Statement of Cash Flows: Question Information

CHAPTER 16
STATEMENT OF CASH FLOWS

QUESTION INFORMATION
Number Objective Description Difficulty Time AACSB AICPA
EO16-1 16-3 Easy 5 min Analytic FN-Measurement
EO16-10 16-2, 16-3 Easy 5 min Analytic FN-Measurement
EO16-11 16-1, 16-3 Easy 5 min Analytic FN-Measurement
PE16-1A 16-1 Classifying cash flows Easy 5 min Analytic FN-Measurement
PE16-1B 16-1 Classifying cash flows Easy 5 min Analytic FN-Measurement
PE16-2A 16-2 Adjustments to net Easy 5 min Analytic FN-Measurement
incomeindirect
method
PE16-2B 16-2 Adjustments to net Easy 5 min Analytic FN-Measurement
incomeindirect
method
PE16-3A 16-2 Changes in current Easy 5 min Analytic FN-Measurement
operating assets and
liabilitiesindirect
method
PE16-3B 16-2 Changes in current Easy 5 min Analytic FN-Measurement
operating assets and
liabilitiesindirect
method
PE16-4A 16-2 Reporting cash flows Easy 10 min Analytic FN-Measurement
from operating activi-
tiesindirect method
PE16-4B 16-2 Reporting cash flows Easy 10 min Analytic FN-Measurement
tiesindirect method
PE16-5A 16-2 Reporting land trans- Easy 5 min Analytic FN-Measurement
actions on the state-
ment of cash flows
PE16-5B 16-2 Reporting land trans- Easy 5 min Analytic FN-Measurement
actions on the state-
ment of cash flows
PE16-6A 16-3 Cash received from Easy 5 min Analytic FN-Measurement
customersdirect
method
PE16-6B 16-3 Cash received from Easy 5 min Analytic FN-Measurement
customersdirect
method
PE16-7A 16-3 Cash payments for Easy 5 min Analytic FN-Measurement
merchandisedirect
method
857
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.
PE16-7B 16-3 Cash payments for Easy 5 min Analytic FN-Measurement
merchandisedirect
method
Ex16-1 16-1 Cash flows for operat- Easy 5 min Analytic FN-Measurement
ing activities-net loss
Ex16-2 16-1 Effects of transactions Easy 10 min Analytic FN-Measurement
on cash flows
Ex16-3 16-1 Classifying cash flows Easy 10 min Analytic FN-Measurement
Ex16-4 16-2 Cash flows from op- Easy 10 min Analytic FN-Measurement
erating activities-
indirect method
erating activities-
indirect method
Ex16-6 16-1, 16-2 Cash flows from op- Easy 10 min Analytic FN-Measurement
erating activities-
indirect method
Ex16-7 16-1, 16-2 Cash flows from op- Easy 10 min Analytic FN-Measurement
erating activities-
indirect method
Ex16-8 16-2 Determining cash Easy 5 min Analytic FN-Measurement
payments to stock-
holders
Ex16-9 16-2 Reporting changes in Easy 5 min Analytic FN-Measurement
equipment on state-
ment of cash flows
Ex16-10 16-2 Reporting changes in Easy 5 min Analytic FN-Measurement
equipment on state-
ment of cash flows
Ex16-11 16-2 Reporting land trans- Easy 5 min Analytic FN-Measurement
actions on statement
of cash flows
Ex16-12 16-2 Reporting stockhold- Moderate 10 min Analytic FN-Measurement
ers' equity items on
statement of cash
flows
Ex16-13 16-2 Reporting land acqui- Easy 5 min Analytic FN-Measurement
sition for cash and
mortgage note on
statement of cash
flows
Ex16-14 16-2 Reporting issuance Moderate 10 min Analytic FN-Measurement
and retirement of
long-term debt
Ex16-15 16-2 Determining net in- Moderate 10 min Analytic FN-Measurement
come from cash flow
ties
Ex16-16 16-2 Cash flows from op- Moderate 15 min Analytic FN-Measurement
erating activities-
indirect method
Ex16-17 16-2 Statement of cash Moderate 20 min Analytic FN-Measurement
flows
Ex16-18 16-2 Statement of cash Moderate 15 min Analytic FN-Measurement
flows-indirect method
erating activities-direct
method
Ex16-20 16-3 Cash paid for mer- Easy 5 min Analytic FN-Measurement
chandise purchases
858
Ex16-21 16-3 Determining selected Easy 10 min Analytic FN-Measurement

amounts for cash
flows from operating
activities-direct
method
method
method
Ex16-24 FAI Free cash flow Easy 5 min Analytic FN-Measurement
Ex16-25 FAI Free cash flow Easy 5 min Analytic FN-Measurement
Pr16-1A 16-2 Statement of cash Moderate 1 1/4 Analytic FN-Measurement
flows-indirect method hr
flows-direct method hr
applied to PR 16-1A
Pr16-1B 16-2 Statement of cash Moderate 1 1/4 Analytic FN-Measurement
applied to PR 16-1A
SA16-1 16-1 Ethics and profes- Easy 5 min Ethics BB-Industry
sional conduct in
business
SA16-2 16-1 Using the statement Easy 5 min Analytic FN-Measurement
of cash flows
SA16-3 16-2 Analysis of cash flow Easy 5 min Analytic FN-Measurement
from operations
SA16-4 16-2 Analysis of cash flow Moderate 20 min Analytic FN-Measurement
from operations
SA16-5 16-2, 16-3 Statement of cash Moderate 45 min Analytic FN-Measurement
flows
859
EYE OPENERS
1. It is costly to accumulate the data needed. c. The gain of $9,000 would be deducted
2. It focuses on the differences between net from net income in determining net cash
income and cash flows from operating activi- flow from operating activities; $84,000
ties, and the data needed are generally would be reported as cash flow from in-
more readily available and less costly to ob- vesting activities.
tain than is the case for the direct method. 8. Cash flow from financing activities
3. In a separate schedule of noncash investing issuance of bonds, $4,200,000
and financing activities accompanying the 9. a. Cash flow from investing activities
statement of cash flows. disposal of fixed assets, $12,000
4. a. No effect The $12,000 gain on asset disposal
b. No should be deducted from net income in
5. The $25,000 increase must be added to in- determining cash flow from operating
come from operations because the amount activities under the indirect method.
of cash paid to merchandise creditors was b. No effect
$25,000 less than the amount of purchases 10. The same. The amount reported as the net
included in the cost of goods sold. cash flow from operating activities is not af-
6. The $15,000 decrease in salaries payable fected by the use of the direct or indirect
should be deducted from income to deter- method.
mine the amount of cash flows from operat- 11. Cash received from customers, cash pay-
ing activities. The effect of the decrease in ments for merchandise, cash payments for
the amount of salaries owed was to pay operating expenses, cash payments for in-
$15,000 more cash during the year than had terest, cash payments for income taxes.
been recorded as an expense. 12. Reported in a separate schedule, as follows:
7. a. $9,000 gain Schedule of noncash financing activities:
b. Cash inflow of $84,000 Issuance of stock for
acquisitions ................... $128 million
860
PRACTICE EXERCISES
PE 161A
a. Financing d. Investing
b. Operating e. Operating
c. Investing f. Operating
PE 161B
a. Operating d. Financing
b. Financing e. Operating
c. Investing f. Operating
PE 162A
Net income........................................................................................... $ 90,000

