CH 15

CHAPTER 15
STATEMENT OF CASH FLOWS

CLASS DISCUSSION QUESTIONS
1. It is costly to accumulate the data needed.
2. It focuses on the differences between net
income and cash flows from operating
activities, and the data needed are generally
more readily available and less costly to
obtain than is the case for the direct
method.
3. In a separate schedule of noncash investing
and financing activities accompanying the
statement of cash flows.
4. a. No effect
b. No
5. The $25,000 increase must be added to
income from operations because the
amount of cash paid to merchandise
creditors was $25,000 less than the amount
of purchases included in the cost of goods
sold.
6. The $10,000 decrease in salaries payable
should be deducted from income to
determine the amount of cash flows from
operating activities. The effect of the
decrease in the amount of salaries owed
was to pay $10,000 more cash during the
year than had been recorded as an
expense.
7. a. $5,000 gain
b. Cash inflow of $80,000
c. The gain of $5,000 would be deducted

from net income in determining net cash
flow from operating activities; $80,000
would be reported as cash flow from
investing activities.
8. Cash flow from financing activities
issuance of bonds, $5,250,000
9. a. Cash flow from investing activities
disposal of fixed assets, $5,000
The $5,000 gain on asset disposal
should be deducted from net income in
determining cash flow from operating
activities under the indirect method.
b. No effect
10. The same. The amount reported as the net
cash flow from operating activities is not
affected by the use of the direct or indirect
method.
11. Cash received from customers, cash
payments for merchandise, cash payments
for operating expenses, cash payments for
interest, cash payments for income taxes.
12. Reported in a separate schedule, as follows:
Schedule of noncash financing activities:
Issuance of stock for
acquisitions..........................$438 million
129
EXERCISES
Ex. 151
There were net additions, such as depreciation and amortization of intangible
assets, of $155 million to the net loss reported on the income statement to
convert the net loss from the accrual 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.
Ex. 152
a.
b.
c.
d.
e.
f.
g.
h.
Cash payment, $30,000

Cash receipt, $101,000
Ex. 153
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
financing
financing
investing
financing
financing
financing
operating
investing
financing
investing
investing
130
Ex. 154
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
added
deducted
deducted
added
added
added
deducted
deducted
added
deducted
k. added
l. added
Ex. 155
a. Cash flows from operating activities:
Net income, per income statement..............
Add: Depreciation......................................... $41,300
Decrease in prepaid expenses...........
200
Increase in accounts payable.............
1,900
Deduct: Increase in accounts receivable. . . $ 4,850
Increase in inventories...................
9,500
Decrease in salaries payable........
800
Net cash flow from operating activities......
$167,900
43,400
$211,300
15,150
$196,150
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.
131
Ex. 156
Cash flows from operating activities:
Net income, per income statement.................
Add: Depreciation.........................................
Decrease in accounts receivable.......
Increase in wages payable..................
$489,000
$135,700
68,100
5,600
Deduct: Increase in merchandise inventory$ 19,900

Increase in prepaid expenses.........
1,500
Decrease in accounts payable.......
19,800
Net cash flow from operating activities.........
209,400
$698,400
41,200
$657,200
Ex. 157
Dividends declared..............................................................
Less increase in dividends payable..................................
Dividends paid to stockholders during the year..............
$280,000
10,000
$270,000
The company probably had four quarterly paymentsthe first one being $60,000
declared in the preceding year and three payments of $70,000 eachof dividends
declared and paid during the current year. Thus, $270,000 [$60,000 + (3
$70,000)] is the amount of cash payments to stockholders.
Ex. 158
Cash flows from investing activities:
Cash received from sale of equipment........................
$125,000
[The gain on the sale, $20,000 ($125,000 proceeds from sale less $105,000
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. 159
Cash received from sale of equipment........................
$24,000
[The loss on the sale, $3,000 ($24,000 proceeds from sale less $27,000 book
value), would be added to net income in determining the cash flows from
operating activities if the indirect method of reporting cash flows from
operations is used.]
132
Ex. 1510
Cash received from sale of land...................................
Less: Cash paid for purchase of land.........................
$105,000
200,000
(The gain on the sale of land, $25,000, 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.)
Ex. 1511
Cash flows from financing activities:
Cash received from sale of common stock................
Less: Cash paid for dividends......................................
$300,000
180,000
Note: The stock dividend is not disclosed on the statement of cash flows.
Ex. 1512
Cash paid for purchase of land....................................
$210,000
A separate schedule of noncash investing and financing activities would report

the purchase of $250,000 land with a long-term mortgage note, as follows:
Purchase of land by issuing long-term mortgage note.....
$250,000
Ex. 1513
Net cash flow from operating activities..............
Add: Increase in accounts receivable................
Increase in prepaid expenses....................
Decrease in income taxes payable...........
Gain on sale of investments......................
Deduct: Depreciation...........................................
Decrease in inventories........................
Increase in accounts payable..............
Net income, per income statement......................
$ 93,200
$ 4,850
1,500
1,600
2,350
$12,500
7,400
3,200
10,300
$103,500
23,100
$ 80,400
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.
133
Ex. 1514
Operating activities:*
Net income, per income statement.................................................
Add: Depreciation............................................................................
Loss on sale of property, plant, and equipment.................
Other noncash expenses......................................................
Decrease in inventories.........................................................
Decrease in other operating assets.....................................
$6,068
$2,807
282
242
167
37
3,535
$9,603
Deduct: Increase in accounts receivable.......................................

Decrease in income tax payable......................................
Decrease in accounts payable and accrued expenses.
Net cash flow from operating activities..........................................

*Dollars in millions
Ex. 1515
a.
Sales..............................................................................
Plus decrease in accounts receivable balance.........
Cash received from customers...................................
$685,000
38,000
$723,000
b.
Income tax expense.....................................................

Plus decrease in income tax payable........................
Cash payments for income tax...................................
$ 72,000
4,500
$ 76,500
Ex. 1516
Cost of merchandise sold..................................................
Deduct: Decrease in merchandise inventories................
Increase in accounts payable.............................
Cash paid for merchandise................................................
*In millions.
134
$8,191*
562
135
$7,494
38
211
163
412
$9,191
Ex. 1517
a.
Cost of merchandise sold...........................................

Add decrease in accounts payable............................
Deduct decrease in inventories..................................
Cash payments for merchandise................................
b.
Operating expenses other than depreciation...........

