Chapter 10

The Statement of Cash Flow

learning outcomes
1 Classify operating, investing and financing 4 Explain the concept of free cash flow and its
activities importance for potential investors
2 Prepare a cash flow statement using the 5 Discuss ethics and control issues related to
indirect method cash flow
3 Calculate book value and cash received for Appendix
selling non-current assets 6 Prepare a cash flow statement using the
direct method

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Assessment Questions
AS-1 ( 1 )
Is the cash flow statement an optional statement? Explain.

The cash flow statement is not optional. It is required by both ASPE and IFRS.

AS-2 ( 1 )
Identify the three ways a business can generate and use cash.

A business can generate and use cash through operating, investing and financing activities.

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AS-3 ( 1 )
What does cash flow from operating activities represent?
Cash flow from operating activities represents cash movement within a business based on
day-to-day activities.

AS-4 ( 1 )
What does cash flow from investing activities represent?
Cash flow from investing activities represents cash changes based on the purchase or sale of
long-term assets.

AS-5 ( 1 )
What does cash flow from financing activities represent?
Cash flow from financing activities represents cash received from investors and lenders to
help to run or finance the business and cash paid back to the investors and lenders (principal
repayment).

AS-6 ( 2 )
Which financial statements are required to prepare a cash flow statement?
The current year’s income statement and a comparative balance sheet with the current year
and the previous year’s balances are needed to prepare a cash flow statement.

AS-7 ( 2 )
Which items appear in the cash flow from operating activities section of the cash flow
statement using the indirect method?
Net income, non-cash items in the income statement such as depreciation and gains or losses
on the disposal of equipment, changes in current assets and changes in current liabilities are all
reported in the cash flow from operating activities section.

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AS-8 ( 2 )
Which items appear in the cash flow from investing activities section of the cash flow
statement?
Buying or selling property, plant and equipment is recorded in the cash flow from investing
activities section.

AS-9 ( 2 )
Which items appear in the cash flow from financing activities section of the cash flow
statement?
Changes in financing debt, changes in contributed capital (common shares) and dividends
are reported in the cash flow from financing activities section.

AS-10 ( 3 )
What does a gain on the sale of equipment indicate?
A gain on the sale of equipment indicates that equipment was sold for more than the book value.

AS-11 ( 2 )
How is a gain on the sale of equipment shown on the cash flow statement using the indirect
method?
A gain on the sale of equipment is subtracted from net income in the cash flow from
operating activities section. The proceeds from the sale of equipment (including the gain) will
be reported in the investing activities section.

AS-12 ( 4 )

Define free cash flow.

Free cash flow is the amount of cash remaining after a business has covered its operating

activities and capital expenditures.

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AS-13 ( 4 )

Why would an investor or creditor want to see a company show a positive free cash flow
amount?

A positive free cash flow indicates that the company has cash available to pay for financing.

This can be either to pay back debt or to pay dividends to shareholders.

AS-14 ( 5 )

What are some actions a company may be tempted to take to unethically and artificially
improve its cash flow statement presentation?

In an attempt to artificially improve its cash flow statement presentation, a company may

delay paying its accounts payable, finance its payables or shorten its collection period on

receivables.

AS-15 ( 6 )

What is the difference in the presentation of the cash flow statement between the indirect
and the direct methods?

The operating activities section is presented differently under the two methods. The indirect

method starts with net income and adjusts that number based on changes in current assets

and liabilities. The direct method presents cash in relation to every cash item on the income

statement.

AS-16 ( 6 )

Using the direct method, how can we calculate the amount of cash spent on inventory?

Using inventory and cost of goods sold, we must first calculate the total inventory purchases

for the period. This is Ending Inventory – Beginning Inventory + COGS.

Next, we use the inventory purchases and accounts payable to determine the amount of cash

spent on inventory. This is Beginning Accounts Payable + Purchases – Ending Accounts Payable.

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Application Questions Group A

AP-1A ( 1 )

For each item listed, indicate how the item will impact cash flow (increase, decrease or no
change) using the indirect method.

Item Effect on Cash

Net Income Increase
Increase in Accounts Payable Increase
Decrease in Accounts Receivable Increase
Purchase of Property, Plant and Equipment Decrease
Payment of Bank Loan Decrease
Increase in Inventory Decrease
Pay Dividends Decrease
Increase in Loans Increase
Increase in Prepaid Insurance Decrease

AP-2A ( 1 )

Indicate the section of the cash flow statement where each item would be located (operating,
investing or financing activities) using the indirect method.

Item Section
Change in Accounts Payable Operating
Change in Inventory Operating
Change in Property, Plant and Equipment Investing
Change in Non-Current Portion of Bank Loan Financing
Change in Current Portion of Bank Loan Financing
Change in Prepaid Rent Operating
Change in Accounts Receivable Operating
Change in Common Shares Financing
Gain on Sale of Property, Plant and Equipment Operating

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AP-3A ( 2 )

The net income for the year ended on December 31, 2016 for RC Corporation was $120,000.
Additional data for the year is provided below.

Purchase of property, plant and equipment $280,000

Depreciation of property, plant and equipment 14,000
Dividends declared 50,000
Decrease in accounts receivable 29,000
Loss on sale of equipment 13,000

Calculate the change in cash from operating activities using the indirect method.

Net income $120,000

Add: Depreciation Expense 14,000

Decrease in accounts receivable 29,000

Loss on sale of equipment 1 3,000

Increase in cash from operating activities $176,000

AP-4A ( 2 )

Ashe Inc. reported the following data for 2016.

Income Statement
Net Income $30,000
Depreciation Expense 4,000

Balance Sheet
Increase in Accounts Receivable 9,000
Decrease in Accounts Payable 7,000

Calculate the increase (decrease) in cash from operating activities.

Net Income $30,000

Add: Depreciation Expense 4,000

Deduct: Increase in accounts receivable (9,000)

Decrease in accounts payable (7,000)

Increase in cash from operating activities $18,000

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AP-5A ( 2 )

The net income for the year ended on August 31, 2016 for Wonderstruck Corporation was
$147,000. Additional data for the year is provided below.

Purchase of property, plant and equipment $257,000

Depreciation of equipment $11,000
Dividends paid $42,000
Net increase in accounts receivable $22,000
Loss on sale of property $17,000

Calculate the increase or decrease in cash from operating activities.

Net Income $147,000

Add: Depreciation Expense 11,000

Add: Loss on sale of property 17,000

Increase in accounts receivable (22,000)

Increase in cash from operating activities $153,000

AP-6A ( 2 )

Mellon Incorporated had a net income for 2016 of $320,000. Included on the income
statement was a loss on sale of equipment for $5,000, a gain on the sale of investments for
$15,000, depreciation of $8,000 and interest of $3,000. Calculate the increase or decrease in
cash from operating activities using the indirect method.

Net Income $320,000

Add: Depreciation Expense 8,000

Add: Loss on sale of equipment 5,000

Less: Gain on sale of investment (15,000)

Increase in cash $318,000

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Analysis

Does net income, after being adjusted by the non-cash items on the income statement,
represent the actual amount of cash received through operating activities by the company
during the year?

No. The actual amount of cash received through operations will be different from net income

due to changes in current assets and current liabilities. The company must pay for inventory,

pay bills and will receive cash from customers who bought on credit.

AP-7A ( 2 )

The following information pertains to Tree Company for the fiscal year 2016.

