Chapter 11- Statement of Cash Flows

I. Purpose of the Statement of Cash Flows

A. Focuses on the company’s ability to generate cash

internally, its management of current assets and current liabilities,
and the details of its investments and its external financing.

B. The statement compares cash at the beginning of the period to cash at the
end of the period

C. For purposes of the cash flow statement, the definition of cash includes
cash and cash equivalents. Remember cash equivalents are investments
with original maturities of three months or less.

Examples include: Treasury Bills, Commercial Paper, Certificates of

Deposit, Money Market Funds

D. There are 3 sections of the cash flow statement:

1. Cash Flow from Operations

2. Cash Flow from Investing

3. Cash Flow from Financing

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 II. Accrual Basis Accounting vs. Cash Basis Accounting

Decrease in A/R Increase in A/R

Increase in A/P Decrease in A/P

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Example:

The following information has been developed by the bookkeeper of the ABC Co.
It relates to the company’s operations for 2021.

Cash Receipts from customers $46,100

Cash disbursements for expenses 10,600

Account balances as of Dec. 31 2021 2020

Accounts Receivables $9,600 $10,400
Accrued Expenses payable 1,600 1,900

Required: Prepare an income statement for the year ended Dec. 31, 2021.

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 II. Cash Flow Statement – Shows Sources and Uses of Cash
Gives a detailed review of how the company's cash was used (outflows) and where the
cash inflows came from. It reconciles the change in cash for the period. (It tells you
what activities caused your cash balance to change throughout the year)

A. 3 Major Sections of Cash Flow Statement

1. Operating Activities -cash inflow and outflow related to revenue and

expense accounts reported on the income statement.
INDIRECT METHOD:
Net Income
Add: Depr. & Amort. Exp.
Loss on Sale of PPE
Decreases in all CA
Increases in all CL
Subtract: Gain on Sale of PPE
Increases in all CA
Decreases in all CL
Cash Flow from Operations xx

2. Investing Activities – cash inflows and outflows related to the purchase and
disposal on long-term assets
Add: Proceeds from Sale of PPE
Proceeds from Sale of Investments
Proceeds from Collection of Note

Subtract: Purchase of PPE using CASH

Purchase of Intangibles using CASH
Note Receivable (Principle only)
Cash Flow from Investing xx

3. Financing Activities – cash inflows and outflows related to the issuance and
repayment of long-term liabilities and equity
Add: Proceeds from issuing Bonds Payable
Proceeds from issuing Stock

Subtract: Payment of Cash Dividends

Pmt. of L-T Debt (principle only)
Purchase of Treasury stock
Cash Flow from Financing xx

CHANGE IN CASH XX

(Add together: Cash Flow Operations + Cash Flow Investing + Cash Flow Financing = Change in
Cash)

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 Cash Flow Problems:

1. Below is the income statement for Lopes Company for the year ending December 31, 2021:

Sales (net) $500,000

Cost of Goods Sold:
Beginning Inventory $ 50,000
Purchases 300,000
Goods Available for Sale 350,000
Ending Inventory 40,000
Cost of Goods Sold 310,000
Gross Margin $ 190,000
Expenses:
Wages $35,000
Depreciation 30,000
Advertising 15,000
Administrative 5,000 $85,000
Income from Operations $105,000
Gain on Sale of Equipment 50,000
Net Income $155,000

The following balances were derived from the balance sheet:

December 31

2021 2020

Accounts Receivable $100,000 $90,000

Accounts Payable 30,000 50,000
Prepaid Advertising Expense 5,000 3,000
Wages Payable 5,000 4,000
Inventory 40,000 50,000

Required: Prepare the Cash Flows from Operating Activities using the Indirect
Method.

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2. Condensed financial data of Fern Galenti, Inc. appear below:

FERN GALENTI, INC.