Add decrease in accrued expenses...........................
Deduct decrease in prepaid expenses......................
Cash payments for operating expenses....................
$315,000
3,400
$318,400
2,400
$316,000
$ 87,600
400
$ 88,000
500
$ 87,500
Ex. 1518
Cash received from customers.......................
Deduct: Cash payments for merchandise. . . $182,3002
Cash payments for operating
expenses..................................... 131,2003
Cash payments for income tax.......
9,7004
$375,0001
323,200
$ 51,800
Computations:
1. Sales.....................................................................................
Add decrease in accounts receivable...............................
Cash received from customers..........................................
2. Cost of merchandise sold..................................................
Add: Increase in inventories.............................................
Decrease in accounts payable................................
Cash payments for merchandise.......................................
3. Operating expenses other than depreciation...................
Deduct: Decrease in prepaid expenses..........................
Increase in accrued expenses...........................
Cash payments for operating expenses...........................
$131,200
4. Income tax expense............................................................
Add decrease in income tax payable................................
Cash payments for income tax..........................................
135
$358,000
17,000
$375,000
$163,400
$
5,300
13,600
18,900
$182,300
$142,600
3,100
8,300
11,400
$
$
7,300
2,400
9,700
Ex. 1519
Deduct: Cash payments for merchandise. . . $540,8002
expenses..................................... 195,9003
65,300
$932,1001
802,000
Computations:
1. Sales...........................................................................................................
Deduct increase in accounts receivable.................................................
Cash received from customers................................................................
2. Cost of merchandise sold........................................................................
Add increase in inventories.....................................................................
Deduct increase in accounts payable.....................................................
Cash payments for merchandise.............................................................
3. Operating expenses other than depreciation........................................
Add decrease in accrued expenses........................................................
Deduct decrease in prepaid expenses...................................................
Cash payments for operating expenses.................................................
136
$130,100
$935,600
3,500
$932,100
$534,200
10,500
$544,700
3,900
$540,800
$195,700
1,600
$197,300
1,400
$195,900
Ex. 1520
a.
Fiscal Years Ended

2000
1999
Cash provided from operating activities................. $ 6,141,000,000 $4,325,000,000
Less: 40% of property and equipment acquisitions (434,400,000) (240,800,000)
20% of technology license acquisitions.......
(88,800,000)
(19,000,000)
Free cash flow............................................................ $ 5,617,800,000 $4,065,200,000
Note: Cisco Systems does not pay a dividend.
b. Ciscos free cash flow is very strong. In both years, Cisco had over $4 billion
in free cash flow. This places Cisco within the top 5% of all U.S.
manufacturing companies for free cash flow. In addition, Cisco has been
growing its free cash flow, from over $4 billion in fiscal year 1999 to over $5
billion in fiscal year 2000 (38% increase). Ciscos free cash flow is so strong
that it is able to fund most of its growth using internal resources. The balance
sheet indicates that Cisco has no debt, while the statement of cash flows
indicates that Cisco is issuing nearly $1 billion in common stock in 1999 and
$1.56 billion in 2000. As can be seen from the statement of cash flows, most
of Ciscos cash flow is used toward purchases of investments. These
investments are often in other companies that Cisco uses to grow into new
markets and technologies. Cisco does not pay a dividend, so free cash flow
is not reduced to support dividends.
137
Ex. 1521
MARIAS MEMORIES INC.
Statement of Cash Flows
For the Year Ended December 31, 2003
Net income, per income statement.........................
Add: Depreciation....................................................
Decrease in accounts receivable..................
Deduct: Increase in inventories..............................
Decrease in accounts payable.................
Gain on sale of land..................................
Net cash flow from operating activities.................
Cash received from sale of land.............................
Less cash paid for purchase of equipment...........
Net cash flow from investing activities..................
Cash received from sale of common stock...........
Less cash paid for dividends..................................
Net cash flow from financing activities..................
Increase in cash.............................................................
Cash at the beginning of the year................................
Cash at the end of the year...........................................
*$13 + $6 $8 = $11
$25
$3
4
$2
1
7
7
$32
10
$22
$17
14
3
$ 6
11*
(5)
$20
34
$54
Ex. 1522
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.
5. The correct amount of cash at the beginning of the year, $70,700, should be
added to the increase in cash.
6. The final amount should be the amount of cash at the end of the year,
$101,300.
Ex. 1522
Concluded
A correct statement of cash flows would be as follows:

CYBER-MASTER GAMES INC.
Net income, per income statement...................
Add: Depreciation............................................... $ 49,000
Increase in accounts payable...................
4,400
Deduct: Increase in accounts receivable......... $ 11,500
Increase in inventories........................
18,300
Gain on sale of investments...............
7,000
Decrease in accrued expenses...........
1,600
Net cash flow from operating activities ...........
Cash received from sale of investments..........
Less: Cash paid for purchase of land.............. $ 90,000
Cash paid for purchase of equipment.. . 150,100
Net cash flow used for investing
activities..........................................................
Cash received from sale of common
stock................................................................
Less: Cash paid for dividends..........................
Net cash flow provided by financing
activities..........................................................
Increase in cash........................................................
Cash at the beginning of the year...........................
Cash at the end of the year......................................
$100,500
53,400
$153,900
38,400
$115,500
$ 85,000
240,100
(155,100)
$107,000
36,800
70,200
$ 30,600
70,700
$101,300
PROBLEMS
Prob. 151A
EVERLAST FLOORING CO.
For the Year Ended June 30, 2003
Add: Depreciation............................................ $ 20,500
Increase in accounts payable................
8,600
Increase in accrued expenses...............
700
Loss on sale of investments.................
8,000
Deduct: Increase in accounts receivable...... $ 4,800
Increase in inventories......................
19,200
Cash received from sale of investments.......
Less: Cash paid for purchase of land........... $124,000
Cash paid for purchase of
equipment......................................... 172,000
activities.......................................................
Cash received from sale of common stock...
Less cash paid for dividends..........................
activities.......................................................
Increase in cash.....................................................
Cash at the beginning of the year........................
Cash at the end of the year...................................
*$60,000 + $12,500 $15,000 = $57,500
$126,000
37,800
$163,800
24,000
$ 139,800
$ 50,000
296,000
(246,000)
$220,000
57,500*
162,500
$ 56,300
67,900
$ 124,200
Prob. 151A
Concluded
Work Sheet for Statement of Cash Flows
Transactions
Balance
June 30, 2002
Cash.................................................
67,900
Accounts receivable.......................
97,600
Inventories....................................... 123,500
Investments.....................................
58,000
Land.................................................
0
Equipment....................................... 201,400
Accumulated depreciation
equipment.................................. (58,900)
Accounts payable........................... (84,600)
Accrued expenses.......................... (12,300)
Dividends payable........................... (12,500)
Common stock................................
(80,000)
Paid-in capital in excess of par
common stock........................... (130,000)
Retained earnings........................... (170,100)
Totals...............................................
0
Operating activities:
Net income.................................
Increase in accrued expenses.
Increase in accounts payable. .
Depreciation..............................
Loss on sale of investments....
Increase in inventories.............
Increase in accounts receivable
Investing activities:
Purchase of equipment............
Purchase of land.......................
Sale of investments...................
Financing activities:
Declaration of cash dividends..
Sale of common stock..............
Increase in dividends payable..
Net increase in cash.......................
Totals...............................................
Debit
(m)
(l)
(k)
Credit
56,300
4,800
19,200
60,000
436,300
58,000
(g)
(f)
(e)
(d)
(c)
20,500
8,600
700
2,500
40,000
(79,400)
(93,200)
(13,000)
(15,000)
(120,000)
(c) 180,000
(a) 126,000
436,300
(310,000)
(236,100)
0
(a) 126,000
(e)
700
(f)
8,600
(g) 20,500
(j)
8,000
(k)
(l)
19,200
4,800
(h) 172,000
(i) 124,000
(j)
50,000
(b)
60,000
(m)
56,300
436,300
(c) 220,000
(d)
2,500
436,300
124,200
102,400
142,700
0
124,000
373,400
(j)
(i) 124,000
(h) 172,000
(b)
Balance
June 30, 2003
Prob. 152A
BON VOYAGE LUGGAGE COMPANY
Add: Depreciation............................................
Amortization of patents..........................
Decrease in inventories..........................
Deduct: Increase in accounts receivable......
Increase in prepaid expenses..........
Decrease in accounts payable.........
Decrease in salaries payable...........
$ 99,800
$60,700
2,600
24,800
$16,000
2,500
15,300
2,300