Adjustments to reconcile net income to net cash flow from
operating activities:
Depreciation.................................................................................. 8,000
Amortization.................................................................................. 5,200
Loss from sale of investments .................................................... 6,000
Net cash flows from operating activities........................................... $109,200
PE 162B
Net income........................................................................................... $125,000

Depreciation.................................................................................. 3,500
Amortization.................................................................................. 1,800
Gain from sale of land.................................................................. (12,500)
Net cash flows from operating activities........................................... $117,800
861
PE 163A
Net income........................................................................................... $110,000

Changes in current operating assets and liabilities:
Decrease in accounts receivable.................................................. 2,000
Increase in inventory ..................................................................... (2,500)
Increase in accounts payable ....................................................... 1,300
Net cash flow from operating activities ............................................ $110,800
PE 163B
Net income........................................................................................... $290,000

Increase in accounts receivable ................................................... (7,500)
Increase in inventory ..................................................................... (21,000)
Increase in accounts payable ....................................................... 19,500
Net cash flow from operating activities ............................................ $281,000
PE 164A
Cash flows from operating activities:

Net income ................................................................. $ 85,000
Adjustments to reconcile net income to net cash
flow from operating activities:
Depreciation ........................................................... 14,000
Gain from disposal of equipment ......................... (10,500)
Decrease in accounts receivable.......................... 6,000
Decrease in accounts payable.............................. (1,800)
Net cash flow from operating activities ................... $92,700
862
PE 164B

Net income ................................................................. $150,000
Depreciation ........................................................... 25,000
Loss from disposal of equipment......................... 14,300
Increase in accounts receivable ........................... (9,400)
Increase in accounts payable ............................... 4,300
PE 165A
The loss on sale of land is deducted from net income as shown below:
Loss on sale of land ...................................................................... $ 15,000
The purchase and sale of land is reported as part of cash flows from investing ac-
tivities as shown below:
Cash received for sale of land .................................................. 90,000
Cash paid for purchase of land ................................................ (200,000)
PE 165B
The gain on sale of land is deducted from net income as shown below:
Gain on sale of land....................................................................... $ (55,000)
The purchase and sale of land is reported as part of cash flows from investing ac-
tivities as shown below:
Cash received for sale of land .................................................. 375,000
Cash paid for purchase of land ................................................ (500,000)
PE 166A
Sales ...................................................................................... $623,000

Deduct increase in accounts receivable ........................................... 48,000
Cash received from customers .......................................................... $575,000
863
PE 166B
Sales ................................................................................................... $ 58,400

Add decrease in accounts receivable ............................................... 2,100
Cash received from customers .......................................................... $ 60,500
PE 167A
Cost of merchandise sold .................................................................. $568,000

Deduct decrease in inventories ......................................................... (39,000)
Add decrease in accounts payable.................................................... 28,000
Cash paid for merchandise ................................................................ $557,000
PE 167B
Cost of merchandise sold .................................................................. $111,000

Add increase in inventories ............................................................... 8,400
Deduct increase in accounts payable ............................................... (5,700)
Cash paid for merchandise ................................................................ $113,700
864
EXERCISES
Ex. 161
There were net additions, such as depreciation and amortization of intangible as-
sets of $1.133 billion, to the net loss reported on the income statement to convert
the net loss from the accrual basis to the cash basis. For example, depreciation is
an expense in determining net income, but it does not result in a cash outflow.
Thus, depreciation is added back to the net loss in order to determine cash flow
from operations.
The cash from operating activities detail is provided as follows for class discus-
sion:
NORTHWEST AIRLINES CORPORATION

Cash Flows from Operating Activities
(selected from Statement of Cash Flows)
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................................................................. $(862)
Adjustments to reconcile net income (loss) to net cash flow
provided by operating activities:
Depreciation and amortization............................................................. 731
Income tax expense (benefit)............................................................... 1
Net receipts (payments) of income taxes ........................................... (3)
Pension and other postretirement benefit contributions less
than expense ..................................................................................... 190
Net loss (earnings) of affiliates............................................................ (8)
Net loss (gain) on disposition of property, equipment and other..... (95)
Other, net............................................................................................... 77
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable................................... 46
Decrease (increase) in flight equipment spare parts..................... 7
Decrease (increase) in supplies, prepaid expenses and other ..... (60)
Increase (decrease) in air traffic liability......................................... 191
Increase (decrease) in accounts payable ....................................... 27
Increase (decrease) in other liabilities ............................................ 19
Increase (decrease) in accrued liabilities ....................................... 10
Net cash provided by (used in) operating activities................................ $ 271
865
Ex. 162
a. Cash receipt, $450,000 e. Cash receipt, $98,000

b. Cash receipt, $36,000 f. Cash payment, $52,500
c. Cash payment, $250,000 g. Cash payment, $500,500
d. Cash payment, $300,000 h. Cash payment, $40,000
Ex. 163
a. financing g. financing
b. operating h. financing
c. investing i. investing
d. financing j. financing
e. investing k. financing
f. investing
Ex. 164
a. deducted g. deducted
b. deducted h. deducted
c. added i. deducted
d. added j. added
e. added k. added
f. added
Ex. 165
Net income....................................................................... $ 92,000

Depreciation ................................................................ 18,600
Increase in accounts receivable ................................ (1,200)
Decrease in inventories .............................................. 1,900
Increase in prepaid expenses .................................... (500)
Increase in accounts payable .................................... 3,100
Decrease in wages payable........................................ (2,200)
Net cash flow from operating activities ........................ $111,700
866
Ex. 166
a. Cash flows from operating activities:

Net income ..................................................................... $165,300
Depreciation............................................................... 46,700
Decrease in accounts receivable ............................. 3,800
Increase in inventories.............................................. (10,800)
Decrease in prepaid expenses ................................. 600
Decrease in accounts payable ................................. (2,800)
Increase in salaries payable ..................................... 300
Net cash flow from operating activities....................... $203,100
b. Yes. The amount of cash flows from operating activities reported on the
statement of cash flows is not affected by the method of reporting such flows.
Ex. 167

Net income ................................................................. $186,000
Depreciation ........................................................... 24,500
Gain on disposal of equipment ............................ (10,200)
Increase in accounts receivable ........................... (4,400)
Decrease in inventories......................................... 2,000
Decrease in prepaid insurance ............................. 800
Decrease in accounts payable.............................. (2,700)
Increase in taxes payable...................................... 900
Note: The change in dividends payable would be used to adjust the dividends de-
clared in obtaining the cash paid for dividends in the financing activities section
of the statement of cash flows.
867
Ex. 168
Dividends declared ............................................................ $120,000

Add decrease in dividends payable.................................. 5,000
Dividends paid to stockholders during the year ............. $125,000
The company probably had four quarterly paymentsthe first one being $35,000
declared in the preceding year and three payments of $30,000 eachof dividends
declared and paid during the current year. Thus, $125,000 [$35,000 + (3
$30,000)] is the amount of cash payments to stockholders. The $30,000 of divi-
dends payable at the end of the year will be paid in the next year.
Ex. 169
Cash flows from investing activities:

