This document provides an overview of exercises, problems, cases, and an internet assignment related to Chapter 13 on statements of cash flows. It describes 13 exercises, 9 problems, 4 cases, and 1 internet assignment. The descriptions provide the learning objectives targeted, estimated time to complete, and difficulty level of each item. Key topics covered include preparing statements of cash flows using both the direct and indirect methods, analyzing cash flows from operating, investing and financing activities, and evaluating a company's liquidity and financial position.
2. Cases
Topic
Learning
Objectives
Characteristics
13–1 Using a statement of cash flows 1 Analytical, communication
13–2 Budgeting at a personal level 1, 8 Mechanical, analytical
13–3 Window dressing; effects on net
income and net cash flow
1, 4, 8 Analytical, communication
13–4 Peak pricing 8 Conceptual, ethics, group
Business Week
Assignment
13–5 Business Week assignment 6, 8 Analytical—Texas Instruments
Internet
Assignment
13–1 Comparing cash flow information from
two companies
2, 3, 4 Analytical—Coca-Cola,
Amazon
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 435
4. * 13–8 Satellite 2010
A comprehensive problem covering all learning objectives. Includes a
worksheet, the indirect method, and analysis of the company’s financial
position. We assign this to groups and let them deal with the worksheet
mechanics on their own. This company is earnings rich and cash poor;
Problem *13–9 is similar.
60 Strong
* 13–9 Miracle Tool, Inc.
A comprehensive problem covering all learning objectives. Includes a
worksheet, the indirect method, and analysis of the company’s financial
position. We assign this to groups and let them deal with the worksheet
mechanics on their own. Problem *13–8 is similar.
60 Strong
Cases
13–1 Another Look at Allison Corporation
Students are asked to review the cash flow statement of Allison Corporation
(the company used as an example throughout the chapter) and to evaluate the
company’s ability to maintain its present level of dividends.
25 Strong
13–2 Personal Budgeting
A simple case that illustrates the usefulness of cash budgeting in the
environment of a college student.
15 Easy
13–3 General Wheels, Inc.
An automobile manufacturer is in serious financial difficulty, and management
is considering several proposals to increase reported net income and net cash
flow. Students are asked to evaluate the probable effects of each proposal.
This case can lead into an open-ended discussion of “window dressing” in
annual statements.
45 Medium
13–4 Peak Pricing
Students are to discuss various aspects of peak pricing and discuss how it
might be applied in specific situations. Also, they are to describe situations in
which peak pricing might be considered unethical.
15 Easy
Business Week Assignment
13–5 Business Week Assignment
Students consider the impact on a company of an economic downturn.
20 Medium
Internet Assignment
13–1 Comparing Cash Flow Information from Two Companies
Visit a website that actually provides assistance in preparing cash budgets
and statements of cash flows.
30 Medium
____________
*Supplemental Topic, “A Works heet for Preparing a Statement of Cas h Flows .”
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 437
10. 17. The credit to the Land account indicates a sale of land and, therefore, a cash receipt. However, the
$220,000 credit represents only the cost (book value) of the land that was sold. This amount must be
adjusted by any gain or loss recognized on the sale in order to reflect the amount of cash received.
18. Credits to paid-in capital accounts usually indicate the issuance of additional shares of capital stock.
Assuming that these shares were issued for cash, the transaction would be presented in the financing
activities section of a statement of cash flows as follows:
Proceeds from issuance of capital stock ($12,000,000 + $43,500,000) ........................... $55,500,000
19. The amount of cash dividends paid during the current year may be determined as follows:
Dividends declared during the year................................................................................. $ 4,300,000
Add: Decrease during the year in the liability for dividends payable
($1,500,000 $900,000)...............................................................................................
600,000
Dividends paid during the year ....................................................................................... $ 4,900,000
20. Free cash flow is that portion of the net cash flow from operating activities that is available for
discretionary purposes after the basic obligations of the business have been met.
