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# Chapter 12

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• 1. Chapter 12 The Statement of Cash Flows T Questions 1. The statement of cash flows 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 statement of cash flows are to (a) predict future cash flows, (b) evaluate management decisions, (c) determine the company’s ability to pay dividends to stockholders 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 statement of cash flows is dated “Period ended XXX” because it reports the reasons for the changes in cash that occurred during the period — for example, “Year Ended December 31, 19XX” or “Month Ended June 30, 19XX.” Chapter 12 The Statement of Cash Flows 39
• 2. 5. The check figure for the statement of cash flows 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 statement of cash flows. The two amounts should be equal. 6. The largest source of cash for most successful companies is operations. Within this category, collections from customers are most important. 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 activities b. Operating activities c. Operating activities d. Not reported because cash is unaffected e. Operating activities 9. Depreciation, depletion, and 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. 10. 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. 40 Financial Accounting 4/e Solutions Manual
• 3. 11. OPERATING ACTIVITIES: Cash Receipts Cash Payments Collections from customers Payments to suppliers Receipts of interest and dividends Payments of interest and taxes on investments Other operating disbursements Other operating receipts INVESTING ACTIVITIES: Cash Receipts Cash Payments Sale of plant assets Acquisition of plant assets Sale of investments that Acquisition of investments that are not cash equivalents are not cash equivalents Cash receipts on loans receivable Making loans FINANCING ACTIVITIES: Cash Receipts Cash Payments Issuing stock Payment of dividends Selling treasury stock Purchase of treasury stock Borrowing money Paying principal amounts of debts 12. 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 X Beginning balance 10,000 Salary expense 51,000 Ending balance 2,000 Chapter 12 The Statement of Cash Flows 41
• 4. 13. Acquisitions of plant 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. Plant Assets, Net Beginning balance 193,000 Depreciation expense 37,000 Book value of plant Acquisitions X assets disposed of 9,000 Ending balance 176,000 14. 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 statement of cash flows. Three other transactions in this category are issuance of stock to acquire a building, issuance of stock to pay long-term debt, and issuance of a note payable to retire stock. Note: Students may list other examples that are acceptable. 15. Cash flows from operating activities: Net income………………………………………….. \$ XXX Add (subtract) items that affect net income and cash flow differently: Gain on sale of investments……………………… (15,000) Cash flows from investing activities: Sale of investments…………………………………. \$ 80,000 42 Financial Accounting 4/e Solutions Manual
• 5. 16. 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. 17. Net cash inflow from operations = \$64,000 (\$38,000 + \$22,000 + \$13,000  \$9,000). 18. Free cash flow is the amount of cash available from operations after paying for planned investments in plant, equipment, and other long- term assets. Chapter 12 The Statement of Cash Flows 43
• 6. Check Points (10 min.) CP 12-1 The statement of cash flows helps investors and creditors: a. Predict future cash flows by reporting past cash receipts and payments, which are a reasonably good predictor of future cash receipts and disbursements. 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. 44 Financial Accounting 4/e Solutions Manual
• 7. (5 min.) CP 12-2 Main danger signal: Operating activities generated a net cash outflow. (5 min.) CP 12-3 End of 20X0: Millions Cash balance (\$31  \$19  \$19)…………………………… \$(7) Likely result: Bankruptcy (5 min.) CP 12-4 Mid America Resources, Inc. Statement of Cash Flows (partial) Year ended June 30, 20X0 Cash flows from operating activities: Collections from customers \$190,000 Payments to suppliers (80,000) Payments to employees (70,000) Payment of income tax (10,000) Net cash inflow from operating activities \$30,000 Chapter 12 The Statement of Cash Flows 45
• 8. (15 min.) CP 12-5 Mid America Resources, Inc. Statement of Cash Flows Year ended June 30, 20X0 Cash flows from operating activities: Collections from customers \$190,000 Payments to suppliers (80,000) Payments to employees (70,000) Payment of income tax (10,000) Net cash inflow from operating activities \$30,000 Cash flows from investing activities: Purchase of equipment \$(40,000) Proceeds from sale of land 60,000 Net cash inflow from investing activities 20,000 Cash flows from financing activities: Proceeds from issuance of common stock \$20,000 Payment of note payable (30,000) Payment of dividends (6,000) Purchase of treasury stock (5,000) Net cash outflow from financing activities (21,000) Net increase in cash \$29,000 46 Financial Accounting 4/e Solutions Manual
• 9. (15 min.) CP 12-6 1. Net income = \$180,000 (\$600,000  \$420,000) 2. Ending cash = \$94,000 (\$104,000 + \$590,000  \$410,000  \$140,000  \$50,000) 3. Wellness Health Laboratories Statement of Cash Flows Year 20X1 Cash flows from operating activities: Collections from customers \$590,000 Payments to suppliers and employees (410,000) Net cash inflow from operating activities \$180,000 Cash flows from investing activities: Purchase of equipment \$(140,000) Net cash outflow from investing activities (140,000) Cash flows from financing activities: Payment of dividends \$ (50,000) Net cash outflow from financing activities (50,000) Net decrease in cash \$(10,000) Cash balance, beginning 104,000 Cash balance, ending \$ 94,000 Chapter 12 The Statement of Cash Flows 47
• 10. (15 min.) CP 12-7 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 Receivable Beg. Bal. 48,000 Sales 710,000 Collections 704,000 End. Bal. 54,000 b. Payments for inventory = \$331,000, as follows: Cost of Payments for Decrease in Increase in = goods   inventory Inventory Accounts Payable sold = \$340,000  \$4,000  \$5,000 (\$84,000  \$80,000) (\$47,000  \$42,000) = \$331,000 Inventory Accounts Payable Beg. bal. 84,000 Payments for Beg. bal. 42,000 Purchases 336,000 Cost of goods sold 340,000 inventory 331,000 Purchases 336,000 End. bal. 80,000 End. bal. 47,000 48 Financial Accounting 4/e Solutions Manual
• 11. (10 min.) CP 12-8 a. Payments to employees = \$48,000, as follows: Payments to Salary Increase in =  employees expense Salary Payable = \$50,000  \$2,000 (23,000  \$21,000) = \$48,000 Salary Payable Payments to Beg. bal. 21,000 employees 48,000 Salary expense 50,000 End. bal. 23,000 b. Payments for other expenses = \$154,000, as follows: Increase in Decrease in Payments of Other = + prepaid + accrued other expenses expenses expenses liabilities = \$150,00 + \$1,000 + \$3,000 0 (\$3,000  \$2,000) (\$11,000  \$8,000) = \$154,00 0 Chapter 12 The Statement of Cash Flows 49