Cash paid for construction of building..........
Net cash flow used for investing activities. . .
Cash received from issuance of
mortgage note..............................................
Less: Cash paid for dividends......................
Net cash flow provided by
financing activities.......................................
Increase in cash.....................................................
Schedule of noncash financing and investing activities:
Issuance of common stock to retire bonds. .
*$48,000 + $10,000 $12,000 = $46,000
88,100
$ 187,900
36,100
$ 151,800
$ 135,000
(135,000)
$ 50,000
46,000*
4,000
$ 20,800
134,600
$ 155,400
$ 164,000
Prob. 152A
Continued
BON VOYAGE LUGGAGE COMPANY
Transactions
Balance
Dec. 31, 2002
Cash.................................................
Accounts receivable (net)..............
Inventories.......................................
Prepaid expenses...........................
Land.................................................
Buildings..........................................
buildings....................................
Machinery and equipment..............
machinery and equipment........
Patents.............................................
Accounts payable...........................
Dividends payable...........................
Salaries payable..............................
Mortgage note payable...................
Bonds payable................................
Common stock................................
common stock...........................
Retained earnings...........................
Totals...............................................
134,600
176,400
312,300
6,000
100,000
415,000
Debit
(p)
(o)
20,800
16,000
(m)
2,500
Credit
Balance
Dec. 31, 2003
155,400
192,400
287,500
8,500
100,000
550,000
(n)
24,800
(176,000)
295,700
(k)
25,500
(201,500)
295,700
(84,600)
40,000
(146,700)
(10,000)
(12,800)
(164,000)
(15,000)
(j)
(i)
35,200
2,600
(g)
2,000
(e)
50,000
(c)
4,000
(119,800)
37,400
(131,400)
(12,000)
(10,500)
(50,000)
(19,000)
(c) 160,000
(a) 99,800
403,900
(210,000)
(872,700)
0
(50,000)
(820,900)
0
(l) 135,000
(h)
15,300
(f)
2,300
(d) 164,000
(b)
48,000
403,900
Prob. 152A
Concluded
Transactions
Balance
Dec. 31, 2002
Net income.................................
Decrease in salaries payable. . .
Decrease in accounts payable.
Amortization of patents............
Depreciationmachinery and
equipment............................
Depreciationbuildings...........
Increase in prepaid expenses. .
Decrease in inventories............
Construction of building...........
Issuance of mortgage note payable
Schedule of noncash investing and
financing activities:
Issuance of common stock to
retire bonds.........................
Totals...............................................
Debit
(a)
Credit
99,800
(i)
2,600
(j)
(k)
35,200
25,500
(n)
24,800
(f)
(h)
2,300
15,300
(m)
2,500
(o)
16,000
(l) 135,000
(b)
(e)
(g)
48,000
50,000
2,000
(c) 164,000
403,900
(d) 164,000
(p) 20,800
403,900
Balance
Dec. 31, 2003
Prob. 153A
UNION WHOLESALE SUPPLY CO.
Increase in income tax payable..........
Decrease in prepaid expenses...........
Deduct: Increase in accounts receivable. . .
Decrease in accounts payable......
Gain on sale of land.......................
Cash received from land sold......................
Less: Cash paid for acquisition
of building......................................
Cash paid for purchase
of equipment..................................
activities....................................................
bonds payable..........................................
common stock..........................................
Less: Cash paid for dividends.....................
activities....................................................
Decrease in cash.................................................
Cash at the beginning of the year.....................
Cash at the end of the year................................
$ 12,100
$ 39,300
200
600
$ 18,500
17,500
3,700
14,000
40,100
$ 52,200
53,700
$ (1,500)
$ 34,000
$110,000
40,000
150,000
(116,000)
$ 50,000
71,000
$121,000
6,000
115,000
$ (2,500)
27,400
$ 24,900
Prob. 153A
Continued
UNION WHOLESALE SUPPLY CO.
Transactions
Balance
Dec. 31, 2002
Cash.................................................
27,400
94,600
Inventories....................................... 176,500
4,000
Land.................................................
80,000
Buildings.......................................... 155,000
buildings.................................... (43,500)
Equipment....................................... 185,600
Accumulated deprecation
equipment.................................. (74,500)
Income tax payable.........................
(3,800)
Bonds payable................................
0
Common stock................................
(25,000)
common stock........................... (280,000)
Totals...............................................
0
Debit
(o)
(n)
Credit
(p)
2,500
(m)
(l)
600
20,000
(j)
(h)
12,300
30,000
(55,800)
195,600
(g)
27,000
(e)
(d)
(c)
200
50,000
1,000
(71,500)
(140,000)
(4,000)
(50,000)
(26,000)
(c)
(a)
70,000
12,100
225,700
(350,000)
(158,700)
0
18,500
17,500
(k) 110,000
(i)
40,000
(h)
(f)
30,000
3,700
(b)
6,000
225,700
Balance
Dec. 31, 2003
24,900
113,100
194,000
3,400
60,000
265,000
Prob. 153A
Concluded
Transactions
Balance
Dec. 31, 2002
Net income.................................
Increase in income tax payable
Depreciationequipment.........
Gain on sale of land..................
Decrease in prepaid expenses.
Acquisition of building..............
Sale of land................................
Payment of cash dividends......
Issuance of bonds payable......
Issuance of common stock......
Net decrease in cash......................
Totals...............................................
Debit
(a)
(e)
12,100
200
(g)
(j)
27,000
12,300
(m)
600
Credit
(f)
3,700
(l)
14,000
(n)
(o)
17,500
18,500
(i) 40,000
(k) 110,000
(l)
34,000
(d)
(c)
(p)
50,000
71,000
2,500
209,700
(b)
6,000
209,700
Balance
Dec. 31, 2003
Prob. 154A
GREEN THUMB NURSERY INC.
Cash received from customers....................
Deduct: Cash payments for
merchandise................................
expenses.....................................
Cash payments for income tax.....
Cash received from sale of investments.....
Less: Cash paid for land..............................
Cash paid for equipment...................
activities....................................................
$1,231,9001
$760,9002
286,1003
85,000
1,132,000
$ 99,900
$
$ 95,000
90,000