Cash received from sale of equipment....................... $41,000
[The loss on the sale, $4,000 ($41,000 proceeds from sale less $45,000 book
value), would be added to net income in determining the cash flows from op-
erating activities if the indirect method of reporting cash flows from opera-
tions is used.]
Ex. 1610

Cash received from sale of equipment....................... $15,000
[The gain on the sale, $2,000 ($15,000 proceeds from sale less $13,000 book
value), would be deducted from net income in determining the cash flows
from operating activities if the indirect method of reporting cash flows from
operations is used.]
Ex. 1611

Cash received from sale of land ................................. $365,000
Less: Cash paid for purchase of land ........................ 400,000
(The gain on the sale of land, $115,000, would be deducted from net income
in determining the cash flows from operating activities if the indirect method
of reporting cash flows from operations is used.)
868
Ex. 1612
Cash flows from financing activities:

Cash received from sale of common stock ............... $496,000
Less: Cash paid for dividends .................................... 124,000
Note: The stock dividend is not disclosed on the statement of cash flows.
Ex. 1613

Cash paid for purchase of land................................... $326,000
A separate schedule of noncash investing and financing activities would report
the purchase of $400,000 land with a long-term mortgage note, as follows:
Purchase of land by issuing long-term mortgage note .... $400,000
Ex. 1614

Cash received from issuing bonds payable .............. $330,000
Less: Cash paid to redeem bonds payable................ 70,000
Note: The discount amortization of $1,600 would be shown as an adjusting
item (increase) in the cash flows from operating activities section under the
indirect method.
869
Ex. 1615
Net cash flow from operating activities ............. $ 86,700

Add: Increase in accounts receivable............... $4,300
Increase in prepaid expenses................... 700
Decrease in income taxes payable .......... 2,000
Gain on sale of investments ..................... 3,400 10,400
$ 97,100
Deduct: Depreciation ......................................... $8,500
Decrease in inventories ....................... 5,600
Increase in accounts payable ............. 1,200 15,300
Net income, per income statement ..................... $ 81,800
Note to Instructors: The net income must be determined by working backward
through the cash flows from operating activities section of the statement of cash
flows. Hence, those items which were added (deducted) to determine net cash
flow from operating activities must be deducted (added) to determine net income.
Ex. 1616
a.
JONES SODA CO.
Cash Flows from Operating Activities
(in thousands)
Net income .................................................................. $1,330
Depreciation ............................................................ 193
Stock-based compensation expense (noncash) .. 20
Increase in accounts receivable ............................ (1,328)
Increase in inventories ........................................... (1,550)
Increase in prepaid expenses ................................ (124)
Increase in accounts payable ................................ 686
Net cash flow used in operating activities................ $(773)
b. Jones Soda is a very profitable company, but is using cash in operating ac-
tivities (a negative cash flow). The reason is the large increases in accounts
receivable and inventory. The current assets and liabilities are all increasing
because Jones Soda is expanding rapidly. Thus, the negative cash flows from
operating activities should not be too much of a concern to management.
870
Ex. 1617
ALLIANCE STRUCTURES INC.

Statement of Cash Flows
For the Year Ended December 31, 2008
Net income ................................................................. $ 40
Depreciation ........................................................... 4
Loss on sale of land .............................................. 5
Increase in accounts receivable ........................... (3)
Increase in inventories .......................................... (3)
Increase in accounts payable ............................... 7
Net cash flow from operating activities ................... $ 50
Cash received from sale of land ............................... $ 15
Less cash paid for purchase of equipment ............. 10
Net cash flow provided by investing activities ....... 5
Cash received from sale of common stock ............. $ 23
Less cash paid for dividends.................................... 11*
Net cash flow provided by financing activities ....... 12
Increase in cash .............................................................. $ 67
Cash at the beginning of the year.................................. 23
Cash at the end of the year ............................................ $ 90
*$12 $1 = $11
Ex. 1618
1. The increase in accounts receivable should be deducted from net income in

the cash flows from operating activities section.
2. The gain from sale of investments should be deducted from net income in the
cash flows from operating activities section.
3. The increase in accounts payable should be added to net income in the cash
flows from operating activities section.
4. Cash paid for dividends should be deducted from cash received from the sale
of common stock in the cash flows from financing activities section.
871
Ex. 1618 Concluded
5. The correct amount of cash at the beginning of the year, $83,600, should be
added to the increase in cash.
6. The final amount should be the amount of cash at the end of the year, $123,900.
A correct statement of cash flows would be as follows:
WHOLE LIFE NUTRITION PRODUCTS INC.

Net income ......................................................... $123,400
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation.................................................. 35,000
Gain on sale of investments ........................ (6,000)
Changes in current operating assets and
liabilities:
Increase in accounts receivable.................. (9,500)
Increase in inventories................................. (12,300)
Increase in accounts payable...................... 3,700
Decrease in accrued expenses ................... (900)
Net cash flow from operating activities ........... $133,400
Cash received from sale of investments ......... $ 85,000
Less: Cash paid for purchase of land.............. $ 90,000
Cash paid for purchase of equipment ... 150,100 240,100
Net cash flow used for investing
activities........................................................... (155,100)
Cash received from sale of common
stock................................................................. $107,000
Less: Cash paid for dividends.......................... 45,000
Net cash flow provided by financing
activities........................................................... 62,000
Increase in cash ...................................................... $ 40,300
Cash at the beginning of the year.......................... 83,600
Cash at the end of the year .................................... $123,900
872
Ex. 1619
a. Sales............................................................................. $450,000
Plus decrease in accounts receivable balance ........ 21,000
Cash received from customers.................................. $471,000
b. Income tax expense .................................................... $ 35,000
Plus decrease in income tax payable ........................ 3,100
Cash payments for income tax .................................. $ 38,100
Ex. 1620
Cost of merchandise sold ................................................. $8,639*

Add increase in merchandise inventories ....................... 291
Deduct increase in accounts payable .............................. (125)
Cash paid for merchandise ............................................... $8,805
*In millions
Ex. 1621
a. Cost of merchandise sold .......................................... $345,000

Add decrease in accounts payable............................ 3,300
$348,300
Deduct decrease in inventories ................................. 5,200
Cash payments for merchandise ............................... $343,100
b. Operating expenses other than depreciation ........... $ 60,000

Add decrease in accrued expenses........................... 400
$ 60,400
Deduct decrease in prepaid expenses ...................... 500
Cash payments for operating expenses ................... $ 59,900
873
Ex. 1622

Cash received from customers...................... $466,5001
Deduct: Cash payments for merchandise... $269,7002
Cash payments for operating
expenses .................................... 87,9003
Cash payments for income tax ...... 21,7004 379,300
Net cash flow from operating activities ........ $ 87,200
Computations:
1. Sales ................................................................................... $456,000
Add decrease in accounts receivable .............................. 10,500
Cash received from customers......................................... $466,500
2. Cost of merchandise sold ................................................. $259,000
Add: Increase in inventories ........................................... $ 3,500
Decrease in accounts payable ............................... 7,200 10,700
Cash payments for merchandise...................................... $269,700
3. Operating expenses other than depreciation .................. $ 92,400
Deduct: Decrease in prepaid expenses ......................... $ 3,400
Increase in accrued expenses .......................... 1,100 4,500
Cash payments for operating expenses .......................... $ 87,900
4. Income tax expense........................................................... $ 19,300
Add decrease in income tax payable ............................... 2,400
Cash payments for income tax ......................................... $ 21,700
874
Ex. 1623