• 12. (10 min.) CP 12-9 a. Acquisitions of plant assets = \$100,000, as follows: Plant Assets, net Beg. Book value of End. + Acquisitions  Depreciation  = bal. assets sold bal. \$185,000 + X  \$ 60,000  \$0 = \$225,000 X = \$225,000  \$185,000 + \$60,000 X = \$100,000 Plant Assets, net Beg. bal. 185,000 Acquisitions 100,000 Depreciation 60,000 End. bal. 225,000 b. Proceeds from the sale of long-term investments + \$15,000, as follows: Long-term investments Book value of Beg. bal. + Purchases  = 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 Investments Beg. bal. 90,000 Book value of investments sold 15,000 End. bal. 75,000 50 Financial Accounting 4/e Solutions Manual
• 13. (15 min.) CP 12-10 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 stock = \$3,000 (\$40,000  \$37,000) This is clear from the increase in common stock. c. Payment of dividends (same as amount of = \$84,000, as follows: dividends declared) Beginning Ending Net Dividend retained +  = retained income declarations earnings earnings \$246,000 + \$110,000  X = \$272,000 X =  \$272,000 + \$246,000 + \$110,000 = \$ 84,000 Retained Earnings Dividend declarations Beg. bal. 246,000 (same amount paid) 84,000 Net income 110,000 End. bal. 272,000 Chapter 12 The Statement of Cash Flows 51
• 14. (10-15 min.) CP 12-11 1. Cost of plant asset acquisitions = \$252,000, as follows: Plant Assets, net Beg. Book value of End. + Acquisitions  Depreciation  = bal. assets sold bal. \$219,000 + X  \$ 18,000  \$0 = \$453,000 X = \$453,000  \$219,000 + \$18,000 X = \$252,000 Plant Assets, net Beg. bal. 219,000 Acquisitions 252,000 Depreciation 18,000 End. bal. 453,000 2. Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Plant Assets……………………………... 252,000 Note Payable, Long-Term…………… 83,000 Cash………………………………….. 169,000 Acquisition of plant assets. 3. Cash flows from investing activities: Acquisition of plant assets………………………….. \$(169,000) Noncash investing and financing activities: Acquisition of plant assets by issuing long-term note payable………………….. \$ 83,000 52 Financial Accounting 4/e Solutions Manual
• 15. (10 min.) CP 12-12 O+ a. Loss on sale of land O+ h. Increase in accounts O+ b. Depreciation 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 stock I f. Purchase of O m.Gain on sale of building equipment N n. Retained earnings N g. Collection of cash from customers (5-10 min.) CP 12-13 Cash flows from operating activities: Net income……………………………………………… \$81,000 Add (subtract) items that affect net income and cash flows differently: Depreciation…………………………………………. 9,000 Gain 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 inflow from operating activities:………... \$71,000 Chapter 12 The Statement of Cash Flows 53
• 16. (20-30 min.) CP 12-14 Grace Chemical Company Statement of Cash Flows Year Ended December 31, 20X2 (In Thousands) Cash flows from operating activities: Net income \$110 Add (subtract) items that affect net income and cash flows differently: Depreciation \$ 60 Increase in accounts receivable (6) Decrease in inventory 4 Increase in prepaid expenses (1) Increase in accounts payable 5 Increase in salary payable 2 Decrease in accrued liabilities (3) 61 Net cash inflow from operating activities 171 Cash flows from investing activities: Acquisition of plant assets (\$225  \$185 + \$60) \$(100) Sale of long-term investments (\$90  \$75) 15 Net cash outflow from investing activities (85) Cash flows from financing activities: Payment of long-term note payable (\$68  \$66) \$ (2) Issuance of common stock (\$40  \$37) 3 Payment of dividends (\$246 + \$110  \$272) (84) Net cash outflow from financing activities (83) Net increase in cash \$ 3 Cash balance, beginning 16 Cash balance, ending \$ 19 54 Financial Accounting 4/e Solutions Manual
• 17. (10 min.) CP 12-14 1. The statement of cash flows indicates why the company’s cash balance changed. It reports where cash came from and how cash was spent. Thus, the statement of cash flows explains the causes of the changes in the cash balance. Cash flows are important because it takes cash to pay the bills. The W.T. Grant Company case shows that a company can be profitable and still go bankrupt if it runs out of cash. 2. The indirect method starts with net income and shows the reconciliation from net income to operating cash flows. 3. Nike’s 19X7 cash flows look very strong. Virtually all the increase in cash came from operations — a sign of strength. During the year, Nike invested in new plant and equipment and paid off some debt. To evaluate a company’s cash flows, look for: a. Net cash inflow from operating activities. b. Investment in assets such as plant and equipment. Chapter 12 The Statement of Cash Flows 55
• 18. Exercises (10-15 min.) E 12-1 DATE: _______________ TO: Managers of NEI Datacom FROM: Student Name SUBJECT: Purposes of the statement of cash flows The statement of cash flows is designed to help management predict the future cash flows of a business. The statement of cash flows 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 statement of cash flows. In evaluating a borrower’s ability to repay a loan, a creditor examines the statement of cash flows to learn how the borrower has gained and spent cash. As NEI’s situation indicates, income may increase while cash decreases, so the statement of cash flows should be used in conjunction with the income statement and the balance sheet in evaluating a company. Note: Student responses may vary. 56 Financial Accounting 4/e Solutions Manual
• 19. (10-15 min.) E 12-2 O a. Collection of account NIF k. Acquisition of equipment receivable by issuance of note payable F b. Issuance of long-term note F l. Payment of long-term debt payable to borrow cash N c. Depreciation of equipment NIF m. Acquisition of building by issuance of common stock F d. Purchase of treasury stock N n. Accrual of salary expense F e. Issuance of common stock I o. Purchase of long-term for cash investment O f. Payment of account O p. Payment of wages to payable employees F g. Issuance of preferred O q. Collection of cash interest stock for cash F h. Payment of cash dividend I r. Cash sale of land I i. Sale of long-term N s. Distribution of stock investment dividend N j. Amortization of bond discount Chapter 12 The Statement of Cash Flows 57
• 20. (5-10 min.) E 12-3 a. Investing activities h. Operating activities b. Investing activities i. Financing activities c. Financing activities j. Financing activities d. Noncash investing and k. Not reported financing activities e. Operating activities l. Operating activities f. Financing activities m. Investing activities g. Noncash investing and n. Operating activities financing activities 58 Financial Accounting 4/e Solutions Manual
• 21. (10-15 min.) E 12-4 Cash flows from operating activities: Receipts: Collections from customers (\$93,000 + \$9,000)………………… \$ 102,000 Dividends received on investments in stock……………….. 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 outflow from operating activities. \$ (8,000) Evaluation: Operating cash flow is weak, as shown by the net cash outflow from operating activities. Chapter 12 The Statement of Cash Flows 59
• 22. (5-10 min.) E 12-5 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. 60 Financial Accounting 4/e Solutions Manual