Cash received from sale of
common stock..........................................
Net cash flow used for
financing activities...................................
Decrease in cash.................................................
79,000
185,000
(106,000)
78,000
93,700*
(15,700)
$ (21,800)
176,500
$ 154,700
Schedule Reconciling Net Income with Cash Flows from Operating Activities:
$ 115,000
$20,500
12,600
33,100
$ 148,100
Deduct: Increase in accounts receivable. . .
$18,100
14,500
Decrease in accrued expenses.....
1,600
Gain on sale of investments..........
14,000
48,200
$ 99,900
*Dividends paid: $97,700 + $20,000 $24,000 = $93,700
Prob. 154A
Continued
Computations:
1. Sales................................................................................... $ 1,250,000
Deduct increase in accounts receivable........................
18,100
Cash received from customers....................................... $ 1,231,900
2. Cost of merchandise sold................................................ $
Add increase in inventories.............................................
$
Deduct increase in accounts payable............................
Cash payments for merchandise.................................... $
759,000
14,500
773,500
12,600
760,900
3. Operating expenses other than depreciation................ $

Add decrease in accrued expenses...............................
Cash payments for operating expenses........................ $
284,500
1,600
286,100
Prob. 154A
Continued
GREEN THUMB NURSERY INC.
Transactions
Balance
Dec. 31, 2003
Balance Sheet
Cash................................................. 176,500
Accounts receivable....................... 243,200
Inventories....................................... 303,300
Investments.....................................
65,000
Land.................................................
0
Equipment....................................... 275,000
Accumulated depreciation............. (103,200)
Common stock................................
(12,000)
common stock........................... (110,000)
Totals...............................................
0
Debit
(p)
(o)
18,100
14,500
(n)
(m)
95,000
90,000
(k)
(h)
Credit
(q)
21,800
(e)
65,000
(c)
(l)
20,500
12,600
(j)
(i)
4,000
3,000
154,700
261,300
317,800
0
95,000
365,000
(123,700)
(248,300)
(10,900)
(24,000)
(15,000)
(i) 75,000
(g) 115,000
316,900
(185,000)
(586,900)
0
1,600
97,700
316,900
Balance
Dec. 31, 2004
Prob. 154A
Concluded
Transactions
Balance
Dec. 31, 2003
Income Statement
Sales................................................
Cost of merchandise sold..............
Depreciation expense.....................
Other operating expenses..............
Gain on sale of investments...........
Income tax.......................................
Net income.......................................
Cash Flows
Cash received from customers
Cash payments:
Merchandise........................
Debit
(a) 1,250,000
(b) 759,000
(c)
20,500
(d) 284,500
(e)
14,000
(a) 1,250,000 (p)
18,100
(f)
(g)
85,000
115,000
(l)
12,600 (b) 759,000

(o)
14,500
(d) 284,500
(k)
1,600
(f)
85,000
(e)
79,000
Operating expenses............
Income taxes.......................
Purchase of land.......................
Totals...............................................
Credit
(j)
(i)
(q)
4,000
78,000
21,800
2,709,400
(m)
90,000
(n)
95,000
(h)
97,700
2,709,400
Balance
Dec. 31, 2004
Prob. 155A
Cash received from customers....................
Deduct: Cash payments for merchandise. .
expenses.....................................
Cash payments for income tax.....
Less: Cash paid for purchase of land.........
equipment......................................
activities....................................................
$ 539,0001
$208,800
109,6003
80,800
399,200
$ 139,800
$ 50,000
$124,000
172,000

Cash received from sale of common
stock..........................................................
activities....................................................
Increase in cash..................................................
296,000
(246,000)
$ 220,000
57,500*
162,500
$ 56,300
67,900
$ 124,200
Schedule Reconciling Net Income with Cash Flows from Operating Activities:
$126,000
Add: Depreciation........................................ $ 20,500
Increase in accounts payable............
8,600
Increase in accrued expenses...........
700
Loss on sale of investments.............
8,000
37,800
$163,800
Deduct: Increase in accounts receivable. . . $ 4,800
19,200
24,000
$139,800
*Dividends paid: $60,000 + $12,500 $15,000 = $57,500
Prob. 155A
Continued
Computations:
1. Sales...................................................................................
Cash received from customers.......................................
$543,800
4,800
$539,000
2. Cost of merchandise sold................................................

Cash payments for merchandise....................................
$198,200
19,200
$217,400
8,600
$208,800
3. Operating expenses other than depreciation................

Deduct increase in accrued expenses...........................
Cash payments for operating expenses........................
$110,300
700
$109,600
Prob. 155A
Continued
Transactions
Balance
June 30, 2002
Balance Sheet
Cash.................................................
67,900
97,600
Inventories....................................... 123,500
Investments.....................................
58,000
Land.................................................
0
Equipment....................................... 201,400
Common stock................................
(80,000)
common stock........................... (130,000)
Totals...............................................
0
Debit
(q)
(p)
(o)
Credit
56,300
4,800
19,200
(e)
58,000
(c)
(l)
(k)
(j)
(i)
20,500
8,600
700
2,500
40,000
124,200
102,400
142,700
0
124,000
373,400
(79,400)
(93,200)
(13,000)
(15,000)
(120,000)
(i) 180,000
(g) 126,000
436,300
(310,000)
(236,100)
0
(n) 124,000
(m) 172,000
(h)
60,000
436,300
Balance
June 30, 2003
Prob. 155A
Concluded
Transactions
Balance
June 30, 2002
Income Statement
Sales................................................
Loss on sale of investments..........
Income tax.......................................
Net income.......................................
Cash Flows
Cash payments:
Merchandise........................
Debit
(a)
543,800
(b) 198,200
(c)
20,500
(d) 110,300
(e)
(8,000)
(f)
80,800
(g) 126,000
(a)
(l)
Operating expenses............
(k)
Income taxes.......................
Purchase of land.......................
Totals...............................................
Credit
543,800 (p)
4,800
8,600 (b) 198,200

