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12.E: Exercises (Part 1)

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    27592
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    1. Why was the statement of cash flows created by the Financial Accounting Standards Board (FASB)?
    2. Describe the three classifications of cash flows, and provide examples of activities that would appear in each classification.
    3. Which section of the statement of cash flows is widely regarded as the most important? Why?
    4. Briefly describe the four steps required to prepare the statement of cash flows using the indirect method.
    5. Refer to the Note 12.15 "Business in Action 12.3" Why is the indirect method used by most companies?
    6. Describe the three adjustments necessary to convert net income to a cash basis using the indirect method. Provide an example for each adjustment.
    7. Why is depreciation expense added back to net income using the indirect method of preparing the statement of cash flows?
    8. Assume you are using the indirect method to prepare the operating activities section of the statement of cash flows. Describe the adjustment rules for current assets and current liabilities, and provide one example for each rule.
    9. You have just completed the statement of cash flows for a company, and the bottom of the statement shows a net increase in cash of $250,000. Describe where this increase should be shown elsewhere in the financial statements.
    10. Provide an example of a noncash investing or financing activity. Describe how these transactions are disclosed in the financial statements.
    11. How is the operating cash flow ratio calculated, and what does it tell the user?
    12. How is the capital expenditure ratio calculated, and what does it tell the user?
    13. How is free cash flow calculated, and what does it tell the user?
    14. Appendix. Describe how the indirect method differs from the direct method.
    15. Appendix. Assume you are using the direct method to prepare the operating activities section of the statement of cash flows. Describe the adjustment rule used to convert sales revenue to cash receipts from customers.
    16. Appendix. Assume you are using the direct method to prepare the operating activities section of the statement of cash flows. Describe the adjustment rules used to convert cost of goods sold to cash payments to suppliers.

    Brief Exercises

    1. Evaluating Cash Flows at Home Store, Inc. Refer to the dialogue at Home Store, Inc., presented at the beginning of the chapter and the follow-up dialogue after Note 12.25 "Review Problem 12.7".

      Required:

      1. Why was the CEO concerned about the company’s cash flow?
      2. Why did the CEO state, “We probably should have financed the equipment rather than having paid for it all at once”?
    2. Classifying Cash Flows. Identify whether each of the following items would appear in the operating, investing, or financing activities section of the statement of cash flows. Briefly explain your answer for each item.
      1. Cash receipts from the sale of common stock
      2. Cash receipts from the sale of a building
      3. Cash payments for income taxes
      4. Cash receipts from issuance of bonds
      5. Cash payments for the purchase of equipment
    3. Operating Activities Section Using the Indirect Method. The following income statement and current sections of the balance sheet are for Donzi, Inc.

      Required:

      Using the indirect method, prepare the operating activities section of the statement of cash flows for Donzi, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.5.

    4. (Appendix) Operating Activities Section Using the Direct Method. The following income statement and current sections of the balance sheet are for Donzi, Inc. (this is the same information as the previous brief exercise).

      Required:

      Using the direct method, prepare the operating activities section of the statement of cash flows for Donzi, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.12.

    5. Investing Activities Section. The following information is from the noncurrent asset portion of Santana, Inc.’s balance sheet.

      The following activities occurred during 2012:

      • Sold equipment with a book value of $3,000 (= $13,000 cost − $10,000 accumulated depreciation) for $4,000 cash and depreciation expense for the year totaled $26,000
      • Purchased property for $43,000 cash
      • Purchased long-term investments for $15,000 cash

      Required:

      Prepare the investing activities section of the statement of cash flows for Santana, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.6.

    6. Financing Activities Section. The following information is from the noncurrent liabilities and owners’ equity portions of Canton Company’s balance sheet.

      The following activities occurred during 2012:

      • Issued bonds for $80,000 cash
      • Issued common stock for $100,000 cash
      • Earned net income totaling $60,000
      • Paid cash dividends totaling $15,000

      Required:

      Prepare the financing activities section of the statement of cash flows for Canton Company for the year ended December 31, 2012. Use the format presented in Figure 12.7.

    7. Cash Flow Measures. The selected information in the following is from Diaz Company’s financial records for the most recent fiscal year.
      Current assets $600,000
      Current liabilities $250,000
      Cash provided by operating activities $700,000
      Net income $300,000
      Capital expenditures $550,000

      Required:

      Calculate Diaz Company’s

      1. Operating cash flow ratio;
      2. Capital expenditure ratio; and
      3. Free cash flow.

    Exercises: Set A

    1. Classifying Cash Flows. Identify whether each of the following items would appear in the operating, investing, or financing activities section of the statement of cash flows. Briefly explain your answer for each item.
      1. Cash payments for the repurchase of common stock
      2. Cash payments for the purchases of merchandise
      3. Cash receipts from the collection of interest on loans made to other entities
      4. Cash receipts from the collection of principal on loans made to other entities
      5. Cash payments to shareholders for dividends
      6. Cash payments for the purchase of equipment
    2. Operating Activities Section Using the Indirect Method. The following income statement and current sections of the balance sheet are for Capstone, Inc.

      Required:

      1. Using the indirect method, prepare the operating activities section of the statement of cash flows for Capstone, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.5.
      2. How much cash was provided by (used by) operating activities? Briefly describe what this amount tells us about the company.
    3. (Appendix) Operating Activities Section Using the Direct Method. The following income statement and current sections of the balance sheet are for Capstone, Inc. (this is the same information as the previous exercise).

      Required:

      1. Using the direct method, prepare the operating activities section of the statement of cash flows for Capstone, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.12.
      2. How much cash was provided by (used by) operating activities? Briefly describe what this amount tells us about the company.
    4. Investing Activities Section. The following information is from the noncurrent asset portion of Caldera, Inc.’s balance sheet.

      The following activities occurred during 2012:

      • Sold equipment with a book value of $46,000 (= $170,000 cost − $124,000 accumulated depreciation) for $37,000 cash and depreciation expense for the year totaled $159,000
      • Purchased equipment for $310,000 cash
      • No additional loans to other entities were made during the year (Hint: Solve for the principal amount on loans collected during the year.)
      • Sold long-term investments with an original cost of $27,000 for $33,000 cash

      Required:

      1. Prepare the investing activities section of the statement of cash flows for Caldera, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.6.
      2. How much cash was provided by (used by) investing activities? Briefly describe what this amount tells us about the company.
    5. Financing Activities Section. The following information is from the noncurrent liabilities and owners’ equity portions of Flash, Inc.’s balance sheet.

      The following activities occurred during 2012:

      • Paid principal amount of $20,000 for long-term notes payable
      • Received $110,000 for long-term notes payable
      • Paid principal amount on bonds totaling $33,000
      • Repurchased common stock for $60,000 cash
      • Earned net income totaling $200,000
      • Paid cash dividends totaling $40,000

      Required:

      1. Prepare the financing activities section of the statement of cash flows for Flash, Inc., for the year ended December 31, 2012. Use the format presented in Figure 12.7.
      2. How much cash was provided by (used by) financing activities? Briefly describe what this amount tells us about the company.
    6. Operating Activities Section Using the Indirect Method and Cash Ratios. The following data are for Cycle Company.

      Required:

      1. Using the indirect method, prepare the operating activities section of the statement of cash flows for Cycle Company for the year ended December 31, 2012. Use the format presented in Figure 12.5.
      2. Calculate the following cash measures:
        1. Operating cash flow ratio
        2. Capital expenditure ratio
        3. Free cash flow

    12.E: Exercises (Part 1) is shared under a CC BY-NC-SA 2.5 license and was authored, remixed, and/or curated by LibreTexts.