Comparative Balance Sheet
December 31

Assets 2021 2020

Cash and Cash Equivalents $ 97,800 $ 38,400
Accounts Receivable 90,800 33,000
Inventories 112,500 102,850
Prepaid expenses 18,400 16,000
Investments 108,000 94,000
Plant Assets 270,000 242,500
Accumulated Depreciation (50,000) (52,000)
$647,500 $474,750

Liabilities & Stockholder’s Equity

Accounts Payable $ 92,000 $ 67,300
Accrued Expenses payable 16,500 17,000
Bonds Payable 85,000 110,000
Common Stock 180,000 150,000
APIC– Common Stock 40,000 25,000
Retained Earnings 234,000 105,450
$647,500 $474,750

FERN GALENTI, INC.

Income Statement
For the Year Ended December 31, 2021

Sales $342,780
Less:
Cost of Goods Sold $ 115,460
Operating Expenses 58,910
Income Tax Expense 7,280
Interest Expense 2,730
Loss on Sale of Plant Assets 7,500 191,880
Net Income $150,900

Additional Information:
1. New plant assets were purchased for cash during the year.
2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash.
3. Bonds matured and were paid off at face value for cash.
4. A cash dividend was declared and paid during the year.

Required: Prepare a statement of cash flows using the indirect method.

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 Fern Galenti, Inc.
Statement of Cash Flows

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3. The following balance sheets apply to Kleocyk Company. Prepare a statement of
cash flow.

Assets: 2021 2020

Cash and Cash Equivalents $1,200 $ 800
Accounts Receivable 400 440
Inventory 1,220 740
Land 820 500
Equipment 4,600 4,140
Accumulated Depreciation (800) (620)
Total Assets $7,440 $6,000

Liabilities & Equities:

Accounts Payable $ 1,000 $ 1,600
Long-Term Borrowings 1,440 1,800
Common Stock 2,000 1,200
Retained Earnings 3,000 1,400
Total Liabilities & Equities $7,440 $6,000

Additional Data:
a. Net Income for 2021 was $2,200.
b. During 2021 the company sold for $740 equipment that cost $740
and had a book value of $600.
c. The company sold land for $400, resulting in a loss of $80. The
remaining land change was due to the acquisition of land for
common stock.

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 Kleocyk Company
Statement of Cash Flows

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4. Prepare a Statement of Cash Flows using the following financial statements:

BREWER, INC.
Comparative Balance Sheet
December 31

2021 2020
Assets:
Current Assets:
Cash and Cash Equivalents $ 5,000 $45,000
Accounts Receivable 100,000 75,000
Inventories 50,000 45,000
Prepaid Expenses 30,000 35,000
Total Current Assets 185,000 $200,000

Non-current Assets:
Land $100,000 $75,000
Buildings 200,000 175,000
Accumulated Depr. – Bldgs (50,000) (40,000)
Equipment 100,000 75,000
Accumulated Depr – Equip. (35,000) (15,000)
Patents 20,000 30,000
TOTAL ASSETS $520,000 $500,000

Liabilities & Stockholder’s Equity:

Current Liabilities:
Accounts Payable $50,000 $40,000
Notes Payable 25,000 25,000
Accrued Expenses 40,000 35,000
Total Current Liabilities $115,000 $100,000

Long-Term Liabilities:
Bonds Payable $100,000 $140,000

Stockholder’s Equity:
Common Stock ($100 par value) $230,000 $200,000
Additional Paid in Capital 40,000 30,000
Retained Earnings 35,000 30,000
Total Stockholders Equity $305,000 $260,000
TOTAL LIABILITIES & EQUITY $520,000 $500,000

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 BREWER, INC.
Income Statement
For the year ended December 31, 2021

Sales $2,000,000
Cost of Goods Sold 1,500,000
Gross Profit $ 500,000
Operating Expenses 485,000
Income From Operations $ 15,000
Other Revenues & Expenses:
Add: Gain on Sale of Building 20,000
$ 35,000
Less: Loss on sale of Land $10,000
Interest Expense 15,000 25,000
Net Income before Taxes $ 10,000
Less: Income Tax Expense 5,000
Net Income $ 5,000

Additional Data:

a. A building which cost $50,000 and had accumulated depreciation of $10,000 was sold.
b. Common stock with $30,000 par value was issued for cash.
c. Land with a cost of $25,000 was sold.
d. Land was purchased for $50,000.
e. No equipment was sold during the year.

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 BREWER, INC.
STATEMENT OF CASH FLOWS

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