositionsBook value

soldproperty and = –equipment

$46 = $53 – $99

Property & Equipment, NetBal., April 30, 2001 1,610Capital Amortization 119

expenditures 520 Book value ofprop. & equip.sold X = 99

Bal., April 30, 2002 1,912

Req. 2

Long-Term DebtBal., April 30, 2001 1,196

Repayment 170 Proceeds fromissuance 60

LT debt repaidby somethingother than cash X = 25

Bal., April 30, 2002 1,061

Problems


Group A

(15-30 min.) P 12-1A

DATE: _______________

TO: Managers of Durham Wood Furniture Ltd.

FROM: Student Name

SUBJECT: Assessment of 2005 operations and outlook for the future

2005 was not a good year. Most of the increase in net income

resulted from the extraordinary gain, 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.


(continued) P 12-1A

During 2005, 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 2005 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 capital 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 2005 may be hard to pay back.

Overall, the outlook for the future is not bright.

Note: Student responses may vary. The key conclusion is that 2005 was not a good year, and the outlook is not bright.


(40 min.) P 12-2A

Req. 1

Red River Home Furnishings Ltd.Income Statement

For the Year Ended December 31, 2005Sales revenue (2,500 $200)…………………………... $500,000

Cost of goods sold $120,000 + (1,500 $260,000) 315,000

2,000Salary expense…………………………………………… 95,000Amortization expense ($150,000 / 5)…………………. 30,000Rent expense……………………………………………... 20,000Income tax expense……………………………………... 10,000 Net income………………………………………………... $ 30,000

Req. 2

Red River Home Furnishings Ltd.Balance Sheet

As at December 31, 2005ASSETS LIABILITIES

Current: Current:Cash $ 90,000* Accounts payableAccounts receivable ($260,000 – $208,000) $ 52,000

(2,500 $200 0.20) 100,000 Salary payable 4,000 Inventory Total current liabilities 56,000

$260,000 (3,000 – 2,500) 65,000 2,000Total current assets 255,000

SHAREHOLDERS’ EQUITYProperty, plant, and equipment: Common shares 300,000

Store fixtures $150,000 Retained earningsLess Accumulated ($30,000 – $11,000) 19,000

amortization (30,000 ) 120,000 319,000

Total liabilities andTotal assets $375,000 shareholders' equity $375,000

_____*$300,000 – $150,000 – $120,000 – $20,000 –$208,000 + $400,000 – $91,000 – $10,000 – $11,000 = $90,000.


(continued) P 12-2A

Req. 3

Red River Home Furnishings Ltd.Cash Flow Statement


Net income………………………………………. $ 30,000Adjustments to reconcile net income tonet cash used for operating activities:

Amortization………………………………….. $ 30,000Increase in accounts receivable………….. (100,000)Increase in inventory……………………….. (65,000)Increase in accounts payable…………….. 52,000Increase in salary payable………………… 4,000 (79,000 )

Net cash used for operating activities.. (49,000)

Cash flows from investing activities:Purchase of equipment……………………….. (150,000 )

Net cash used for investing activities…… (150,000)

Cash flows from financing activities:Issuance of common shares………………… 300,000Payment of dividend…………………………… (11,000 )

Net cash provided by financing activities 289,000________

Increase in cash……………………………………. $ 90,000Cash balance, January 1, 2005…………………. 0 Cash balance, December 31, 2005……………... $ 90,000


(35-45 min.) P 12-3A

Datex CorporationCash Flow Statement

For the Year Ended December 31, 2005Cash flows from operating activities: Net income…………………………………………... $ 57,100 Adjustments to reconcile net income to net cash provided by operating activities: Amortization…………………………………….. $ 27,100 Loss on sale of equipment…………………… 11,700 Increase in accounts receivable…………….. (5,500) Increase in inventories………………………… (5,600) Increase in prepaid expenses………………… (1,200) Increase in accounts payable………………… 1,400 Increase in income tax payable……………… 1,900 Decrease in accrued liabilities……………….. (11,700 ) 18,100 Net cash provided by operating activities…. 75,200

Cash flows from investing activities: Acquisition of building……………………………. $(125,300) Acquisition of long-term investment…………… (31,600) Sale of equipment………………………………….. 58,000 Collection of loan…………………………………... 8,700 Net cash used for investing activities………. (90,200)

Cash flows from financing activities: Issuance of common shares……………………. $ 41,200 Issuance of long-term note payable……………. 34,400 Payment of cash dividends………………………. (18,300) Repurchase of shares…………………….……….. (14,300 ) Net cash provided by financing activities….. 43,000 Net increase in cash…………………………………… $ 28,000 Cash balance, December 31, 2004………………….. 22,700 Cash balance, December 31, 2005………………….. $ 50,700

(continued) P 12-3A Financial Accounting Canadian Edition Instructor’s Solutions Manual918

Noncash investing and financing activities: Acquisition of land by issuing long-term note payable……. $107,000 Retirement of bonds payable by issuing common shares. 65,000 Total noncash investing and financing activities………………. $172,000


(35-45 min.) P 12-4AReq. 1

Haehn for Golf Ltd.Cash Flow Statement

For the Year Ended March 31, 2006Cash flows from operating activities: Net income…………………………………………… $ 70,000 Adjustments to reconcile net income to net cash provided by operating activities: Amortization……………………………………… $ 17,300 Decrease in accounts receivable…………….. 6,800 Increase in inventories…………………………. (2,600) Increase in prepaid expenses…………………. (200) Increase in accounts payable…………………. 2,700 Decrease in accrued liabilities………………... (400) Increase in income tax payable………………. 3,300 26,900 Net cash provided by operating activities….. 96,900