• 23. (20-30 min.) E 12-6 Req. 1 Crawford Properties, Inc. Statement of Cash Flows Year Ended June 30, 20X1 Cash flows from operating activities: Receipts: Collections from customers (\$229,000 + \$15,000)……………………… \$ 244,000 Dividends received on investments in stock…... 8,000 Total cash receipts…………………………. 252,000 Payments: To suppliers (\$103,000 + \$11,000  \$9,000)…. \$(105,000) To employees (\$45,000 + \$1,000)…………….. (46,000) For income tax…………………………………. (9,000) For interest…………………………………….. (2,000) Total cash payments………………………... (162,000) Net cash inflow from operating activities……... 90,000 Cash flows from investing activities: Acquisition of plant assets………………………… \$(101,000) Proceeds from sale of land………………………... 14,000 Net cash outflow from investing activities……. (87,000) Cash flows from financing activities: Proceeds from issuance of common stock………... \$ 30,000 Payment of long-term note payable………………. (15,000) Dividends paid……………………………………. (11,000) Net cash inflow from financing activities……... 4,000 Net increase in cash…………………………………... \$ 7,000 Noncash investing and financing activities: Acquisition of plant assets by issuing note payable. \$ 15,000 Chapter 12 The Statement of Cash Flows 61
• 24. (continued) E 12-6 Req. 2 Evaluation: Crawford Properties’ cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets without having to borrow. It was able to issue stock and pay off a long-term note payable — both financing transactions. All of these signs are favorable. 62 Financial Accounting 4/e Solutions Manual
• 25. (10-15 min.) E 12-7 \$4,000 decrease in a. Cash collections = \$81,000 + Accounts Receivable (\$22,000  \$18,000) = \$85,000 \$4,000 decrease in \$3,000 decrease in b. Cash payments = \$90,000  Inventory + Accounts Payable for inventory (\$25,000  \$21,000) (\$11,000  \$8,000) = \$89,000 Chapter 12 The Statement of Cash Flows 63
• 26. (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 Ending balance 73,000 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 Plant Assets, Net Beginning balance 103,000 Depreciation 16,000 Purchases 27,000 Book value sold 7,000 Ending balance 107,000 64 Financial Accounting 4/e Solutions Manual
• 27. (10-15 min.) E 12-9 Cash flows from operating activities: Net income…………………………………… \$27,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………. \$ 12,000 Loss on sale of land……………………….. 5,000 Increase in current assets other than cash… (17,000) Decrease in current liabilities……………... (23,000) (23,000) Net cash inflow from operating activities……. \$ 4,000 Evaluation: Operating cash flow is a little weak. Net cash inflow from operating activities is much less than net income. It should be near the level of net income. (10-15 min.) E 12-10 1. Direct method: a. Report the cash receipt of \$17,000 as an investing activity. b. Report the \$50,000 cash payment as an investing activity. Report issuance of the \$160,000 note payable to acquire land as a noncash investing and financing activity in a schedule to accompany the statement of cash flows. 2. Indirect method: a. Subtract the \$7,000 gain from net income in the operating activities section. Report cash receipt of \$17,000 as an investing activity. b. Same as answer to 1b. Chapter 12 The Statement of Cash Flows 65
• 28. (20-30 min.) E 12-11 Req. 1 Crawford Properties, Inc. Statement of Cash Flows Year Ended June 30, 20X1 Cash flows from operating activities: Net income……………………………………… \$ 38,000 Add (subtract) items that affect net income and cash flow differently: Depreciation…………………………………. \$ 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** Increase in accrued liabilities………………… 2,000** 52,000 Net cash inflow from operating activities……. 90,000 Cash flows from investing activities: Acquisition of plant assets ……………………… \$(101,000) Proceeds from sale of land………………………. 14,000 Net cash outflow from investing activities…... (87,000) Cash flows from financing activities: Proceeds from issuance of common stock………. \$ 30,000 Payment of long-term note payable…………….. (15,000) Dividends paid………………………………….. (11,000) Net cash inflow from financing activities……. 4,000 Net increase in cash………………………………… \$ 7,000 Noncash investing and financing activities: Acquisition of plant assets by issuing note payable \$ 15,000 _____ * These amounts can be combined into a single total and reported as “Decrease in current assets other than cash……………………………… 8,000.” ** These amounts can be combined into a single total and reported as “Increase in current liabilities……………………………………………. 15,000.” 66 Financial Accounting 4/e Solutions Manual
• 29. (continued) E 12-11 Req. 2 Evaluation: Crawford Properties’ cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets without having to borrow. It was able to issue stock and pay off a long-term note payable — both financing transactions. All of these signs are favorable. Chapter 12 The Statement of Cash Flows 67
• 30. (15-20 min.) E 12-12 Cash flows from operating activities: Net income…………………………………….. \$69,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………... \$ 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 inflow from operating activities... \$76,000 Ochoa shows no sign of trouble collecting receivables or selling nventory. There is no large build-up in either account. (5-10 min.) E 12-13 Case A - New borrowing generated the cash to acquire plant assets. Case B - A combination of operations and new borrowing generated most of the cash for acquisition of plant assets. Case C - The sale of plant assets generated the cash needed to acquire new plant assets. 68 Financial Accounting 4/e Solutions Manual
• 31. (15-20 min.) E 12-14 (All amounts in millions) 1. Indirect method 19X8 19X7 19X6 2. Largest source of cash Operations Long-term Operations borrowing \$2,711.6 \$2,799.6 \$2,110.0 3. Inventories increased, as shown by the decrease in cash. Income taxes payable decreased, as shown by the decrease in cash. 4. Cash……………………………………. 89.0 Property, Plant, and Equipment…….. 64.3 Gain on Sale of Plant Assets………... 24.7 Chapter 12 The Statement of Cash Flows 69
• 32. Problems Group A (15-30 min.) P 12-1A DATE: _______________ TO: Top Managers of Henry’s Interiors, Inc. FROM: Student Name SUBJECT: Assessment of 20X4 and outlook for the future 20X4 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 plant 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. 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 resulted in 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 20X4 was a good year, and the outlook is not clouded by any obvious difficulties. 70 Financial Accounting 4/e Solutions Manual
• 33. (40 min.) P 12-2A Req. 1 Dohn Corporation Income Statement Year Ended December 31, 20X2 Sales revenue (2,800 × \$200) \$560,000 \$160,000 Cost of goods sold \$120,000 + (1,800 × 264,000 2,000 Salary expense 90,000 Rent expense 12,000 Depreciation expense (\$50,000 / 5) 10,000 Income tax expense 64,000 Net income \$120,000 Req. 2 Dohn Corporation Balance Sheet December 31, 20X2 ASSETS LIABILITIES Current: Current: Cash \$191,000* Accounts payable Accounts receivable (\$160,000  \$140,000) \$ 20,000 (2,800 × \$200 × .10) 56,000 Salary payable 3,000 Inventory Total current liabilities 23,000 \$160,000 Total liabilities 2,000 × (3,0002,800) 16,000 Total current assets 263,000 STOCKHOLDERS’ EQUITY Property, plant, and equipment: Common stock 200,000 Store fixtures \$50,000 Retained earnings Less Accumulated (\$120,000  \$40,000) 80,000 depreciation (10,000 40,000 280,000 ) Total liabilities and Total assets \$303,000 stockholders' equity \$303,000 _____ Chapter 12 The Statement of Cash Flows 71