From a short-term creditor’s point of view, free cash flow is a “buffer,” indicating that the business
brings in more cash than it must have to meet recurring commitments. Long-term creditors view free
cash flow as evidence of the company’s ability to meet interest payments and to accumulate funds for
the eventual retirement of long-term debt.
From the stockholders’ viewpoint, free cash flow indicates a likelihood of future dividend increases or,
perhaps, expansion of the business, which will increase future profitability.
Management views free cash flow positively because it is available for discretionary purposes rather
than already committed to basic operations.
In summary, everyone associated with the business views free cash flow favorably—and the more, the
better.
21. A cash budget is a forecast of expected future cash flows. It usually shows the expected cash flows of
each department within the organization, month by month, for the coming year.
Budgets are useful to management in many ways. The very act of preparing a budget forces
management to plan and coordinate the activities of all departments. During the year, it advises managers
of the resources available to them and the results they are expected to achieve. It also serves as a basis
for evaluating actual performance, and provides advance warning of impending cash shortages.
22. Peak pricing means charging higher prices in periods in which customer demand exceeds the company’s
capacity, and lower prices in “off-peak” periods. This serves the dual purposes of increasing revenue
during peak periods, and allowing the business to serve more customers by shifting excess demand to
off-peak periods.
Common examples include restaurants, which charge higher prices at dinner time, and movie theaters,
which offer low matinee prices during the daytime.
23. An effective product mix is one that generates more sales, both by attracting more customers and
inspiring customers to purchase more products.
24. Speeding up the collection of accounts receivable does not increase the total amount collected. Rather, it
merely shifts collections to an earlier time period. The only period(s) in which cash receipts actually
increase are those in which collections under both the older and newer credit periods overlap.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 443
12. Ex. 13–2 Note: All dollar figures are in thousands.
a. Cash from operations................................................................................... $19,582
Expenditures for property and equipment .................................................. (10,066)
Dividends paid ............................................................................................. -0-
Free cash flow .............................................................................................. $ 9,516
b. The major sources and uses of cash from financing activities during 2001 were:
Source: ......................................................................................................... none
Use: Purchase of stock ................................................................................ $ 4,783
Use: Repayment of Debt ............................................................................. $ 4,762
Financing activities resulted in a decline in cash of $9,802 in 2001.
c. Cash and cash equivalents decreased by $4,587 during 2001, moving the cash
balance from $19,690 to $15,103. The company does not show any payment of
dividends in 1999, 2000, or 2001, but appears to be in a relatively strong cash
position should it decide to pay dividends in the future. Cash balances for the last
three years range from $15 to $19 million with relatively strong operating cash
flows each year ($15 to $20 million).
d. 1. The loss (gain) on the disposal of property, plant, and equipment represents a
reclassification of this item from the operating activities section of the
statement of cash flows (which is based on net income and includes any loss or
gain on the disposal of property, plant, and equipment) to the investing
activities section of the statement of cash flows. If a loss is present, as in 1999
and 2001, the loss is added back to effectively remove the item from net
income; if a gain is present, as in 2000, the gain is subtracted to effectively
remove it from net income.
2. The decrease in accounts and notes receivable represents credit sales from
previous years that were collected in 2001. In the indirect method calculation,
presented at the bottom of Exhibit 13-6, this item is an increase in the amount
of cash provided by net income because the sale was recognized in previous
years but the cash was received in 2001.
Ex. 13–3 a. Purchases of marketable securities ............................................................ $125,000
b. Proceeds from sales of marketable securities ($140,000 book value,
less
$35,000 loss) ..............................................................................................