Cash flows from investing activities: Acquisition of equipment………………………….. $(78,700) Acquisition of building…………………………….. (47,000) Sale of long-term investment……………………... 13,700 Net cash used for investing activities……….. (112,000)

Cash flows from financing activities: Issuance of long-term note payable……………... $ 50,000 Issuance of common shares…………………….. 11,000 Payment of cash dividends……………………….. (30,000 ) Net cash provided by financing activities…... 31,000 Net increase in cash……………………………………. $ 15,900Cash balance, March 31, 2005………………….……. 4,000 Cash balance, March 31, 2006………………….……. $ 19,900

Noncash investing and financing activities: Acquisition of land by issuing note payable…… $ 76,000


Req. 2

Evaluation: Haehn’s cash flows look strong. Operations are the

main source of cash. The company is investing in

new capital assets, and borrowing—a financing

cash flow—appears reasonable. All of these signs

are favourable.


(30-40 min.) P 12-5A

Req. 1

Dan’s Triathlon Sports Ltd.Cash Flow Statement

For the Year Ended December 31, 2005Cash flows from operating activities: Net income………………………………………………. $68,000 Adjustments to reconcile net income to net cash provided by operating activities: Amortization…………………………………………. $ 4,000 Decrease in accounts receivable………………… 1,600 Increase in interest receivable…………………… (1,200) Decrease in inventories……………………………. 3,600 Increase in prepaid expenses…………………….. (600) Increase in accounts payable…………………….. 2,600 Decrease in interest payable……………………… (500) Decrease in salary payable……………………….. (3,500) Decrease in other accrued liabilities……………. (2,300) Increase in income tax payable………………….. 1,200 4,900 Net cash provided by operating activities….. 72,900

Cash flows from investing activities: Acquisition of land……………………………………... $(29,000) Acquisition of equipment ($49,400 – amortization expense of $4,000 = $45,400; $53,500 – $45,400)….. (8,100 ) Net cash used for investing activities………. (37,100)

Cash flows from financing activities: Payment of dividends ($2,700 + $68,000 – $41,500) $(29,200) Payment of note payable……………………………… (25,000) Issuance of common shares………………………… 23,600 Net cash used for financing activities………. (30,600 )Net increase in cash……………………………………….. $ 5,200 Cash balance, December 31, 2004……………………… 5,300 Cash balance, December 31, 2005……………………… $10,500

(continued) P 12-5A


Req. 2

This problem will help students learn how operating activities,

investing activities, and financing activities generate cash

receipts and cash payments. By solving this problem, students

will learn how companies prepare the cash flow statement.

Students will thus be able to understand the meaning of cash

flows from the three basic categories of business activities.

This knowledge will aid their analysis of investments. For

example, students should know that net cash provided by

operating activities conveys a more positive signal about a

company than net cash used for operations.


(35-45 min.) P 12-6AReq. 1

Campbell River KayaksCash Flow Statement

For the Year Ended April 30, 2005Cash flows from operating activities: Receipts: Collections from customers ($448,600 + $171,900)…………………….. $ 620,500 Interest received……………………………… 4,400 Dividends received…………………………… 4,100 Total cash receipts………………………... $ 629,000 Payments: To suppliers……………………………………. $(368,500) To employees………………………………….. (93,600) For interest…………………………………….. (13,300) For income tax………………………………… (37,900 ) Total cash payments……………………... (513,300 ) Net cash provided by operating activities.. 115,700 Cash flows from investing activities: Acquisition of capital assets…………………... $ (59,400) Proceeds from sale of capital assets………… 22,400 Collection of loans……………………………….. 12,800 Loan to another company………………………. (12,500) Proceeds from sale of investments…………… 9,100 Net cash used for investing activities…….. (27,600)Cash flows from financing activities: Payments of long-term debt……………………. $ (50,000) Payment of dividends……………………………. (48,400) Proceeds from issuance of short-term debt… 19,600 Proceeds from issuance of common shares.. 8,000 Net cash used for financing activities…….. (70,800 )Net increase in cash…………………………………. $ 17,300 Cash balance, April 30, 2004………………………. 39,300 Cash balance, April 30, 2005………………………. $ 56,600


Noncash investing and financing transactions: Payment of short-term note payable by issuing long-term note payable……………………. $ 63,000 Acquisition of equipment by issuing short-term note payable…………………………….. 16,400 Total noncash investing and financing transactions…. $ 79,400

Req. 2

Evaluation of 2005: 2005 was a strong year from a cash flow

standpoint. Operations provided the bulk of the company’s

cash. The business acquired additional capital assets to lay a

foundation for future operations. The corporation also reduced

its debt position.


(40 min.) P 12-7A

Req. 1

Red River Home Furnishings Ltd.Income Statement

For the Year Ended December 31, 2005Sales revenue (2,500 $200)……………………………

$500,000

Cost of goods sold $120,000 + 1,500

$260,000) 315,000

2,000Salary expense……………………………………………. 95,000Amortization expense ($150,000 / 5)………………….. 30,000Rent expense……………………………………………… 20,000Income tax expense……………………………………… 10,000 Net income………………………………………………… $ 30,000

Req. 2Red River Home Furnishings Ltd.