• 34. *\$200,000  \$50,000  \$120,000  \$12,000  \$140,000 + \$504,000  \$87,000  \$64,000  \$40,000 = \$191,000. (continued) P 12-2A Req. 3 Dohn Corporation Statement of Cash Flows Year Ended December 31, 20X2 Cash flows from operating activities: Collections from customers (2,800 × \$200 × .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 inflow from operating activities………….. 81,000 Cash flows from investing activities: Purchase of store fixtures……………………………... (50,000) Net cash outflow from investing activities………… (50,000) Cash flows from financing activities: Issuance of common stock…………………………….. 200,000 Payment of dividend…………………………………... (40,000) Net cash inflow from financing activities………….. 160,000 _______ Increase in cash…………………………………………... \$191,000 Cash balance, January 1, 20X2…………………………... 0 Cash balance, December 31, 20X2………………………. \$191,000 72 Financial Accounting 4/e Solutions Manual
• 35. (35-45 min.) P 12-3A Req. 1 Patio Haus, Inc. Statement of Cash Flows Year Ended July 31, 20X2 Cash 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 outflow from operating activities................ (30,000) Cash flows from investing activities: Acquisition of plant assets.............................................. \$(181,000) Collection of loans.......................................................... 74,400 Proceeds from sale of plant assets.................................. 59,700 Loan to another company............................................... (35,000) Proceeds from sale of investments................................. 34,700 Net cash outflow from investing activities................ (47,200) Cash flows from financing activities: Proceeds from issuance of common stock...................... \$ 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 inflow from financing activities.................. 91,700 Net increase in cash............................................................. \$ 14,500 Cash balance, July 31, 20X1................................................ 53,800 Cash balance, July 31, 20X2................................................ \$ 68,300 continued on next page Chapter 12 The Statement of Cash Flows 73
• 36. (continued) P 12-3A Noncash investing and financing activities: Payment of long-term debt by issuing preferred stock. \$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 20X2: 20X2 was a disappointing year from a cash-flow standpoint. Operations generated a net cash outflow. On the positive side, Patio Haus was able to issue \$116,900 of new stock, which means the stockholders have faith in the company. The business invested heavily in plant assets, and cash increased by \$14,500. But ultimately, operations must generate a net cash inflow for the company to remain in business. 74 Financial Accounting 4/e Solutions Manual
• 37. (30-40 min.) P 12-4A Req. 1 Genie Marketing, Inc. Statement of Cash Flows Year Ended December 31, 20X3 Cash 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 inflow from operating activities…………… 70,600 Cash flows from investing activities: Acquisition of land……………………………………… \$ (25,100) Acquisition of equipment (\$93,700  depreciation expense of \$15,300 = \$78,400; \$100,900  \$78,400)………………………….. (22,500) Net cash outflow from 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 stock……………………………… 8,800 Net cash outflow from financing activities………….. (29,900) Net decrease in cash………………………………………... \$ (6,900) Chapter 12 The Statement of Cash Flows 75
• 38. (continued) P 12-4A 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 statement of cash flows. 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 a net cash inflow from operating activities conveys a more positive signal about a company than a net cash outflow from operations. 76 Financial Accounting 4/e Solutions Manual
• 39. (30-40 min.) P 12-5A Req. 1 Genie Marketing, Inc. Statement of Cash Flows Year Ended December 31, 20X3 Cash flows from operating activities: Net income \$ 61,600 Add (subtract) items that affect net income and cash flow differently: Depreciation \$ 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 inflow from operating activities 70,600 Cash flows from investing activities: Acquisition of land \$ (25,100) Acquisition of equipment (\$93,700  depreciation expense of \$15,300 = \$78,400; \$100,900  \$78,400) (22,500) Net cash outflow from 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 stock 8,800 Net cash outflow from financing activities (29,900) Net decrease in cash \$ (6,900) _____ *These amounts can be combined into a single total and reported as “Increase in current assets other than cash……………………………….. (7,000).” **These amounts can be combined into a single total and reported as “Increase in current liabilities…………………………………………….. 700.” Chapter 12 The Statement of Cash Flows 77
• 40. (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 statement of cash flows. 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 a net cash inflow from operating activities conveys a more positive signal about a company than a net cash outflow from operations. 78 Financial Accounting 4/e Solutions Manual
• 41. (40 min.) P 12-6A Dohn Corporation Income Statement Year Ended December 31, 20X2 Sales revenue (2,800 × \$200) \$560,000 \$160,000) Cost of goods sold \$120,000 + (1,800 × 264,000 2,000 Salary expense 90,000 Rent expense 12,000 Depreciation expense (\$50,000 / 5) 10,000 Income tax expense 64,000 Net income \$120,000 Dohn Corporation Balance Sheet December 31, 20X2 ASSETS LIABILITIES Current: Current: Cash \$191,000* Accounts payable Accounts receivable (\$160,000  \$140,000) \$ 20,000 (2,800 × \$200 × .10) Salary payable 3,000 Inventory Total current liabilities 23,000 \$160,000 Total liabilities 2,000 × (3,000 2,800) 16,000 Total current assets 263,000 STOCKHOLDERS’ EQUITY Property, plant, and equipment: Common stock 200,000 Store fixtures \$50,000 Retained earnings Less Accumulated (\$120,000  \$40,000) 80,000 depreciation (10,000 40,000 280,000 ) Total liabilities and Total assets \$303,000 stockholders' equity \$303,000 _____ Chapter 12 The Statement of Cash Flows 79
• 42. *\$200,000  \$50,000  \$120,000  \$12,000  \$140,000 + \$504,000  \$87,000  \$64,000  \$40,000 = \$191,000. (continued) P 12-6A Dohn Corporation Statement of Cash Flows Year Ended December 31, 20X2 Cash flows from operating activities: Net income……………………………………. \$120,000 Add (subtract) items that affect net income and cash flow differently: Depreciation……………………………….. \$ 10,000 Increase in accounts receivable……………. (56,000) Increase in inventory………………………. (16,000) Increase in accounts payable………………. 20,000 Increase in salary payable…………………. 3,000 (39,000) Net cash inflow from investing activities. 81,000 Cash flows from investing activities: Purchase of store fixtures……………………... (50,000) Net cash outflow from investing activities… (50,000) Cash flows from financing activities: Issuance of common stock……………………. 200,000 Payment of dividend………………………….. (40,000) Net cash inflow from financing activities…. 160,000 ________ Increase in cash………………………………….. \$191,000 Cash balance, January 1, 20X2………………….. 0 Cash balance, December 31, 20X2……………… \$191,000 80 Financial Accounting 4/e Solutions Manual
• 43. (35-45 min.) P 12-7A WWW.Smart, Inc. Statement of Cash Flows Year Ended December 31, 20X4 Cash flows from operating activities: Net income………………………………………………. \$50,500 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………….. \$ 29,200 Amortization…………………………………………. 1,100 Gain on sale of investment…………………………… (3,500) Decrease in accounts receivable……………………… 3,600* Decrease in inventories………………………………. 5,900* Increase in prepaid expenses ………………………… (1,100)* Decrease in notes payable, short-term……………….. (500)** Increase in accounts payable…………………………. 4,600** Decrease in income tax payable……………………… (900)** Increase in accrued liabilities………………………… 5,100** 43,500 Net cash inflow from 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 outflow from 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 stock………………………………. 36,200 Net cash inflow from financing activities……………. 11,100 Net increase in cash (\$48,600  \$34,800)………………….. \$13,800 continued on next page Chapter 12 The Statement of Cash Flows 81
• 44. (continued) P 12-7A Noncash investing and financing activities: Acquisition of building by issuing long-term note payable… \$118,000 Payment of long-term debt by issuing common stock……… 89,400 Total noncash investing and financing activities………………. \$207,400 _____ *These amounts can be combined into a single total and reported as “Decrease in current assets other than cash………………………………… 8,400.” **These amounts can be combined into a single total and reported as “Increase in current liabilities ………………………………………………. 8,300.” 82 Financial Accounting 4/e Solutions Manual
• 45. (35-45 min.) P 12-8A Req. 1 CNA Insurance Statement of Cash Flows Year Ended December 31, 20X5 Cash flows from operating activities: Net income…………………………………………….. \$ 31,600 Add (subtract) items that affect net income and cash flow differently: Depreciation……………………………………….. \$ 12,800 Amortization……………………………………….. 5,000 Decrease in accounts receivable …………………… 700* Decrease in inventories…………………………….. 1,400* Increase in prepaid expenses……………………….. (500)* Increase in notes payable, short-term………………. 9,200** Decrease in accounts payable……………………… (6,100)** Decrease in accrued liabilities……………………… (2,500)** Decrease in income tax payable……………………. (3,300)** 16,700 Net cash inflow from 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 outflow from investing activities…………. (173,000) Cash flows from financing activities: Issuance of common stock…………………………….. \$ 105,600 Issuance of long-term note payable……………………. 32,000 Payment of cash dividends…………………………….. (17,000) Net cash inflow from financing activities………….. 120,600 Net decrease in cash (\$8,400  \$12,500)…………………. \$ (4,100) Noncash investing and financing activities: Retirement of bonds payable by issuing common stock. \$ 55,000 _____ *These amounts can be combined into a single total and reported as “Decrease in current assets other than cash…………………………………………… 1,600.” **These amounts can be combined into a single total and reported as “Decrease in current liabilities………………………………………………………… (2,700).” Chapter 12 The Statement of Cash Flows 83
• 46. (continued) P 12-8A Req. 2 Evaluation: CNA’s cash flows look strong. Operations are the main source of cash. The company is investing heavily in new plant assets and is financing the investments more by issuing stock than by borrowing. All of these signs are favorable. 84 Financial Accounting 4/e Solutions Manual
• 47. (45-60 min.) P 12-9A Req. 1 Rolex Paper Company Statement of Cash Flows Year Ended December 31, 20X8 Cash 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 inflow from 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 outflow from investing activities… (51,500) Cash flows from financing activities: Payment of long-term debt……………………. \$ (78,900) Issuance of common stock……………………. 34,600 Sale of treasury stock…………………………. 26,200 Purchase of treasury stock…………………….. (10,400) Payment of dividends…………………………. (1,800) Net cash outflow from financing activities… (30,300) Net decrease in cash (\$82,500  \$87,100)……….. \$ (4,600) continued on next page Chapter 12 The Statement of Cash Flows 85
• 48. (continued) P 12-9A Req. 1 Noncash investing and financing activities: Acquisition of land by issuing common stock……………… \$ 62,100 Retirement of long-term debt by issuing common stock…… 21,100 Total noncash investing and financing activities………………. \$ 83,200 86 Financial Accounting 4/e Solutions Manual
• 49. (continued) P 12-9A Req. 2 Rolex Paper Company Cash Flows from Operating Activities Year Ended December 31, 20X8 Cash flows from operating activities: Net income……………………………………… \$43,900 Add (subtract) items that affect net income and cash flow differently: Depreciation…………………………………. \$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 inflow from operating activities…… \$77,200 _____ *These amounts can be combined into a single total and reported as “Decrease in current assets other than cash………………… 12,500.” **These amounts can be combined into a single total and reported as “Increase in current liabilities………………………………. 600.” Chapter 12 The Statement of Cash Flows 87
• 50. (45-60 min.) P 12-10A Req. 1 Heart O’Kansas Optical Corporation Statement of Cash Flows Year Ended September 30, 20X4 Cash flows from operating activities: Net income……………………………………………… \$ 56,900 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………… \$ 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 inflow from operating activities…………… 30,400 Cash flows from investing activities: Sale of land……………………………………………… \$ 38,100 Acquisition of long-term investments…………………... (37,300) Net cash inflow from investing activities…………… 800 Cash flows from financing activities: Payment of cash dividends……………………………… \$(64,300) Issuance of common stock……………………………… 51,900 Payment of long-term note payable…………………….. (24,700) Net cash outflow from financing activities…………. (37,100) Net decrease in cash……………………………………….. \$ (5,900) continued on next page _____ *These amounts can be combined into a single total and reported as “Increase in current assets other than cash………………………………. (3,300).” **These amounts can be combined into a single total and reported as 88 Financial Accounting 4/e Solutions Manual
• 51. “Decrease in current liabilities…………………………………………… (20,800).” Chapter 12 The Statement of Cash Flows 89
• 52. (continued) P 12-10A 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 90 Financial Accounting 4/e Solutions Manual
• 53. (continued) P 12-10A Req. 2 Heart O’Kansas Optical Corporation Cash Flows from Operating Activities Year Ended September 30, 20X4 Cash 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 inflow from operating activities….. \$ 30,400 Chapter 12 The Statement of Cash Flows 91
• 54. Problems Group B (15-30 min.) P 12-1B DATE: _______________ TO: Managers of Oasis Water FROM: Student Name SUBJECT: Assessment of 20X7 operations and outlook for the future 20X7 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 resulted in net cash outflow, which is bad news. Over the long run, operations should generate the bulk of net cash inflow if the business expects to succeed. During 20X7, 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 20X7 net cash flows from investing activities was positive, which means that net investments were negative. Although the net cash inflow resulting from investing activities may be temporary, it does not reflect especially well on the company. It means that, in part at least, the company is maintaining its cash position by liquidating fixed assets. This is a bad sign. Financing activities produced a net cash inflow, which is normal. However, coupled with the net cash outflow from operations and the net cash inflow from investing activities, the additional debt created in 20X7 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 20X7 was not a good year, and the outlook is not bright. 92 Financial Accounting 4/e Solutions Manual
