LO 3

Report
12-1
Copyright ©2015 Pearson Education Inc. All rights reserved.
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
Learning Objective
1. Identify the purposes of the statement of cash
flows
12-2
Copyright ©2015 Pearson Education Inc. All rights reserved.
IDENTIFY THE PURPOSES OF THE
STATEMENT OF CASH FLOWS
Statement of cash flows

12-3
Reports cash flows

Cash receipts

Cash payments

Covers a span of time (month, quarter, year)

Includes cash equivalents
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 1
IDENTIFY THE PURPOSES OF THE
STATEMENT OF CASH FLOWS
Serves these purposes:
12-4
Predicts future cash
flows
Evaluates
management
decisions
Determines ability to
pay dividends and
interest
Shows relationship
of net income to
cash flows
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LO 1
Timing of the Financial Statements
12-5
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Exhibit 12-1
LO 1
Learning Objective
2. Distinguish among operating, investing, and
financing activities
12-6
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DISTINGUISH AMONG OPERATING,
INVESTING, AND FINANCING ACTIVITIES
Three types of business activities:
Operating
Investing
Financing
12-7
Create revenue, expenses, gains and
losses—net income
Cash flows related to long-term assets
Cash flows related to long-term
liabilities and owners’ equity
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 2
DISTINGUISH AMONG OPERATING,
INVESTING, AND FINANCING ACTIVITIES
Exhibit 12-2 | How Operating, Investing, and Financing Activities Affect the Balance Sheet
12-8
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LO 2
Two Formats for Operating Activities
Indirect
Direct
12-9
Reconciles from net income to net
cash provided by operating activities
Reports all cash receipts and cash
payments from operating activities
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LO 2
Learning Objective
3. Prepare a statement of cash flows by the indirect
method
12-10
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Exhibit 12-3 | Part 1
PREPARE A
STATEMENT OF
CASH FLOWS
BY THE INDIRECT
METHOD
LO 3
12-11
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INDIRECT METHOD
Operating Activities
Positive Items
Negative Items

Net income

Net loss

Depreciation and

Gain on sale of long-term
amortization

assets
Loss on sale of long-term

assets

other than cash
Decreases in current assets
other than cash

12-12
Increase in current assets

Decrease in current
liabilities
Increase in current liabilities
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
INDIRECT METHOD
Investing Activities
Positive Items
Negative Items

Sale of plant assets

Acquisition of plant assets

Sale of investments that are

Purchase of investments
not cash equivalents

Collections of loans
receivable
12-13
that are not cash
equivalents

Making loans to others
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
INDIRECT METHOD
Financing Activities
Positive Items
12-14
Negative Items

Issuing stock

Payment of dividends

Selling treasury stock

Purchase of treasury stock

Borrowing money

Payment of principal
amounts of debts
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
PREPARE A STATEMENT OF CASH FLOWS
BY THE INDIRECT METHOD
To illustrate the statement of cash flows, we use The
Roadster Factory, Inc. (TRF), a dealer in auto parts for sports
cars. Using the comparative balance sheets for 2014 and
2013 and the income statement for 2014, prepare the
statement of cash flows using the indirect method.
12-15
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LO 3
Exhibit 12-4
12-16
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LO 3
Exhibit 12-5
12-17
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
Cash Flows from Operating Activities

Transactions that make up net income

From the income statement


Net income

Depreciation, depletion and amortization expense

Gains and losses on sales of long-term asset
From the comparative balance sheets

Increase or decrease in each current asset (other
than cash)

12-18
Increase or decrease in each current liability
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LO 3
Cash Flows Template: Operating
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
12-19
+
Depreciation/depletion/amortization expense
+
Loss on sale of long-term assets
-
Gain on sale of long-term assets
-
Increases in current assets other than cash
+
Decreases in current assets other than cash
+
Increases in current liabilities
-
Decreases in current liabilities
=
Net cash provided by (used for) operating activities
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LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
From the Income Statement
Net cash provided by (used for) operating activities
12-20
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LO 3
Depreciation, Depletion, and Amortization

Added back to net income to convert net income to cash
flow

No effect on cash, decreases net income

Add-back cancels the deduction on the income
statement
The Roadster Factory, Inc. (TRF) reports Depreciation
Expense of $18,000 on their 2014 income statement
(Exhibit 12-5)
12-21
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LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
18,000
From the Income Statement
Net cash provided by (used for) operating activities
12-22
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LO 3
Gains and Losses on Sale of Long-Term
Assets

Gain or loss is an adjustment to net income

The Roadster Factory sold equipment for $62,000. The
book value was $54,000, so there was a gain of $8,000.