(o)
19,200
(d) 110,300
700
(f)
80,800
(m) 172,000
(e)
50,000
(n) 124,000
(j)
(i)
(h)
60,000
(q)
56,300
1,361,400
2,500
220,000
1,361,400
Balance
June 30, 2003
Prob. 151B
IDAHO ALS GOLF SHOPS CO.
Deduct: Increase in accounts receivable. .
Increase in inventories..................
Gain on sale of investments........
Decrease in accrued
expenses................................
Less: Cash paid for purchase of land.........
equipment......................................
activities....................................................
Cash received from sale of
common stock..........................................
Less cash paid for dividends.......................
activities....................................................
Increase in cash..................................................
*$96,000 + $20,000 $24,000 = $92,000
$376,400
$ 31,000
4,900
$
35,900
$412,300
5,800
10,500
24,000
3,100
43,400
$368,900
$114,000
$125,000
220,000
345,000
(231,000)
$165,000
92,000*
73,000
$210,900
313,400
$524,300
Prob. 151B
Concluded
Transactions
Balance
Dec. 31, 2002
Cash................................................. 313,400
Inventories....................................... 332,100
Investments.....................................
90,000
Land.................................................
0
Equipment....................................... 535,000
equipment.................................. (158,000)
Accrued expenses..........................
(7,400)
Common stock................................
(50,000)
common stock........................... (200,000)
Totals...............................................
0
Net income.................................
Decrease in accrued expenses
Depreciation..............................
Gain on sale of investments.....
Purchase of land.......................
Totals...............................................
Debit
Credit
(m) 210,900
(l)
5,800
(k) 10,500
(j)
90,000
(g)
(f)
31,000
4,900
(d)
(c)
4,000
30,000
(i) 125,000
(h) 220,000
(e)
(b)
3,100
96,000
671,300
(e)
3,100
(j)
(k)
(l)
24,000
10,500
5,800
4,900
31,000
(h) 220,000
(i) 125,000
(j) 114,000
(b)
96,000
(c) 165,000
(d)
4,000
695,300
524,300
132,500
342,600
0
125,000
755,000
(189,000)
(85,200)
(4,300)
(24,000)
(80,000)
(c) 135,000
(335,000)
(a) 376,400 (1,161,900)
671,300
0
(a) 376,400
(f)
(g)
Balance
Dec. 31, 2003
(m) 210,900
695,300
Prob. 152B
GOLD MEDAL ATHLETIC APPAREL CO.
Add: Depreciation........................................... $ 92,000
25,500
Decrease in accounts receivable.........
34,700
Deduct: Increase in merchandise
inventory...................................... $ 13,900
Increase in prepaid expenses ........
2,000
Cash paid for equipment.................................
activities.......................................................
Less: Cash paid for dividends........................ $ 88,000
Cash paid to retire mortgage
note payable..................................... 205,000
Net cash flow used in financing
activities.......................................................
Decrease in cash....................................................
$ 125,800
152,200
$ 278,000
15,900
$ 262,100
$ 244,500
(244,500)
$ 250,000
293,000
(43,000)
$ (25,400)
257,900
$ 232,500
Prob. 152B
Concluded
GOLD MEDAL ATHLETIC APPAREL CO.
Transactions
Balance
Dec. 31, 2002
Cash.................................................
Merchandise inventory...................
Equipment.......................................
equipment..................................
Mortgage note payable...................
Common stock................................
common stock...........................
Totals...............................................
Net income.................................
Depreciation..............................
Increase in prepaid expenses. .
Increase in merchandise
inventory..............................
Decrease in accounts
receivables...........................
Payment of mortgage note
payable.................................
Totals...............................................
257,900
532,500
621,300
15,000
600,000
(297,500)
(397,600)
(205,000)
(70,000)
(620,000)
(436,600)
0
Debit
Credit
(l)
(k)
(j) 13,900
(i)
2,000
(h) 244,500
(g) 124,500
25,400
34,700
(g) 124,500
88,000
677,900
92,000
25,500
(c)
50,000
(265,000)
(423,100)
0
(120,000)
(c) 200,000
(a) 125,800
677,900
(820,000)
(474,400)
0
(a) 125,800
(e) 25,500
(f) 92,000
(k)
(i)
2,000
(j)
13,900
34,700
(h) 244,500
(b)
88,000
(c) 250,000
(d) 205,000
(l)
25,400
553,400
232,500
497,800
635,200
17,000
720,000
(f)
(e)
(d) 205,000
(b)
Balance
Dec. 31, 2003
553,400
Prob. 153B
HANDYMANS HELPER HARDWARE COMPANY
For the Year Ended, December 31, 2003
Net loss, per income statement...................
Add: Depreciation........................................
Decrease in prepaid expenses..........
Deduct: Increase in accounts receivable. .
Increase in inventory.....................
Decrease in accounts payable.....
Gain on sale of land......................
Cash received from land sold......................
Less: Cash paid for acquisition
of building......................................
Cash paid for purchase
of equipment..................................
activities....................................................
bonds payable..........................................
common stock..........................................
activities....................................................
Decrease in cash.................................................
$(114,200)
$ 53,300
500
$ 18,400
30,800
9,200
13,000
53,800
$ (60,400)
71,400
$ (131,800)
$ 38,000
$120,000
58,200
178,200
(140,200)
$ 60,000
220,000
$ 280,000
20,000
260,000
$ (12,000)
275,400
$ 263,400
Prob. 153B
Concluded
HANDYMANS HELPER HARDWARE COMPANY
Transactions
Balance
Dec. 31, 2002
Cash.................................................
Inventories.......................................
Land.................................................
Buildings..........................................
buildings....................................
Equipment.......................................
equipment..................................
Bonds payable................................
Common stock................................
common stock...........................
Totals...............................................
Net loss......................................
Depreciationequipment.........
Gain on sale of land..................
Decrease in prepaid expenses.
Acquisition of building..............
Sale of land................................
Issuance of bonds payable......
Totals...............................................
275,400
356,800
512,400
9,000
120,000
350,000
(170,000)
185,500
(48,000)
(377,100)
0
(70,000)
(250,000)
(894,000)
0
Debit
(n)
(m)
Credit
(o)
12,000
(l)
(k)
500
25,000
(i)
(g)
12,300
45,000
(182,300)
198,700
(f)
41,000
(d)
(c)
60,000
20,000
(44,000)
(367,900)
(60,000)
(90,000)
18,400
30,800
(j) 120,000
(h)
58,200
(g)
(e)
45,000
9,200
(c) 200,000
(a) 114,200
(b) 20,000
415,800
415,800
(a) 114,200
(e)
9,200
(f)
(i)
41,000
12,300
(l)
500
(k)
13,000
(m)
(n)
30,800
18,400
(h) 58,200
(j) 120,000
(k)
38,000
(b)
(d) 60,000
(c) 220,000
(o) 12,000
383,800
Balance
Dec. 31, 2003
20,000
383,800
263,400
375,200
543,200
8,500
95,000
470,000
(450,000)
(759,800)
0
Prob. 154B
NATURES BOUNTY MARKETS, INC.
Deduct: Cash payments for
merchandise................................ $293,9002
expenses..................................... 154,3003
20,500
Less: Cash paid for purchase of land........... $ 70,500
equipment.........................................
90,000
Less: Cash paid for dividends........................
activities.......................................................
Decrease in cash....................................................
$539,6001
468,700
$ 70,900
$ 41,000
160,500
(119,500)
$ 52,000
21,100*
Reconciliation of Net Income with Cash Flows from Operating Activities:

$ 53,700
Add: Depreciation........................................... $ 20,300
6,800
Loss on sale of investments................
4,000
31,100
$ 84,800
Deduct: Increase in accounts receivable..... $ 5,400
Increase in inventories....................
6,700
Decrease in accrued expenses......
1,800
13,900
$ 70,900
*Dividends paid: $23,100 + $4,000 $6,000 = $21,100
30,900
$ (17,700)
83,500
$ 65,800
Prob. 154B
Continued
Computations:
1. Sales...................................................................................
Cash received from customers.......................................
2. Cost of merchandise sold................................................
$545,000
5,400
$539,600

Cash payments for merchandise....................................
$294,000
6,700
$300,700
6,800
$293,900
3. Operating expenses other than depreciation................

Cash payments for operating expenses........................
$152,500
1,800
$154,300
Prob. 154B
Continued
NATURES BOUNTY MARKETS, INC.
Transactions
Balance
Dec. 31, 2003
Balance Sheet
Cash.................................................
83,500
95,800
Inventories....................................... 125,700
Investments.....................................
45,000
Land.................................................
0
Equipment....................................... 210,500
Dividends payable...........................
(4,000)
Common stock................................
(15,000)
common stock........................... (150,000)
Totals...............................................
0
Debit
(p)
(o)
5,400
6,700
(n)
(m)
70,500
90,000
(k)
(h)
Credit
(q)
17,700
(e)
45,000
(c)
(l)
20,300
6,800
(j)
(i)
2,000
2,000
65,800
101,200
132,400
0
70,500
300,500
(65,900)
(93,500)
(10,200)
(6,000)
(17,000)
(i)
(g)
50,000
53,700
197,500
(200,000)
(277,800)
0
1,800
23,100
197,500
Balance
Dec. 31, 2004
Prob. 154B
Concluded
Transactions
Balance
Dec. 31, 2003
Income Statement
Sales................................................
Loss on sale of investments..........
Income tax.......................................
Net income.......................................
Cash Flows
Cash payments:
Merchandise..............................
Debit
(a)
(l)
Income taxes.............................
Totals...............................................
(a)
545,000
545,000 (p)
5,400
(b) 294,000
(c)
20,300
(d) 152,500
(e)
4,000
(f)
20,500
(g)
53,700
Operating expenses..................
Purchase of land.......................
Credit
(e)
(j)
(i)
(q)
6,800 (b) 294,000

(o)
6,700
(d) 152,500
(k)
1,800
(f)
20,500
(m)
90,000
(n)
70,500
(h)
23,100
41,000
2,000
52,000
17,700
1,209,500
1,209,500
Balance
Dec. 31, 2004
Prob. 155B
$1,090,7001
2
Deduct: Cash payments for merchandise..... $406,800
expenses....................................... 166,5003
Cash payments for income tax........ 148,500
721,800
$368,900
Less: Cash paid for land................................. $125,000
Cash paid for equipment...................... 220,000
Less: Cash paid for dividends........................
activities.......................................................
Increase in cash.....................................................
$ 114,000
345,000
(231,000)
$ 165,000
92,0004
Reconciliation of Net Income with Cash Flows from Operating Activities:

$ 376,400
Add: Depreciation............................................ $ 31,000
Increase in accounts payable................
4,900
35,900
$ 412,300
Deduct: Increase in accounts receivable...... $ 5,800
Increase in inventories......................
10,500
Gain on sale of investments.............
24,000
Decrease in accrued expenses........
3,100
43,400
$ 368,900
73,000
$210,900
313,400
$524,300
Prob. 155B
Continued
Computations:
1. Sales................................................................................... $ 1,096,500
5,800
Cash received from customers....................................... $ 1,090,700
2. Cost of merchandise sold................................................ $
$
Cash payments for merchandise.................................... $
401,200
10,500
411,700
4,900
406,800
3. Operating expenses other than

depreciation................................................................. $
Cash payments for operating expenses........................ $
163,400
3,100
166,500
4. Cash dividends declared................................................. $

Deduct increase in dividends payable...........................
Cash paid for dividends................................................... $
96,000
4,000
92,000
Prob. 155B
Continued
Transactions
Balance
Dec. 31, 2002
Balance Sheet
Cash................................................. 313,400
Inventories....................................... 332,100
Investments.....................................
90,000
Land.................................................
0
Equipment....................................... 535,000
Accrued expenses..........................
(7,400)
Common stock................................
(50,000)
common stock........................... (200,000)
Totals...............................................
0
Debit
Credit
(q) 210,900
(p)
5,800
(o) 10,500
(e)
90,000
(c)
(l)
31,000
4,900
(j)
(i)
4,000
30,000
(n) 125,000
(m) 220,000
(k)
(h)
3,100
96,000
671,300
Balance
Dec. 31, 2003
524,300
132,500
342,600
0
125,000
755,000
(189,000)
(85,200)
(4,300)
(24,000)
(80,000)
(i) 135,000
(335,000)
(g) 376,400 (1,161,900)
671,300
0
Prob. 155B
Concluded
Transactions
Balance
Dec. 31, 2002
Income Statement
Sales................................................
Gain on sale of investments...........
Income tax.......................................
Net income.......................................
Cash Flows
Cash payments:
Merchandise..............................
Debit
(a) 1,096,500
(b) 401,200
(c)
31,000
(d) 163,400
(e)
24,000
(a) 1,096,500 (p)
5,800
(f) 148,500
(g) 376,400
(l)
Operating expenses..................
Income taxes.............................
Purchase of land.......................
Total.................................................
Credit
4,900 (b) 401,200

