CHAPTER 17



CHAPTER 17

QUESTIONS

3. The indirect method of reporting cash flows from operating activities begins with net income and then adjusts it for items that are necessary to reconcile net income to the net cash provided or used by operating activities.

9. Yes; even though a company reports positive net income for the year, it may still show a net cash outflow from operating activities. When net income is reconciled to the net cash flow from operating activities, the net effect of all the adjustment items may be a subtraction from net income (examples of such adjustments are accrued revenues, prepaid expenses, and other gains). If the amount of this net subtraction is larger than the net income, the result is net cash used by operating activities.

10. Depreciation is not a source or a use of cash, even though it must be added to net income when the net cash flow from operating activities is calculated by the indirect method. (Note: When depreciation is deducted on the tax return of a corporation, the effect is to reduce taxable income and reduce the cash outflow for income taxes. But this is driven by the activity of purchasing the asset.)

Quick Study 17-1

The statement of cash flows reports the cash (and cash equivalent) activities of a business for a specific accounting period. The cash flows are classified into operating, investing, and financing activities. The net change in cash as well as the beginning and ending cash balances are also reported on the statement.

Quick Study 17-2

Examples of transactions classified as investing activities:

• Plant asset purchases

• Plant asset sales

• Investment in debt and equity securities (except trading securities)

• Intangible asset acquisitions and disposals

• Purchases and sales of natural resources

Quick Study 17-3

Examples of transactions classified as financing activities:

Bond retirement and issuance

• Issuance and settlement of notes payable

• Common stock issuance

• Cash paid for dividends

• Treasury stock acquisitions

• Owner contributions or withdrawals

Exercise 17-4

| |Statement of Cash Flows |Noncash | |

| | | | |Investing & |Not reported |

| |Operating |Investing |Financing |Financing Activities|on Statement or in |

| |Activities |Activities |Activities | |Note |

|a. Paid cash to purchase inventory | | | | | |

| | | | | |X |

|b. Purchased land by issuing stock | | | | | |

| | | | |X | |

|c. Accounts receivable decreased in the | | | | | |

|year |X | | | | |

|d. Sold equipment at a loss | | | | | |

| |X |X | | | |

|e. Recorded depreciation expense | | | | | |

| |X | | | | |

|f. Income taxes payable increased in the | | | | | |

|year |X | | | | |

|g. Declared and paid a cash dividend | | | | | |

| | | |X | | |

Exercise 17-7

|Cash flows from operating activities: | |

| Net income |$481,540 |

| Adjustments to reconcile net income to net cash | |

|provided by operating activities: | |

| Increase in accounts receivable |(30,500) |

| Increase in merchandise inventory |(25,000) |

| Decrease in accounts payable |(12,500) |

| Decrease in salaries payable |(3,500) |

| Depreciation expense |44,200 |

| Amortization expense, patents |4,200 |

| Gain on sale of equipment | (6,200) |

| Net cash provided by operating activities |$452,240 |

Exercise 17-8

|Cash flows from operating activities: | |

| Net income |$374,000 |

| Adjustments to reconcile net income to net cash | |

|provided by operating activities: | |

| Decrease in accounts receivable |17,100 |

| Decrease in merchandise inventory |42,000 |

| Increase in prepaid expenses |(4,700) |

| Decrease in accounts payable |(8,200) |

| Increase in other payables |1,200 |

| Depreciation expense |44,000 |

| Amortization expense |7,200 |

| Gain on sale of plant assets | (6,000) |

| Net cash provided by operating activities |$466,600 |

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