Net income also includes the gain

Must subtract gain from operating activities as it is
included in $62,000 reported in investing section
($54,000 + $8,000 = $62,000)
12-23
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LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
18,000
Gain on sale of plant assets
(8,000)
From the Income Statement
Net cash provided by (used for) operating activities
12-24
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LO 3
Changes in Current Assets and Current
Liabilities, Excluding Cash
1. An increase in a noncash current asset decreases cash


Accounts receivable increased $15,000

Sales revenue includes $15,000 not collected in cash

Subtract from net income in operating section
Prepaid expenses increased by $1,000, cash
decreases
12-25

Paid cash of $1,000 not deducted from net income

Subtract from net income in operating section
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
18,000
Gain on sale of plant assets
(8,000)
Increase in accounts receivable
Increase in prepaid expense
(15,000)
(1,000)
Net cash provided by (used for) operating activities
12-26
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LO 3
Changes in Current Assets and Current
Liabilities, Excluding Cash
2. An decrease in a noncash current asset increases cash

Inventory decreased $3,000

Decrease causes increase in Cost of Goods Sold,
decrease in net income, but no corresponding decrease
in cash

12-27
Add to net income in operating section
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
18,000
Gain on sale of plant assets
(8,000)
Increase in accounts receivable
(15,000)
Increase in prepaid expense
(1,000)
Decrease in inventory
3,000
Net cash provided by (used for) operating activities
12-28
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LO 3
Changes in Current Assets and Current
Liabilities, Excluding Cash
3. An increase in a current liability increases cash

Accounts payable increased $34,000

Cash was not spent to pay this debt

Cash payments are therefore less than expenses, and
TRF has more cash on hand
12-29

Increases in current liabilities increase cash

Add to net income in operating section
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
18,000
Gain on sale of plant assets
(8,000)
Increase in accounts receivable
(15,000)
Increase in prepaid expense
(1,000)
Decrease in inventory
3,000
Increase in accounts payable
34,000
Net cash provided by (used for) operating activities
12-30
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LO 3
Changes in Current Assets and Current
Liabilities, Excluding Cash
4. An decrease in a current liability decreases cash

Salary and wages payable decreased $2,000 and
Accrued liabilities decreased by $2,000
12-31

Payment of a current liability decreases cash but does
not affect net income

Subtract from net income in operating section
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
The Roadster Factory, Inc. (TRF)
Partial Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2014
Cash Flows From Operating Activities
Net income
$50,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
18,000
Gain on sale of plant assets
(8,000)
Increase in accounts receivable
Increase in prepaid expense
(1,000)
Decrease in inventory
3,000
Increase in accounts payable
34,000
Decrease in salary and wages payable
(2,000)
Decrease in accrued liabilities
(2,000)
Net cash provided by operating activities
12-32
(15,000)
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$77,000
LO 3
Cash Flows from Investing Activities

Transactions that affect long-term assets


Increases in these accounts represent purchase


Decreases to cash
Decreases to these accounts represent sales

12-33
Plant Assets, Investments, and Notes Receivable
Increases to cash
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LO 3
Cash Flows Template: Investing
Cash Flows From Investing Activities
12-34
+
Sale of long-term assets
-
Purchases of long-term assets
+
Collections of note receivable
-
Loans to others
=
Net cash provided by (used for) investing activities
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LO 3
Purchases and Sales of Plant Assets
For computing cash flows, it is helpful to combine all the plant
assets into a single summary account
Plant Assets, Net
Beginning
219,000
18,000
Depreciation expense
Acquisitions
196,000
54,000
Book value of assets sold
Ending balance
343,000
Calculating the proceeds from the sale of plant assets
Book value
$54,000
12-35
+
Gain
+ $8,000
–
loss
=
Proceeds
–
$0
=
$62,000
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LO 3
Purchases and Sales of Investments and
Loans
Investments
Beginning
100,000
Purchases
50,000
Ending balance
10,000
Book value invest. sold
140,000
Notes Receivable
Beginning
0
New loans made
21,000
Ending balance
21,000
12-36
0
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Collections
LO 3
Cash Flows from Financing Activities

Transactions affecting liabilities and stockholders’
equity

Notes Payable, Bonds Payable, Long-Term Debt,
Common Stock, Paid-in Capital in Excess of Par, and
Retained Earnings
12-37

Most of the data comes from the balance sheet

Increases are offset by increases in cash

Decreases are offset by decreases in cash
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
Cash Flows Template: Financing
Cash Flows From Financing Activities
12-38
+
Issuance of stock
-
Purchases of treasury stock
+
Borrowing
-
Payment of notes and bonds payable
-
Payment of dividends
=
Net cash provided by (used for) financing activities
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LO 3
Issuance and Payments of Long-Term
Debt
Long-Term Debt
Payments
11,000
77,000
Beginning balance
94,000
Issuance of new debt
160,000
Ending balance
If either new issuances or payments are known, the other
amount can be computed.
12-39
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LO 3
Issuance of Stock and Purchases of
Treasury Stock
Common Stock
158,000
Beginning balance
4,000
Issuance of new stock
162,000
Ending balance
Treasury Stock
Beginning balance
Purchase treasury stock
Ending balance
12-40
16,000
3,000
19,000
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LO 3
Dividend Declarations and Payments
Retained Earnings
Dividend declarations
and payments
12-41
17,000
86,000
Beginning balance
50,000
Net income
119,000
Ending balance
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LO 3
Classify each of the following as an operating activity, an investing activity, or a
financing activity as reported on the statement of cash flows prepared by the
indirect method.
a.
b.
c.
d.
e.
f.
Issuance of stock
Borrowing long-term
Sales revenue
Payment of dividends
Purchase of land with cash
Purchase of treasury stock
g.
h.
i.
j.
k.
l.
Paying bonds payable
Interest expense
Sale of equipment
Cost of goods sold
Purchase of another company with cash
Making a loan
g.
h.
i.
j.
k.
l.
Financing
Operating
Investing
Operating
Investing
Investing
Answers
a.
b.
c.
d.
e.
f.
12-42
Financing
Financing
Operating
Financing
Investing
Financing
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LO 3
Noncash Investing and Financing
Activities
Exhibit 12-10 illustrates noncash investing and financing
activities (all amounts are assumed)
Thousands
Noncash investing and financing activities:
Acquisition of building by issuing common stock
Acquisition of land by issuing note payable
Payment of long-term debt by issuing common stock
Total noncash investing and financing activities
12-43
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$ 300
70
100
$ 470
LO 3
Illustration
Income statement of Mueller Travel Products,
Inc., for the year ended December 21, 2014:
Income Statement
Revenues:
Service revenue
$237,000
Dividend income
8,700
$245,700
Expenses:
Cost of goods sold
100,000
Salary expense
59,000
Depreciation expense
28,000
Advertising expense
2,900
Interest expense
2,100
Income tax expense
Net income
12-44
14,000
206,000
$39,700
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LO 3
Illustration
Additional data:
a. Acquisition of plant assets was $130,000. Of this amount,
$75,000 was paid in cash and $55,000 by signing a note
payable.
b. Proceeds from sale of land totaled $25,000.
c. Proceeds from issuance of common stock totaled $50,000.
d. Payment of long-term note payable was $16,000.
e. Payment of dividends was $11,000.
12-45
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LO 3
Illustration
Balance sheet data of Mueller Travel Products, Inc., follow:
December 31,
2014
2013
Change
$125,000
$50,800
$74,200
Accounts receivable
41,000
57,000
(16,000)
Inventory
94,000
73,000
21,000
9,200
8,700
500
Accounts payable
32,000
18,000
14,000
Accrued liabilities
82,000
57,000
25,000
Current assets:
Cash
Prepaid expenses
Current liabilities:
12-46
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LO 3
Mueller reported net income of $39,700.
Cash Flows from Operating Activities
Net income
$ 39,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
28,000
Decrease in accounts receivable
16,000
Increase in inventory
(21,000)
Increase in prepaid expense
Increase in accounts payable
14,000
Increase in accrued liabilities
25,000
Net cash provided by operating activities
12-47
(500)
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$101,200
LO 3
Mueller reported depreciation expense of $28,000.
Cash Flows from Operating Activities
Net income
$ 39,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
28,000
Decrease in accounts receivable
16,000
Increase in inventory
(21,000)
Increase in prepaid expense
Increase in accounts payable
14,000
Increase in accrued liabilities
25,000
Net cash provided by operating activities
12-48
(500)
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$101,200
LO 3
Mueller reports the change in all current assets and current
liabilities, other than cash, as follows:
Cash Flows from Operating Activities
Net income
$ 39,700
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
28,000
Decrease in accounts receivable
16,000
Increase in inventory
(21,000)
Increase in prepaid expense
Increase in accounts payable
14,000
Increase in accrued liabilities
25,000
Net cash provided by operating activities
12-49
(500)
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$101,200
LO 3
Proceeds from sale of land totaled $25,000.
Cash Flows from Investing Activities
Sale of land
$ 25,000
Purchases of plant assets
Net cash used for investing activities
(75,000)
($50,000)
Cash Flows from Financing Activities
Issuance of common stock
50,000
Payment of note payable
(16,000)
Payment of dividends
(11,000)
Net cash provided by financing activities
12-50
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$23,000
LO 3
Acquisition of plant assets was $130,000. Of this amount, $75,000
was paid in cash and $55,000 by signing a note payable.
Cash Flows from Investing Activities
Sale of land
$ 25,000
Purchases of plant assets
Net cash used for investing activities
(75,000)
($50,000)
Cash Flows from Financing Activities
Issuance of common stock
50,000
Payment of note payable
(16,000)
Payment of dividends
(11,000)
Net cash provided by financing activities
12-51
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$23,000
LO 3
Proceeds from issuance of common stock totaled $50,000.
Cash Flows from Investing Activities
Sale of land
$ 25,000
Purchases of plant assets
Net cash used for investing activities
(75,000)
($50,000)
Cash Flows from Financing Activities
Issuance of common stock
50,000
Payment of note payable
(16,000)
Payment of dividends
(11,000)
Net cash provided by financing activities
12-52
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$23,000
LO 3
Payment of long-term note payable was $16,000.
Cash Flows from Investing Activities
Sale of land
$ 25,000
Purchases of plant assets
Net cash used for investing activities
(75,000)
($50,000)
Cash Flows from Financing Activities
Issuance of common stock
50,000
Payment of note payable
(16,000)
Payment of dividends
(11,000)
Net cash provided by financing activities
12-53
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$23,000
LO 3
Payment of dividends was $11,000.
Cash Flows from Investing Activities
Sale of land
$ 25,000
Purchases of plant assets
Net cash used for investing activities
(75,000)
($50,000)
Cash Flows from Financing Activities
Issuance of common stock
50,000
Payment of note payable
(16,000)
Payment of dividends
(11,000)
Net cash provided by financing activities
12-54
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$23,000
LO 3
Summary totals for the Statement of Cash Flows
Net cash provided by operating activities
12-55
$101,200
Net cash used for investing activities
(50,000)
Net cash provided by financing activities
23,000
Net increase in cash
74,200
Cash balance, December 31, 2013
50,800
Cash balance, December 31, 2014
$125,000
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 3
Learning Objective
4. Prepare a statement of cash flows by the direct
method
12-56
Copyright ©2015 Pearson Education Inc. All rights reserved.
PREPARE A STATEMENT OF CASH FLOWS
BY THE DIRECT METHOD