$105,000
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 445
14. Ex. 13–7 WYOMING OUTFITTERS, INC.
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities:
Cash received from customers ................................................ $795,000
Interest and dividends received .............................................. 27,000
Cash provided by operating activities .................................. $822,000
Cash paid to suppliers and employees .................................... $(635,000)
Interest paid ............................................................................. (19,000)
Income taxes paid .................................................................... (71,000)
Cash disbursed for operating activities ............................... (725,000)
Net cash flow from operating activities ....................................... $ 97,000
Cash flows from investing activities:
Loans made to borrowers ........................................................ $ (5,000)
Collections on loans ................................................................. 4,000
Cash paid to acquire plant assets ............................................ (21,000)
Proceeds from sales of plant assets ......................................... 9,000
Net cash used by investing activities .......................................... (13,000)
Cash flows from financing activities:
Proceeds from short-term borrowing ...................................... $ 10,000
Dividends paid.......................................................................... (55,000)
Net cash used by financing activities ........................................... (45,000)
Net increase in cash and cash equivalents .................................. $ 39,000
Cash and cash equivalents, beginning of year............................. 35,800
Cash and cash equivalents, end of year....................................... $ 74,800
Ex. 13–8 a. (1) Expenditures for R&D are an operating activity. In the short term, reducing
these expenditures will increase the net cash flow from operating activities.
(2) In the long run, reducing expenditures for R&D may reduce cash flows from
operations by reducing the number of new products the company brings to
market.
b. Selling to customers using bank credit cards taps a new market of potential
customers. This should increase sales and cash receipts in both the short and long
term.
c. (1) Reducing inventory will lessen expenditures for inventory purchases during the
time that inventory levels decline. This will improve the net cash flow from
operating activities in the near term.
(2) Once inventory has stabilized at the new and lower level, monthly expenditures
will become approximately equal to the inventory used. Thus, this strategy will
not affect cash flows once inventory has stabilized.
d. (1) Deferring taxes can postpone taxes each year. For a growing business, this can
reduce annual cash outlays year after year. Thus, it can increase net cash flows
over both the short and long terms.
(2) At some point in the future, the early deferrals will require payment, causing
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 447
16. Ex. 13–9 a. Added to net income. In a statement of cash flows, the retirement of debt is
classified as a financing activity, not an operating activity. However, this
extraordinary loss reduced the amount of net income reported in the income
statement. Therefore, this nonoperating loss is added back to net income as a step
in determining the net cash flows from operating activities.
b. Added to net income. Depreciation is a noncash expense. Although it reduces the
net income for the period, no cash outlay is required. Thus, to the extent of
noncash expenses recorded during the period, net income is less than the amount
of net cash flow.
c. Omitted from the computation. The transfer of cash from a bank account to a money
market fund has no effect on net income. Also, as a money market fund is a cash
equivalent, this transfer is not regarded as a cash transaction.
d. Deducted from net income. An increase over the year in the amount of accounts
receivable indicates that revenue recognized in the income statement (credit sales)
exceeds the collections of cash from credit customers. Therefore, net income is
reduced by the increase in receivables which has not yet been collected.
e. Omitted from the computation. Cash received from customers is a cash inflow shown
in the direct method of computing net cash flow from operating activities. However,
this cash inflow does not appear separately when the indirect method is used.
f. Added to net income. A reduction in prepaid expenses indicates that the amounts
expiring (and, therefore, being recognized as expense) exceed cash outlays for
these items during the period. Thus, net income measured on the accrual basis is
lower than net cash flow.
g. Omitted from the computation. Declarations and payments of dividends do not enter
into the determination of either net income or net cash flows from operating
activities. Therefore, these transactions do not cause a difference be tween these
figures. Dividends paid are reported in the financing activities section as a
disbursement.
h. Added to net income. An increase in accounts payable means that purchases of
merchandise, measured on the accrual basis, exceed the payments during the
period made to suppliers. Thus, costs and expenses measured on the accrual basis
were greater than the actual cash payments during the period.
i. Deducted from net income. The $2 million reduction in accrued income taxes
payable means that cash payments to tax authorities exceeded by $2 million the
income tax expense of the current year. Therefore, cash outlays exceeded the
expenses shown in the income statement, and net cash flow from operating
activities is smaller than net income.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 449
18. Ex. 13–11 a. 1. The major causes of the increase in cash during 2001 are:
Positive operating cash flows ..............................................$.. . .7..8..,.5..8..4.. .t h ousand
Maturity of held to maturity securities ................................$..2..2..8..,.3..9..7.. .t housand
Sale and maturity of available for sale securities ................$.. . .7..4..,.1..6..6.. .t housand
All other major categories of cash flows are negative.