(o)
10,500
(d) 163,400
(k)
3,100
(f) 148,500
(m) 220,000
(e)
114,000
(n) 125,000
(h)
(j)
(i)
96,000
4,000
165,000
(q) 210,900
2,504,900
2,504,900
Balance
Dec. 31, 2003
SPECIAL ACTIVITIES
Activity 151
Although this situation might seem harmless at first, it is, in fact, a gross
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 Tonis
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 Toni, Tom has breached his professional ethics because the
disclosure would violate generally accepted accounting principles. On a more
subtle note, Toni is being somewhat disingenuous. Apparently, Toni 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 Toni be as interested in the dual per share
disclosures in the opposite scenariowith earnings per share improving and
cash flow per share deteriorating? Probably not.
Activity 152
Start-up companies are unique in that they frequently will have negative retained
earnings and operating cash flows. The negative retained earnings are due to
being unable to earn revenues in excess of the 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 VideoToGo.com Inc., the money spent on salaries to
develop the site 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 provided 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). VideoToGo.com 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 successful, then VideoToGo.com Inc., should become
self-sustaining and provide a good return for the shareholders.
Activity 153
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
accounts receivable is growing. Unfortunately, it appears as though the new
campaign has done a poor job of screening creditworthiness in these new
customers. In other words, there are many new credit card purchasers
unfortunately, 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 merchandise has no customer appeal, then that would explain
the inventory increase. In other words, the division is purchasing merchandise
that sits on the shelf, regardless of pricing. The reduction in payables is the
result of the division becoming 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 cannot afford a poor payment history, or they will be
denied future merchandise shipments. This is a signal of severe cash problems.
Overall, the picture is of a retailer having severe operating cash flow difficulties.
Note to Instructor: This scenario is essentially similar to W. T. Grants path to
eventual bankruptcy. They reported earnings, while having significant negative
cash flows from operations due to expanding credit too liberally (increases in
accounts receivable) and purchasing too much unsaleable inventory (increases
in inventory).
Activity 154
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
determine 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
extent that depreciation expense is deducted from revenue. Accordingly,
the depreciation expense for the year must be added back to the
reported net income in arriving at cash flows from operating activities.
2. Generally accepted accounting principles require that significant
transactions affecting future cash flows should be reported in a separate
schedule to the statement, even though they do not affect cash.
Accordingly, even though the issuance of the common stock for land
does not affect cash, the transaction affects future cash flows and must
be reported.
3. The $42,500 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 $7,500, to avoid double reporting of this amount, the gain is
deducted 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
obligations, 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 Elite
Cabinets, Inc. The increase in cash of $76,400 for the past year is more than
adequate 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
information, such as a projection of future earnings, a description of
collateral pledged to support the loan, and an independent credit report,
would normally be considered before a final loan decision is made.
Activity 155
The statements of cash flows for Philip Morris and Loral Space &
Communications, LTD. (LSC) for the most recent year available at this writing are
shown on the following pages. The actual analyses may be different due to
updated information. However, this answer shows the structure for a possible
response.
Operating Activities
First, Philip Morris is an incredible generator of cash flows from operating
activities, over $8 billion per year. LSC, on the other hand, is having severe cash
flow difficulties. The company moved from a positive toward a negative cash flow
from operations. LSC is having trouble selling its satellite phone and Internet
services, as evidenced from the net losses.
Investing Activities
Two striking features of Philip Morriss cash flows from investing activities
include the amount of cash necessary to maintain and grow its business, an
average of $1.8 billion per year in capital expenditures. In addition, Philip Morris
invested about $700 million in finance assets in 1998. LSC is making significant
investments in its satellite network. Its capital expenditures have been running
around a half billion dollars per year, with additional cash invested in affiliates.
Financing Activities
The largest item is the huge sums that Philip Morris pays in dividends (nearly $4
billion in 1998 and 1997). Philip Morris has so much cash that it cannot profitably
invest all of it in its operations, so the company chooses to pay dividends. Even
so, Philip Morriss cash balance is growing from $2.3 billion to over $4 billion in
1998. The cash is likely being accumulated in anticipation of tobacco-related
settlements. LSC is trying to get its satellite network installed and sold. This is
requiring huge cash amounts that are not available from operations. Thus, LSC
must raise cash from financing activities. Its statement of cash flows indicates
significant cash inflows from issuing debt and common stock.
Activity 155
Continued
LORAL SPACE & COMMUNICATIONS, LTD.
For Years Ended December 31, 1999 and 1998
1999/12/31
Net income (loss)........................................................................................................
(138,798,000)
Non-cash items:
Gain on investments, net.....................................................................................
Equity in net loss of affiliates..............................................................................
Minority interest....................................................................................................
Deferred taxes......................................................................................................
Non-cash interest and investment income.........................................................
Non-cash interest expense..................................................................................
Depreciation and amortization............................................................................
Loss on ChinaSat agreement (Note 13)..............................................................
Loss on disposal of property, plant and equipment..........................................
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net.....................................................................................
Contracts-in-process............................................................................................
Inventories............................................................................................................
Other current assets............................................................................................
Deposits................................................................................................................
Long-term receivables.........................................................................................
Other assets..........................................................................................................
Accounts payable.................................................................................................
Accrued expenses and other current liabilities.................................................
Income taxes payable..........................................................................................
Customer advances.............................................................................................
Long-term liabilities..............................................................................................
Other......................................................................................................................
$(201,916,000)
$ 177,819,000
(5,525,000)
(39,864,000)
(22,877,000)
33,758,000
174,906,000
35,492,000
12,696,000
$ (19,360,000)
(84,725,000)
67,117,000
(13,098,000)
(54,350,000)
(5,486,000)
(63,739,000)
(7,517,000)
8,128,000
6,914,000
(90,547,000)
61,000,000
4,769,000
1998/12/31
$
$ (5,494,000)
120,417,000
(3,376,000)
(5,940,000)
(14,249,000)
20,474,000
135,029,000
$ (4,086,000)
(72,413,000)
(90,897,000)
14,450,000
14,000,000
6,662,000
(16,056,000)
9,048,000
19,432,000
(8,322,000)
54,090,000
51,844,000
980,000
Cash (used in) provided by operating activities......................................................
Activity 155
$ (26,405,000)
$ 86,795,000
1999/12/31
1998/12/31
Continued
Cash acquired in connection with Loral CyberStar acquisition.............................
Acquisition of businesses, net of cash acquired.....................................................
Proceeds from the sale of investment in affiliates, net...........................................
Investments in and advances to affiliates................................................................
Other assets................................................................................................................
Use and transfer of restricted and segregated cash...............................................
Capital expenditures..................................................................................................
Cash used in investing activities...............................................................................
(555,613,000)
Proceeds from the issuance of 9.5% senior notes, net...........................................
Proceeds from sale of common stock, net...............................................................
Proceeds from other stock issuances......................................................................
Borrowings (repayments) under revolving credit facility, net.................................
Borrowings under note purchase facility.................................................................
Proceeds from issuance of term loan.......................................................................
Repayments under term loan....................................................................................
Repayments under Export-Import facility.................................................................
Repayments of other long-term obligations.............................................................
Contributions from minority partners.......................................................................
Preferred dividends....................................................................................................
Cash provided by financing activities.......................................................................
Decrease (increase) in cash and cash equivalents.......................................................
Cash and cash equivalentsbeginning of period.........................................................
Cash and cash equivalentsend of period...................................................................
(335,377,000)
$ 53,801,000
(6,877,000)
246,867,000
(624,079,000)
156,381,000
(469,747,000)
$(659,533,000)
264,123,000
(489,448,000)
$
$ (10,790,000)
$ 343,875,000
20,095,000
70,000,000
12,581,000
(18,750,000)
(2,146,000)
(1,896,000)
(44,728,000)
$ 379,031,000
$(306,907,000)
546,772,000
$ 239,865,000
$ 601,816,000
32,121,000
150,000,000
38,423,000
(2,146,000)
(7,819,000)
21,398,000
(44,750,000)
$ 789,043,000
$ 320,225,000
226,547,000
$ 546,772,000
Activity 155
Continued
PHILIP MORRIS COMPANIES
For the Years Ended December 31, 1998 and 1997
1998/12/31
Cash Provided By (Used In) Operating Activities