FASB and IASB prefer the direct method of reporting
operating cash flows

Provides clearer information about sources and
uses of cash

Used by a small percentage of companies


12-57
Requires more computations than indirect method
Investing and financing cash flows are unaffected by
the method used
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 4
DIRECT METHOD
Operating Activities
Positive Items
Negative Items

Collections from customers

Payments to suppliers

Receipts of interest and

Payments to employees

Payments of interest and
dividends on investments

Other operating receipts
income taxes

Other operating
payments
Investing and financing cash flows
are the same as the indirect method
12-58
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LO 4
Exhibit 12-15 | Direct Method of Computing Cash Flows from Operating Activities
12-59
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LO 4
Direct Method Template: Operating
Cash Flows From Operating Activities
12-60
+
Collections from customers
+
Interest received
-
Payments to suppliers
-
Payments to employees
-
Payments for income tax
-
Payments for interest
=
Net cash provided by (used for) operating activities
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LO 4
Using the direct method, classify each of the following as an
operating activity, an investing activity, or a financing activity.
a. Net income
a. Not reported
b. Payment of dividends
b. Financing
c.
c.
Borrowing long-term
Financing
d. Payment of cash to suppliers
d. Operating
e. Making a loan
e. Investing
f.
f.
Sale of treasury stock
Financing
g. Depreciation expense
g. Not reported
h. Purchase of equipment with cash
h. Investing
12-61
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LO 4
Using the direct method, classify each of the following as an
operating activity, an investing activity, or a financing activity.
i.
Issuance of stock
i.
Financing
j.
Purchase of another company with cash
j.
Investing
k.
Payment of a long-term note payable
k.
Financing
l.
Payment of income taxes
l.
Operating
m. Collections from customers
m. Operating
n. Accrual of interest revenue
n. Not reported
o. Expiration of prepaid expense
o. Not reported
p. Receipt of cash dividends
p. Operating
12-62
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LO 4
Cash Collections from Customers
Accounts Receivable
Beginning balance
Sales
81,000
303,000
Ending balance
288,000
Collections
96,000
$303,000 (Sales) - $15,000 (↑ A/R) = $288,000
12-63
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LO 4
Payments for Inventory
$150,000 (COGS) - $3,000 (↓ Inventory) - $34,000 (↑ A/P) = $113,000
Inventory
Beginning balance
Purchases
Ending balance
38,000
147,000
150,000
Cost of goods sold
35,000
Accounts Payable
Payments
12-64
113,000
57,000
Beginning balance
147,000
Purchases
91,000
Ending balance
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LO 4
Payments for Operating Expenses
$17,000 (Expense) + $1,000 (↑ Prepaids) + $2,000 (↓Liabilities) = $20,000
Prepaid Expenses
Beg. balance
7,000
Payments
8,000
End. balance
8,000
Other Operating Expenses
Accrual
7,000 Expired costs
Payments
12-65
3,000
Expired costs 7,000
Payments
Accrued Liabilities
1,000
9,000
End. balance 17,000
3,000
Beg. balance
1,000
Accrual
1,000
End. balance
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LO 4
Payments to Employees
Salary and Wages Payable
Payments
58,000
6,000
Beginning balance
56,000
Expense
4,000
Ending balance
$56,000 (Expense) + $2,000 (↓Payable) = $58,000
12-66
Process is the same for determining cash
payments for interest and income taxes
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 4
Measuring Cash Adequacy: Free Cash
Flow
Free
Cash
Flow
Net cash provided
by operating
=
activities
-
Cash payments
earmarked for investment
in plant assets
Amount of cash available from operations after
paying for planned investments in plant assets
12-67
Copyright ©2015 Pearson Education Inc. All rights reserved.
LO 4
Copyright
This work is protected by United States copyright law and is
provided solely for the use of instructors in teaching their courses
and assessing student learning. Dissemination or sale of any part of
this work (including on the World Wide Web) will destroy the integrity
of the work and is not permitted. The work and materials from it
should never be made available to students except by instructors
using the accompanying text in their classes. All recipients of this
work are expected to abide by these restrictions and to honor the
intended pedagogical purposes and the needs of other instructors
who rely on these materials.
Copyright ©2015 Pearson Education Inc. All rights reserved.

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