Cash received from customers...................... $182,1001
Deduct: Cash payments for merchandise... $ 70,0002
expenses .................................... 49,1003
Cash payments for income tax ...... 15,400 134,500
Computations:
1. Sales ........................................................................................................ $184,000
Deduct increase in accounts receivable............................................... 1,900
Cash received from customers.............................................................. $182,100
2. Cost of merchandise sold ...................................................................... $ 67,000
Add increase in inventories ................................................................... 5,000
$ 72,000
Deduct increase in accounts payable ................................................... 2,000
Cash payments for merchandise........................................................... $ 70,000
3. Operating expenses other than depreciation ....................................... $ 49,000
Add decrease in accrued expenses ...................................................... 700
$ 49,700
Deduct decrease in prepaid expenses.................................................. 600
Cash payments for operating expenses ............................................... $ 49,100
Ex. 1624
Cash flows from operating activities $120,000

Less cash paid for maintaining property, plant, and equipment 27,000*
Free cash flow $ 93,000
*Property, plant, and equipment to maintain productive capacity: $45,000 60% =

$27,000
875
Ex. 1625
Fiscal year ended

January 29, 2006
(all numbers in thousands)
Cash flows from operating activities.......................... $ 348,373
Less: Capital expenditure to maintain existing
capacity:
Purchases of property and equipment ........ $151,788
Percent to maintain productive capacity..... 70% (106,252)
Free cash flow .............................................................. $ 241,121
876
PROBLEMS
Prob. 161A
OAK AND TILE FLOORING CO.

For the Year Ended June 30, 2008
Net income ...................................................... $ 65,900
Depreciation............................................... 7,300
Loss on sale of investments..................... 5,000
liabilities:
Increase in accounts receivable............... (9,300)
Increase in inventories.............................. (4,200)
Increase in accounts payable................... 5,700
Increase in accrued expenses.................. 1,800
Cash received from sale of investments ...... $ 45,000
Less: Cash paid for purchase of land........... $145,000
Cash paid for purchase of
equipment........................................ 39,500 184,500
activities........................................................ (139,500)
Cash received from sale of common stock .. $126,000
Less cash paid for dividends......................... 47,500*
activities........................................................ 78,500
Increase in cash ................................................... $ 11,200
Cash at the beginning of the year....................... 23,500
Cash at the end of the year ................................. $ 34,700
*$50,000 + $10,000 $12,500 = $47,500
877
Prob. 161A Concluded
A B C D E

Spreadsheet (Work Sheet) For Statement of Cash Flows
Balance Transactions Balance

June 30, 2007 Debit Credit June 30, 2008
1 Cash 23,500 (m) 11,200 34,700 1
2 Accounts receivable 92,300 (l) 9,300 101,600 2
3 Inventories 142,100 (k) 4,200 146,300 3
4 Investments 50,000 (j) 50,000 0 4
5 Land 0 (i) 145,000 145,000 5
6 Equipment 175,500 (h) 39,500 215,000 6
7 Accum. dep.equipment (41,300) (g) 7,300 (48,600) 7
8 Accounts payable (95,200) (f) 5,700 (100,900) 8
9 Accrued expenses (13,200) (e) 1,800 (15,000) 9
10 Dividends payable (10,000) (d) 2,500 (12,500) 10
11 Common stock (50,000) (c) 6,000 (56,000) 11
Paid-in capital in excess of
12 (100,000) (c) 120,000 (220,000) 12
parcommon stock
13 Retained earnings (173,700) (b) 50,000 (a) 65,900 (189,600) 13
14 Totals 0 259,200 259,200 0 14
15 Operating activities: 15
16 Net income (a) 65,900 16
17 Depreciation (g) 7,300 17
18 Loss on sale of investments (j) 5,000 18
Increase in accounts receiv-
19 (l) 9,300 19
able
20 Increase in inventories (k) 4,200 20
21 Increase in accounts payable (f) 5,700 21
22 Increase in accrued expenses (e) 1,800 22
23 Investing activities: 23
24 Purchase of equipment (h) 39,500 24
25 Purchase of land (i) 145,000 25
26 Sale of investments (j) 45,000 26
27 Financing activities: 27
28 Declaration of cash dividends (b) 50,000 28
29 Sale of common stock (c) 126,000 29
30 Increase in dividends payable (d) 2,500 30
31 Net increase in cash (m) 11,200 31
32 Totals 259,200 259,200 32
878
Prob. 162A
PORTABLE LUGGAGE COMPANY

Net income ...................................................................... $204,800
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation ................................................................ 29,500
Patent amortization..................................................... 5,500
Increase in accounts receivable ................................ (29,100)
Decrease in inventories.............................................. 53,500
Increase in prepaid expenses .................................... (2,500)
Decrease in accounts payable................................... (35,600)
Decrease in salaries payable ..................................... (4,400)
Net cash flow from operating activities ........................ $ 221,700
Cash paid for construction of building ......................... $230,000
Net cash flow used for investing activities................... (230,000)
Cash received from issuance of mortgage note .......... $ 90,000
Less: Cash paid for dividends ....................................... 49,000*
Net cash flow provided by financing activities ............ 41,000
Increase in cash ................................................................... $ 32,700
Cash at the beginning of the year....................................... 143,200
Cash at the end of the year ................................................. $ 175,900
Schedule of Noncash Financing and Investing Activities:

Issuance of common stock to retire bonds.................. $ 154,000
*$52,000 + $10,000 $13,000 = $49,000
879
Prob. 162A Continued
A B C D E
PORTABLE LUGGACE COMPANY


Dec. 31, 2007 Debit Credit Dec. 31, 2008
1 Cash 143,200 (p) 32,700 175,900 1
2 Accounts receivable (net) 235,000 (o) 29,100 264,100 2
3 Inventories 405,800 (n) 53,500 352,300 3
4 Prepaid expenses 10,000 (m) 2,500 12,500 4
5 Land 120,000 120,000 5
6 Buildings 450,000 (l) 230,000 680,000 6
7 Accum. dep.buildings (164,500) (k) 20,500 (185,000) 7
8 Machinery and equipment 310,000 310,900 8
Accum. dep.machinery and
9 (76,000) (j) 9,000 (85,000) 9
equipment
10 Patents 48,000 (i) 5,500 42,500 10
11 Accounts payable (367,900) (h) 35,600 (332,300) 11
12 Dividends payable (10,000) (g) 3,000 (13,000) 12
13 Salaries payable (34,600) (f) 4,400 (30,200) 13
14 Mortgage note payable 0 (e) 90,000 (90,000) 14
15 Bonds payable (154,000) (d) 154,000 0 15
16 Common stock (20,000) (c) 4,000 (24,000) 16
17 (50,000) (c) 150,000 (200,000) 17
parcommon stock
19 Totals 0 540,300 540,300 0 19
880
A B C D E

Spreadsheet (Work Sheet) for Statement of Cash Flows
Balance, Transactions Balance,

June 30, 2007 Debit Credit June 30, 2008
1 Cash 23,500 (m) 11,200 34,700 1
3 Inventories 142,100 (k) 4,200 146,300 3
4 Investments 50,000 (j) 50,000 0 4
5 Land 0 (i) 145,000 145,000 5
6 Equipment 175,500 (h) 39,500 215,000 6
7 Accum. dep.equipment (41,300) (g) 7,300 (48,600) 7
11 Common stock (50,000) (c) 6,000 (56,000) 11
12 (100,000) (c) 120,000 (220,000) 12
parcommon stock
14 Totals 0 259,200 259,200 0 14
16 Net income (a) 65,900 16
19 (l) 9,300 19
able
32 Totals 259,200 259,200 32
881
Prob. 163A
RESTON SUPPLY CO.