Balance SheetDecember 31, 2005

ASSETS LIABILITIESCurrent: Current:

Cash $ 90,000* Accounts payableAccounts receivable ($260,000 – $208,000) $ 52,000

(2,500 $200 0.20) 100,000 Salary payable 4,000 Inventory Total current liabilities 56,000 $260,000 (3,000 – 2,500) 65,000

Total liabilities 2,000Total current assets 255,000



amortization (30,000 ) 120,000 319,000


_____*$300,000 – $150,000 – $120,000 – $20,000 – $208,000 + $400,000 – $91,000 – $10,000 – $11,000 = $90,000.


(continued) P 12-7A

Req. 3

Red River Home Furnishings Ltd.Cash Flow Statement


Collections from customers(2,500 $200 0.80)…………………………….. $400,000

Payments:To suppliers ($120,000 + $20,000 + $208,000).. (348,000)To employees ($95,000 – $4,000)………………. (91,000)For income tax…………………………………….. (10,000 )Net cash used for operating activities………... (49,000)

Cash flows from investing activities:Purchase of equipment……………………………... (150,000 )

Net cash used for investing activities………… (150,000)

Cash flows from financing activities:Issuance of common shares……………………… 300,000Payment of dividend………………………………… (11,000 )

Net cash provided by financing activities……. 289,000_______

Increase in cash………………………………………… $ 90,000Cash balance, January 1, 2005………………………. 0 Cash balance, December 31, 2005…………………... $ 90,000


(30-40 min.) P 12-8A

Req. 1

Dan’s Triathlon Sports Ltd.Cash Flow Statement

For the Year Ended December 31, 2005Cash flows from operating activities: Cash receipts: Collections from customers ($213,000 + $1,600)…. $214,600 Receipts of interest ($8,600 – $1,200)………………. 7,400 Total cash receipts…………………………………. $222,000 Cash payments: To suppliers: Inventory ($70,600 – $3,600 – $2,600)…………... $ (64,400) Operating expenses ($10,500 + $600 + $2,300).. (13,400) To employees ($27,800 + $3,500)……………………. (31,300) For interest ($11,600 + $500)…………………………. (12,100) For income tax ($29,100 – $1,200)…………………... (27,900 ) Total cash payments………………………………. (149,100 ) Net cash provided by operating activities…………. 72,900

Cash flows from investing activities: Acquisition of land………………………………………… $ (29,000) Acquisition of equipment ($49,400 – amortization expense of $4,000 = $45,400; $53,500 – $45,400)…………………………... (8,100 ) Net cash used for investing activities……………… (37,100)

Cash flows from financing activities: Payments of dividends ($2,700 + $68,000 $41,500).. $ (29,200) Payment of note payable…………………………………. (25,000) Issuance of common shares……………………………. 23,600 Net cash used for financing activities……………… (30,600 )Net increase in cash…………………………………………... $ 5,200 Cash balance, December 31, 2004…………………………. 5,300 Cash balance, December 31, 2005…………………………. $ 10,500


(continued) P 12-8A

Req. 2












(45-60 min.) P 12-9AReq. 1

RealTime Internet Connection Inc.Cash Flow Statement

For the Year Ended December 31, 2006Cash flows from operating activities: Receipts: Collections from customers………………………… $ 673,700 Interest received………………………………………. 12,600 Dividends received ………………………………….. 4,500 Total cash receipts………………………………… $ 690,800 Payments: To suppliers ($399,100 + $34,300)………………….. $(433,400) To employees………………………………………….. (143,800) For interest……………………………………………... (26,900) For income tax…………………………………………. (18,900 ) Total cash payments……………………………… (623,000 ) Net cash provided by operating activities………... 67,800

Cash flows from investing activities: Acquisition of equipment……………………………….. $ (31,400) Collection of loan………………………………………... 13,000 Sale of long-term investments………………………….. 8,200 Net cash used for investing activities……………... (10,200)Cash flows from financing activities: Issuance of common shares…………………………… $ 47,300 Payment of long-term debt……………………………… (41,300) Payment of dividends……………………………………. (27,200) Repurchase of shares…………………………………… (26,400 ) Net cash used for financing activities…………….. (47,600 )Net increase in cash………………………………………….. $ 10,000 Cash balance, December 31, 2005………………………… 53,600 Cash balance, December 31, 2006………………………… $ 63,600

Noncash investing and financing activities: Acquisition of land by issuing common shares……. $ 80,100 Retirement of long-term debt by issuing common shares 19,000 Total noncash investing and financing activities………. $ 99,100

(continued) P 12-9A


Req. 2

RealTime Internet Connection Inc.Cash Flows from Operating Activities


Net income…………………………………… $55,500Adjustments to reconcile net income to

net cash provided by operating activities: Amortization……………………………… $ 19,300 Loss on sale of investments………….. 1,100 Increase in accounts receivable……… (27,600) Decrease in inventories………………… 11,800 Increase in prepaid expenses………… (600) Decrease in accounts payable………... (8,300) Increase in interest payable…………… 1,900 Increase in salary payable……………... 7,000 Increase in other accrued liabilities….. 10,400 Decrease in income tax payable……… (2,700 ) 12,300

Net cash provided by operating activities. $67,800


(45-60 min.) P 12-10AReq. 1

Hardy Driver Training inc.Cash Flow Statement

For the Year Ended June 30, 2006Cash flows from operating activities: Net income…………………………………………... $ 56,200 Adjustments to reconcile net income to net cash provided by operating activities: Amortization……………………………………... $ 13,400 Loss on sale of land……………………………. 6,700 Decrease in accounts receivable……………. 2,400 Decrease in interest receivable………………. 700 Increase in inventories………………………… (8,400) Increase in prepaid expenses………………… (900) Increase in accounts payable………………… 2,100 Decrease in income tax payable……………... (700) Decrease in accrued liabilities……………….. (1,500) Increase in interest payable…………………... 800 Decrease in salary payable…………………… (1,700 ) 12,900 Net cash provided by operating activities…. 69,100

Cash flows from investing activities: Sale of land………………………………………….. $ 46,900 Acquisition of long-term investment…………… (4,900 ) Net cash provided by investing activities….. 42,000

Cash flows from financing activities: Payment of long-term note payable…………….. $(61,000) Payment of cash dividends………………………. (38,100) Issuance of common shares……………………. 3,900 Net cash used for financing activities………. (95,200 ) Net increase in cash…………………………………… $ 15,900 Cash balance, June 30, 2005………………………… 8,600 Cash balance, June 30, 2006………………………… $ 24,500


Req. 1

Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………... $14,300 Payment of short-term note payable by issuing common shares……………………….... 4,700 Total noncash investing and financing activities…... $19,000


(continued) P 12-10A

Req. 2

Hardy Driver Training Inc.Cash Flows from Operating Activities


Receipts: Collections from customers ($245,300 + $2,400)……………………… $247,700 Interest received ($10,600 + $700)……….. 11,300 Total cash receipts……………………… $ 259,000

Payments: To suppliers: Inventory ($82,800 + $8,400 – $2,100).. $ (89,100) Operating expenses ($42,000 + $900 + $1,500)…………… (44,400) To employees ($38,800 + $1,700)………… (40,500) For income tax ($9,900 + $700)…………... (10,600) For interest ($6,100 – $800)……………….. (5,300 ) Total cash payments……………………. (189,900 )

Net cash provided by operating activities….. $ 69,100


Problems

Group B

(15-30 min.) P 12-1B

DATE: _______________

TO: Top Managers of Bison Internet Solutions Inc.

FROM: Student Name

SUBJECT: Assessment of 2004 and outlook for the future

2004 was a good year. Net income increased by 15% and would

have been even higher without the nonrecurring loss, which

cannot be expected to happen every year. Operations appear to

be generating increasing amounts of profit. The increases in

capital assets are consistent with a growing, prospering

company. No unhealthy relationships are apparent among the

assets or liabilities.

The cash flow data paint a similar picture. Operating

activities produced the bulk of the year’s increase in cash,

which is healthy. Over the long run, successful companies

generate the bulk of their cash through operations.


(continued) P 12-1B

The five-year expansion program is generating net cash

outflows from investing activities. The company appears to be

making the long-term investments to lay the foundation for

strong future operations. Financing activities provided a net

cash inflow of $70,000. This amount is insignificant in relation

to cash flows from operating and investing activities. Overall,

the cash-flow data reveal a healthy set of relationships.

On balance, there are no obvious danger signals, so the

outlook is fair to good.

Note: Student responses may vary. The key conclusion is that 2004 was a good year, and the outlook is not clouded by any obvious difficulties.


(40 min.) P 12-2BReq. 1

Dohn CorporationIncome Statement

For the Year Ended December 31, 2005Sales revenue (2,800 $200)…………………………...

$560,000


$160,000) 264,000 2,000

Salary expense…………………………………………… 90,000Rent expense…………………………………………….. 12,000Amortization expense ($50,000 / 5)…………………… 10,000Income tax expense……………………………………... 64,000

Net income………………………………………………... $120,000

Req. 2Dohn Corporation



Cash $191,000* Accounts payableAccounts receivable ($160,000 – $140,000) $ 20,000


2,000Total current assets 263,000



amortization (10,000 ) 40,000 280,000


_____*$200,000 – $50,000 – $120,000 – $12,000 – $140,000 + $504,000 – $87,000 – $64,000 – $40,000 = $191,000.


(continued) P 12-2B

Req. 3

Dohn CorporationCash Flow Statement


Net income………………………………………….. $120,000Adjustments to reconcile net income tonet cash provided by operating activities:

Amortization…………………………………….. $ 10,000Increase in accounts receivable…………….. (56,000)Increase in inventory………………………….. (16,000)Increase in accounts payable………………... 20,000Increase in salary payable……………………. 3,000 (39,000 )

Net cash provided by operating activities. 81,000

Cash flows from investing activities:Purchase of store fixtures……………………….. (50,000 )

Net cash used for investing activities……… (50,000)

Cash flows from financing activities:Issuance of common shares…………………… 200,000Payment of dividend……………………………… (40,000 )

Net cash provided by financing activities…. 160,000________

Increase in cash………………………………………. $191,000Cash balance, January 1, 2005…………………….. 0 Cash balance, December 31, 2005………………… $191,000


(35-45 min.) P 12-3B

Sounds Great Inc.Cash Flow Statement

For the Year Ended December 31, 2004Cash flows from operating activities: Net income……………………………………………. $ 50,500 Adjustments to reconcile net income to net cash provided by operating activities: Amortization………………………………………. $ 30,300 Gain on sale of investment……………………... (3,500) Decrease in accounts receivable……………… 3,600 Decrease in inventories…………………………. 5,900 Increase in prepaid expenses………………….. (1,100) Increase in accounts payable………………….. 4,100 Decrease in income tax payable………………. (900) Increase in accrued liabilities………………….. 5,100 43,500 Net cash provided by operating activities…… 94,000

Cash flows from investing activities: Acquisition of equipment…………………………... $(69,000) Acquisition of long-term investment…………….. (44,800) Sale of long-term investment……………………… 12,200 Collection of loan……………………………………. 10,300 Net cash used for investing activities………... (91,300)

Cash flows from financing activities: Issuance of long-term debt………………………… $ 71,000 Payment of cash dividends………………………… (48,300) Payment of long-term debt…………………………. (47,800) Issuance of preferred shares……………………... 36,200 Net cash provided by financing activities…… 11,100

Net increase in cash…………………………………….. $ 13,800 Cash balance, December 31, 2003…………………… 34,800 Cash balance, December 31, 2004…………………… $ 48,600

(continued) P 12-3B Chapter 12 The Cash Flow Statement 939

Noncash investing and financing activities: Acquisition of building by issuing long-term note payable.... $118,000 Payment of long-term debt by issuing common shares......... 89,400 Total noncash investing and financing activities......................... $207,400


(35-45 min.) P 12-4B

Req. 1

Corporate Leasing Inc.Cash Flow Statement

For the Year Ended December 31, 2005Cash flows from operating activities: Net income……………………………………………. $ 31,600 Adjustments to reconcile net income to net cash provided by operating activities: Amortization……………………………………… $ 17,800 Decrease in accounts receivable……………... 700 Decrease in inventories………………………… 1,400 Increase in prepaid expenses…………………. (500) Increase in accounts payable…………………. 3,100 Decrease in accrued liabilities………………… (2,500) Decrease in income tax payable……………… (3,300 ) 16,700 Net cash provided by operating activities…... 48,300

Cash flows from investing activities: Acquisition of building……………………………... $(124,000) Acquisition of equipment………………………….. (55,000) Sale of long-term investment……………………… 6,000 Net cash used for investing activities……….. (173,000)

Cash flows from financing activities: Issuance of common shares……………………... $ 105,600 Issuance of long-term note payable……………... 32,000 Payment of cash dividends……………………….. (17,000 ) Net cash provided by financing activities…... 120,600 Net decrease in cash…………………………………… $ (4,100)Cash balance, December 31, 2004…………………… 12,500 Cash balance, December 31, 2005…………………… $ 8,400

Noncash investing and financing activities:Retirement of bonds payable by issuing common shares. $ 55,000


(continued) P 12-4B

Req. 2

Evaluation: Corporate Leasing’s cash flows look strong.

Operations are the main source of cash. The

company is investing heavily in new capital assets

and is financing the investments more by issuing

shares than by borrowing. All of these signs are

favourable.


(30-40 min.) P 12-5B

Req. 1

Board Sports Ltd.Cash Flow Statement

For the Year Ended December 31, 2006Cash flows from operating activities: Net income……………………………………………… $ 61,600 Adjustments to reconcile net income to net cash provided by operating activities: Amortization………………………………………… $ 15,300 Increase in accounts receivable ………………… (3,400) Decrease in interest receivable………………….. 300 Increase in inventories……………………………. (4,400) Decrease in prepaid expenses…………………... 500 Decrease in accounts payable…………………... (1,500) Decrease in interest payable…………………….. (400) Increase in salary payable………………………... 700 Decrease in other accrued liabilities…………… (600) Increase in income tax payable…………………. 2,500 9,000 Net cash provided by operating activities…. 70,600 Cash flows from investing activities: Acquisition of land…………………………………….. $(25,100) Acquisition of equipment ($93,700 – amortization expense of $15,300 = $78,400; $100,900 – $78,400)………………………………... (22,500 ) Net cash used for investing activities……… (47,600)Cash flows from financing activities: Payment of dividends ($19,600 + $61,600 – $52,500) $(28,700) Payment of note payable……………………………... (10,000) Issuance of common shares……………………….. 8,800 Net cash used for financing activities….. (29,900 )Net decrease in cash……………………………………… $ (6,900)Cash balance, December 31, 2005……………………... 15,600 Cash balance, December 31, 2006……………………... $ 8,700


Req. 2












(35-45 min.) P 12-6BReq. 1

Halifax Home Care Products Ltd.Cash Flow Statement

For the Year Ended July 31, 2005Cash flows from operating activities: Receipts: Collections from customers ($681,100 + $146,000)................................ $ 827,100 Interest received............................................. 11,700 Dividends received......................................... 2,700 Total cash receipts.................................... $ 841,500 Payments: To suppliers.................................................... $(673,300) To employees.................................................. (104,000) For income tax................................................ (56,400) For interest...................................................... (37,800 ) Total cash payments................................. (871,500 ) Net cash used for operating activities.......... (30,000)Cash flows from investing activities: Acquisition of capital assets.............................. $(181,000) Collection of loans............................................... 74,400 Proceeds from sale of capital assets................. 59,700 Loan to another company................................... (35,000) Proceeds from sale of investments................... 34,700 Net cash used for investing activities........... (47,200)Cash flows from financing activities: Proceeds from issuance of common shares.... $ 116,900 Payments of long-term debt............................... (18,800) Payment of dividends.......................................... (50,500) Proceeds from issuance of short-term debt..... 44,100 Net cash provided by financing activities.... 91,700 Net increase in cash................................................. $ 14,500 Cash balance, July 31, 2004.................................... 53,800 Cash balance, July 31, 2005.................................... $ 68,300


(continued) P 12-6BNoncash investing and financing activities:Payment of long-term debt by issuing preferred shares…………………………………… $107,300 Acquisition of equipment by issuing short-term note payable…………………………… 35,500 Total noncash investing and financing activities……. $142,800

Req. 2

Evaluation of 2005: 2005 was a disappointing year from a cash

flow standpoint. Operations used cash. On

the positive side, Halifax Home Care

Products Ltd. was able to issue $116,900 of

new common shares, which means the

shareholders have faith in the company.

The business invested heavily in capital

assets, and cash increased by $14,500. But

ultimately, operations must provide cash

for Halifax Home Care Products Ltd. to

remain in business.


(40 min.) P 12-7BReq. 1

Dohn CorporationIncome Statement

For the Year Ended December 31, 2005Sales revenue (2,800 $200)…………………………..

$560,000


$160,000264,000

2,000Salary expense………………………………………….. 90,000Rent expense…………………………………………….. 12,000Amortization expense ($50,000 / 5)………………….. 10,000Income tax expense…………………………………….. 64,000

Net income……………………………………………….. $120,000

Req. 2Dohn Corporation



Cash $191,000* Accounts payableAccounts receivable ($160,000 – $140,000) $ 20,000


Total liabilities 2,000Total current assets 263,000



amortization (10,000) 40,000 280,000


_____*$200,000 – $50,000 – $120,000 – $12,000 – $140,000 + $504,000 – $87,000 – $64,000 – $40,000 = $191,000.


Req. 3

Dohn CorporationCash Flow Statement


Collections from customers(2,800 $200 0.90)…………………………….. $504,000

Payments:To suppliers ($120,000 + $12,000 + $140,000).. (272,000)To employees ($90,000 – $3,000)………………. (87,000)For income tax…………………………………….. (64,000 )Net cash provided by operating activities……. 81,000

Cash flows from investing activities:Purchase of store fixtures………………………….. (50,000 )

Net cash used for investing activities………… (50,000)

Cash flows from financing activities:Issuance of common shares……………………… 200,000Payment of dividend………………………………… (40,000 )

Net cash provided by financing activities……. 160,000_______

Increase in cash………………………………………… $191,000Cash balance, January 1, 2005………………………. 0 Cash balance, December 31, 2005…………………... $191,000


(30-40 min.) P 12-8B

Req. 1

Board Sports Ltd.Cash Flow Statement

For the Year Ended December 3, 2006Cash flows from operating activities: Cash receipts: Collections from customers ($438,000 – $3,400)…. $ 434,600 Receipts of interest ($11,700 + $300)………………... 12,000 Total cash receipts………………………………….. $ 446,600 Cash payments: To suppliers: Inventory ($205,200 + $4,400 + $1,500)………….. $(211,100) Operating expenses ($49,700 – $500 + $600)…... (49,800) To employees ($76,400 – $700)………………………. (75,700) For interest ($24,600 + $400)………………………….. (25,000) For income tax ($16,900 – $2,500)…………………… (14,400 ) Total cash payments……………………………….. (376,000 ) Net cash provided by operating activities…………. 70,600

Cash flows from investing activities: Acquisition of land…………………………………………. $ (25,100) Acquisition of equipment ($93,700 – amortization expense of $15,300 = $78,400; $100,900 – $78,400)……………………………… (22,500 ) Net cash used for investing activities………………. (47,600)

Cash flows from financing activities: Payment of dividends ($19,600 + $61,600 $52,500)… $ (28,700) Payment of note payable………………………………….. (10,000) Issuance of common shares…………………………….. 8,800 Net cash used for financing activities………………. (29,900 )Net decrease in cash……………………………………….….. $ (6,900)Cash balance, December 31, 2005………………………….. 15,600 Cash balance, December 31, 2006………………………….. $ 8,700


(continued) P 12-8B

Req. 3












(45-60 min.) P 12-9B

Req. 1

Sapawe Lumber Ltd.Cash Flow Statement

For the Year Ended December 31, 2006Cash flows from operating activities: Receipts: Collections from customers……………….……... $ 308,100 Interest received……………………………………. 12,200 Dividends received…………………………………. 1,900 Total cash receipts……………………………... $ 322,200 Payments: To suppliers ($101,600 + $46,100)……………….. $(147,700) To employees……………………………………….. (67,500) For interest…………………………………………... (21,800) For income tax…………………………….………… (8,000 ) Total cash payments…………………………… (245,000 ) Net cash provided by operating activities……... 77,200 Cash flows from investing activities: Acquisition of equipment…………………………….. $ (79,900) Collection of loan………………………………………. 18,500 Sale of investments……………………………………. 9,900 Net cash used for investing activities………….. (51,500)Cash flows from financing activities: Payment of long-term debt…………………………… $ (78,900) Issuance of common shares………………………... 60,800 Repurchase of shares…………………………...……. (10,400) Payment of dividends…………………………………. (1,800 ) Net cash used for financing activities………….. (30,300 )Net decrease in cash…………….………………………... $ (4,600)Cash balance, December 31, 2005……………………… 87,100 Cash balance, December 31, 2006……………………… $ 82,500


(continued) P 12-9B

Req. 1

Noncash investing and financing activities: Acquisition of land by issuing common shares…………… $ 62,100 Retirement of long-term debt by issuing common shares. 21,100 Total noncash investing and financing activities……………… $ 83,200


(continued) P 12-9B

Req. 2

Sapawe Lumber Ltd.Cash Flows from Operating Activities


Net income…………………………………….. $43,900Adjustments to reconcile net income to netcash flow provided by operating activities:

Amortization………………………………. $20,900 Gain on sale of investments…………… (700) Decrease in accounts receivable……… 16,300 Increase in inventories………………….. (5,700) Decrease in prepaid expenses………… 1,900 Increase in accounts payable………….. 7,700 Increase in interest payable……………. 2,300 Decrease in salary payable…………….. (700) Decrease in other accrued liabilities…. (3,300) Decrease in income tax payable………. (5,400 ) 33,300

Net cash provided by operating activities.. $77,200


(45-60 min.) P 12-10B

Req. 1

Red Deer Optometry Inc.Cash Flow Statement

For the Year Ended September 30, 2004Cash flows from operating activities: Net income…………………………………………… $ 56,900 Adjustments to reconcile net income to net cash provided by operating activities: Amortization……………………………………… $ 8,500 Gain on sale of land…………………………….. (10,900) Decrease in accounts receivable…………….. 2,100 Increase in interest receivable……………….. (1,300) Increase in inventories ……………………….. (4,800) Decrease in prepaid expenses……………….. 700 Decrease in accounts payable……………….. (8,500) Decrease in income tax payable……………… (2,800) Decrease in accrued liabilities………………... (11,200) Increase in interest payable…………………… 1,300 Increase in salary payable …………………….. 400 (26,500 ) Net cash provided by operating activities….. 30,400 Cash flows from investing activities: Sale of land…………………………………………… $ 38,100 Acquisition of long-term investments…………... (37,300 ) Net cash provided by investing activities…... 800 Cash flows from financing activities: Payment of cash dividends……………………….. $(64,300) Issuance of common shares…………………….. 51,900 Payment of long-term note payable……………... (24,700 ) Net cash used for financing activities……….. (37,100 ) Net decrease in cash…………………………………… $ (5,900) Cash balance, September 30, 2003………………….. 17,600 Cash balance, September 30, 2004………………….. $ 11,700


(continued) P 12-10B

Req. 1

Noncash investing and financing activities: Acquisition of equipment by issuing long-term note payable…………………………….. $ 26,300 Acquisition of equipment by issuing short-term note payable…………………………… 22,000 Total noncash investing and financing activities…….. $ 48,300


(continued) P 12-10B

Req. 2

Red Deer Optometry Inc.Cash Flows from Operating Activities

For the Year Ended September 30, 2004Cash flows from operating activities:

Receipts: Collections from customers ($333,600 + $2,100)……………………… $ 335,700 Interest received ($7,300 – $1,300)………. 6,000 Total cash receipts……………………… $341,700

Payments: To suppliers: Inventory ($161,500 + $4,800 + $8,500) $(174,800) Operating expenses ($29,600 – $700 + $11,200)…………. (40,100) To employees ($63,400 – $400)…………… (63,000) For income tax ($18,400 + $2,800)………. (21,200) For interest ($13,500 – $1,300)……………. (12,200 ) Total cash payments……………………. (311,300)

Net cash provided by operating activities….. $ 30,400


Decision Cases

(45-60 min.) Decision Case 1

Req. 1 (indirect method for operating activities)

Tennis, Tennis, Tennis! Inc.Cash Flow Statement

For the Year Ended December 31, 2005Cash flows from operating activities: (Thousands) Net income…………………………………………………. $ 105 Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of property, plant, and equipment.… $ 46 Amortization of patents……………………………….. 11 Increase in accounts receivable ($72 – $61)……… (11) Increase in inventories ($194 – $181)………………. (13) Increase in accounts payable ($63 – $56)…………. 7Decrease in accrued liabilities ($17 – $12)………… (5 ) 35

Net cash provided by operating activities……………. 140

Cash flows from investing activities:Acquisition of property, plant, and

equipment ($369 – $259)……………………………… $(110) Acquisition of long-term investments ($31 – $0)……. (31 )

Net cash used for investing activities……………… (141)

Cash flows from financing activities:Issuance of common shares ($149 – $61)…………… $ 88 Payment of cash dividends ($156 + $105 – $221)…… (40) Payment of long-term notes payable ($264 – $179)… (85 )

Net cash used for financing activities……………… (37 )Net decrease in cash………………………….……………… $ (38)Cash balance, December 31, 2004………………………… 63 Cash balance, December 31, 2005………………………… $ 25


(continued) Decision Case 1

Req. 2

During 2004, the company sold equipment for $33,000 and land

for $61,000. These two transactions, indicated by the gain and

the loss on the 2004 income statement, increased 2004 cash by

$94,000. During 2005, the company generated no cash by

selling capital assets. The two largest payments during 2005

were the purchases of property, plant, and equipment

($110,000) and the payment of long-term notes payable

($85,000), which came to a $195,000 outlay. Thus, compared to

the 2004 cash balance, the 2005 amount looks low.

Req. 3

Overall, 2005 was a good year. Net income was up from $50,000

to $105,000, and operations were the largest source of cash. On

this basis, business appears to have been successful. Also, the

company increased its property, plant, and equipment by

$110,000. Tennis, Tennis, Tennis! Inc. should be able to use

these capital assets to earn profits in future years. The

business eliminated debt by $85,000. Reducing debt decreases

future interest expense. Tell the board members that the future

looks bright for Tennis, Tennis, Tennis! Inc. The cash has been

spent wisely.

(15-25 min.) Decision Case 2


Aylmer Metal Products looks like the better investment because:

1. Operations provide far more cash for Aylmer Metal Products

than for Tillsonburg Fabricating. Operations should be the

main source of cash for a healthy company.

2. Aylmer Metal Products is investing more in long-term capital

assets than Tillsonburg Fabricating is. Aylmer Metal

Products is laying a more solid foundation in revenue-

producing assets than Tillsonburg Fabricating is.

3. Tillsonburg Fabricating’s main source of cash is the sale of

capital assets. This trend cannot continue for long without

hurting the company’s ability to produce revenue.

4. Aylmer Metal Products is raising more cash by selling shares

than Tillsonburg Fabricating is. This gives Aylmer Metal

Products more cash to invest in research and development

of new products and other innovations to enhance the

company’s competitiveness. Tillsonburg Fabricating, on the

other hand, is paying off debt. That is not necessarily bad for

Tillsonburg Fabricating, but Aylmer Metal Products appears

to be a step ahead in terms of financing its operations with

owners’ equity and investing the cash in income-producing

assets.

Ethical Issue


Req. 1

Cash flows from operating activities:

WithoutReclassification

WithReclassification

Net income………………….. $ 37,000 $37,000Increase in accounts

receivable…….…………... (80,000 ) — Net cash (used for) provided by operating activities…….. $(43,000) $37,000

Cape Breton Wood Products looks better with the reclassi-fication because net cash flow from operations is positive.

Req. 2

The reclassification would be ethical if Cape Breton Wood

Products expects to collect the receivables beyond the current

operating cycle, or one year if longer. Reclassification would be

unethical if Cape Breton Wood Products expects to collect

within the current period. In that case, the reclassification

would appear to be designed to create a false picture of cash

flow from operations.


Financial Statement Case

(40-50 min.) Financial Statement Case

Req. 1

Indirect method. The cash flow statement begins with net

earnings for the year. Also, Danier does not report collections

from customers, payments to suppliers, and so on, which are

reported under the direct method.

Req. 2 (Amounts in thousands)

a. Collectionsfrom = Net Sales + Decrease in Receivables

customers

$180,177 = $179,997 + ($664 – $484)

b. (Amounts in thousands)

Payments for=

Cost of–

Decrease in–

Decrease ininventory sales Inventory Accounts Payable

$91,643 = $92,098 – ($39,227 – $38,662) + ($10,582 – $10,472)


(continued) Financial Statement Case


Capital Assets – NetBal., June 30, 2001 25,151 Disposal of capital assets 1,720

Amortization 5,069Additions to capital assets 11,377Amortization on disposals of capital assets 1,460

Bal., June 29, 2002 31,199


Net earnings decreased from $12,078 to $10,725. Total assets

increased from $68,438 to $75,695, and shareholders’ equity

increased from $51,292 to $62,522. The company’s debt ratio is

only 0.21, which is very low. Net cash provided by operating

activities was up from $8,089 to $15,283, and operations

provided most of the company’s cash. Finally the company is

investing heavily in capital assets. Except for the drop in net

income, these results look very strong.


Analytical Case

(20-30 min.) Analytical CaseReq. 1

The main source of cash is financing. This is a positive sign

about the company because it indicates that Lion’s Gate has

the confidence of lenders who are willing to continue to finance

the company.

The main use of cash was operations. The major reductions in

cash were from an increase in Investment in Films and

Television Programs (Lion’s Gate’s inventory) of $317 million.

There was an add-back of $52 million described as Write-down

and Equity Interest in Investments Subject to Significant

Influence, a non-cash expense and Amortization of Films and

Television Programs, also a non-cash expense.

Req. 2

Lion’s Gate invested $316,591 thousand in films and television

programs, one of the company’s core businesses. This

expenditure indicates that the company is growing.

Note: The students may wish to go to the Internet to see the

sorts of films and programs in which Lion’s Gate is investing.

Many will likely be familiar to them.


(continued) Analytical Case

Req. 3

(in thousands of $)

Investment in Films and Television ProgramsBal., March 31, 2001 224,115 Amortization 247,618New investment 316,591 Adjustment 4,778Bal., March 31, 2002 288,310

Req. 4

The principal source of funding for the years ended March 31,

2002 and 2001, was Lion’s Gate’s bankers. This suggests that

the bankers believe in Lion’s Gate’s future.

Note: It might be interesting to ask the students if they believe

the bankers are more or less discriminating than

shareholders.


Group Project 1

Answers will vary with the companies chosen by students.

Group Project 2

Answers will vary with the company chosen by students.


Chapter 12 Excel Application ProblemMud Lake Trading Co. Ltd.Cash Flow Statement - Operating ActivitiesFor the Month Ended March 31

Cash flows from operating activities:Net income $69,000

Adjustments to reconcile net income to net cashprovided by operating activities:

Amortization $3,000Decrease in accounts receivable $4,000Increase in inventory -$2,000Increase in accounts payable $5,000Decrease in accrued liabilities -$3,000 $7,000

Net cash provided by operating activities $76,000


Excel Application Problem

Chapter 12

Solution

1. Mud Lake Trading Co. Ltd. does not have any difficulty collecting its accounts receivable, since the company decreased the balance in its receivables account by $4,000. This means it not only collected an amount equal to sales but also collected the $4,000 decrease in accounts receivable as well.

2. Mud Lake Trading Co. Ltd. has a small increase in its inventory balance ($2,000), but, given the size of its purchases and cost of sales, this amount does not send any warning signals that inventory has built up.

3. There are several decisions for which net cash provided by operating activities is useful. First, the result can be used to predict future cash balances and net income. This may help investors determine potential dividend payments. Second, the information can be used to answer questions about stock price changes.


ch 12

Business

mud lake trading

financial statement casereq

cash flow standpoint

aylmer metal products

00net cash provided

cash flow statement

cash flow statementfor

evaluate management decisions