• 55. (40 min.) P 12-2B Req. 1 Scott Corporation Income Statement Year Ended December 31, 20X1 Sales revenue (2,500 × \$200) \$500,000 \$260,000) Cost of goods sold \$120,000 + (1,500 × 315,000 2,000 Salary expense 95,000 Depreciation expense (\$150,000 / 5) 30,000 Rent expense 20,000 Income tax expense 10,000 Net income \$ 30,000 Req. 2 Scott Corporation Balance Sheet December 31, 20X1 ASSETS LIABILITIES Current: Current: Cash \$ 90,000* Accounts payable Accounts receivable (\$260,000  \$208,000) \$ 52,000 (2,500 × \$200 × .20) 100,000 Salary payable 4,000 Inventory Total current liabilities 56,000 \$260,000 Total liabilities 2,000 × (3,0002,500) 65,000 Total current assets 255,000 STOCKHOLDERS’ EQUITY Property, plant, and equipment: Common stock 300,000 Store fixtures \$150,000 Retained earnings Less Accumulated (\$30,000  \$11,000) 19,000 depreciation (30,000) 120,000 319,000 Total liabilities and Total assets \$375,000 stockholders' equity \$375,000 _____ *\$300,000  \$150,000  \$120,000  \$20,000  \$208,000 + \$400,000  \$91,000  \$10,000  \$11,000 = \$90,000. Chapter 12 The Statement of Cash Flows 93
• 56. (continued) P 12-2B Req. 3 Scott Corporation Statement of Cash Flows Year Ended December 31, 20X1 Cash flows from operating activities: Collections from customers (2,500 × \$200 × .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 outflow from operating activities………… (49,000) Cash flows from investing activities: Purchase of equipment………………………………... (150,000) Net cash outflow from investing activities………… (150,000) Cash flows from financing activities: Issuance of common stock……………………………. 300,000 Payment of dividend………………………………….. (11,000) Net cash inflow from financing activities………….. 289,000 _______ Increase in cash…………………………………………... \$ 90,000 Cash balance, January 1, 20X1…………………………... 0 Cash balance, December 31, 20X1………………………. \$ 90,000 94 Financial Accounting 4/e Solutions Manual
• 57. (35-45 min.) P 12-3B Req. 1 Triad Associates, Inc. Statement of Cash Flows Year Ended April 30, 20X5 Cash 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 inflow from operating activities…………. 115,700 Cash flows from investing activities: Acquisition of plant assets……………………………. \$ (59,400) Proceeds from sale of plant assets……………………. 22,400 Collection of loans……………………………………. 12,800 Loan to another company…………………………….. (12,500) Proceeds from sale of investments…………………… 9,100 Net cash outflow from 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 stock ……………. 8,000 Net cash outflow from financing activities………... (70,800) Net increase in cash……………………………………… \$ 17,300 Cash balance, April 30, 20X4……………………………. 39,300 Cash balance, April 30, 20X5……………………………. \$ 56,600 continued on next page Chapter 12 The Statement of Cash Flows 95
• 58. (continued) P 12-3B . 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 20X5: 20X5 was a strong year from a cash-flow standpoint. Operations generated the bulk of the company’s cash. The business acquired additional plant assets to lay a foundation for future operations. The corporation also reduced its debt position. 96 Financial Accounting 4/e Solutions Manual
• 59. (30-40 min.) P 12-4B Req. 1 Town East Press Statement of Cash Flows Year Ended December 31, 20X5 Cash 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 inflow from operating activities…………….. 72,900 Cash flows from investing activities: Acquisition of land……………………………………….. \$ (29,000) Acquisition of equipment (\$49,400  depreciation expense of \$4,000 = \$45,400; \$53,500  \$45,400)…………………………. (8,100) Net cash outflow from 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 stock……………………………….. 23,600 Net cash outflow from financing activities…………… (30,600) Net increase in cash………………………………………….. \$ 5,200 Chapter 12 The Statement of Cash Flows 97
• 60. (continued) P 12-4B 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 statement of cash flows. 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 a net cash inflow from operating activities conveys a more positive signal about a company than a net cash outflow from operations. 98 Financial Accounting 4/e Solutions Manual
• 61. (30-40 min.) P 12-5B Req. 1 Town East Press Statement of Cash Flows Year Ended December 31, 20X5 Cash flows from operating activities: Net income……………………………………………… \$ 68,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………….. \$ 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 inflow from operating activities………… 72,900 Cash flows from investing activities: Acquisition of land……………………………………… \$(29,000) Acquisition of equipment (\$49,400  depreciation expense of \$4,000 = \$45,400; \$53,500  \$45,400)….. (8,100) Net cash outflow from 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 stock………………………………. 23,600 Net cash outflow from financing activities………. (30,600) Net increase in cash………………………………………… \$ 5,200 _____ *These amounts can be combined into a single total and reported as “Decrease in current assets other than cash…………………………………. 3,400.” **These amounts can be combined into a single total and reported as “Decrease in current liabilities………………………………………………. (2,500).” Chapter 12 The Statement of Cash Flows 99
• 62. (continued) P 12-5B 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 statement of cash flows. 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 a net cash inflow from operating activities conveys a more positive signal about a company than a net cash outflow from operations. 100 Financial Accounting 4/e Solutions Manual
• 63. (40 min.) P 12-6B Req. 1 Scott Corporation Income Statement Year Ended December 31, 20X1 Sales revenue (2,500 × \$200)……………………... \$500,000 \$260,000) Cost of goods sold \$120,000 + (1,500 × 315,000 2,000 Salary expense…………………………………….. 95,000 Depreciation expense (\$150,000 / 5)……………… 30,000 Rent expense………………………………………. 20,000 Income tax expense (\$7,000 + \$3,000)……………. 10,000 Net income………………………………………… \$ 30,000 Req. 2 Scott Corporation Balance Sheet December 31, 20X1 ASSETS LIABILITIES Current: Current: Cash \$ 90,000* Accounts payable Accounts receivable (\$260,000  \$208,000) \$ 52,000 (2,500 × \$200 × .20) 100,000 Salary payable 4,000 Inventory Total current liabilities 56,000 \$260,000 2,000 × (3,000 2,500) 65,000 Total current assets 255,000 STOCKHOLDERS’ EQUITY Property, plant, and equipment: Common stock 300,000 Store fixtures \$150,000 Retained earnings Less Accumulated (\$30,000  \$11,000) 19,000 depreciation (30,000) 120,000 319,000 Total liabilities and Total assets \$375,000 stockholders' equity \$375,000 _____ *\$300,000  \$150,000  \$120,000  \$20,000  \$208,000 + \$400,000  \$91,000  \$10,000  \$11,000 = \$90,000. Chapter 12 The Statement of Cash Flows 101
• 64. (continued) P 12-6B Req. 3 Scott Corporation Statement of Cash Flows Year Ended December 31, 20X1 Cash flows from operating activities: Net income……………………………………. \$ 30,000 Add (subtract) items that affect net income And cash flow differently: Depreciation……………………………….. \$ 30,000 Increase in accounts receivable……………. (100,000) Increase in inventory………………………. (65,000) Increase in accounts payable………………. 52,000 Increase in salary payable…………………. 4,000 (79,000) Net cash inflow from investing activities. (49,000) Cash flows from investing activities: Purchase of equipment…………………….….. (150,000) Net cash outflow from investing activities… (150,000) Cash flows from financing activities: Issuance of common stock……………………. 300,000 Payment of dividend………………………….. (11,000) Net cash inflow from financing activities…. 289,000 ________ Increase in cash………………………………….. \$ 90,000 Cash balance, January 1, 20X1………………….. 0 Cash balance, December 31, 20X1……………… \$ 90,000 102 Financial Accounting 4/e Solutions Manual
• 65. (35-45 min.) P 12-7B Datex Corporation Statement of Cash Flows Year Ended December 31, 20X7 Cash flows from operating activities: Net income…………………………………………….. \$ 57,100 Add (subtract) items that affect net income and cash flow differently: Depreciation……………………………………….. \$ 21,800 Amortization……………………………………….. 5,300 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 notes payable, short-term……………… 4,300** Decrease in accounts payable……………………… (2,900)** Increase in income tax payable…………………….. 1,900** Decrease in accrued liabilities……………………… (11,700)** 18,100 Net cash inflow from 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 outflow from investing activities………… (90,200) Cash flows from financing activities: Issuance of common stock…………………………….. \$ 41,200 Issuance of long-term note payable……………………. 34,400 Payment of cash dividends…………………………….. (18,300) Purchase of treasury stock…………………………….. (14,300) Net cash inflow from financing activities………….. 43,000 Net increase in cash (\$50,700  \$22,700)………………… \$ 28,000 continued on next page Chapter 12 The Statement of Cash Flows 103
• 66. (continued) P 12-7B Noncash investing and financing activities: Acquisition of land by issuing long-term note payable….. \$107,000 Retirement of bonds payable by issuing common stock… 65,000 Total noncash investing and financing activities…………… \$172,000 _____ *These amounts can be combined into a single total and reported as “Increase in current assets other than cash…………………………………. (12,300).” **These amounts can be combined into a single total and reported as “Decrease in current liabilities……………………………………………… (8,400).” 104 Financial Accounting 4/e Solutions Manual
• 67. (35-45 min.) P 12-8B Req. 1 Southern Bell Company Statement of Cash Flows Year Ended March 31, 20X3 Cash flows from operating activities: Net income……………………………………………… \$ 70,000 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………… \$ 15,300 Amortization………………………………………… 2,000 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 inflow from 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 outflow from investing activities………….. (112,000) Cash flows from financing activities: Issuance of long-term note payable…………………….. \$ 50,000 Issuance of common stock……………………………… 11,000 Payment of cash dividends……………………………… (30,000) Net cash inflow from financing activities…………… 31,000 Net increase in cash (\$19,900  \$4,000)…………………… \$ 15,900 Noncash investing and financing activities: Acquisition of land by issuing note payable……………. \$ 76,000 _____ *These amounts can be combined into a single total and reported as “Decrease in current assets other than cash…………………………………………… 4,000.” **These amounts can be combined into a single total and reported as “Increase in current liabilities…………………………………………………………. 5,600.” Chapter 12 The Statement of Cash Flows 105
• 68. (continued) P 12-8B Req. 2 Evaluation: Southern Bell’s cash flows look strong. Operations are the main source of cash. The company is investing in new plant assets, and borrowing — a financing cash flow — appears reasonable. All of these signs are favorable. 106 Financial Accounting 4/e Solutions Manual
• 69. 45-60 min.) P 12-9B Req. 1 Internet Guide, Inc. Statement of Cash Flows Year Ended December 31, 20X3 Cash 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 inflow from operating activities…………… 67,800 Cash flows from investing activities: Acquisition of equipment……………………………….. \$ (31,400) Collection of loans……………………………………… 13,000 Sale of investments……………………………………... 8,200 Net cash outflow from investing activities………….. (10,200) Cash flows from financing activities: Issuance of common stock……………………………… \$ 47,300 Payment of long-term debt……………………………… (41,300) Payment of dividends…………………………………… (27,200) Purchase of treasury stock……………………………… (26,400) Net cash outflow from financing activities………….. (47,600) Net increase in cash (\$63,600  \$53,600)…………………. \$ 10,000 Noncash investing and financing activities: Acquisition of land by issuing common stock………….. \$ 80,100 Retirement of long-term debt by issuing common stock.. 19,000 Total noncash investing and financing activities…………... \$ 99,100 Chapter 12 The Statement of Cash Flows 107
• 70. (continued) P 12-9B Req. 2 Internet Guide, Inc. Cash Flows from Operating Activities Year Ended December 31, 20X3 Cash flows from operating activities: Net income…………………………………….. \$55,500 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………... \$ 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 inflow from operating activities….. \$67,800 _____ *These amounts can be combined into a single total and reported as “Increase in current assets other than cash……………………………. (16,400).” **These amounts can be combined into a single total and reported as “Increase in current liabilities………………………………………… 8,300.” 108 Financial Accounting 4/e Solutions Manual
• 71. (45-60 min.) P 12-10B Req. 1 Funny Bone Defensive Driving, Inc. Statement of Cash Flows Year Ended June 30, 20X1 Cash flows from operating activities: Net income…………………………………………….. \$ 56,200 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………… \$ 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 inflow from operating activities………….. 69,100 Cash flows from investing activities: Sale of land…………………………………………….. \$ 46,900 Acquisition of long-term investment………………….. (4,900) Net cash inflow from 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 stock…………………………….. 3,900 Net cash outflow from financing activities………… (95,200) Net increase in cash………………………………………. \$ 15,900 continued on next page _____ *These amounts can be combined into a single total and reported as “Increase in current assets other than cash…………………………….. (6,200).” **These amounts can be combined into a single total and reported as “Decrease in current liabilities………………………………………… (1,000).” Chapter 12 The Statement of Cash Flows 109
• 72. (continued) P 12-10B 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 stock………………………………… 4,700 Total noncash investing and financing activities…………….. \$19,000 110 Financial Accounting 4/e Solutions Manual
• 73. (continued) P 12-10B Req. 2 Funny Bone Defensive Driving, Inc. Cash Flows from Operating Activities Year Ended June 30, 20X1 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 inflow from operating activities…. \$ 69,100 Chapter 12 The Statement of Cash Flows 111
• 74. Decision Cases (45-60 min.) Decision Case 1 Req. 1 (indirect method for operating activities) UPACK, Inc. Statement of Cash Flows Year Ended December 31, 20X6 Cash flows from operating activities: (Thousands) Net income………………………………………………….. \$105 Add (subtract) items that affect net income and cash flow differently: Depreciation………………………………………………… \$ 46 Amortization of patents…………………………………….. 11 Increase in accounts receivable (\$72  \$61)……………….. (11)* Increase in inventories (\$194  \$181)……………………… (13)* Increase in accounts payable (\$63  \$56)………………….. 7** Decrease in accrued liabilities (\$17  \$12)………………… (5)** 35 Net cash inflow from 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 outflow from investing activities……………… (141) Cash flows from financing activities: Issuance of common stock (\$149  \$61)…………………… \$ 88 Payment of short-term note payable (\$101  \$32)…………. (69) Payment of cash dividends (\$156 + \$105  \$221)…………. (40) Payment of long-term note payable (\$163  \$147)………… (16) Net cash outflow from financing activities……………… (37) Net decrease in cash (\$25  \$63)………………………………. \$ (38) _____ *These amounts can be combined into a single total and reported as “Increase in current assets other than cash…………………………………… (\$24).” **These amounts can be combined into a single total and reported as “Increase in current liabilities………………………………………………… \$ 2.” 112 Financial Accounting 4/e Solutions Manual