Net earningsConsumer products................................................................................
Financial services...................................................................................
Net earnings................................................................................................................
Adjustments to reconcile net earnings to operating cash flows:
Consumer products:
Depreciation and amortization..................................................................................
International food realignment..................................................................................
Deferred income tax provision (benefit)...................................................................
Gain on sale of Brazilian ice cream businesses......................................................
Gains on sales of other businesses..........................................................................
Cash effects of changes, net of the effects from acquired and divested
companies:
Receivables, net...................................................................................................
Inventories............................................................................................................
Accounts payable.................................................................................................
Income taxes.........................................................................................................
Accrued liabilities and other current assets.......................................................
Other......................................................................................................................
Financial services:
Deferred income tax provision..................................................................................
Gain on sale of business...........................................................................................
Other............................................................................................................................
Net cash provided by operating activities..........................................................
1997/12/31
$5,255,000,000
117,000,000
$5,372,000,000
$ 6,152,000,000
158,000,000
$ 6,310,000,000
1,690,000,000
1,629,000,000
630,000,000
(188,000,000)
(774,000,000)
(196,000,000)
11,000,000
(352,000,000)
(192,000,000)
(150,000,000)
565,000,000
254,000,000
671,000,000
265,000,000
(14,000,000)
$8,120,000,000
(168,000,000)
(531,000,000)
37,000,000
48,000,000
726,000,000
653,000,000
257,000,000
(103,000,000)
10,000,000
$ 8,340,000,000
Activity 155
Concluded
Cash Provided By (Used In) Investing Activities

Consumer products:
Capital expenditures..................................................................................................
Purchase of businesses, net of acquired cash........................................................
Proceeds from sales of businesses..........................................................................
Other............................................................................................................................
Financial services:
Investments in finance assets...................................................................................
Proceeds from finance assets...................................................................................
Proceeds from sale of business................................................................................
Net cash used in investing activities...................................................................
Cash Provided By (Used In) Financing Activities
Consumer products:
Net issuance (repayment) of short-term borrowings...............................................
(1,482,000,000)
Long-term debt proceeds..........................................................................................
Long-term debt repaid...............................................................................................
Financial services:
Net repayment of short-term borrowings.................................................................
Long-term debt proceeds..........................................................................................
Long-term debt repaid...............................................................................................
Repurchase of common stock........................................................................................
Dividends paid..................................................................................................................
Issuance of common stock.............................................................................................
Other.................................................................................................................................
Net cash used in financing activities........................................................................
(5,521,000,000)
Effect of exchange rate changes on cash and cash equivalents.................................
Cash and cash equivalents:
Increase (decrease)....................................................................................................
1998/12/31
1997/12/31
$(1,804,000,000)
(17,000,000)
16,000,000
(154,000,000)
$(1,874,000,000)
(630,000,000)
1,784,000,000
42,000,000
(736,000,000)
141,000,000
$(2,554,000,000)
(652,000,000)
287,000,000
424,000,000
$ (619,000,000)
61,000,000
2,065,000,000
(1,616,000,000)
2,893,000,000
(1,987,000,000)
(178,000,000)
(307,000,000)
(3,984,000,000)
265,000,000
(200,000,000)
$(3,894,000,000)
(173,000,000)
174,000,000
(387,000,000)
(805,000,000)
(3,885,000,000)
205,000,000
(74,000,000)
$
127,000,000
$ (158,000,000)
$ 1,799,000,000
$ 2,042,000,000
Balance at beginning of year.....................................................................................

Balance at end of year...............................................................................................
2,282,000,000
$ 4,081,000,000
240,000,000
$ 2,282,000,000

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CHAPTER 15

STATEMENT OF CASH FLOWS

c. The gain of $5,000 would be deducted

Cash payment, $30,000

Deduct: Increase in merchandise inventory$ 19,900

A separate schedule of noncash investing and financing activities would report

Note to Instructors: The net income must be determined by working backward

Deduct: Increase in accounts receivable.......................................

Net cash flow from operating activities..........................................

Income tax expense.....................................................

Cost of merchandise sold...........................................

Operating expenses other than depreciation...........

Fiscal Years Ended

A correct statement of cash flows would be as follows:

Cash flows from investing activities:

Cash flows from financing activities:

3. Operating expenses other than depreciation................ $

(a) 1,250,000 (p)

12,600 (b) 759,000

Cash flows from financing activities:

2. Cost of merchandise sold................................................

3. Operating expenses other than depreciation................

8,600 (b) 198,200

Reconciliation of Net Income with Cash Flows from Operating Activities:

Deduct increase in accounts payable............................

3. Operating expenses other than depreciation................

6,800 (b) 294,000

Reconciliation of Net Income with Cash Flows from Operating Activities:

3. Operating expenses other than

4. Cash dividends declared................................................. $

(a) 1,096,500 (p)

4,900 (b) 401,200

Cash (used in) provided by operating activities......................................................

Cash Provided By (Used In) Operating Activities

Cash Provided By (Used In) Investing Activities

Balance at beginning of year.....................................................................................

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