Net income .................................................... $ 28,600
Depreciation............................................. 10,400
Gain on sale of land ................................ (9,000)
liabilities:
Increase in accounts receivable............. (14,300)
Increase in inventories............................ (8,000)
Decrease in prepaid expenses ............... 1,200
Decrease in accounts payable ............... (5,600)
Increase in income tax payable.............. 800
Net cash flow from operating activities ...... $ 4,100
Cash received from land sold ...................... $ 69,000
Less: Cash paid for acquisition
of building ..................................... $150,000
Cash paid for purchase
of equipment ................................. 29,800 179,800
activities...................................................... (110,800)
Cash received from issuance of
bonds payable ............................................ $ 50,000
common stock............................................ 63,000 $113,000
Less cash paid for dividends....................... 12,000
activities...................................................... 101,000
Decrease in cash ................................................ $ (5,700)
Cash at the beginning of the year..................... 51,200
Cash at the end of the year ............................... $ 45,500
882
A B C D E
RESTON SUPPLY CO.


1 Cash 51,200 (p) 5,700 45,500 1
2 Accounts receivable 92,400 (i) 14,300 106,700 2
3 Inventories 131,200 (h) 8,000 139,200 3
4 Prepaid expenses 4,000 (g) 1,200 2,800 4
5 Land 210,000 (m) 60,000 150,000 5
6 Buildings 150,000 (l) 150,000 300,000 6
7 Accum. dep.buildings (55,500) (f) 4,700 (60,200) 7
8 Equipment 80,300 (k) 10,000 100,100 8
9 Accum. dep.equipment (24,500) (k) 10,000 (e) 5,700 (20,200) 9
10 Accounts payable (95,600) (d) 5,600 (90,000) 10
11 Income tax payable (3,200) (c) 800 (4,000) 11
12 Bonds payable 0 (n) 50,000 (50,000) 12
13 Common stock (30,000) (o) 3,000 (33,000) 13
14 (120,000) (o) 60,000 (180,000) 14
parcommon stock
16 Totals 0 229,700 229,700 0 16
18 Net income (a) 28,600 18
19 Depreciationequipment (e) 5,700 19
20 Depreciationbuildings (f) 4,700 20
21 Gain on sale of land (m) 9,000 21
22 Increase in accounts receivable (i) 14,300 22
23 Increase in inventories (h) 8,000 23
24 Decrease in prepaid expenses (g) 1,200 24
25 Decrease in accounts payable (d) 5,600 25
26 Increase in income tax payable (c) 800 26
28 Purchase of equipment (j) 29,800 28
29 Acquisition of building (l) 150,000 29
30 Sale of land (m) 69,000 30
32 Payment of cash dividends (b) 12,000 32
33 Issuance of bonds payable (n) 50,000 33
34 Issuance of common stock (o) 63,000 34
35 Net decrease in cash (p) 5,700 35
36 Totals 228,700 228,700
883
Prob. 164A
GREEN EARTH LAWN AND GARDEN INC.

Cash received from customers.................... $923,7001
Deduct: Cash payments for
merchandise ............................... $472,2002
expenses..................................... 281,3003
Cash payments for income tax ..... 62,300 815,800
Cash received from sale of investments .... $122,000
Less: Cash paid for land.............................. $200,000
Cash paid for equipment ................... 50,000 250,000
activities...................................................... (128,000)
Cash received from sale of
common stock............................................ $102,000
Less cash paid for dividends....................... 86,300*
Net cash flow used for
financing activities..................................... 15,700
Decrease in cash ................................................ $ (4,400)
Schedule Reconciling Net Income with Cash Flows from Operating Activities:
Net income ................................................................................. $ 117,900
Depreciation expense............................................................ 23,600
Gain on sale of investments ................................................. (32,000)
Increase in accounts receivable ........................................... (16,300)
Increase in inventories .......................................................... (6,400)
Increase in accounts payable ............................................... 23,500
Decrease in accrued expense............................................... (2,400)
Net cash flow from operating activities ................................... $ 107,900
*Dividends paid: $88,300 + $19,000 $21,000 = $86,300
884
Computations:
1. Sales ................................................................................ $940,000
Deduct increase in accounts receivable....................... 16,300
Cash received from customers...................................... $923,700
2. Cost of merchandise sold .............................................. $489,300
Add increase in inventories ........................................... 6,400
$495,700
Deduct increase in accounts payable ........................... 23,500
Cash payments for merchandise................................... $472,200
3. Operating expenses other than depreciation ............... $278,900
Add decrease in accrued expenses .............................. 2,400
Cash payments for operating expenses ....................... $281,300
885
Prob. 165A

Cash received from customers.................... $ 954,1001
Deduct: Cash payments for merchandise $660,6002
expenses..................................... 193,2003
Cash payments for income tax ..... 28,100 881,900
Cash received from sale of investments .... $ 45,000
Less: Cash paid for purchase of land......... $145,000
equipment...................................... 39,500 184,500
activities...................................................... (139,500)
Cash received from sale of common
stock............................................................ $ 126,000
activities...................................................... 78,500
Increase in cash ................................................. $ 11,200
Schedule Reconciling Net Income with Cash Flows from Operating Activities:
Net income ...................................................................... $ 65,900
Depreciation expense ............................................... 7,300
Loss on sale of investments..................................... 5,000
Increase in accounts receivable............................... (9,300)
Increase in accounts payable................................... 5,700
Increase in accrued expenses.................................. 1,800
*Dividends paid: $50,000 + $10,000 $12,500 = $47,500
886
Computations:
1. Sales ................................................................................ $963,400
Cash received from customers...................................... $954,100
2. Cost of merchandise sold .............................................. $662,100
$666,300
Cash payments for merchandise................................... $660,600
3. Operating expenses other than depreciation ............... $195,000
Deduct increase in accrued expenses .......................... 1,800
Cash payments for operating expenses ....................... $193,200
887
Prob. 161B
GOLD MEDAL SPORTING GOODS INC.