2. Cash flows from financing activities would have been a negative $1,932 from
the repurchase and retirement of shares of outstanding stock. Cash would
have increased by an additional $14,168, the amount paid in dividends, for a
total increase of $59,818 ($45,650 + $14,168).
b. 2002 free cash flow is computed as follows:
Net cash from operating activities .....................................$.. . .7 1,203 thousand
Cash invested in property, plant, and equipment
(capital expenditures)................................................(..1 0,308 thousand)
Dividends paid .....................................................................(.1. 4,610 thousand)
$46,285 thousand
c. The amount of cash from operations is relatively stable in that it is positive each of
the three years and ranges from $82,591 thousand in 2000 to $71,203 thousand in
2002. The variability in the change in cash comes primarily from the highly
variable amount paid out in the investing activities category. This amount ranges
from a high of $64,177 thousand in 2000 to a low of $16,834 thousand in 2001. The
amount paid out for financing activities is also variable, but not as much as the
amounts in the inve s ting activitie s cate gory. The s ingle item “Acquis itions of
bus ine s s e s , ne t of cas h acquire d” in the inve s ting activitie s cate gory in 2000
($74,293 thousand paid out) is more responsible than any other single item for the
high variability. It is difficult to say whether the variability is positive or negative,
but assuming that the acquisition referred to above was a good management
decision, the high variability may be a positive thing. One way to look at it is that
the company has a sufficiently strong cash position to allow it to take advantage of
opportunities like the acquisition of a business in 2000 that will provide benefits in
the future.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 451
20. 30 Minutes, Medium PROBLEM 13–2
HARRIS COMPANY
HARRIS COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from operating activities:
Cash received from customers (1) $ 3 0 0 0 0 0 0
Interest and dividends received 1 0 0 0 0 0
Cash provided by operating activities $ 3 1 0 0 0 0 0
Cash paid to suppliers and employees (2) $ (2 5 5 0 0 0 0 )
Interest paid ( 1 8 0 0 0 0 )
Income taxes paid ( 9 5 0 0 0 )
Cash disbursed for operating activities (2 8 2 5 0 0 0 )
Net cash flow from operating activities $ 2 7 5 0 0 0
Cash flows from investing activities:
Loans made to borrowers $ ( 5 0 0 0 0 0 )
Collections on loans 2 6 0 0 0 0
Cash paid to acquire plant assets (3 1 0 0 0 0 0 )
Proceeds from sales of plant assets (3) 5 8 0 0 0 0
Net cash used in investing activities: (2 7 6 0 0 0 0 )
Cash flows from financing activities:
Proceeds from issuing bonds payable $ 2 5 0 0 0 0 0
Dividends paid ( 1 2 0 0 0 0 )
Net cash provided by financing activities 2 3 8 0 0 0 0
Net increase (decrease) in cash and cash equivalents $ ( 1 0 5 0 0 0 )
Cash and cash equivalents, beginning of year 4 8 9 0 0 0
Cash and cash equivalents, end of year $ 3 8 4 0 0 0
Supporting computations:
(1) Cash received from customers:
Cash sales $ 8 0 0 0 0 0
Collections on accounts receivable 2 2 0 0 0 0 0
Cash received from customers $ 3 0 0 0 0 0 0
(2) Cash paid to suppliers and employees:
Payments on accounts payable to merchandise suppliers $ 1 5 0 0 0 0 0
Cash payments for operating expenses 1 0 5 0 0 0 0
Cash paid to suppliers and employees $ 2 5 5 0 0 0 0
(3) Proceeds from sales of plant assets:
Book value of plant assets sold $ 6 6 0 0 0 0
Less: Loss on sales of plant assets 8 0 0 0 0
Proceeds from sales of plant assets $ 5 8 0 0 0 0
Note to instructor: The transfer from the money market fund to the general bank account is not
considered a cash receipt because a money market fund is a cash equivalent.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 453
22. 25 Minutes, Easy PROBLEM 13–4
HAYES EXPORT CO.
a. HAYES EXPORT CO.
Partial Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flows from investing activities:
Purchases of marketable securities $ ( 7 8 0 0 0 )
Proceeds from sales of marketable securities (1) 4 6 0 0 0
Loans made to borrowers ( 5 5 0 0 0 )
Collections on loans 6 0 0 0 0
Cash paid to acquire plant assets (see part b ) ( 5 0 0 0 0 )
Proceeds from sales of plant assets (2) 5 2 0 0 0
Net cash used in investing activities $ ( 2 5 0 0 0 )
Supporting computations:
(1) Proceeds from sales of marketable securities:
Cost of securities sold (credit entries to Marketable Securities
account) $ 6 2 0 0 0
Less: Loss on sales of marketable securities 1 6 0 0 0
Proceeds from sales of marketable securities $ 4 6 0 0 0
(2) Proceeds from sales of plant assets:
Cost of plant assets sold or retired $ 1 4 0 0 0 0
Less: Accumulated depreciation on plant assets sold or retired 1 0 0 0 0 0
Book value of plant assets sold or retired $ 4 0 0 0 0
Add: Gain on sales of plant assets 1 2 0 0 0
Proceeds from sales of plant assets $ 5 2 0 0 0
b.
Schedule of noncash investing and financing activities:
Purchases of plant assets $ 1 5 0 0 0 0
Less: Portion financed through issuance of long-term debt 1 0 0 0 0 0
Cash paid to acquire plant assets $ 5 0 0 0 0
c. Management has more control over the timing and amount of outlays for investing activities
than for operating activities. Many of the outlays for operating activities are contractual,
reflecting payroll agreements, purchase invoices, taxes, and monthly bills. Most investing
activities, in contrast, are discretionary—both as to timing and dollar amount.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 455
24. PROBLEM 13–5
TREECE, INC. (concluded)
b. In addition to more aggressive collection of accounts receivable, management could increase
cash flows from operations by (only two required):
Reducing the amount of inventories being held.
Reducing the amount of short-term prepayments of expenses.
Taking greater advantage of accounts payable as a short-term means of financing
purchases of goods and services.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 457
28. PROBLEM 13–7
21ST CENTURY TECHNOLOGIES (concluded)
b. (1) The primary reason why cash provided by operating activities substantially exceeded net
income was the company’s $150,000 in depreciation expense. Depreciation reduces net
income, but does not affect the cash flows from operating activities.
(2) The primary reason for the net decrease in cash was the large cash outlays for investing
activities—specifically, the cash paid to acquire plant assets.
c. To the extent that receivables increase, the company has not yet collected cash from its
customers. Thus, if the growth in receivables had been limited to $10,000, instead of $60,000,
the company would have collected an additional $50,000 from its customers. Thus, the net
decrease in cash (and cash equivalents) would have been $30,000, instead of $80,000.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 461
34. PROBLEM 13–9
MIRACLE TOOL, INC. (continued)
c. Miracle Tool, Inc. achieved its positive cash flow from operating activities basically by
liquidating assets and by not paying its bills. It has converted most of its accounts receivable
into cash, which probably means that credit sales have declined substantially over the past
several months. A decrease in sales shows up in the income statement immediately, but may
take months before its effects appear in a statement of cash flows.
Miracle Tool, Inc. is not replacing plant assets as quickly as these assets are being
depreciated. In any given year, this may not be significant. But on the other hand, this
relationship certainly indicates that the business is not expanding, and it may indicate that the
company is deferring replacements of plant assets in an effort to conserve cash.
Miracle Tool, Inc. is allowing its accounts payable to rise much more quickly than it is
increasing inventory. This indicates that the company is not paying its bills as quickly as it
us e d to. While this cons e rve s cas h, the “s avings ” are temporary. Als o, if t he company’s cre dit
rating is damaged, this strategy may reduce both earnings and cash flows in the near future.
d. Miracle Tool, Inc. has substantially more cash than it did a year ago. Nonetheless, the
company’s financial pos ition appe ars to be de te riorating. Its marketable securities—a highly
liquid asset—are almost gone. Its accounts payable are rising rapidly, and substantially exceed
the amount of cash on hand. Most importantly, sales and accounts receivable both are falling,
which impairs the company’s ability to ge ne rate cas h from ope rating activitie s in the future .
Als o, the liquidity of the company’s inve ntory is que s tionable in light of the de clining s ale s .
e. This company is contracting its operations. Its investment in marketable securities,
receivables, and plant assets all are declining. Further, the income statement shows that
ope rations are e roding the owne rs ’ e quity in the bus ine s s . The de cline in s ale s —already
apparent in the income statement—soon will reduce the cash collected from customers, which
is the principal factor contributing to a positive cash flow from operating activities.
In summary, this company appears to be in real trouble.
f. The company’s principal re ve nue s ource —sales of tools—appears to be collapsing. If nothing
is done, it is likely that the annual net losses will increase, and that operating cash flows soon
will turn ne gative . Thus , manageme nt’s firs t de cis ion is whe the r to attempt to re vive the
company, or liquidate it.
If the company is to be liquidated, this should be done quickly to avoid future operating losses.
Information should be gathered to determine whether it would be best to sell the company as a
going concern or whether management should sell the assets individually. In either event,
management should stop purchasing tools. Assuming that sales continue to decline, the
company’s curre nt inve ntory appe ars to be approximate ly a one -year supply.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 467
36. SOLUTIONS TO CASES
25 Minutes, Strong CASE 13–1
ANOTHER LOOK AT ALLISON CORPORATION
a. Based on past performance, it does not appear that Allison Corporation can continue to pay
annual dividends of $40,000 without straining the cash position of the company. In a typical
year, Allison generates a positive cash flow from operating activities of approximately $50,000.
However, about $45,000 is required in a normal year to replace the plant assets retired. This
leaves only about $5,000 per year of the net operating cash flow available for dividends and
other purposes. If Allison is to continue paying cash dividends of $40,000 per year, the
company must raise about $35,000 from investing and financing activities.
Over the long run, it is quite difficult for a company to continually finance its cash dividends
through increased borrowing (financing activity) or through sales of assets (investing activity).
Therefore, Allison Corporation may have to reduce its cash dividends in future years.
b. Two of the unusual factors appearing in the current statement of cash flows should be
cons ide re d in as s e s s ing the company’s ability to pay future dividends. First, the company
spent an unusually large amount ($160,000) to purchase plant assets during the year. This
expenditure for plant assets may increase net operating cash flow above the levels of prior
years. Second, the company issued $100,000 of bonds payable and an additional 1,000 shares
of capital stock. The interest on the new bonds payable will reduce future cash flows from
operations. Also, the additional shares of capital stock mean that total dividend payments must
be increased if the company is to maintain the current level of dividends per share.
In s ummary, the unus ual inve s ting and financing activitie s will improve the company’s ability
to continue its dividends only if the new plant assets generate more cash than is needed to
meet the increased interest and dividend requirements.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 469
38. 45 Minutes, Medium CASE 13–3
GENERAL WHEELS, INC.
a.