Purchase of plant and equipment $35,000

Purchase of long‐term investments $19,000
Increase in accounts receivable $7,100
Repayment of bonds payable $12,000
Depreciation of plant and equipment $10,000

Calculate the increase or decrease in cash from investing activities.

Purchase of plant and equipment ($35,000)

Purchase of long-term investments (19,000)

Decrease in cash from investing activities ($54,000)

AP-8A ( 2 )

The Marking Company’s cash account decreased by $20,000. Cash increase from operating
activities was $17,000. Net cash decrease from investing activities was $22,000. Calculate the
cash increase (or decrease) from financing activities.

Decrease in cash ($20,000)

Increase in cash from operating activities (17,000)

Decrease in cash from investing activities 22,000

Decrease in cash from financing activities ($15,000)

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AP-9A ( 2 )

The Grading Company’s cash account decreased by $14,000. Cash increase from operating
activities was $21,000. Net cash decrease from investing activities was $22,000. Based on this
information, calculate the cash increase (or decrease) from financing activities.

The net decrease in cash from financing activities is equal to $13,000, as shown in the
calculation below.

Net increase in cash from operating activities $21,000

Net decrease in cash from investing activities (22,000)

Net decrease in cash from financing activities (13,000)

Net decrease in cash ($14,000)

AP-10A ( 3 )

Allen Woods has just started working as an accountant for Stickla Supplies. Unfortunately,
the company had no proper accounting system in place and Allen had to start everything
from scratch. He has been provided with some items from the company’s balance sheet and
income statement for the end of 2016.

Going through the company’s purchase receipts and some other financial documents, Allen
realized that Stickla purchased $2,500 of equipment in 2016 and the balance of property,
plant and equipment and accumulated depreciation at the end of 2015 was $11,000 and
$2,900 respectively. Accounts payable balance was not affected by any investment activities
during 2016.

Accounts 2016
Property, Plant and Equipment $10,000
Accumulated Depreciation $3,600
Accounts Payable $4,000
Current Portion of Bank Loan $15,000
Retained Earnings $5,400
Depreciation Expense $1,200
Loss on Sale of Equipment $300

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Based on the information provided, help Allen fill the missing information in the table below.

Which section of the Cash Flow Statement is affected? Investing

How much PPE was sold in 2016? $3,500
What was the accumulated depreciation for the PPE sold? $500
What was the book value of the PPE sold? $3,000
How much cash was received from the sale? $2,700
How much cash was paid out for the purchase? $2,500
What was the net change in cash resulting from PPE? $200 (Increase)

AP-11A ( 2 )

Balance sheet accounts for Planet Inc. contain the following amounts at the end of 2015 and 2016.

Planet Inc.
Balance Sheet
As at December 31

2016 2015
Assets
Current Assets
Cash $7,500 $5,000
Accounts Receivable 21,000 15,000
Prepaid Expenses 2,500 2,000
Inventory 37,000 28,000
Total Current Assets 68,000 50,000
Long-Term Assets
Equipment 196,000 175,000
Less: Accumulated Depreciation (41,000) (32,000)
Total Long-Term Assets 155,000 143,000
Total Assets $223,000 $193,000

Liabilities
Current Liabilities $33,000 $33,000
Non-Current Liabilities 30,000 35,000
Total Liabilities 63,000 68,000

Shareholders' Equity
Common Shares 75,000 60,000
Retained Earnings 85,000 65,000
Total Shareholders' Equity 160,000 125,000

Total Liabilities and Equity $223,000 $193,000

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Assume current liabilities include only items from operations (e.g. accounts payable, taxes
payable). Non-current liabilities include items from financing (e.g. bonds and other non-
current liabilities).

Note that there was no sale of equipment throughout the year.

Prepare the cash flow statement for 2016 using the indirect method. Assume no dividends
were declared or paid in 2016.

Planet Inc.
Cash Flow Statement
For the Year Ended December 31, 2016

Cash Flow from Operating Activities

Net Income $20,000
Add: Depreciation Expense 9,000
Change in Current Assets and Current Liabilities
Increase in Accounts Receivable (6,000)
Increase in Prepaid Expenses (500)
Increase in Inventory (9,000)
Change in Cash due to Operating Activities $13,500

Cash Flow from Investing Activities

Purchase of Equipment (21,000)
Change in Cash due to Investing Activities (21,000)

Cash Flow from Financing Activities

Issuance of Common Shares 15,000
Repayment of Non-Current Liabilities (5,000)
Change in Cash due to Financing Activities 10,000

Net Increase (Decrease) in Cash 2,500

Cash at the Beginning of the Year 5,000
Cash at the End of the Year $7,500

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AP-12A ( 2 6 )

Breakwater Boats sells boating accessories. At the end of 2016, the income statement and
comparative balance sheet were prepared as shown below.

Breakwater Boats
Balance Sheet
As at December 31
2016 2015
Assets
Current Assets
Cash $73,870 $62,500
Accounts Receivable 94,800 87,500
Inventory 327,000 245,700
Prepaid Expenses 14,500 14,500
Total Current Assets 510,170 410,200
Non-Current Assets
Property, Plant and Equipment(1)
Land 0 44,000
Equipment 340,000 340,000
Less: Accumulated Depreciation (26,200) (24,500)
Total Non-Current Assets 313,800 359,500
Total Assets $823,970 $769,700

Liabilities and Equity

Liabilities
Current Liabilities
Accounts Payable $52,600 $45,700
Current Portion of Bank Loan 8,500 8,500
Total Current Liabilities 61,100 54,200
Non-Current Portion of Bank Loan 50,100 58,600
Total Liabilities 111,200 112,800

Shareholders' Equity
Common Shares 150,000 150,000
Retained Earnings 562,770 506,900
Total Shareholders' Equity 712,770 656,900
Total Liabilities and Equity $823,970 $769,700

1
Property, Plant & Equipment
During 2016, land was sold for a gain of $6,000. There was no purchase of equipment
throughout the year.

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Breakwater Boats
Income Statement
For the Year Ended December 31, 2016

Sales $562,000
Cost of Goods Sold 365,300
Gross Profit 196,700
Operating Expenses
Depreciation Expense 1,700
Other Operating Expenses 61,200
Total Operating Expenses 62,900
Operating Income 133,800
Other Revenue
Gain on Sale of Land 6,000
Operating Income before Tax 139,800
Income Tax Expense 48,930
Net Income $90,870

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Required

a) Create the cash flow statement using the indirect method.

Breakwater Boats
Cash Flow Statement
For the Year Ended December 31, 2016

Cash Flow from Operating Activities

Net Income $90,870
Add: Depreciation Expense 1,700
Deduct: Gain on Sale of Land (6,000)
Changes in Current Assets and Current Liabilities
Increase in Accounts Receivable (7,300)
Increase in Inventory (81,300)
Increase in Accounts Payable 6,900
Change in Cash due to Operating Activities $4,870

Cash Flow from Investing Activities

Sale of Land 50,000
Change in Cash due to Investing Activities 50,000

Cash Flow from Financing Activities

Payment of Bank Loan (8,500)
Payment of Cash Dividend (35,000)
Change in Cash due to Financing Activities (43,500)

Net Increase (Decrease) in Cash 11,370

Cash at the Beginning of the Year 62,500
Cash at the End of the Year $73,870

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Breakwater Boats
Cash Flow Statement
For the Year Ended December 31, 2016

Cash Flow from Operating Activities

Cash Receipts
Cash Received from Customers $554,700
Cash Payments
Payments for Inventory $439,700
Payments for Other Operating Expenses 61,200
Payments for Income Taxes 48,930
Total Cash Payments 549,830
Change in Cash due to Operating Activities 4,870

Cash Flow from Investing Activities

Sale of Land 50,000
Change in Cash due to Investing Activities 50,000

Cash Flow from Financing Activities

Payment of Bank Loan (8,500)
Payment of Cash Dividend (35,000)
Change in Cash due to Financing Activities (43,500)

Net Increase (Decrease) in Cash 11,370

Cash at the Beginning of the Year 62,500
Cash at the End of the Year $73,870

Analysis

Explain the main activities that caused Breakwater Boats’ net cash flow to increase or
decrease.