Net income .................................................... $ 94,400
Depreciation............................................. 11,500
Gain on sale of investments ................... (25,000)
liabilities:
Increase in accounts payable................. 14,700
Decrease in accrued expenses .............. (6,500)
Cash received from sale of investments .... $175,000
Less: Cash paid for purchase of land......... $205,000
equipment...................................... 95,000 300,000
activities...................................................... (125,000)
Cash received from sale of
common stock............................................ $145,000
activities...................................................... 88,000
Increase in cash ................................................. $ 24,900
*$60,000 + $12,000 $15,000 = $57,000
888
Prob. 161B Concluded
A B C D E


1 Cash 366,200 (m) 24,900 391,100 1
3 Inventories 385,700 (k) 15,400 401,100 3
4 Investments 150,000 (j) 150,000 0 4
5 Land 0 (i) 205,000 205,000 5
6 Equipment 345,700 (h) 95,000 440,700 6
7 Accum. depr.equipment (92,500) (g) 11,500 (104,000) 7
11 Common stock (60,000) (c) 20,000 (80,000) 11
12 12
parcommon stock (175,000) (c) 125,000 (300,000)
14 Totals 0 418,600 418,600 0 14
16 Net income (a) 94,400 16
19 19
able (l) 11,800
32 Totals 443,600 443,600 32
889
Prob. 162B
AIR GLIDE ATHLETIC APPAREL CO.

Net income ...................................................... $ 81,300
Depreciation............................................... 26,100
liabilities:
Decrease in accounts receivable ............. 5,400
Increase in merchandise inventory.......... (7,000)
Increase in prepaid expenses................... (1,200)
Increase in accounts payable................... 3,900
Cash paid for equipment................................ $ 50,900
activities........................................................ (50,900)
Cash received from sale of common stock .. $ 85,000
Less: Cash paid for dividends....................... $ 48,000
Cash paid to retire mortgage
note payable.................................... 105,000 153,000
Net cash flow used in financing
activities........................................................ (68,000)
Decrease in cash .................................................. $ (10,400)
890
A B C D E
AIR GLIDE ATHLETIC APPAREL CO.


1 Cash 56,200 (l) 10,400 45,800 1
2 Accounts receivable 75,600 (k) 5,400 70,200 2
3 Merchandise inventory 93,500 (j) 7,000 100,500 3
4 Prepaid expenses 3,000 (i) 1,200 4,200 4
5 Equipment 167,800 (h) 50,900 (g) 14,000 204,700 5
6 Accum. depr.equipment (41,300) (g) 14,000 (f) 26,100 (53,400) 6
7 Accounts payable (74,300) (e) 3,900 (78,200) 7
8 Mortgage note payable (105,000) (d) 105,000 0 8
9 Common stock (10,000) (c) 5,000 (15,000) 9
10 10
parcommon stock (100,000) (c) 80,000 (180,000)
12 Totals 0 226,100 226,100 0 12
14 Net income (a) 81,300 14
15 Depreciation (f) 26,100 15
16 Decrease in accts. receivable (k) 5,400 16
Increase in merchandise
17 17
inventory (j) 7,000
18 Increase in prepaid expenses (i) 1,200 18
19 Increase in accounts payable (e) 3,900 19
Payment of mortgage note
25 25
payable (d) 105,000
26 Net decrease in cash (l) 10,400 26
27 Totals 212,100 212,100 27
891
Prob. 163B
RISE N SHINE JUICE CO.

Net loss.......................................................... $ (11,700)
Depreciation............................................. 23,800
Loss on sale of land ................................ 6,000
liabilities:
Decrease in prepaid expenses ............... 2,500
Decrease in accounts payable ............... (15,300)
Net cash flow from operating activities ...... $ (68,400)
Cash received from land sold ...................... $ 64,000
Less: Cash paid for acquisition
of building ..................................... $240,000
Cash paid for purchase
of equipment ................................. 44,600 284,600
activities...................................................... (220,600)
bonds payable ............................................ $115,000
common stock............................................ 168,000 $ 283,000
Less cash paid for dividends....................... 14,000
activities...................................................... 269,000
Decrease in cash ................................................ $ (20,000)
892
A B C D E
RISE N SHINE JUICE CO.


1 Cash 412,300 (o) 20,000 392,300 1
2 Accounts receivable 325,600 (g) 28,600 354,200 2
3 Inventories 497,000 (h) 45,100 542,100 3
4 Prepaid expenses 15,000 (f) 2,500 12,500 4
5 Land 205,000 (l) 70,000 135,000 5
6 Buildings 385,000 (k) 240,000 625,000 6
7 Accum. depr.buildings (163,400) (e) 11,200 (174,600) 7
8 Equipment 194,300 (i) 44,600 (j) 20,000 218,900 8
9 Accum. depr.equipment (67,800) (j) 20,000 (d) 12,600 (60,400) 9
10 Accounts payable (409,500) (c) 15,300 (394,200) 10
11 Bonds payable 0 (m) 115,000 (115,000) 11
12 Common stock (50,000) (n) 8,000 (58,000) 12
13 13
parcommon stock (240,000) (n) 160,000 (400,000)
14 Retained earnings (1,103,500) (a) 11,700 (1,077,800) 14
15 (b) 14,000 15
16 Totals 0 419,300 419,300 0 16
18 Net loss (a) 11,700 18
19 Depreciationequipment (d) 12,600 19
20 Depreciationbuildings (e) 11,200 20
21 Loss on sale of land (l) 6,000 21
22 Increase in accounts receivable (g) 28,600 22
23 Increase in inventories (h) 45,100 23
24 Decrease in prepaid expenses (f) 2,500 24
25 Decrease in accounts payable (c) 15,300 25
27 Purchase of equipment (i) 44,600 27
28 Acquisition of building (k) 240,000 28
29 Sale of land (l) 64,000 29
32 Issuance of bonds payable (m) 115,000 32
33 Issuance of common stock (n) 168,000 33
34 Net decrease in cash (o) 20,000 34
35 Totals 399,300 399,300 35
893
Prob. 164B
HOME AND HEARTH INC.

Cash received from customers.................... $3,733,6001
Deduct: Cash payments for
merchandise ............................ $1,535,6002
expenses .................................. 1,941,4003
Cash payments for income tax .... 63,000 3,540,000
Cash received from sale of investments .... $ 110,000
Less: Cash paid for purchase of land......... $ 325,000
equipment...................................... 125,000 450,000
Net cash flow used for investing activities. (340,000)
Cash received from sale of common stock $ 144,000
activities ................................................... 123,900
Decrease in cash ................................................ $ (22,500)
Reconciliation of Net Income with Cash Flows from Operating Activities:

Net income ...................................................................... $ 146,000
Depreciation............................................................... 27,400
Loss on sale of investments..................................... 40,000
Increase in accounts receivable............................... (12,100)
Increase in accounts payable................................... 14,600
Decrease in accrued expenses ................................ (4,600)
*Dividends paid: $21,600 + $4,000 $5,500 = $20,100
894
Computations:
1. Sales ................................................................................ $3,745,700
Cash received from customers...................................... $3,733,600
2. Cost of merchandise sold .............................................. $1,532,500
$1,550,200
Cash payments for merchandise................................... $1,535,600
3. Operating expenses other than depreciation ............... $1,936,800
Cash payments for operating expenses ....................... $1,941,400
895
Prob. 165B

Cash received from customers...................... $1,620,7001
Deduct: Cash payments for merchandise.... $909,0002
expenses ..................................... 615,5003
Cash payments for income tax ....... 34,300 1,558,800
Cash received from sale of investments ...... $ 175,000
Less: Cash paid for land................................ $205,000
Cash paid for equipment ..................... 95,000 300,000
Net cash flow used for investing activities... (125,000)
Cash received from sale of common stock .. $ 145,000
Less cash paid for dividends......................... 57,0004
activities........................................................ 88,000
Increase in cash ................................................... $ 24,900
Reconciliation of Net Income with Cash Flows from Operating Activities:

Net income ......................................................................... $ 94,400
Depreciation.................................................................. 11,500
Gain on sale of investments ........................................ (25,000)
Increase in accounts receivable.................................. (11,800)
Increase in inventories................................................. (15,400)
Increase in accounts payable...................................... 14,700
Decrease in accrued expenses ................................... (6,500)
Net cash flow from operating activities ........................... $ 61,900
896
Computations:
1. Sales ................................................................................ $ 1,632,500
Cash received from customers...................................... $ 1,620,700
2. Cost of merchandise sold .............................................. $ 908,300
$ 923,700
Cash payments for merchandise................................... $ 909,000
3. Operating expenses other than
depreciation ............................................................... $ 609,000
Cash payments for operating expenses ....................... $ 615,500
4. Cash dividends declared................................................ $ 60,000
Deduct increase in dividends payable .......................... 3,000
Cash paid for dividends ................................................. $ 57,000
897
SPECIAL ACTIVITIES
SA 161
Although this situation might seem harmless at first, it is, in fact, a violation of
generally accepted accounting principles. The operating cash flow per share
figure should not be shown on the face of the income statement. The income
statement is constructed under accrual accounting concepts, while operating
cash flow undoes the accounting accruals. Thus, unlike Lindas assertion that
this information would be useful, more likely the information could be confusing
to users. Some users might not be able to distinguish between earnings and
operating cash flow per shareor how to interpret the difference. By agreeing
with Linda, Ben has breached his professional ethics because the disclosure
would violate generally accepted accounting principles. On a more subtle note,
Linda is being somewhat disingenuous. Apparently, Linda is not pleased with this
years operating performance and would like to cover the earnings bad news
with some cash flow good news disclosures. An interesting question is: Would
Linda be as interested in the dual per share disclosures in the opposite sce-
nariowith earnings per share improving and cash flow per share deteriorating?
Probably not.
SA 162
Start-up companies are unique in that they frequently will have negative retained
earnings and operating cash flows. The negative retained earnings are often due
to losses from high start-up expenses. The negative operating cash flows are
typical because growth requires cash. Growth must be financed with cash before
the cash returns. For example, a company must expend cash to make the service
in Period 1 before selling it and receiving cash in Period 2. The start-up company
constantly faces spending cash today for the next periods growth. For Aspen
Technologies Inc., the money spent on salaries to develop the business is a cash
outflow that must occur before the service provides revenues. In addition, the
company must use cash to market its service to potential customers. In this
situation, the only way the company stays in business is from the capital pro-
vided by the owners. This owner-supplied capital is the lifeblood of a start-up
company. Banks will not likely lend money on this type of venture (except with
assets as security). Aspen Technologies Inc. could be a good investment. It all
depends on whether the new service has promise. The financial figures will not
reveal this easily. Only actual sales will reveal if the service is a hit. Until this time
the company is at risk. If the service is not popular, the company will have no
cash to fall back onit will likely go bankrupt. If, however, the service is success-
ful, then Aspen Technologies Inc. should become self-sustaining and provide a
good return for the shareholders.
898
SA 163
The senior vice president is very focused on profitability but has been bleeding
cash. The increase in accounts receivable and inventory is striking. Apparently,
the new credit card campaign has found many new customers, since the ac-
counts receivable is growing. Unfortunately, it appears as though the new cam-
paign has done a poor job of screening creditworthiness in these new customers.
In other words, there are many new credit card purchasersunfortunately, they
do not appear to be paying off their balances. The new merchandise purchases
appear to be backfiring. The company has received some good deals, except
that they are only good deals if it can resell the merchandise. If the merchan-
dise has no customer appeal, then that would explain the inventory increase. In
other words, the division is purchasing merchandise that sits on the shelf, re-
gardless of pricing. The reduction in payables is the result of the division becom-
ing overdue on payments. The memo reports that most of the past due payables
have been paid. This situation is critical in the retailing business. A retailer can-
not afford a poor payment history, or it will be denied future merchandise ship-
ments. This is a signal of severe cash problems. Overall, the picture is of a re-
tailer having severe operating cash flow difficulties.
Note to Instructors: This scenario is essentially similar to Kmarts path to even-
tual bankruptcy. It reported earnings, while having significant negative cash flows
from operations due to expanding credit too liberally (increases in accounts re-
ceivable) and purchasing too much unsaleable inventory (increases in inventory).
Eventually, Kmarts inventory write-down resulted in significant losses about the
time it entered bankruptcy.
899
SA 164
a. 1. Normal practice for determining the amount of cash flows from operating
activities during the year is to begin with the reported net income. This
net income must ordinarily be adjusted upward and/or downward to de-
termine the amount of cash flows. Although many operating expenses
decrease cash, depreciation does not do so. The amount of net income
understates the amount of cash flows provided by operations to the ex-
tent that depreciation expense is deducted from revenue. Accordingly,
the depreciation expense for the year must be added back to the re-
ported net income in arriving at cash flows from operating activities.
2. Generally accepted accounting principles require that significant trans-
actions affecting future cash flows should be reported in a separate
schedule to the statement, even though they do not affect cash. Accord-
ingly, even though the issuance of the common stock for land does not
affect cash, the transaction affects future cash flows and must be re-
ported.
3. The $50,000 cash received from the sale of the investments is reported in
the cash flows from investing activities section. Since the sale included a
gain of $8,000, to avoid double reporting of this amount, the gain is de-
ducted from net income to remove it from the determination of cash
flows from operating activities.
4. The balance sheets for the last two years will indicate the increase in
cash but will not indicate the firms activities in meeting its financial ob-
ligations, paying dividends, and maintaining and expanding operating
capacity. Such information, as provided by the statement of cash flows,
assists creditors in assessing the firms solvency and profitabilitytwo
very important factors bearing on the evaluation of a potential loan.
b. The statement of cash flows indicates a strong liquidity position for Cabinet
Craft Inc. The increase in cash of $97,800 for the past year is more than ade-
quate to cover the $50,000 of new building and store equipment costs that will
not be provided by the loan. Thus, the statement of cash flows most likely will
enhance the companys chances of receiving a loan. However, other informa-
tion, such as a projection of future earnings, a description of collateral
pledged to support the loan, and an independent credit report, would nor-
mally be considered before a final loan decision is made.
900
SA 165
a. and b.
Recent statements of cash flows for Johnson & Johnson and AMR Corp. (Ameri-
can Airlines) are shown on the following pages. The actual analysis may be dif-
ferent due to updated information. However, this answer shows the structure for
a possible response.
Johnson & Johnson

Johnson & Johnson (J&J) is a powerful generator of cash flows from operating
activities, with over $11 billion in cash flows. This is enough to support over $2
billion in new investment, with the remainder available for dividends and repur-
chases of common stock. Overall, the statement of cash flows indicates very fa-
vorable cash flows for J&J. J&Js free cash flow is approximately $9.3 billion for
the year ($11.9 $2.6).
JOHNSON & JOHNSON

Consolidated Statements of Cash Flows
1-Jan-06
In Millions For Period Ended Jan 1, 2006 01/01/06