Proposals
Net Income
Net Cash Flows from
Operating Activities
Cash
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Increase
Increase
Increase
No effect
(or decrease)*
Decrease
Increase
No effect
No effect
No effect
Increase
Increase
(or decrease)*
Increase
Increase
No effect
No effect
No effect
Increase
Increase
(or decrease)*
Increase
Increase
Increase
*Eithe r “no e ffe ct” or “de cre as e ” is an acce ptable answe r to the probable e ffe ct of this
proposal upon net income; see discussion in paragraph (4), part b.
b. (1) If the costs of producing inventory are rising, use of the FIFO (first-in, first-out) method
assigns older and lower costs to the cost of goods sold. Thus, it results in higher reported
profits (but also in higher income taxes) than does the LIFO method. The inventory
method used by a company does not affect the price that it pays to suppliers to purchase
inventory. Thus, other than for possible tax consequences, the choice of inventory method
does not affect cash flows. (The case stated that the additional taxes stemming from use of
the FIFO method would not be paid until the following year.)
(2) Changing from an accelerated method to the straight-line method of depreciation will
(generally) reduce the amount of depreciation expense included in the income statement,
thus increasing reported net income. Lengthening estimates of useful lives has a similar
effect. Depreciation is a noncash expense; therefore, cash flows are not affected by the
choice of depreciation method or the estimate of useful lives, except to the extent that
these choices may affect income tax payments. The problem stated, however, that no
changes would be made in the depreciation claimed for tax purposes.
(3) Pressuring dealers (customers) to increase their inventories will increase General
Whe e ls ’ s ale s for the ye ar. This s hould incre as e net income and cash flows from operating
activities (collections from customers).
(4) Requiring dealers to pay more quickly will speed up cash collections from customers, thus
increasing operating cash flows and total cash. The timing of these collections has no direct
effect upon net income. However, offering shorter credit terms may have the indirect effect
of reducing net sales. Thus, one might argue that this proposal could decrease both net
income and future collections from customers.
(5) Passing up cash discounts will delay many cash outlays by about 20 days. In the long run
the amount paid will be about 2% greater, but in the short run the delay should more than
offset these increased costs. (A 20-day delay in cash outlays usually amounts to over 5% of
total cash outlays for the year: 20 days/365 days = 5.5%.) While operating cash flows will
increase, net income will decline; the higher purchase costs will be reflected in the cost of
goods sold.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 471
40. CASE 13–3
GENERAL WHEELS, INC. (concluded)
(6) Incurring short-term interest charges of 10% to replace long-term interest charges of
13% will reduce interest expense and cash payments of interest. Therefore, net income,
cash flows from operating activities, and total cash flow will improve. Manageme nt’s only
risks in pursuing this proposal are that short-term rates may rise or that the company may
be unable to renew the short-term loans as they mature.
(7) Dividend payments do not enter into the determination of net income or net cash flow from
operating activities. Therefore, these two amounts will not be affected by the proposal.
Cash dividends are classified as financing activities and do affect total cash flows.
Therefore, replacing cash dividends with stock dividends (which require no cash payment)
will increase net cash flow from all sources. However, management should be aware that
dis continuing cas h divide nds may adve rs e ly affe ct the company’s ability to rais e capital
through the issuance of additional shares of capital stock.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 473
42. 20 Minutes, Medium CASE 13–5
BUSINESS WEEK ASSIGNMENT
a. Cash increases (decreases) and net income (losses) are almost never equal. Net income is
determined using accrual-based accounting procedures. As a result, the cash flow associated
with revenues and expenses reported on the income statement can (and usually does) occur in
different time periods from when these items appear on the statements. Many things such as
depreciation expenses and non-operating gains and losses appear on the income statement,
but do not affect cash flows.
b. In order to keep cash from going out the door, management at Texas Instruments can:
cut capital spending
lay off employees
trim inventories
demand quicker payment from customers
slow down payments to suppliers
cut cash dividends
slow or stop stock buybacks
forego acquisitions by cash or
defer income taxes.
None of these things will affect net income, but they will increase cash.
c. In order to bring in fresh cash, management can:
issue debt
generate cash through operations
issue securities
practice peak pricing or
create an effective product mix.
Solutions Manual Vol. I, Financial and Managerial Accounting 13/e, Williams et al 475