Cash flow from operations explains less than half of the increase. Some land was sold, which

was enough to repay a portion of the bank loan and pay a rather large dividend.

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AP-13A ( 2 3 6 )

The balance sheet and income statement for Zooyo Appliance are presented below.
Zooyo Appliance
Balance Sheet
As at December 31
2016 2015
Assets
Cash $37,580 $15,000
Accounts Receivable 17,000 16,000
Inventory 21,000 27,000
Total Current Assets 75,580 58,000
Property, Plant & Equipment
Land 110,000 80,000
Equipment 130,000 160,000
Less: Accumulated Depreciation (26,500) (30,000)
Total Assets $289,080 $268,000

Liabilities
Accounts Payable $29,000 $35,000
Current Portion of Bank Loan 18,000 18,000
Current Liabilities 47,000 53,000
Non-Current Portion of Bank Loan 80,000 65,000
Total Liabilities 127,000 118,000

Shareholders’ Equity
Common Shares 75,000 70,000
Retained Earnings 87,080 80,000
Shareholders’ Equity 162,080 150,000

Liabilities and Shareholders’ Equity $289,080 $268,000

Zooyo Appliance
Income Statement
For the Year Ended December 31, 2016
Sales $142,000
Cost of Goods Sold 92,000
Gross Profit 50,000
Expenses
Depreciation Expense 4,500
Other Operating Expenses 17,900
Total Expenses 22,400
Operating Income 27,600
Other Expenses
Loss on Sale of Equipment (3,200)
Operating Income before Tax 24,400
Income Tax Expense 7,320
Net Income (Loss) $17,080

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Notes: There was no sale of land or purchase of equipment during the year. The company
declared and paid dividends during the year.

Required

a) Prepare the cash flow statement for December 31, 2016 using the indirect method.

Zooyo Appliance
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $17,080
Add: Depreciation Expense 4,500
Add: Loss on Sale of Equipment 3,200
Changes in Assets and Liabilities
Increase in Accounts Receivable (1,000)
Decrease in Inventory 6,000
Decrease in Accounts Payable (6,000)
Change in Cash due to Operating Activities $23,780

Cash Flow from Investing Activities

Sale of Equipment 18,800
Purchase of Land (30,000)
Change in Cash due to Investing Activities (11,200)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 5,000
Receipt of Bank Loan 15,000
Payment of Dividends (10,000)
Change in Cash due to Financing Activities 10,000

Total Change in Cash 22,580

Opening Cash Balance 15,000
Cash at the End of the Year $37,580

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Zooyo Appliance
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $141,000
Cash Payments
Payments for Inventory $92,000
Payments for Other Operating Expenses 17,900
Payments for Income Taxes 7,320
Total Cash Payments 117,220
Change in Cash due to Operating Activities 23,780

Cash Flow from Investing Activities

Sale of Equipment 18,800
Purchase of Land (30,000)
Change in Cash due to Investing Activities (11,200)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 5,000
Receipt of Bank Loan 15,000
Payment of Dividends (10,000)
Change in Cash due to Financing Activities 10,000

Net Increase (Decrease) in Cash 22,580

Cash at the Beginning of the Year 15,000
Cash at the End of the Year $37,580

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AP-14A ( 2 3 6 )

The balance sheet and income statement for Demgo Inc. are presented below.
Demgo Inc.
Balance Sheet
As at December 31
2016 2015
Assets
Cash $20,140 $21,000
Accounts Receivable 17,000 19,000
Inventory 21,000 15,000
Total Current Assets 58,140 55,000
Property, Plant & Equipment
Land 110,000 60,000
Machinery 100,000 140,000
Less: Accumulated Depreciation (40,500) (60,000)
Total Assets $227,640 $195,000

Liabilities
Accounts Payable $29,000 $25,000
Current Portion of Bank Loan 22,000 22,000
Current Liabilities 51,000 47,000
Non-Current Portion of Bank Loan 70,000 65,000
Total Liabilities 121,000 112,000

Shareholders’ Equity
Common Shares 85,000 70,000
Retained Earnings 21,640 13,000
Shareholders’ Equity 106,640 83,000

Liabilities and Shareholders’ Equity $227,640 $195,000

Demgo Inc.
Income Statement
For the Year Ended December 31, 2016
Sales $130,000
Cost of Goods Sold 72,000
Gross Profit 58,000
Expenses
Depreciation Expense 20,500
Other Operating Expenses 14,000
Total Expenses 34,500
Operating Income 23,500
Other Revenue
Gain on Sale of Machinery 1,700
Operating Income before Tax 25,200
Income Tax Expense 7,560
Net Income (Loss) $17,640

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Notes: There was no sale of land.

Machinery was purchased for an amount of $80,000.
The company declared and paid dividends during the year.

Required

a) Prepare the cash flow statement for December 31, 2016 using the indirect method.

Demgo Inc.
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $17,640
Add: Depreciation Expense 20,500
Less: Gain on Sale of Machinery (1,700)
Changes in Assets and Liabilities
Decrease in Accounts Receivable 2,000
Increase in Inventory (6,000)
Increase in Accounts Payable 4,000
Change in Cash due to Operating Activities $36,440

Cash Flow from Investing Activities

Sale of Machinery 81,700
Purchase of Machinery (80,000)
Purchase of Land (50,000)
Change in Cash due to Investing Activities (48,300)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 15,000
Receipt of Bank Loan 5,000
Payment of Dividends (9,000)
Change in Cash due to Financing Activities 11,000

Total Change in Cash (860)

Opening Cash Balance 21,000
Cash at the End of the Year $20,140

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Demgo Inc.
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $132,000
Cash Payments
Payments for Inventory $74,000
Payments for Other Operating Expenses 14,000
Payments for Income Taxes 7,560
Total Cash Payments 95,560
Change in Cash due to Operating Activities 36,440

Cash Flow from Investing Activities

Sale of Machinery 81,700
Purchase of Machinery (80,000)
Purchase of Land (50,000)
Change in Cash due to Investing Activities (48,300)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 15,000
Receipt of Bank Loan 5,000
Payment of Dividends (9,000)
Change in Cash due to Financing Activities 11,000

Net Increase (Decrease) in Cash (860)

Cash at the Beginning of the Year 21,000
Cash at the End of the Year $20,140

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AP-15A ( 2 3 6 )

The balance sheet and income statement for Vispara Company are presented below.

Vispara Company
Balance Sheet
As at December 31
2016 2015
Assets
Cash $133,400 $75,000
Accounts Receivable 47,000 26,000
Inventory 72,000 42,000
Total Current Assets 252,400 143,000
Property, Plant & Equipment
Land 90,000 100,000
Equipment 90,000 130,000
Less: Accumulated Depreciation (45,000) (60,000)
Total Assets $387,400 $313,000

Liabilities
Accounts Payable $35,000 $65,000
Current Portion of Bank Loan 40,000 40,000
Current Liabilities 75,000 105,000
Non-Current Portion of Bank Loan 140,000 95,000
Total Liabilities 215,000 200,000

Shareholders’ Equity
Common Shares 85,000 75,000
Retained Earnings 87,400 38,000
Shareholders’ Equity 172,400 113,000

Liabilities and Shareholders’ Equity $387,400 $313,000

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Vispara Company
Income Statement
For the Year Ended December 31, 2016
Sales $380,000
Cost of Goods Sold 247,000
Gross Profit 133,000
Expenses
Depreciation Expense 5,000
Other Operating Expenses 29,600
Total Expenses 34,600
Operating Income 98,400
Other Revenue (Expenses)
Loss on Sale of Equipment (5,400)
Gain on Sale of Land 5,000
Operating Income before Tax 98,000
Income Tax Expense 29,400
Net Income (Loss) $68,600

Notes
The company paid cash dividends during 2016.
The company did not make a bank loan payment during 2016.
The company did not purchase any equipment during 2016.
The company did not purchase any land during 2016.

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Required

a) Prepare the cash flow statement for December 31, 2016 using the indirect method.

Vispara Company
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $68,600
Add: Depreciation Expense 5,000
Add: Loss on Sale of Equipment 5,400
Less: Gain on Sale of Land (5,000)
Changes in Assets and Liabilities
Increase in Accounts Receivable (21,000)
Increase in Inventory (30,000)
Decrease in Accounts Payable (30,000)
Change in Cash due to Operating Activities (7,000)

Cash Flow from Investing Activities

Sale of Equipment 14,600
Sale of Land 15,000
Change in Cash due to Investing Activities 29,600

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 10,000
Receipt of Bank Loan 45,000
Payment of Dividends (19,200)
Change in Cash due to Financing Activities 35,800

Total Change in Cash 58,400

Opening Cash Balance 75,000
Cash at the End of the Year $133,400

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Vispara Company
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $359,000
Cash Payments
Payments for Inventory $307,000
Payments for Other Operating Expenses 29,600
Payments for Income Taxes 29,400
Total Cash Payments 366,000
Change in Cash due to Operating Activities (7,000)

Cash Flow from Investing Activities

Sale of Equipment 14,600
Sale of Land 15,000
Change in Cash due to Investing Activities 29,600

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 10,000
Receipt of Bank Loan 45,000
Payment of Dividends (19,200)
Change in Cash due to Financing Activities 35,800

Net Increase (Decrease) in Cash 58,400

Cash at the Beginning of the Year 75,000
Cash at the End of the Year $133,400

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Analysis

a) Are there any concerns based on the cash flow statement?

Although cash increased a little, cash flow from operations showed a decrease. This means

that day-to-day operations is not generating enough cash to remain self sufficient. The

company is selling assets and using bank loans to fund daily operations, which is not a sign of

a healthy business.

b) Are there any concerns in the cash flow from operating activities section?

Accounts receivable and inventory both increased dramatically. This can indicate problems

with collecting from customers and a possible buildup of inventory.

Accounts payable decreased dramatically. The company may have trouble getting credit from

suppliers, or is not taking advantage of longer payment terms.

AP-16A ( 2 )

2016 has been a great year for Exany Company, which managed to earn $56,000 of net
income. Therefore, the board decided to declare and pay dividends by year-end.

Based on the following information, answer the following questions.

Accounts 2016 2015

Retained Earnings $91,000 $67,000
Common Shares $120,000 $110,000

a) How much dividends were paid in 2016? $32,000

b) Which section of the cash flow statement is affected? Financing
c) A
 ssuming only the information given impacted the section of the ($22,000)
cash flow statement indicated in b), what is the net change in cash
for this section?

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AP-17A ( 1 4 )

Cleancarpet Vacuums sells vacuum accessories. At the end of 2016, the cash flow statement
below was prepared.

Cleancarpet Vacuums
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Net Income $83,800
Add: Depreciation Expense 4,760
Deduct: Gain on Sale of Equipment (7,200)
Change in Current Assets and Current Liabilities
Decrease in Accounts Receivable 2,210
Increase in Inventory (46,800)
Increase in Accounts Payable 6,000
Change in Cash due to Operating Activities $42,770

Cash Flow from Investing Activities

Sale of Equipment 20,300
Change in Cash due to Investing Activities 20,300

Cash Flow from Financing Activities

Payment of Bank Loan (19,100)
Payment of Cash Dividend (23,700)
Change in Cash due to Financing Activities (42,800)

Net Increase (Decrease) in Cash 20,270

Cash at the Beginning of the Year 68,300
Cash at the End of the Year $88,570

Required

a) How much of the company’s cash is from day-to-day operations?

The company generated $42,770 from operating activities.

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b) Why does the company have positive cash flow from investing activities? Would such
positive cash flow from investing activities be sustainable?

The company sold equipment to generate positive cash flow from investing activities. The

decision to sell the equipment might have been made to cover the cash shortfall due

to the large cash outflow from financing activities. The increase in cash of $42,770 from

operating activities was not enough to cover the decrease in cash of $42,800 due to

financing activities. The $20,300 proceed from the sale of equipment helps to cover the

cash deficit. However, selling assets to generate cash would not be sustainable.

c) Calculate Cleancarpet Vacuums’ free cash flow in 2016.

Free Cash Flow = $42,770 + $20,300 = $63,070

Analysis

What could Cleancarpet Vacuums do if selling the equipment were not an action the
company could take, yet it still wanted to have a positive net cash flow at the end of the year?

If selling the equipment were not an action the company could take, then Cleancarpet

Vacuums should consider reducing the amount of cash dividends or not paying them out at

all.

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Application Questions Group B

AP-1B ( 1 )

Indicate which section each item in the table below would appear in a cash flow statement
using the indirect method. Also indicate whether the item would increase or decrease cash
using the indirect method.

Item Section Effect on Cash

Loss on sale of equipment Operating Increase
Decrease in accounts payable Operating Decrease
Increase in inventory Operating Decrease
Depreciation expense Operating Increase
Gain on sale of investments Operating Decrease
Dividends paid Financing Decrease
Issued shares in the company Financing Increase
Net income Operating Increase
Decrease in bank loan Financing Decrease
Sold equipment Investing Increase
Decrease accounts receivable Operating Increase

AP-2B ( 2 )

Bonus Company had the following amounts in its cash flow statement for the year ended
December 31, 2016.

Net decrease in cash from operating activities $100,000

Net decrease in cash from investing activities 400,000
Net increase in cash from financing activities 350,000
Cash balance, January 1, 2016 600,000

Calculate the cash balance at December 31, 2016.

Cash balance, January 1, 2016 $600,000

Net decrease in cash from operating activities (100,000)

Net decrease in cash from investing activities (400,000)

Net increase in cash from financing activities 350,000

$450,000

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AP-3B ( 2 )

The net income for the year ended December 31, 2016 for Kersley Company was $73,000.
Additional information is shown below.

Interest expense on borrowing $8,000

Increase in accounts receivable 10,000
Decrease in prepaid expense 3,000
Decrease in accounts payable 4,000
Dividends paid to common shareholders 14,000

Calculate the increase (decrease) in cash from operating activities.

Net income $73,000

Increase in accounts receivable (10,000)

Decrease in prepaid expense 3,000

Decrease in accounts payable (4,000)

Net increase in cash from operating activities $62,000

AP-4B ( 2 )

Use the following information to prepare the operating activities section of a cash flow
statement for MNO Co. for 2016 using the indirect method.

Net income $140,000

Increase in inventory 30,000
Increase in accounts payable 20,000
Depreciation expense 55,000
Increase in accounts receivable 18,000
Gain on sale of land 25,000

Net income $140,000

Increase in inventory (30,000)

Increase in accounts payable 20,000

Depreciation expense 55,000

Increase in accounts receivable (18,000)

Gain on sale of land (25,000)

Net increase in cash provided from operating activities $142,000

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AP-5B ( 2 )

Danes Company had net income for 2016 of $120,000. Included in net income was a
depreciation of $3,000, a gain of the sale of land of $5,000 and income taxes of $30,000. Using
the information given, calculate the increase or decrease in cash from operating activities
using the indirect method.

Net Income $120,000

Add: Depreciation expense 3,000

Less: Gain on sale of land (5,000)

Increase in cash $118,000

Analysis

Why are some items from the income statement added back to net income on the cash flow
statement?

We start with the assumption that net income will become cash. However, some items such as

depreciation and gains or losses on sale of long-term assets are not cash items. Thus, net

income must be adjusted by these values to convert the accrual-based net income to the

cash-based net income in the cash flow statement.

AP-6B ( 2 )

The following information pertains to Bush Company for the fiscal year 2016.

Purchase of plant and equipment $33,000

Sale of long-term investments 12,000
Increase in accounts payable 6,000
Repayment of bonds payable 15,000
Depreciation of plant and equipment 7,000

Calculate the increase (decrease) in cash from investing activities.

Purchase of plant and equipment ($33,000)

Sale of long-term investments 12,000

Net decrease in cash from investing activities ($21,000)

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AP-7B ( 2 )

The following events took place during 2016 at Bernard Company. Based on the information
given, calculate how much cash inflow or outflow there was from investing activities.

Gain on sale of investments $4,000

Sale of investments (including gain) $50,000
Issued company shares $60,000
Paid off a bank loan $30,000
Purchased equipment $70,000

Sale of investments (including gain) $50,000

Purchased equipment (70,000)

Cash inflow (outflow) from investing activities ($20,000)

AP-8B ( 2 )

The following events took place during 2016 to Shaw Company. Based on the information
given, calculate how much cash inflow or outflow there was from financing activities.

Loss on sale of land $10,000

Sale of land (including loss) $110,000
Issued company shares $120,000
Paid off a bank loan $50,000
Paid dividends $30,000
Depreciation Expense $6,000

Issued company shares $120,000

Paid off a bank loan (50,000)

Paid dividends (30,000)

Cash inflow (outflow) from financing activities $40,000

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Analysis

If Shaw Company’s net income during 2016 was $25,000, identify a potential concern from the
cash flows from financing activities section.

Shaw Company paid out more dividends during in 2016 than it earned in net income. This

means the company is not retaining any profits for future growth and may run into financial

difficulties if this practice continues.

AP-9B ( 2 )

The following events took place during 2016 to Robinson Company. Based on the information
given, calculate how much cash inflow or outflow there was from investing activities and
financing activities.

Gain on sale of equipment $2,000

Sale of equipment (including gain) $90,000
Purchase of long-term investments $65,000
Issued company shares $60,000
Received a bank loan $40,000
Paid dividends $20,000
Increase in inventory $24,000

Investing activities include:

Sale of equipment (including gain) $90,000

Purchase long-term investments (65,000)

Cash inflow (outflow) from investing activities $25,000

Financing activities include:

Issued company shares $60,000

Received a bank loan 40,000

Paid dividends (20,000)

Cash inflow (outflow) from financing activities $80,000

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Analysis

Suppose Robinson Company had a net increase in cash of $50,000. Explain why the company
may be in trouble despite having a large increase in cash during the year.

Net Increase in Cash $50,000

Cash Inflow from Investing Activities $25,000

Cash Inflow from Financing Activities $80,000

Cash Inflow from Operating Activities ($55,000)

Robinson Company’s day-to-day operating activities are using up a very large amount of cash

that must be covered by selling investments and increasing financing. A healthy business will

generate positive cash flows from operations that can then be used to purchase assets and

pay down bank loans.

AP-10B ( 3 )

Factsy Inc. is planning to make the best use out of its cash on hand by purchasing some
additional long-term investments. Factsy’s long-term investments are held at cost. In January
2016, Factsy bought additional investments. The company also sold part of its investments
in November 2016 due to a sudden growth in the value of its holdings. December 31 is its
year-end.

Below are the data of Factsy Company.

Accounts 2016 2015

Long-Term Investment $120,000 $110,000
Purchase of Investment $40,000
Gain on Sale of Investment $5,000

Calculate the net change in cash resulting from the long-term investment.

Cash Flow from Investing

Sale of long-term investment (including gain) $35,000

Purchase of long-term investment ($40,000)

Net Change in Cash ($5,000)

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Analysis

Factsy’s bookkeeper believes that the net change in cash from the investing activities must
be a positive number (a cash inflow) as a result of a big gain on the sale of investment. Do you
agree with this comment? Explain.

I do not agree with the comments made by the bookkeeper. Although a gain is a cash inflow,

it does not necessarily result into a positive cash flow in Factsy’s investment section. The net

change in cash resulting from long-term investments is affected by both purchases (cash

outflow) and sales (cash inflow). If cash inflow is greater than cash outflow, the net change

is positive and vice versa. Also note that a positive or negative net change in cash resulting

from long-term investments is not a good or bad sign on its own; in fact, it needs to be

analyzed by looking at a big picture.

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AP-11B ( 2 )

Flax Corporation’s balance sheet accounts as of December 31, 2016 and 2015 are presented below.

Flax Corp.
Balance Sheet
As at December 31

2016 2015
Assets
Current Assets
Cash $460,000 $300,000
Short-Term Investments 600,000 -
Accounts Receivable 1,020,000 1,020,000
Inventory 1,360,000 1,200,000
Total Current Assets 3,440,000 2,520,000
Long-Term Assets
Long-Term Investments 400,000 800,000
Equipment 3,100,000 2,500,000
Less: Accumulated Depreciation (900,000) (600,000)
Total Long-Term Assets 2,600,000 2,700,000
Total Assets $6,040,000 $5,220,000

Liabilities
Current Liabilities $2,300,000 $2,000,000
Non-Current Liabilities 800,000 700,000
Total Liabilities 3,100,000 2,700,000

Shareholders' Equity
Common Shares 1,800,000 1,680,000
Retained Earnings 1,140,000 840,000
Total Shareholders' Equity 2,940,000 2,520,000

Total Liabilities and Equity $6,040,000 $5,220,000

Assume current liabilities include only items from operations (e.g. accounts payable, taxes
payable). Non-current liabilities include items from financing (e.g. bonds and other non-
current liabilities).

Note that there was no sale of equipment throughout the year.

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Prepare the cash flow statement for 2016 using the indirect method. Assume the net income
for 2016 was $300,000.

Flax Corp.
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Net Income $300,000
Add: Depreciation Expense 300,000
Change in Current Assets and Current Liabilities
Increase in Short-Term Investments (600,000)
Increase in Inventory (160,000)
Increase in Current Liabilities 300,000
Change in Cash due to Operating Activities $140,000

Cash Flow from Investing Activities

Purchase of Equipment (600,000)
Sale of Long-Term Investments 400,000
Change in Cash due to Investing Activities (200,000)

Cash Flow from Financing Activities

Common Shares 120,000
Non-Current Liabilities 100,000
Change in Cash due to Financing Activities 220,000

Net Increase (Decrease) in Cash 160,000

Cash at the Beginning of the Year 300,000
Cash at the End of the Year $460,000

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AP-12B ( 2 6 )
Vortex Manufacturing makes and sells integrated circuit boards. At the end of 2016, the
income statement and comparative balance sheet were prepared as shown below.
Vortex Manufacturing
Balance Sheet
As at December 31

2016 2015
Assets
Current Assets
Cash $239,820 $135,640
Accounts Receivable 242,100 265,300
Inventory 503,200 465,300
Prepaid Expenses 26,500 26,500
Total Current Assets 1,011,620 892,740
Non-Current Assets
Property, Plant and Equipment(1)
Land 0 16,000
Equipment 840,400 840,400
Less: Accumulated Depreciation (102,300) (95,600)
Total Non-Current Assets 738,100 760,800
Total Assets $1,749,720 $1,653,540

Liabilities and Equity

Liabilities
Current Liabilities
Accounts Payable $305,600 $324,500
Current Portion of Bank Loan 32,000 23,000
Total Current Liabilities 337,600 347,500
Non-Current Portion of Bank Loan 205,000 185,000
Total Liabilities 542,600 532,500

Shareholders' Equity
Common Shares 290,000 260,000
Retained Earnings 917,120 861,040
Total Shareholders' Equity 1,207,120 1,121,040
Total Liabilities and Equity $1,749,720 $1,653,540

1
Property, Plant & Equipment
During 2016, land was sold for a loss of $5,000. There was no purchase of equipment
throughout the year.
The company did not pay off any amount of the bank loan.

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Vortex Manufacturing
Income Statement
For the Year Ended December 31, 2016

Sales $2,650,000
Cost of Goods Sold 1,722,500
Gross Profit 927,500
Operating Expenses
Depreciation Expense 6,700
Other Operating Expenses 752,600
Total Operating Expenses 759,300
Operating Income 168,200
Other Expenses
Loss on Sale of Land (5,000)
Operating Income before Tax 163,200
Income Tax 57,120
Net Income $106,080

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Required

a) Create the cash flow statement using the indirect method.

Vortex Manufacturing
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Net Income $106,080
Add: Depreciation Expense 6,700
Add: Loss on Sale of Land 5,000
Changes in Current Assets and Current Liabilities
Decrease in Accounts Receivable 23,200
Increase in Inventory (37,900)
Decrease in Accounts Payable (18,900)
Change in Cash due to Operating Activities $84,180

Cash Flow from Investing Activities

Sale of Land 11,000
Change in Cash due to Investing Activites 11,000

Cash Flow from Financing Activiites

Receipt of Bank Loan 29,000
Payment of Cash Dividend (50,000)
Issue of Common Shares 30,000
Change in Cash due to Financing Activities 9,000

Net Increase (Decrease) in Cash 104,180

Cash at the Beginning of the Year 135,640
Cash at the End of the Year $239,820

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Vortex Manufacturing
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $2,673,200
Cash Payments
Payments for Inventory $1,779,300
Payments for Other Operating Expenses 752,600
Payments for Income Taxes 57,120
Total Cash Payments 2,589,020
Change in Cash due to Operating Activities 84,180

Cash Flow from Investing Activities

Sale of Land 11,000
Change in Cash due to Investing Activities 11,000

Cash Flow from Financing Activities

Receipt of Bank Loan 29,000
Payment of Cash Dividend (50,000)
Issue of Common Shares 30,000
Change in Cash due to Financing Activities 9,000

Net Increase (Decrease) in Cash 104,180

Cash at the Beginning of the Year 135,640
Cash at the End of the Year $239,820

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AP-13B ( 2 3 6 )

The balance sheet and income statement for Venus Company are presented below.
Venus Company
Balance Sheet
As at December 31
2016 2015
Assets
Cash $191,410 $94,000
Accounts Receivable 30,000 34,000
Inventory 42,000 50,000
Total Current Assets 263,410 178,000
Property, Plant and Equipment
Land 90,000 100,000
Building 125,000 130,000
Less: Accumulated Depreciation (62,000) (60,000)
Total Assets $416,410 $348,000

Liabilities
Accounts Payable $76,000 $65,000
Current Portion of Bank Loan 45,000 40,000
Current Liabilities 121,000 105,000
Non-Current Portion of Bank Loan 120,000 95,000
Total Liabilities 241,000 200,000

Shareholders’ Equity
Common Shares 85,000 75,000
Retained Earnings 90,410 73,000
Shareholders’ Equity 175,410 148,000

Liabilities and Shareholders’ Equity $416,410 $348,000

Venus Company
Income Statement
For the Year Ended December 31, 2016
Sales $380,000
Cost of Goods Sold 255,000
Gross Profit 125,000
Expenses
Depreciation Expense 42,000
Other Operating Expense 28,500
Total Expenses 70,500
Operating Income 54,500
Other Revenue (Expenses)
Loss on Sale of Building (5,400)
Gain on Sale of Land 3,200
Operating Income before Tax 52,300
Income Tax Expense 15,690
Net Income (Loss) $36,610

Notes: Building and land were purchased for amounts of $115,000,

and $200,000 respectively.
The company declared and paid dividends during the year.
The company did not pay off any amount of the bank loan.

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Required

a) Prepare the cash flow statement for December 31, 2016 using the indirect method.

Venus Company
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $36,610
Add: Depreciation Expense 42,000
Add: Loss on Sale of Building 5,400
Less: Gain on Sale of Land (3,200)
Changes in Assets and Liabilities
Decrease in Accounts Receivable 4,000
Decrease Inventory 8,000
Increase in Accounts Payable 11,000
Change in Cash due to Operating Activites $103,810

Cash Flow from Investing Activities

Sale of Building 74,600
Purchase of Building (115,000)
Sale of Land 213,200
Purchase of Land (200,000)
Change in Cash due to Investing Activities (27,200)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 10,000
Receipt of Bank Loan 30,000
Payment of Dividends (19,200)
Change in Cash due to Financing Activities 20,800

Total Change in Cash 97,410

Opening Cash Balance 94,000
Cash at the End of the Year $191,410

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Venus Company
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $384,000
Cash Payments
Payments for Inventory $236,000
Payments for Other Operating Expenses 28,500
Payments for Income Taxes 15,690
Total Cash Payments 280,190
Change in Cash due to Operating Activities 103,810

Cash Flow from Investing Activities

Sale of Building 74,600
Purchase of Building (115,000)
Sale of Land 213,200
Purchase of Land (200,000)
Change in Cash due to Investing Activities (27,200)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 10,000
Receipt of Bank Loan 30,000
Payment of Dividends (19,200)
Change in Cash due to Financing Activities 20,800

Net Increase (Decrease) in Cash 97,410

Cash at the Beginning of the Year 94,000
Cash at the End of the Year $191,410

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AP-14B ( 2 3 6 )

The balance sheet and income statement for Twely Inc. are presented below.

Twely Inc.
Balance Sheet
As at December 31
2016 2015
Assets
Cash $62,927 $56,000
Accounts Receivable 27,000 23,000
Inventory 24,500 18,000
Total Current Assets 114,427 97,000
Property, Plant and Equipment
Long-Term Investment 42,000 45,000
Land 119,000 100,000
Equipment 89,000 76,000
Less: Accumulated Depreciation (28,200) (24,000)
Total Assets $336,227 $294,000

Liabilities
Accounts Payable $29,000 $25,000
Current Portion of Bank Loan 22,000 22,000
Total Current Liabilities 51,000 47,000
Non-Current Portion of Bank Loan 79,000 65,000
Total Liabilities 130,000 112,000

Shareholders’ Equity
Common Shares 85,000 85,000
Retained Earnings 121,227 97,000
Shareholders’ Equity 206,227 182,000

Liabilities and Shareholders’ Equity $336,227 $294,000

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Twely Inc.
Income Statement
For the Year Ended December 31, 2016
Sales $140,000
Cost of Goods Sale 76,000
Gross Profit 64,000
Expenses
Depreciation Expense 8,200
Other Operating Expenses 14,790
Total Expenses 22,990
Operating Income 41,010
Other Revenue
Gain on Sale of Investment 1,100
Gain on Sale of Equipment 2,500
Operating Income before Tax 44,610
Income Tax Expense 13,383
Net Income (Loss) $31,227

Notes: There was no sale of land.

Equipment and long-term investment were purchased for
amounts of $30,000 and $10,500 respectively.
The long-term investment is held at cost.
The company declared and paid dividends during the year.
The company did not pay off any amount of the bank loan.

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Required

a) Prepare the cash flow statement for December 31, 2016 using the indirect method.

Twely Inc.
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $31,227
Add: Depreciation Expense 8,200
Less: Gain on Sale of Long-Term Investment (1,100)
Less: Gain on Sale of Equipment (2,500)
Changes in Assets and Liabilities
Increase in Accounts Receivable (4,000)
Increase in Inventory (6,500)
Increase in Accounts Payable 4,000
Change in Cash due to Operating Activities $29,327

Cash Flow from Investing Activities

Sale of Equipment 15,500
Sale of Long-Term Investment 14,600
Purchase of Equipment (30,000)
Purchase of Long-Term Investment (10,500)
Purchase of Land (19,000)
Change in Cash due to Investing Activities (29,400)

Cash Flow from Financing Activities

Receipt of Bank Loan 14,000
Payment of Dividends (7,000)
Change in Cash due to Financing Activities 7,000

Total Change in Cash 6,927

Opening Cash Balance 56,000
Cash at the End of the Year $62,927

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Twely Inc.
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $136,000
Cash Payments
Payments for Inventory $78,500
Payments for Other Operating Expenses 14,790
Payments for Income Taxes 13,383
Total Cash Payments 106,673
Change in Cash due to Operating Activities 29,327

Cash Flow from Investing Activities

Sale of Equipment 15,500
Sale of Long-Term Investment 14,600
Purchase of Equipment (30,000)
Purchase of Long-Term Investment (10,500)
Purchase of Land (19,000)
Change in Cash due to Investing Activities (29,400)

Cash Flow from Financing Activities

Receipt of Bank Loan 14,000
Payment of Dividends (7,000)
Change in Cash due to Financing Activities 7,000

Net Increase (Decrease) in Cash 6,927

Cash at the Beginning of the Year 56,000
Cash at the End of the Year $62,927

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AP-15B ( 2 3 6 )

The balance sheet and income statement for Joe’s Fish Hut are presented below.

Joe's Fish Hut

Balance Sheet
As at December 31, 2016
2016 2015
Assets
Cash $2,100 $23,000
Accounts Receivable 21,000 12,000
Inventory 21,000 25,000
Total Current Assets 44,100 60,000
Property, Plant and Equipment
Land 100,000 100,000
Equipment 170,000 150,000
Less: Accumulated Depreciation (28,600) (25,000)
Total Assets $285,500 $285,000

Liabilities
Accounts Payable $23,000 $33,000
Current Portion of Bank Loan 12,000 12,000
Current Liabilities 35,000 45,000
Non-Current Portion of Bank Loan 48,000 60,000
Total Liabilities 83,000 105,000

Shareholders' Equity
Common Shares 20,000 15,000
Retained Earnings 182,500 165,000
Shareholders' Equity 202,500 202,500

Liabilities and Shareholders' Equity $285,500 $285,000

Joe's Fish Hut

Income Statement
For the Year Ended December 31, 2016
Sales $161,000
Cost of Goods Sold 112,700
Gross Profit 48,300
Operating Expenses
Depreciation Expense 3,600
Other Operating Expense 19,700
Total Operating Expenses 23,300
Operating Income before Tax 25,000
Income Tax Expense 7,500
Net Income (Loss) $17,500

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Note

The company did not sell any equipment during the year. The company did not receive any
extra amount of the bank loan in 2016.

Required

a) Prepare the cash flow statement for December 31, 2016 using the indirect method.

Joe’s Fish Hut

Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $17,500
Add: Depreciation Expense 3,600
Changes in Assets and Liabilities
Accounts Receivable (9,000)
Inventory 4,000
Accounts Payable (10,000)
Change in Cash due to Operating Activities $6,100

Cash Flow from Investing Activites

Purchase of Equipment (20,000)
Change in Cash due to Investing Activities (20,000)

Cash Flow from Financing Activites

Issued Shares 5,000
Bank Payment (12,000)
Change in Cash due to Financing Activites (7,000)

Total Change in Cash (20,900)

Cash at the Beginning of the Year 23,000
Cash at the End of the Year $2,100

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b) Create the cash flow statement using the direct method. Assume accounts payable is only
for the purchase of inventory.

Joe’s Fish Hut

Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Cash Receipts
Cash Received from Customers $152,000
Cash Payments
Payments for Inventory $118,700
Payments for Other Operating Expenses 19,700
Payments for Income Taxes 7,500
Total Cash Payments 145,900
Change in Cash due to Operating Activities 6,100

Cash Flow from Investing Activities

Purchase of Equipment (20,000)
Change in Cash due to Investing Activities (20,000)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 5,000
Payment of Bank Loan (12,000)
Change in Cash due to Financing Activities (7,000)

Net Increase (Decrease) in Cash (20,900)

Cash at the Beginning of the Year 23,000
Cash at the End of the Year $2,100

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Analysis

a) Are there any concerns based on the cash flow statement?

Although cash flow from operations is positive, overall cash decreased significantly. The

company could run into cash flow problems unless cash is collected quickly (another bank

payment of $12,000 is due this year). Hopefully the newly acquired fixed assets will help

generate more operating cash flows this year.

b) Are there any concerns in the cash flow from the operating activities section?

Accounts receivable increased, which can indicate problems with collecting cash from

customers who owe money. This could lead to further bad debts.

Accounts payable decreased, which can indicate the company may have trouble getting

credit from suppliers, or is not taking advantage of longer payment terms.

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AP-16B ( 1 2 )

Carlin Corporation has prepared the following cash flow statement for the year-end.

Carlin Corporation
Cash Flow Statement
For the Year Ended December 31, 2016

Cash Flow from Operating Activities

Net Income $56,200
Add: Depreciation Expense 3,100
Changes in Assets and Liabilities
Increase in Accounts Receivable (31,000)
Increase in Inventory (33,000)
Decrease in Accounts Payable (26,000)
Change in Cash due to Operating Activities ($30,700)

Cash Flow from Investing Activities

Purchase of Equipment (95,000)
Sale of Land 120,000
Change in Cash due to Investing Activities 25,000

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 10,000
Received Bank Loan 45,000
Dividends Paid (40,000)
Change in Cash due to Financing Activities 15,000

Total Change in Cash 9,300

Opening Cash Balance 12,000
Cash at the End of the Year $21,300

Required

a) The company had a net income during the year; however, they had a negative cash flow
from operations. Identify the problems that led to a negative cash flow from operations.

Accounts receivable increased. This can indicate that customers are buying on credit and not

paying on time. Inventory also increased. This can indicate that too much inventory has been

purchased and is being stockpiled. Accounts payable has decreased. This can indicate that the

company is not taking advantage of payment terms from its suppliers.

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b) Even though cash flow from operations was negative, total cash increased by $9,300. How
did cash increase?

Cash increased due to the sale of land, issuance of common shares and getting a bank loan.

These were enough to cover the negative cash flow from operations, plus other cash outflows

such as purchasing equipment and paying dividends.

c) Are there any other concerns regarding the cash flow statement that have not been
covered in parts a) and b)?

Net income was just over $56,000; however, the company paid dividends of $40,000. It does

not seem like the company can afford to pay dividends with a relatively small net income and

apparent cash flow problems.

AP-17B ( 1 2 )
Dawson Corporation has prepared the following cash flow statement for the year-end.

Dawson Corporation
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Add: Net Income $68,000
Add: Depreciation Expense 3,700
Less: Gain on Sale of Equipment (8,000)
Changes in Assets and Liabilities
Decrease in Accounts Receivable 15,000
Increase in Inventory (60,000)
Decrease in Accounts Payable (5,000)
Change in Cash due to Operating Activities $13,700

Cash Flow from Investing Activities

Sale of Equipment 84,000
Purchase of Land (240,000)
Change in Cash due to Investing Activities (156,000)

Cash Flow from Financing Activities

Proceeds from Issuance of Common Shares 30,000
Bank Loan 120,000
Dividends (10,000)
Change in Cash due to Financing Activities 140,000

Total Change in Cash (2,300)

Opening Cash Balance 12,000
Cash at the end of the year $9,700

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Required

a) The company had a total decrease in cash during the year of $2,300. What is the primary
cause of this decrease in cash?

The company purchased some land. It partially covered the cost of the land by taking a

loan and selling equipment. The cash inflow from operating activities and share issuance was

not enough to cover the shortfall, so overall cash decreased.

b) Are there any concerns with operating activities?

The primary concern is the increase in inventory. This increase can indicate a stockpile

of inventory. If this inventory is not sold, the company will not recover the cash used to

purchase it.

Analysis

In a cash flow budgeting meeting, the company’s CEO argued that, “we could have taken
a larger bank loan to finance our land purchase in 2016. In fact, instead of borrowing only
$120,000, we should have asked for $240,000. That would have put us into a better cash flow
situation.” Evaluate this comment from the CEO. How would a larger bank loan affect the cash
flow of Dawson Corporation?

A bank loan of $240,000 might have prevented the sale of the equipment, which was most

likely done to partially finance the land purchase. Assuming the equipment is a revenue

generating asset, selling it could negatively impact future cash flow from operating activities.

The CEO’s comment could also be valid if the revenue generated from the purchased land

would be large enough to cover the increase in interest expense from a larger loan.

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However, a loan of $240,000 would not benefit Dawson Corporation if the increase in interest

expenses would be more than the increase in revenue from the purchased land. In that

scenario, the future cash flow will be negatively affected. Also, the company should consider

whether it will have enough cash flow generated in the future to pay back the larger loan

principal when it becomes due. Note that if the equipment happened to be an idle asset, then

selling the equipment would be considered a sound economic decision.

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Case Study
CS-1 ( 2 )

Granite Surfaces specializes in making granite countertops. A new accounting clerk has
compiled the following information to prepare the cash flow statement for the year ended
December 31, 2016.

• Net income for the year was $114,140.

• Depreciation expense was $15,300.
• Equipment was sold for a gain of $16,000. Cash proceeds from the sale were
$36,000.
• Equipment was purchased for $250,000.
• Dividends of $50,000 were paid.
• Accounts receivable increased by $31,400.
• Inventory decreased by $38,700.
• Accounts payable increased by $41,100.
• Bank loans increased by $55,000.
• Shares were sold for $50,000 (also their book value).
• Cash balance on January 1, 2016 was $114,800.
• Cash balance on December 31, 2016 was $117,640.

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The cash flow statement the accounting clerk prepared is shown below.

Granite Surfaces
Cash Flow Statement
For the Year Ended December 31, 2016

Cash Flow from Operating Activities

Net Income $114,140
Add: Depreciation Expense 15,300
Changes in Current Assets and Current Liabilities
Increase in Accounts Receivable 31,400
Decrease in Inventory (38,700)
Increase in Accounts Payable 41,100
Sale of Equipment 36,000
Purchase of Equipment (250,000)
Change in Cash due to Operating Activities ($50,760)

Cash Flow from Investing Activities

Receipt of Bank Loan 55,000
Change in Cash due to Investing Activities 55,000

Cash Flow from Financing Activities

Payment of Cash Dividend (50,000)
Proceeds from Issuance of Common Shares 50,000
Change in Cash due to Financing Activities 0

Net Increase (Decrease) in Cash 4,240

Cash at the Beginning of the Year 114,800
Cash at the End of the Year $119,040

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Required

a) Identify the problems with the cash flow statement that the accounting clerk prepared.

• The gain on the sale of the equipment is not deducted from the net income.
• The increase in accounts receivable is a decrease in cash flow.
• The decrease in inventory is an increase in cash flow.
• The sale and purchase of equipment should be recorded in the investing activities
section.
• The bank loan should be recorded in the financing activities section.
• The cash at the end of the year does not match the ending cash balance.

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b) Prepare a corrected cash flow statement.

Granite Surfaces
Cash Flow Statement
For the Year Ended December 31, 2016
Cash Flow from Operating Activities
Net Income $114,140
Add: Depreciation Expense 15,300
Deduct: Gain on Sale of Equipment (16,000)
Changes in Current Assets and Current Liabilities
Increase in Accounts Receivable (31,400)
Decrease in Inventory 38,700
Increase in Accounts Payable 41,100
Change in Cash due to Operating Activities $161,840

Cash Flow from Investing Activities

Sale of Equipment 36,000
Purchase of Equipment (250,000)
Change in Cash due to Investing Activities (214,000)

Cash Flow from Financing Activities

Receipt of Bank Loan 55,000
Payment of Cash Dividend (50,000)
Proceeds from Issuance of Common Shares 50,000
Change in Cash due to Financing Activities 55,000

Net Increase (Decrease) in Cash 2,840

Cash at the Beginning of the Year 114,800
Cash at the End of the Year $117,640

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