• 75. (continued) Decision Case 1 Req. 2 During 20X5, the company sold equipment for \$33,000 and land for \$61,000. These two transactions, indicated by the gain and the loss on the 19X5 income statement, increased 20X5 cash by \$94,000. During 20X6, the company generated no cash by selling plant assets. The two largest payments during 20X6 were the purchases of property, plant, and equipment (\$110,000) and the payment of short-term notes payable (\$69,000), which came to a \$179,000 outlay. Thus, compared to the 20X5 cash balance, the 20X6 amount looks low. Req. 3 Overall, 20X6 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. UPACK should be able to use these plant assets to earn profits in future years. The business eliminated debt by \$85,000 (\$69,000 short-term and \$16,000 long-term). Reducing debt decreases future interest expense. Tell the board members that the future looks bright for UPACK, Inc. The cash has been spent wisely. Chapter 12 The Statement of Cash Flows 113
• 76. (15-25 min.) Decision Case 2 Abba Medical looks like the better investment because: 1. Operations generate far more cash for Abba than for Esquire. Operations should be the main source of cash for a healthy company. 2. Abba is investing more in long-term plant assets than Esquire is. Abba is laying a more solid foundation in revenue-producing assets than Esquire is. 3. Esquire’s main source of cash is the sale of plant assets. This trend cannot continue for long without hurting the company’s ability to produce revenue. 4. Abba is raising more cash by selling stock than Esquire. This gives Abba more cash to invest in research and development of new products and other innovations to enhance the company’s competitiveness. Esquire, on the other hand, is paying off debt. That is not bad for Esquire, but Abba appears to be a step ahead in terms of financing its operations with owners’ equity and investing the cash in income- producing assets. 114 Financial Accounting 4/e Solutions Manual
• 77. Ethical Issue Req. 1 Cash flows from operating activities: Without With Reclassification Reclassification Net income………………………… \$ 37,000 \$37,000 Increase in accounts receivable……. (80,000) — Net cash inflow (outflow) from operating activities……………... \$(43,000) \$37,000 Terminix looks better with the reclassification because net cash flow from operations is positive. Req. 2 Cash flows from investing activities: Reclassification of (or long-term investment in) receivables……… — ( 80,000) _______ _______ Decrease in cash from all activities... \$(43,000) (\$43,000) Praco is correct that reclassifying the receivables will increase the reported amount of cash inflow from operations. This will make Terminix look better. But reclassifying a receivable has no effect on overall cash from all activities, as shown in the final result above. Req. 3 The reclassification would be ethical if Terminix expects to collect the receivables beyond the current operating cycle, or one year if longer. Reclassification would be unethical if Terminix 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. Chapter 12 The Statement of Cash Flows 115
• 78. Financial Statement Cases (40-50 min.) Financial Statement Case 1 Req. 1 Indirect method. The statement of cash flows begins with net income for the year. Also, The Gap does not report collections from customers, payments to suppliers, and so on, which are reported under the direct method. Req. 2 (All amounts in thousands) a. Collections + Decrease in Receivables from = Sales Revenue or customers  Increase in Receivables \$9,054,462 = \$9,054,462 + 0 116 Financial Accounting 4/e Solutions Manual
• 79. (continued) Financial Statement Case 1 b. (All amounts in thousands) Payments for Cost of Increase in Increase in = +  inventory goods sold Inventory Accounts Payable \$5,374,334 = \$5,318,218 + (\$1,056,444  \$733,174)  (\$684,130  \$416,976) Cost of Goods Sold Beg. inventory 733,174 End. inventory 1,056,444 Purchases 5,641,488 Cost of goods sold 5,318,218 Accounts Payable Beg. bal. 416,976 Payments for inventory 5,374,334 Purchases 5,641,488 End. bal. 684,130 Chapter 12 The Statement of Cash Flows 117
• 80. (continued) Financial Statement Case 1 Req. 3 Net income increased from \$534 million to \$825 million after increasing during the preceding year. Total assets increased from \$3,338 million to \$3,964 million, and stockholders’ equity decreased mostly due to large purchases of treasury stock. The company’s debt ratio is 0.60, which is manageable. Net cash flows from operating activities were up from \$845 million to \$1,394 million, and the company is investing heavily in property and equipment. Overall, these results look very strong. (30-50 min.) Financial Statement Case 2 Because the students will be using the annual reports of real companies, the answers to this problem will vary widely. 118 Financial Accounting 4/e Solutions Manual
• 81. Solutions to Internet Exercise COCA-COLA COMPANY The numerical computations printed here are based on information from fiscal years 1996 through 1998. The figures for subsequent years will of course vary. Go to the http://www.prenhall.com/harrison/ Web site for updated solutions. 2. Coca-Cola uses the indirect method to prepare the statement of cash flows. One can tell by looking at the Operating Activities section of the statement of cash flows. If net income/(loss) is reported at the top of the section followed by reconciliation adjustments, the indirect method is being used. Only one activity section, operating activities, is affected by the choice of method. 3. 1998: Net cash provided by operating activities: + \$ 3,433,000,000 Net cash used in investing activities: (2,161,000,000) Net cash used in financing activities: (1,333,000,000) Operating Activities is providing the most cash. This is considered favorable because operating activities must be the primary source of cash over the long term or the company will not survive. 4. 1998 Net income is \$3,533,000,000 1998 Net cash provided by operating activities is \$3,433,000,000 These amounts differ. Both Net Income and Net Cash provided by Operating Activities report the results of operations. However, Net Income reports operating results using accrual-basis accounting, while Net Cash provided by Operating Activities reports operating results using cash-basis accounting. Chapter 12 The Statement of Cash Flows 119
• 82. 5. In 1998, Coca-Cola purchased \$809,000,000 (\$863,000,000  \$54,000,000) more in property, plant, and equipment (PPE) than it sold. Purchasing property, plant, and equipment is considered favorable since this indicates the company is growing. Purchases and sales of PPE are reported in the Investing Activities section. 6. In 1998, Coca-Cola issued \$1,408,000,000 (\$1,818,000,000  \$410,000,000) more debt than it paid back. In 1998, Coca-Cola purchased \$1,261,000,000 (\$1,563,000,000  \$302,000,000) more stock than it issued. In 1998, Coca-Cola paid \$1,480,000,000 in cash dividends. Debt transactions, stock transactions, and cash dividends are all reported in the Financing Activities section. 120 Financial Accounting 4/e Solutions Manual