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................................................................... $ 10,411
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization of property and intangibles ......... 2,093
Purchased in-process research and development ........................ 362
Deferred tax provision...................................................................... (46)
Accounts receivable allowances ..................................................... (31)
Changes in assets and liabilities, net of effects from acquisitions:
Increase in accounts receivable ...................................................... (568)
(Increase)/decrease in inventories .................................................. (396)
(Decrease)/increase in accounts payable and accrued liabilities. (911)
(Decrease)/(increase) in other current and non-current assets.... 620
Increase in other current and non-current liabilities ..................... 343
NET CASH FLOWS FROM OPERATING ACTIVITIES............................... $ 11,877
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment....................................... (2,632)
Proceeds from the disposal of assets ................................................ 154
Acquisitions, net of cash acquired (Note 17) ..................................... (987)
Purchases of investments ................................................................... (5,660)
Sales of investments ............................................................................ 9,187
Other (primarily intangibles) ................................................................ (341)
NET CASH USED BY INVESTING ACTIVITIES ......................................... $ (279)
901
SA 165 Continued
In Millions For Period Ended Jan 1, 2006 01/01/06

CASH FLOWS FROM FINANCING ACTIVITIES
Dividends to shareholders ................................................................... $ (3,793)
Repurchase of common stock............................................................. (1,717)
Proceeds from short-term debt ........................................................... 1,215
Retirement of short-term debt ............................................................. (732)
Proceeds from long-term debt............................................................. 6
Retirement of long-term debt............................................................... (196)
Proceeds from the exercise of stock options .................................... 696
NET CASH USED BY FINANCING ACTIVITIES......................................... $ (4,521)
Effect of exchange rate changes on cash and cash equivalents........... (225)
Increase in cash and cash equivalents .................................................... $ 6,852
Cash and cash equivalents, beginning of year (Note 1) ......................... 9,203
CASH AND CASH EQUIVALENTS, END OF YEAR (NOTE 1) .................. 16,055
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Treasury stock issued for employee compensation and
stock option plans, net of cash proceeds .......................................... 818
Conversion of debt..................................................................................... 369
AMR Corp.
AMR is weaker than J&J. AMR had cash flows from operating activities of over $1
billion. In addition, AMR had net negative cash flows from investing activities of
approximately $1.5 billion. As a result, AMR needed sources of cash from financ-
ing activities. The net sources of cash from financing activities was $533 million.
AMR generates sufficient cash from operations to maintain the necessary
investment in its fixed assets. Free cash flow is approximately $343 million
($1,024 $681). However, AMR does not generate cash at nearly the same amount
as Johnson & Johnson.
902
SA 165 Continued
AMR CORP.
Consolidated Statements of Cash Flows
31-Dec-05
In Millions For Period Ended Dec 31, 2005 12/31/05
Cash Flow from Operating Activities:
Net loss........................................................................................... $ (861)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation ...................................................................................... 1,033
Amortization...................................................................................... 131
Provisions for asset impairments and restructuring charges ...... 134
Redemption payments under operating leases for special
facility revenue bonds .................................................................. (104)
Change in assets and liabilities:
Decrease (increase) in receivables ................................................. (156)
Decrease (increase) in inventories.................................................. (59)
Increase (decrease) in accounts payable and accrued liabilities . 250
Increase (decrease) in air traffic liability......................................... 432
Increase (decrease) in other liabilities and deferred credits......... 197
Other, net........................................................................................... 27
Net cash (used) provided by operating activities.................................... $ 1,024
Cash Flow from Investing Activities:
Capital expenditures, including purchase deposits on flight
equipment ........................................................................................... (681)
Net increase in short-term investments.............................................. (867)
Net decrease (increase) in restricted cash and short-term
investments ........................................................................................ (32)
Proceeds from sale of equipment and property and other
investments ........................................................................................ 40
Other ...................................................................................................... 1
Net cash used for investing activities ...................................................... $(1,539)
903
SA 165 Concluded
In Millions For Period Ended Dec 31, 2005 12/31/05

Cash Flow from Financing Activities:
Payments on long-term debt and capital lease obligations .............. $(1,131)
Proceeds from:
Issuance of long-term debt and special facility bond
transactions .................................................................................. 1,252
Issuance of common stock, net of issuance costs........................ 223
Securitization transactions .............................................................. 133
Exercise of stock options ................................................................ 56
Net cash provided by financing activities................................................ $ 533
Net increase in cash................................................................................... 18
Cash at beginning of year ......................................................................... 120
Cash at end of year .................................................................................... 138
Activities Not Affecting Cash
Funding of construction and debt service reserve accounts ................ 284
Capital lease obligations incurred ............................................................ 13
904

Statement of Cash Flows: Question Information

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CHAPTER 16

STATEMENT OF CASH FLOWS

Ex16-21 16-3 Determining selected Easy 10 min Analytic FN-Measurement

Net income........................................................................................... $ 90,000

Net income........................................................................................... $125,000

Net income........................................................................................... $110,000

Net income........................................................................................... $290,000

Cash flows from operating activities:

Cash flows from operating activities:

Sales ...................................................................................... $623,000

Sales ................................................................................................... $ 58,400

Cost of merchandise sold .................................................................. $568,000

Cost of merchandise sold .................................................................. $111,000

NORTHWEST AIRLINES CORPORATION

a. Cash receipt, $450,000 e. Cash receipt, $98,000

Net income....................................................................... $ 92,000

a. Cash flows from operating activities:

Cash flows from operating activities:

Dividends declared ............................................................ $120,000

Cash flows from investing activities:

Cash flows from investing activities:

Cash flows from investing activities:

Cash flows from financing activities:

Cash flows from investing activities:

Cash flows from financing activities:

Net cash flow from operating activities ............. $ 86,700

ALLIANCE STRUCTURES INC.

1. The increase in accounts receivable should be deducted from net income in

A correct statement of cash flows would be as follows:

WHOLE LIFE NUTRITION PRODUCTS INC.

Cost of merchandise sold ................................................. $8,639*

a. Cost of merchandise sold .......................................... $345,000

b. Operating expenses other than depreciation ........... $ 60,000

Cash flows from operating activities:

Cash flows from operating activities:

Cash flows from operating activities $120,000

*Property, plant, and equipment to maintain productive capacity: $45,000 60% =

Fiscal year ended

OAK AND TILE FLOORING CO.

OAK AND TILE FLOORING CO.

Balance Transactions Balance

PORTABLE LUGGAGE COMPANY

Schedule of Noncash Financing and Investing Activities:

PORTABLE LUGGACE COMPANY

Balance Transactions Balance

OAK AND TILE FLOORING CO.

Balance, Transactions Balance,

RESTON SUPPLY CO.

RESTON SUPPLY CO.

Balance Transactions Balance

GREEN EARTH LAWN AND GARDEN INC.

OAK AND TILE FLOORING CO.

GOLD MEDAL SPORTING GOODS INC.

GOLD MEDAL SPORTING GOODS INC.

Balance, Transactions Balance,

AIR GLIDE ATHLETIC APPAREL CO.

AIR GLIDE ATHLETIC APPAREL CO.

Balance, Transactions Balance,

RISE N SHINE JUICE CO.

RISE N SHINE JUICE CO.

Balance, Transactions Balance,

HOME AND HEARTH INC.

Reconciliation of Net Income with Cash Flows from Operating Activities: