Chapter 13

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition
CHAPTER 13
STATEMENT OF CASH FLOWS
LEARNING OBJECTIVES
1. Describe the content and format of the statement of cash flows.
2. Prepare the operating activities section of a statement of cash flows using
the indirect method.
3. Prepare the investing and financing activities sections and complete the
statement of cash flows.
4. Use the statement of cash flows to evaluate a company.
5. Prepare the operating activities section of a statement of cash flows using
the direct method (Appendix 13A).
SUMMARY OF QUESTIONS BY LEARNING

OBJECTIVES AND BLOOM’S TAXONOMY
Ite
LO BT Item LO BT Item LO BT Item LO BT Item LO BT
m
Questions
1. 1 C 6. 1 K 11. 2 C 16. 4 C 21. 5 C
2. 1 C 7. 1 C 12. 2 C 17. 4 C 22. 5 C
3. 1 C 8. 2 C 13. 3 C 18. 4 C
4. 1 C 9. 2 C 14. 3 AP 19. 4 C
5. 1 K 10. 2 K 15. 3 C 20. 5 C
Brief Exercises
1. 1 K 5. 2 AP 9. 3 AP 13. 5 AP
2. 1 C 6. 3 AN 10. 4 AN 14. 5 AP
3. 1 C 7. 3 AP 11. 4 AN 15. 5 AP
4. 2 C 8. 3 AN 12. 5 AP 16. 5 AP
Exercises
1. 1 C 4. 2 AP 7. 2,3 AP 10. 4 AN 13. 5 AP
2. 1 C 5. 2,3 C 8. 2,3,4 AN 11. 4 AN 14. 5 AP
3. 2 C 6. 2,3 AN 9. 2,3,4 AN 12. 5 C 15. 3,5 AP
Problems: Set A and B
1. 1 C 4. 3,4 AN 7. 2,3 AN 10. 2,5 AN .
2. 2 AP 5. 2,3 AN 8. 4 AN 11. 5 AN
3. 3,4 AN 6. 2,3 AN 9. 4 AN 12. 5 AN
Cases
1. 1,4 AN 3. 4 E 5. 1 C 7. 4 E
2. 1,4 AN 4. 4 AN 6. 5 AN
Solutions Manual 13-1 Chapter 13

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibited.
Legend: The following abbreviations will appear throughout the solutions

manual file.
LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to prepare in minutes
AACSB Association to Advance Collegiate Schools of Business

Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency
cpa-e001 Ethics Professional and Ethical Behaviour
cpa-e002 PS and DM Problem-Solving and Decision-Making
cpa-e003 Comm. Communication
cpa-e004 Self-Mgt. Self-Management
cpa-e005 Team & Lead Teamwork and Leadership
cpa-t001 Reporting Financial Reporting
cpa-t002 Stat. & Gov. Strategy and Governance
cpa-t003 Mgt. Accounting Management Accounting
cpa-t004 Audit Audit and Assurance
cpa-t005 Finance Finance
cpa-t006 Tax Taxation

prohibited.
ANSWERS TO QUESTIONS
1. The statement of cash flows reports the cash receipts, cash
payments, and net change in cash resulting from the operating,
investing, and financing activities of a company during a period, in
a format that reconciles the beginning and ending cash balances.
The statement of cash flows is useful to all readers because it allows
them to assess the following aspects of a company’s financial
position:
• the reasons for the difference between net income and cash
provided (used) by operating activities
• the cash generated by (used in) investing and financing
transactions during a period
• the company’s ability to generate future cash flows
Creditors in particular, are concerned about the borrower’s ability to
generate cash to repay loans and service debt. The cash flow
statement helps creditors assess risk.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. Cash equivalents are short-term, highly liquid investments that are

readily convertible to known amounts of cash. Generally, only debt
investments with original maturities of three months or less qualify
under this definition. Bank overdrafts that are repayable on demand
are also included in (deducted from) cash equivalents.
The statement of cash flows may be prepared using cash, or cash

and cash equivalents as its base. If the latter, cash equivalents must
be clearly defined.

prohibited.
3. Operating activities include the cash flow activities arising from a

company’s principal revenue-producing activities and all other
activities that are not investing or financing activities.
Investing activities are those arising from the acquisition and

disposal of non-current assets.
Financing activities include those resulting in changes in the size

and composition of the equity and borrowings of a company.
LO 1 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
4. Companies following ASPE classify interest paid, interest revenue,

and dividend revenue, as part of operating activities because they
are disclosed on the income statement as part of net income.
Dividend payments are classified as financing activities. This is the
most common practice for both publicly traded and private
companies. Companies following IFRS may classify interest and
dividend revenue as either investing activities or operating activities,
and interest and dividend payments as either financing activities or
operating activities. Companies select where these payments and
receipts will be presented and must apply the presentation
consistently.
5. Examples of noncash transactions include the issue of shares or a

mortgage to purchase property, plant, and equipment. In both
cases, cash is not involved. Noncash transactions should be
reported in the notes to the financial statements and cross-
referenced to the statement of cash flows, but not reported as
investing and financing activities in the body of the statement of
cash flows.
LO 1 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

prohibited.
6. Although the approaches and format are different, both the direct
and indirect methods will produce the same net cash provided by
operating activities.
LO 1 BT: Difficulty: S Time: 2 min. AACSB: None CPA CM: Reporting
7. (a) and (b)

(1) The adjusted trial balance is not required to prepare the
statement of cash flows because it does not provide necessary
data.
(2) A comparative statement of financial position is required to

obtain the changes in individual asset, liability, and equity
balances. Changes in the noncash working capital (current)
accounts may affect the operating activities, changes in short-
term investment and long-lived asset accounts may affect the
investing activities, and changes in non-current liability and
equity accounts may affect the financing activities reported in
the statement of cash flows.
(3) The income statement is required to obtain the elements of

operating activities, which will be converted from the accrual
basis to the cash basis. The income statement is also required
to identify noncash revenues and expenses such as
depreciation and amortization expenses and accounting gains
and losses.
(4) The statement of comprehensive income is needed to

reconcile certain fair-valued assets (e.g., revaluation of the fair
value of land) and equity (e.g., accumulated other
comprehensive income) accounts appearing in the statement
of financial position. However, changes in comprehensive
income do not affect cash and are not reported on the

prohibited.
7. (continued)
(5) The statement of changes in equity will provide details of the

changes in the share capital and retained earnings accounts.
From these, the cash effects of financing transactions with
shareholders, such as the issue or reacquisition of shares
and/or payment of dividends, can be determined and reported
as financing activities on the statement of cash flows.
8. The indirect method involves converting accrual-based net income

to net cash provided by operating activities. This is done by starting
with accrual-based net income from the income statement and
adding or subtracting noncash items included in net income.
Examples of adjustments include adding back noncash expenses,
such as depreciation, and removing any noncash gains or losses
from net income. Then, changes in the balances of noncash current
asset and current liability accounts from one period to the next are
added or subtracted.
9. A number of factors could have caused a positive amount of net

cash provided by operating activities in spite of the fact that
Clearwater reported a net loss. These include (1) a high amount of
collection of unearned revenue; (2) large amounts of depreciation
or amortization; and (3) accounting losses or impairments. The
increase in unearned revenue is added as an inflow under operating
activities. Items (2) and (3) are non-cash items deducted in arriving
at net income (in this case a net loss) so they are now added back
to net loss when determining net cash flow provided by operating
activities, thereby making it positive.

prohibited.
10. Under the indirect method, depreciation and amortization expense

is added back to net income to reconcile net income to net cash
provided by operating activities because depreciation and
amortization are expenses that have reduced net income, but do not
result in the use of cash. Adding them back cancels the expenses
reported in the income statement, as accrual net income is the
starting point under the indirect method.
Example: Income before depreciation $5,000

Less: Depreciation expense (1,000)
Income 4,000
Add: Depreciation expense 1,000
Cash provided by operating activities $5,000
11. Under the indirect method, a gain on disposal of equipment is

deducted from net income to reconcile net income to net cash
provided by operating activities. A gain is the difference between the
cash proceeds received when the asset is sold and the carrying
amount of the asset. This gain is not a cash receipt or payment.
Therefore, the noncash gain, which was included in net income,
must be deducted from net income on the statement of cash flows
to convert net income to net cash provided by operating activities.
The total cash proceeds received when the asset is disposed of
would be reported in the statement of cash flows as an investing
activity.
12. When a business invests money, it does so outside of its main

revenue-generating operations. It might have excess cash, which it
wants to put to use in producing some interest or dividend revenue.
Since the intention is to earn a return on its investment, the buying
and selling of investments is generally reported as investing activities
in the statement of cash flows. The exception occurs when the
investments are held for trading purposes, in which case they are
treated similarly to inventory acquired for resale. These types of
investments are reported as operating activities.

prohibited.
13. The principal amount advanced by the bank and later repaid
involves borrowing and repayment transactions that need to be
reported under financing activities in the statement of cash flows.
The timing of the loan principal repayments will lead to a portion of
the loan principal being classified as current liabilities. This
classification does not change the nature of the cash activity with
the bank. Both the current and non-current principal portions are
treated together for cash flow reporting purposes.
14. Dividends declared reduce retained earnings once the declaration

is made by the board of directors. For the cash flow statement, only
dividends paid are reported in the financing activities section of the
statement. Similar to the adjustments made for the changes in
working capital accounts in the indirect format of the statement of
cash flows, any increase or decrease in the Dividends Payable
account will adjust dividends declared (accrual basis) to dividends
paid (cash basis). For this example, the amount of the increase of
$2,000 ($10,000 - $8,000) in dividends payable will be deducted
from the amount of dividends declared of $40,000 to arrive at cash
paid for dividends of $38,000.
LO 3 BT: AP Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting
15. The statement of cash flows is prepared from detailed information

about the changes in account balances that occurred between two
periods of time, as shown on the other financial statements. Unlike
the other financial statements, it is not prepared from an adjusted
trial balance. In particular, the information to prepare the statement
of cash flows comes from a comparative statement of financial
position, the income statement, the statement of changes in equity,
and additional information concerning specific transactions such as
disposals of property, plant, and equipment.
LO 3 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

prohibited.
16. (a) The corporate life cycle consists of four phases: introductory,
growth, maturity, and decline.
(b) In the introductory and growth phases, we don’t usually expect
to see a company generate positive cash from its operating
activities until part way through the growth phase. Because the
company is making significant investments in its long-lived
assets, cash will be used by investing activities. During the first
two phases, cash generated by financing activities is usually
positive as debt and equity are issued to pay for the
investments and cover the operating activities shortfall. These
patterns reverse in the maturity and decline phases of the
cycle. In the decline phase, cash from operating activities
decreases. Cash from investing activities is positive as the
company sells off its excess assets, before starting to decline.
Cash is used for financing activities as the company continues
to pay off its debt.
17. A company that just commenced its operations would be expected

to report low or negative cash flows from operating activities. Later,
when the company is growing and healthy, the cash from operating
activities will become positive. The company would also usually
show cash used in investing activities as it invests in its productive
capacity. At this stage, the company will also usually show cash
inflows in financing activities to finance the purchase of productive
assets not covered from operating activities.

prohibited.
18. Creditors may be concerned about the company’s ability to repay its
obligations over the long-term. The lack of cash flows from operating
activities may be of concern to investors for several reasons. First,
the decrease in cash flows may have an adverse effect on the
company’s share price. In addition, some investors may be
concerned that the company will not generate enough cash to pay
dividends in the future. This concern is supported by the declining
free cash flow, which also indicates the company is generating less
cash from operating activities to pay future dividends and to expand
the business.
LO 4 BT: C Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005
CM: Reporting and Finance
19. If net capital expenditures and dividends paid exceed cash provided
by operating activities, then free cash flow will be negative.
LO 4 BT: C Difficulty: M Time: 2 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

*20. Net cash provided by operating activities under the direct method is
the difference between cash revenues and cash expenses. The
direct method adjusts the accrual-based revenues and expenses
directly to reflect the cash-based revenues and expenses, which
combine to equal "net cash provided by operating activities."
*21. Depreciation and amortization expenses are not listed in the

operating activities section under the direct method because they
are not cash flow items—they do not affect cash. Recall the journal
entry to record depreciation: debit Depreciation Expense and credit
Accumulated Depreciation. The entry to record amortization is
similar. As you can see, there is no cash involved in this journal
entry. This is different from the indirect method, which uses net
income as its starting point and must add back depreciation and
amortization as noncash items included in the determination of net
income.

prohibited.
*22. The gain on disposal of equipment and the loss on the sale of land
would not appear on the statement of cash flows prepared using the
direct method because these are not cash flow items. However, the
gross proceeds received when the assets are sold would be
reported in the statement of cash flows, as investing activities.

prohibited.
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13-1
(a) – (g) NE
(b) – (h) –
(c) NE (i) –
(d) + (j) NE
(e) – (k) ̶
(f) +
BRIEF EXERCISE 13-2

(a) F
(b) O if reporting under ASPE but if reporting under IFRS a choice exists
between showing this as an operating or financing activity
(c) NC – an exchange of land (investing activity) for shares (financing activity)
that does not involve cash
(d) F
(e) O
(f) O
(g) Not a cash activity – a reduction of retained earnings and an increase in
dividends payable
(h) F if reporting under ASPE but if reporting under IFRS a choice exists
between showing this as a financing or operating activity
(i) O
(j) Not a cash activity – a cost allocation
(k) F

prohibited.
BRIEF EXERCISE 13-3
(a) 1. F
2. O
3. I
4. F
5. F
6. O
(b) Linamar uses the indirect method as indicated by the change in noncash
operating working capital items and the depreciation expense.
BRIEF EXERCISE 13-4

(a) +
(b) –
(c) +
(d) +
(e) N/A
(f) –
(g) –
(h) +
(i) N/A for ASPE, possibly – for IFRS
(j) +
(k) + unless designated as a cash equivalent in which case it does not appear

Copyright © 2017 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
BRIEF EXERCISE 13-5
DUPIGNE CORPORATION
Statement of Cash Flows (Partial)—Indirect Method
Year Ended March 31, 2018
Operating activities
Net income ................................................................... $275,000
Adjustments to reconcile net income to
net cash provided (used) by operating activities
Depreciation expense ........................................... $60,000
Loss on disposal of land ....................................... 15,000
Accounts receivable increase ............................... (20,000)
Inventory increase ................................................ (5,000)
Accounts payable decrease .................................. (5,000) 45,000
Net cash provided by operating activities ............................... $320,000
[Adjustments to net income include depreciation (+); loss (+); increase in noncash current
assets (–); and decrease in current liabilities (−)]. Dividends pertain to financing activities.

BRIEF EXERCISE 13-6
Original cost of equipment sold ........................................................... $20,000

Less: Accumulated depreciation ......................................................... (5,500)
Carrying amount of equipment sold ..................................................... 14,500
Less: Loss on disposal ....................................................................... (1,500)
Cash received from disposal of equipment .......................................... $13,000
The following journal entry may be helpful in understanding this brief exercise:
Cash ............................................................................ 13,000

Accumulated Depreciation—Equipment ...................... 5,500
Loss on Disposal ......................................................... 1,500
Equipment ......................................................... 20,000
(a) Cash provided by disposal of equipment = $13,000
(b) Investing activities for the proceeds; Operating activities for the loss as it
is shown on the income statement.
LO 3 BT: AN Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13-7
($ in thousands)
Investing activities
Purchase of long-term investments ($150 – $100) ................ $ (50)
Disposal of equipment ........................................................... 60 *
Purchase of equipment [$500 – ($400 – $100)] ..................... (200)
Net cash used by investing activities .............................................. $(190)
Equipment
400
XXX
100
500
*Cost of equipment sold ......................................................... $100

*Accumulated depreciation ($100 – carrying amount of $50) 50
*Carrying amount ................................................................... 50
*Gain on disposal................................................................... 10)
*Cash proceeds from disposal ............................................... $ 60)
LO 3 BT: AP Difficulty: C Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13-8
($ in millions)
Beginning balance, retained earnings ......................... $4,075.1

Add: Net income .......................................................... 735.9
Less: Ending balance, retained earnings ..................... (4,172.0)
Dividends paid ............................................................. $ 639.0
Retained Earnings
4,075.1
735.9
639.0
4,172.0
The answer would change if the Dividends Payable account increased during the
year. In this case, the $639.0 decrease in Retained Earnings would be reduced
by the increase in Dividends Payable to arrive at the amount of dividends paid.
LO 3 BT: AN Difficulty: M Time: 10 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 13-9
($ in thousands)
Financing activities
Payment of cash dividends .................................................... $(195) 1
Repayment of bank loan payable .......................................... (200)2
Issue of common shares ($600 – $400) ................................ 200
Net cash used by financing activities .............................................. $(195)
Note X to the Statement of Cash Flows: During the year, the company purchased
equipment costing $500 by paying $200 cash and issuing a $300 bank loan payable.
1 Beginning balance, retained earnings................. $500
Add: Net income ................................................. 400
Less: Ending balance, retained earnings ............ (700)
Dividends declared ............................................. $200
Beginning balance, dividends payable................ $ 10

Add: Dividends declared (from above) ............... 200
Less: Ending balance, dividends payable ........... (15)
Dividends paid .................................................... $195
2
Beginning balance, bank loan ($200 + $300) ..... $500
Additional borrowings ......................................... 300
800
Ending balance, bank loan ($200 + $400) .......... (600)
Loan payments made ......................................... $200
(Financing activity cash flows = Issuance/repayment of long-term debt,

issuance/repurchase of shares, and payment of cash dividends)

BRIEF EXERCISE 13-10
(a) Free cash flow = $325,000 – $200,000 – $25,000 = $100,000
(b) Free cash flow provides better information than net cash provided by
operating activities because it includes the corporation’s ability to sustain
capital asset replacements and additions, and its ability to distribute
dividends to its shareholders.
LO 4 BT: AN Difficulty: M Time: 5 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

BRIEF EXERCISE 13-11
(a) Based on the changes in cash flows from 2014 and 2015, Apple Inc. is
likely in the growth stage of the corporate life cycle. This is due to the
continued increases in cash used by investing activities and the decline in
cash used by financing activities.
(b) Free cash flow in millions of US dollars:

2015: $81,266 – $11,831 – $11,561 = $57,874
2014: $59,713 – $9,571 – $11,126 = $39,016
(c) As a shareholder of Apple Inc., I would be pleased with the large increase
in the free cash flow generated in 2015 compared to 2014.
(d) The amount of the dividends paid exceeds the amount of capital
expenditures because all necessary capital expenditures have been made
throughout the previous years, as needed and also because of the nature
of Apple’s business, which is not capital intensive.


*BRIEF EXERCISE 13-12

+ Decrease in accounts receivable
Cash receipts Sales
=
from customers revenues
– Increase in accounts receivable
Thus, cash receipts from customers must have equalled = $160,000 [$170,000
– ($24,000 – $14,000)].
(in USD millions)

+ Increase in inventory + Decrease in accounts payable
Cash payments to = Cost of goods
suppliers sold – Decrease in inventory – Increase in accounts payable
Thus, the cash payments to suppliers must have equalled = $1,338,712

($1,252,680 + $88,987 – $2,955).
Operating + Increase in prepaid expenses

Cash expenses – Decrease in prepaid expenses
payments for (excluding
= and
operating depreciation
expenses and + Decrease in accrued expenses payable
amortization) – Increase in accrued expenses payable
Thus, the cash payments for operating expenses must have equalled =
$184,000 ($200,000 – $30,000 – $5,000 + $1,000 + $13,200 + $4,800).

(a)
Income tax expense $50,000

Less: Increase in income tax payable (4,000)
Cash payments for income tax $46,000
(b)

Add: Decrease in income tax payable 3,000

Cash receipts from customers .................................................. $830,0001
Cash payments
To suppliers ........................................................................... $474,0002
For operating expenses ......................................................... 212,0003
For income tax ....................................................................... 10,0004 696,000*
Net cash provided by operating activities ....................................... $134,000*
1 $850,000 – $20,000 = $830,000
2 $475,000 – $6,000 + $5,000 = $474,000
3 $230,000 – $20,000 + $2,000 = $212,000
4 $15,000 – $5,000 = $10,000

SOLUTIONS TO EXERCISES
EXERCISE 13-1
(a) (b)
Cash Effect Classification
1. + $50,000 F
2. – $5,000 I / NC*
3. + $16,000 O
4. – $25,000 F
5. + $18,000 I
6. + $1,000 O
7. – $18,000 O
8. – $100,000 O
9. NE **
10. + $1,000 O
11. – $25,000 F
* Investing activity; Cash payment of $5,000.

Also requires note disclosure of the $25,000 noncash transaction acquisition
of machine in exchange for long-term note payable.
** No effect on cash flows; increase in inventory offset by increase in accounts
payable.

EXERCISE 13-2
1. An impairment loss on goodwill involves the recording of a loss and a

reduction of the asset account Goodwill. This transaction does not involve
cash in any way. This would not be reported on the statement of cash flows
when using the direct method but the impairment might be discussed in the
accompanying notes. (The amount would be shown as an adjustment to
net income to reverse this loss in the operating activities section prepared
using the indirect method.)
2. Depreciation is a cost allocation technique. The cash transaction occurred

with the purchase of the property, plant, and equipment. Depreciation
charges the cost to expense as the assets are being consumed. This
transaction does not involve cash. This would not be reported on the
statement of cash flows or in the accompanying notes. (The amount would
be shown as an adjustment to net income to reverse this expense in the
operating activities section prepared using the indirect method.)
3. The recording of the fair value adjustment through net income or loss for
an unrealized gain on a trading investment does not involve cash, but
increases net income for the gain that is accrued and the carrying amount
of the investment on the statement of financial position. This would not be
reported on the statement of cash flows if the direct method was used or
shown in the accompanying notes. (The amount would be shown as
reduction in net income in the operating activities section prepared using
the indirect method.)
4. The reduction of inventory to net realizable value is similar to the recording

of an impairment in item 1 above. This transaction does not involve cash
in any way. This would not be reported on the statement of cash flows when
using the direct method but the charge to cost of goods sold might be
discussed in the accompanying notes. (The amount would be included in
the change in inventory amount that appears as an adjustment to net
income in the operating activities section prepared using the indirect
method.)

EXERCISE 13-2 (CONTINUED)
5. A stock dividend results in the reduction of Retained Earnings and the

increase of the share capital account and does not involve cash. This would
not be reported on the statement of cash flows or in the accompanying
notes concerning the statement of cash flows, but would be reported in the
statement of changes in equity.
6. A stock split results in additional shares being issued and does not involve
cash in any way. This would not be reported on the statement of cash flows,
but would be reported in the statement of changes in equity and the notes
to the financial statements.
7. The conversion occurs as a result of non-payment of the outstanding

receivable and does not involve cash. This would not be reported
separately on the statement of cash flows or in the accompanying notes.
(The amount would be included in the change in accounts receivable and
the change in notes receivable that appear as adjustments to net income
in the operating activities section prepared using the indirect method.)
8. The equipment was purchased by paying with common shares rather than
cash. Since this transaction does not involve cash directly, it is not reported
on the statement of cash flows. This is, however, an example of a
significant noncash investing (acquisition of equipment) and financing
(issue of shares) activity and would be disclosed in the notes to the
financial statements.
LO 1 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13-3
Cash Provided (Used)
Transaction Net income by Operating Activities
1. Sold inventory for cash at a higher price than cost. + +
2. Collected cash in advance from a customer for a
NE +
service to be provided in the future.
3. Purchased inventory on account in a perpetual
NE NE
inventory system.
4. Declared and paid dividends. NE NE
5. Recorded and paid salaries. – –
6. Recorded income tax payable. – NE
7. Accrued interest receivable. + NE
8. Recorded depreciation expense. – NE
9. Paid an amount owing on account to a supplier. NE –
10. Collected an amount owing from a customer. NE +

EXERCISE 13-4
JUNO LTD.
Year Ended December 31, 2018
Net income ............................................................................ $21,000
Adjustments to reconcile net income to net
cash provided (used) by operating activities
Depreciation expense ................................................... $11,000
Loss on disposal of equipment ..................................... 5,000
Decrease in accounts receivable .................................. 5,000
Increase in inventory ..................................................... (1,400)
Increase in prepaid expenses ....................................... (500)
Increase in accounts payable ....................................... 1,250
Increase in income tax payable .................................... 400
Increase in accrued liabilities ........................................ 1,000 21,750
Net cash provided by operating activities ....................................... $42,750
Note: The current portion of the bank loan payable was not included because
this bank loan was issued for borrowing purposes rather than trade.
[Adjustments to net income include depreciation (+); loss (+); decrease in noncash
current assets (+); increase in noncash current assets (-); and increase in current
liabilities (+)]

EXERCISE 13-5
Operating Investing Financing Noncash
Transaction Activities Activities Activities Activities
1. Purchased inventory for cash. – NE NE NE
2. Sold inventory on account. (+/–) NE NE NE NE
3. Sold equipment for cash at a loss. + + NE NE
4. Recorded depreciation on equipment. + NE NE NE
5. Paid dividends. NE NE – NE
6. Recorded an unrealized loss on a
long-term equity investment carried at + NE NE NE
fair value through profit or loss.
7. Collected an account from a customer. + NE NE NE
8. Signed and received a mortgage
NE NE + NE
payable.
9. Paid, in full, the current portion of a
NE NE – NE
mortgage payable.
10. Purchased land by issuing common
NE NE NE +/–
shares.
LO 2,3 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

EXERCISE 13-6
DUPRÉ CORP.
Statement of Cash Flows (Partial)
Year Ended December 31
Proceeds from disposal of equipment.................................... $ 6,000*
Purchase of land .................................................................... (6,000)
Purchase of equipment [$70,000 + ($53,000 – $43,000)] ...... (80,000)
Net cash used by investing activities .............................................. $(80,000)
Payment of cash dividends** ................................................. nil
*Cost of equipment sold ......................................................... $39,000

*Accumulated depreciation .................................................... 30,000
*Carrying amount ................................................................... 9,000
*Loss on disposal of equipment ............................................. 3,000)
*Cash proceeds ..................................................................... $ 6,000)
Cash ................................................................................ 6,000

Accumulated Depreciation—Equipment .......................... 30,000
Loss on Disposal ............................................................. 3,000
Equipment ................................................................... 39,000
Notes to the financial statements: Equipment of $53,000 was purchased by

paying $10,000 cash and issuing a bank loan payable for $43,000.
** For this year, no dividends were paid. We know this because the dividends
declared are equal to the increase in the Dividends Payable account. The
amount of dividends paid is equal to dividends declared plus any decrease in
the Dividends Payable account or minus any increase in the Dividends
Payable account. In this case, the dividends paid = $4,000 - $4,000 = $0.
LO 2,3 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13-7
PUFFY LTD.
Statement of Cash Flows—Indirect Method
Net income.................................................................... $115,000
Gain on sale of long-term investments................. $ (5,000)
Depreciation expense .......................................... 34,000
Increase in accounts receivable
($80,000 – $76,000).......................................... (4,000)
Decrease in inventory ($189,000 – $185,000) ..... 4,000
Decrease in accounts payable ($47,000 – $39,000) (8,000) 21,000
Net cash provided by operating activities .............................. 136,000
Proceeds from sale of long-term investments ............... $35,000*
Purchase of equipment ................................................. (65,000)
Net cash used by investing activities ..................................... (30,000)
Payment of cash dividends
($134,000 + $115,000 – $199,000)............................ $(50,000)
Repayment of bank loan .............................................. (50,000)
Issue of common shares ............................................... 25,000
Net cash used by financing activities ..................................... (75,000)
Net increase in cash .............................................................. 31,000)

Cash, January 1..................................................................... 22,000)
Cash, December 31 ............................................................... $ 53,000)

* Cash proceeds received from sale of long-term investments:

Cash ........................................................................ 35,000
Long-Term Investments ($100,000 – $70,000) 30,000
Gain on Disposal ............................................ 5,000
LO 2,3 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13-8
(a) CHARMAINE RETAILERS LTD.

Net income.................................................................... $62,000
Depreciation expense .......................................... $21,000
($50,000 – $42,000).......................................... (8,000)
Increase in inventory ($168,000 – $143,000)....... (25,000)
Increase in accounts payable ($45,000 – $35,000) 10,000 (2,000)
Purchase of furniture ($163,000 – $80,000) ................. $(83,000)
Increase in bank loans ($103,000 + $10,000 – $76,000) $37,000
Repayment of bank loan .............................................. (10,000)
Issue of common shares ($60,000 – $55,000).............. 5,000
Net cash provided by financing activities ............................... 32,000

Cash, January 1..................................................................... 9,000)
Cash, December 31 ............................................................... $18,000)
(b) The company was able to generate a sufficient amount of operating cash
flows and to obtain bank financing and use both of these sources of cash
to purchase additional furniture. The net cash from operating activities
seems sufficiently large enough to make any loan payments in the future.
One needs to ask why the inventory rose as much as it did because it did
lower cash from operating activities.
LO 2,3,4 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13-9
(a)
DAGENAIS RETAILERS LTD.
Net income.................................................................... $32,000
net cash used by operating activities
Gain on disposal of furniture ................................ $ (2,000)
Depreciation expense .......................................... 19,000
($77,000 – $50,000).......................................... (27,000)
Increase in inventory ($219,000 – $168,000)....... (51,000)
Increase in accounts payable ($68,000 – $45,000) 23,000 (38,000)
Net cash used by operating activities .................................... (6,000)
Proceeds from disposal of furniture (see below) ........... $6,000
Net cash provided by investing activities ............................... 6,000
($173,000 - $32,000 – $146,000) .............................. $(5,000)
Repurchase of common shares .................................... (10,000)
Repayment of bank loan ($103,000 – $90,000) ............ (13,000)
Net decrease in cash ............................................................. (28,000)

Cash, January 1..................................................................... 18,000)
Bank overdraft, December 31................................................ $(10,000)))
The bank overdraft is considered a cash equivalent.


Calculations:
Transactions involving Furniture:
Furniture
Dec. 31, 2017 163,000 Disposal 33,000
Dec. 31, 2018 130,000
Accumulated Depreciation—Furniture
Dec. 31, 2017 45,000
Disposal (derived) 29,000 Depreciation 19,000
Dec. 31, 2018 35,000
Cost of furniture sold (derived) ........................................ $33,000

Accumulated depreciation (derived) ................................ 29,000
Net carrying amount (derived) ......................................... 4,000
Add: Gain on disposal of furniture .................................. 2,000
Cash proceeds from disposal .......................................... $ 6,000
Cash ................................................................................ 6,000

Accumulated Depreciation—Furniture ............................. 29,000
Gain on Disposal ........................................................ 2,000
Furniture ...................................................................... 33,000

(b) In 2018, Dagenais suffered a significant decline in cash. This decline was
principally caused by the repurchase of common shares and the
mismanagement of accounts receivable and inventory. The increase in
accounts receivable is most likely attributable to difficulty in collecting these
receivables and the increase in inventory has probably occurred because
of slowing inventory turnover. Under the circumstances, management
could have postponed the payment of dividends. This year the negative
cash from operations may have led to the disposal of furniture in an attempt
to generate cash to finance day to day operations. When a company
cannot generate positive cash flows from its operating activities and drains
its cash balances, bankruptcy will follow without the support of creditors
like a bank or the support of shareholders who are willing to provide more
equity to the company.
LO 2,3,4 BT: AN Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

EXERCISE 13-10
(a) Company A and Company C both show a source of increase in their cash
from operating activities of $25,000 when compared to net income or loss.
Since the amount of depreciation is assumed to be the same, both
companies show an equal ability in managing non-cash working capital,
which is better than Company B.
(b) When a company has cash provided by investing activities, it arises from
an excess of cash proceeds received from the sale of non-current assets
such as long-term investments or property, plant, and equipment over
amounts paid to purchase these assets. This can occur for a number of
reasons, including the timing of these cash flows. For example, if a
company sells such assets first but then replaces them later in a
subsequent year, cash provided from investment activities will be shown.
Another reason why this may occur is because the company is not
generating sufficient cash flows from operations and must sell off non-
current assets in order to obtain funds.
(c) Company A is the most likely to have sufficient cash flows to pay down debt
or pay out dividends because it is the only company of the three that has
provided positive cash flows from operations.
(d) Company A is the most capable of growing the size of its business
operations as its operations have generated the most cash and this made
it able to spend $50,000 on investing activities, to pay out cash for financing
activities, and still increase its cash position by the end of the year.


EXERCISE 13-11
Category of Impact on Cash
Cash Flow Flow (Increase or
Affected Decrease)
Collect accounts receivable more quickly and Operating and Increase and
use the cash received to buy equipment. Investing Decrease
Pay accounts payable more slowly and use Operating and Increase and
the cash saved to pay dividends. Financing Decrease
Issue common shares and use the proceeds to Financing and Increase and
pay down bank loans. Financing Decrease
Sell non-current bond investments and use the Investing and Increase and
proceeds to pay a larger bonus to employees Operating Decrease
to improve retention rates.
LO 4 BT: AN Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

*EXERCISE 13-12
Part (a)
Add to (+) or
Deduct from
Income Change in Current (–) Income Part (b)
Statement Asset / Current Statement Related Cash Receipt or
Account Liability Account Account Payment
1. Sales revenue Decrease in + Cash receipts from
accounts receivable customers
2. Dividend Increase in – Cash receipts from

revenue dividends receivable dividends
3. Interest Decrease in interest + Cash receipts from

revenue receivable interest
4. Rent revenue Decrease in – Cash receipts from

unearned rent customers
5. Cost of goods Decrease in – Cash payments to

sold inventory suppliers
6. Cost of goods Decrease in + Cash payments to

sold accounts payable suppliers
7. Insurance Decrease in prepaid – Cash payments for

expense insurance operating expenses
8. Salaries Decrease in salaries + Cash payments to

expense payable employees
9. Interest Increase in interest – Cash payments for

expense payable interest
10. Income tax Decrease in income + Cash payments for

expense tax payable income tax

*EXERCISE 13-13
(a) Sales revenue $160,000

Add: Decrease in accounts receivable 2,000
Add: Increase in unearned revenue 3,000
Cash receipts from customers $165,000
(b) Cost of goods sold $85,000

Add: Increase in inventory 1,700
Less: Increase in accounts payable (3,200)
Cash payments to suppliers $83,500
(c) Salaries expense $45,000

Less: Increase in salaries payable (1,175)
Cash payments to employees $43,825
(d) Operating expenses $50,000

Add: Decrease in accrued expenses payable 300
Less: Decrease in prepaid expenses (450)
Cash payments for operating expenses $49,850

*EXERCISE 13-14
JUNO LTD.
Statement of Cash Flows (Partial)—Direct Method
Cash payments
To suppliers ........................................................................... $114,1502
For operating expenses ......................................................... 33,5003
For interest ............................................................................ 1,200
For income tax ....................................................................... 3,4004 152,250
Net cash provided by operating activities ....................................... $ 42,750
Note: The current portion of the bank loan payable was not included because
this bank loan was issued for lending purposes rather than trade.
1 $190,000 + $5,000 = $195,000
2 $114,000 + $1,400 – $1,250 = $114,150
3 $50,000 – $11,000 – $5,000 + $500 – $1,000 = $33,500
4 $3,800 – $400 = $3,400

*EXERCISE 13-15
PUFFY LTD.
Statement of Cash Flows—Direct Method
Cash receipts from customers* ..................................... $974,000
Cash payments
To suppliers** ......................................................... $755,000
For operating expenses .......................................... 43,000
For interest ............................................................. 14,000
For income tax ........................................................ 26,000 838,000
Sale of long-term investments*** .................................. $35,000
Purchase of equipment ................................................. (65,000)
($134,000 + $115,000 – $199,000) .............................. $(50,000)
Repayment of bank loan ............................................... (50,000)
Issue of common shares ............................................... 25,000

Cash, January 1..................................................................... 22,000
Cash, December 31 ............................................................... $ 53,000)
Calculations:
* Cash receipts = sales – increase in accounts receivable = $978,000 – $4,000
= $974,000

** Cash payments to suppliers = cost of goods sold – decrease in inventory +

decrease in accounts payable
$751,000 – $4,000 + $8,000 = $755,000
*** Cash proceeds received from sale of long-term investments:

Cash ........................................................................ 35,000
Long-Term Investments ($100,000 – $70,000) 30,000
Gain on Disposal ............................................ 5,000
LO 3,5 BT: AP Difficulty: M Time: 45 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

SOLUTIONS TO PROBLEMS
PROBLEM 13-1A
(a) (c)
(b)
Transaction Classification Cash Flow Net Income
1. Paid salaries to employees. O – –
2. Sold land for cash, at a gain. I + +
(gain
increases
income)
3. Purchased a building by making a I – NE
down payment in cash and signing (for the cash (for the
a mortgage payable for the balance. down- cash down-
payment) payment)
NC
(for the
exchange)
4. Made a principal repayment on the F – NE
mortgage.
5. Paid interest on the mortgage. O – –
6. Issued common shares for cash. F + NE
7. Purchased shares of another I – NE
company to be held as a long-term
non-strategic investment.
8. Paid dividends to shareholders. F – NE
9. Sold inventory on account, at a O NE +
price greater than cost. The
company uses a perpetual inventory
system.
10. Wrote down the cost of the NE NE –
remaining inventory to its net
realizable value.

PROBLEM 13-1A (CONTINUED)
(d) Because of the accrual basis of accounting, it is not surprising that

transactions can impact cash and net income differently. For example, in
transaction #6 above, cash was received from the issue of common shares
without net income being affected in any way. In transaction #9 above,
revenue and net income were affected by the sale of inventory but because
it was sold on account, cash was not affected.

PROBLEM 13-2A
(a) WHISTLER LTD.

Year Ended November 30, 2018
Net income ............................................................. $600,000
Adjustments to reconcile net income to net cash
Depreciation expense .................................... $ 75,000
Impairment loss on property, plant,
and equipment.......................................... 100,000
Increase in accounts receivable..................... (190,000)
Decrease in inventory .................................... 50,000
Increase in prepaid expenses ........................ (40,000)
Decrease in accounts payable ....................... (180,000)
Decrease in accrued liabilities ....................... (90,000)
Decrease in interest payable ......................... (10,000)
Decrease in unearned revenue...................... (17,000)
Increase in income tax payable ..................... 20,000 (282,000)
Net cash provided by operating activities ........................ $318,000
(b) If Whistler were a publicly traded company following IFRS, it could choose
to disclose interest expense as part of financing activities rather than in
operating activities. Reporting interest paid as in part (a) in the operating
activities section above is the usual practice for a publicly traded company
and the required practice followed by a private company using ASPE.

PROBLEM 13-3A
(a) Cash receipts and payments related to property, plant, and equipment in
2018:
Land purchase $(40,000)

Equipment purchase (10,000)
Proceeds from disposal of equipment 8,000*
* Cost of equipment sold: $240,000 + $75,000 – $300,000 = $15,000
Accumulated depreciation of equipment sold

$96,000 + $60,000 – $144,000 = $12,000
Cash proceeds = Carrying amount (cost $15,000 – accumulated

depreciation $12,000) + gain $5,000 = $8,000
Note to instructor–some students may find journal entries helpful in understanding

this problem.
Equipment .............................................................................................. 75,000

Bank Loan Payable ........................................................................ 65,000
Cash ............................................................................................... 10,000
Land ....................................................................................................... 40,000

Cash ............................................................................................... 40,000
Cash ....................................................................................................... 8,000

Accumulated Depreciation—Equipment ................................................. 12,000
Gain on Disposal ............................................................................ 5,000
Equipment ...................................................................................... 15,000

(b)
Land purchase Investing activities (use)

Equipment purchase Investing activities (use)
Proceeds from equipment disposal Investing activities (source)
Also include the following note to the financial statements:

Note: During the year the company purchased equipment costing $75,000 by
paying $10,000 cash and issuing a bank loan payable for $65,000.
(c) A growing company must invest in productive assets so it would normally

be using cash in its investing activities.

PROBLEM 13-4A
(a) Cash receipts: Issue of common shares

$550,000 – $400,000 +$100,000 = $250,000
Issuance of preferred shares
$325,000 – $275,000 = $50,000
Cash payments: Repurchase of common shares

10,000 shares at $11 per share = $110,000
Payment of dividends = $15,626
Note to instructor: Students may find summary journal entries helpful in

understanding this problem.
Cash .................................................................................... 50,000

Preferred Shares ($325,000 – $275,000) .................... 50,000
To record issue of preferred shares
Common Shares [10,000 x ($400,000 ÷ 40,000)] ................ 100,000

Retained Earnings ($110,000 - $100,000) ........................... 10,000
Cash (10,000 x $11) .................................................... 110,000
To record the repurchase of common shares
Cash .................................................................................... 250,000

Common Shares ($550,000 – $400,000 + $100,000) .. 250,000
To record the issue of common shares
Dividends Declared .............................................................. 16,250

Dividends Payable ($4,062 – $3,438) .......................... 624
Cash ............................................................................ 15,626
To record the payment of dividends
(b) All of the above activities would be classified as financing activities on the

(c) A growing company would usually be generating cash from its financing
activities. Cash is needed to invest in productive assets, such as buildings
and equipment and most companies are not able to generate sufficient
cash from their operating activities. To finance these purchases,
companies normally have to issue debt or shares.

PROBLEM 13-5A
(a) E-PERFORM INC.

Net income ............................................................................ $155,180
Loss on disposal of equipment ..................................... 7,500
Unrealized gain on held for trading investments ........... (14,000)
Increase in accounts receivable.................................... (32,800)
Increase in inventory..................................................... (29,650)
Decrease in prepaid expenses ..................................... 7,600
Increase in accrued liabilities ........................................ 4,500 5,350
Net cash provided by operating activities ....................................... 160,530
Proceeds from disposal of equipment.................................... $ 1,500
Purchase of equipment (Note X) ........................................... (25,000)
Net cash used by investing activities .............................................. (23,500)
Sale of common shares ......................................................... $ 25,000
Repayment of bank loan payable .......................................... (100,000)
($105,450 + $155,180 – $248,000) ............................. (12,630)
Net cash used by financing activities .............................................. (87,630)
Net increase in cash ....................................................................... 49,400

Cash, January 1 ............................................................................. 48,400
Cash, December 31 ........................................................................ $ 97,800


Note X to the Statement of Cash Flows: During the year, the company purchased
equipment costing $85,000 by paying $25,000 cash and issuing a $60,000 bank
loan payable.
(b) E-Perform’s cash position has increased primarily because of significant

amounts of cash generated from its operating activities. Cash from
operating activities increased the company’s cash account by $160,530.
Some of this cash was used to purchase equipment, repay its bank loans
and pay dividends, but sufficient cash remained at the end of the year to
increase its cash position by $49,400.

PROBLEM 13-6A
(a) SYLVESTER LTD.

Net income....................................................................... $57,000
provided(used) by operating activities
Depreciation expense (3) ........................................ $ 74,000
Gain on disposal of land ......................................... (7,000)
Gain on disposal of building (1) .............................. (38,000)
Loss on disposal of equipment (2) .......................... 4,000
Decrease in accounts receivable ............................ 11,000
Decrease in inventory ............................................. 21,000
Increase in accounts payable ................................. 17,000
Decrease in interest payable .................................. (1,000)
Increase in income tax payable .............................. 1,000 82,000
Net cash provided by operating activities ................................. 139,000
Purchase of building (1) ................................................... $(364,000)
Purchase of equipment (2) .............................................. (65,000)
Proceeds from disposal of land
($110,000 – $100,000 + $7,000 gain) .................... 17,000
Proceeds from disposal of equipment (2) ........................ 5,000
Proceeds from disposal of building (1)............................. 50,000
Net cash used by investing activities ........................................ (357,000)
Issue of common shares ($198,000 – $88,000)............... $110,000
Additions to bank loan ..................................................... 210,000
Repayments of bank loan (5) ........................................... (36,000)
Dividends paid (4) ............................................................ (35,000)
Net cash provided by financing activities .................................. 249,000

(a) (continued)
Net increase in cash ................................................................. 31,000

Bank overdraft, January 1 ......................................................... (8,000)
Cash, December 31 .................................................................. $ 23,000
Calculations:
(1) Transactions involving Buildings:
Buildings
Dec. 31, 2017 263,000 Disposal 100,000
Purchases 364,000
Dec. 31, 2018 527,000
Accumulated Depreciation—Buildings
Dec. 31, 2017 100,000
Dec. 31, 2018 67,000
Cost of building sold (derived) ......................................... $100,000

Accumulated depreciation ............................................... 88,000
Add: Gain on disposal of buildings (derived) .................. 38,000
Cash proceeds from disposal .......................................... $50,000
Cash ................................................................................ 50,000

Accumulated Depreciation—Buildings ............................. 88,000
Gain on Disposal ........................................................ 38,000
Buildings...................................................................... 100,000

(2) Transactions involving Equipment:
Equipment
Dec. 31, 2017 40,000 Disposal 20,000
Purchases 65,000
Dec. 31, 2018 85,000
Accumulated Depreciation—Equipment
Dec. 31, 2017 10,000
Disposal 11,000 Depreciation 19,000
Dec. 31, 2018 18,000
Cost of equipment sold (derived) ..................................... $20,000

Net carrying amount ........................................................ 9,000
Less: Loss on disposal ................................................... 4,000
Cash ................................................................................ 5,000

Loss on Disposal ............................................................. 4,000
Equipment ................................................................... 20,000
(3) Total depreciation recorded during the year:

For buildings .......................................................... $55,000
For equipment ........................................................ 19,000
Total depreciation expense for the year: ................ $74,000

(a) (continued)
(4) Transactions involving Retained Earnings:
Retained Earnings
Dividends declared Dec. 31, 2017 30,000
(derived) 37,000 Net income 57,000
Dec. 31, 2018 50,000
Dividends Payable
Dec. 31, 2017 1,000
Dividends paid 35,000 Dividends declared 37,000
Dec. 31, 2018 3,000
(5) Transactions involving Bank Loan Payable:
Bank loan balance Dec. 31, 2017:

Current portion ........................................................... $ 20,000
Non-current portion .................................................... 212,000
Total ........................................................................... $232,000

Current portion ........................................................... $ 26,000
Total ........................................................................... $406,000
Net increase during the year ($406,000 – $232,000) ...... $174,000

Additions to the bank loans during the year (given) ......... 210,000
Repayments made on bank loans during the year .......... $ 36,000

(b) On the surface, Sylvester Ltd. looks as if it is managing its noncash working
capital efficiently. It decreased its accounts receivable and inventory while
at the same time increased its accounts payable. A creditor might find this
alarming because suppliers don’t look as if they are being paid on time. As
well, a decline in inventory might not necessarily mean that the company
is making sure that inventory is on hand to secure sales.
(c) The purchase of the building was financed partially from the issuance of
common shares and mostly from increasing the bank loan. The amount of
the investment for the building is disproportionate to the amount of the
retained earnings, which in turn was substantially depleted from a large
dividend payment. Net income is modest and is made up of a one-time
gain realized on the disposal of the old building. The net income level will
decline in the future as a result of servicing the additional debt. Sylvester
Ltd. could not afford to purchase the building without external financing.
LO 2,3 BT: AN Difficulty: C Time: 60 min. AACSB: Analytic CPA: cpa-t001 CM: Reporting

PROBLEM 13-7A
(a) ALTON LTD.

Net income....................................................................... $10,000
Loss on disposal of land ......................................... 21,000
Increase in accounts receivable .............................. (35,000)
Increase in inventory ............................................... (31,000)
Decrease in accounts payable ................................ (43,000)
Increase in interest payable .................................... 5,000
Decrease in income tax payable ............................. (2,000) (16,000)
Net cash used by operating activities ....................................... (6,000)
Proceeds from disposal of land (3) .................................. 29,000
Proceeds from disposal of building (1) ............................. 40,000
Repurchase of common shares ($180,000 – $160,000) .. $ (20,000)
Dividends paid (5) ............................................................ (32,000)

(a) (continued)
Net decrease in cash and cash equivalents ............................. (73,000)

Cash and cash equivalents, January 1 ..................................... 78,000
Cash and cash equivalents, December 31 ............................... $ 5,000
Calculations:
Buildings
Dec. 31, 2017 524,000 Disposal 121,000
Purchases 520,000
Dec. 31, 2018 923,000
Dec. 31, 2018 190,000
Dec. 31, 2018 136,000

Net carrying amount ....................................................... 25,000
Add: Gain on disposal of buildings ................................. 15,000
Cash ................................................................................ 40,000

Gain on Disposal ........................................................ 15,000
Buildings...................................................................... 121,000

(a) (continued)
Equipment
Dec. 31, 2017 70,000 Disposal 42,000
Purchases 72,000
Dec. 31, 2018 100,000
Dec. 31, 2017 20,000
Disposal 10,000 Depreciation (der.) 31,000
Dec. 31, 2018 41,000
Cost of equipment sold .................................................... $42,000

Cash proceeds from disposal ......................................... $ 21,000
Cash ................................................................................ 21,000

Loss on Disposal ............................................................. 11,000
Equipment ................................................................... 42,000
(3) Transaction involving Land:
Cash (derived) ................................................................. 29,000

Loss on Disposal ............................................................. 21,000
Land ($230,000 - $180,000) ........................................ 50,000

For buildings ................................................................ $42,000
For equipment ............................................................. 31,000
Total depreciation expense for the year: ..................... $73,000

(a) (continued)
Retained Earnings
Dec. 31, 2018 50,000

Current portion ........................................................... $ 40,000
Total ........................................................................... $460,000

Current portion ........................................................... $ 56,000
Total ........................................................................... $947,000

Total Bank Loan

Dec. 31, 2017 460,000
Loan payments 25,000 New loans 512,000
Dec. 31, 2018 947,000

(b) Alton Ltd. did not manage its noncash working capital efficiently. It
increased both its accounts receivable and inventory while at the same
time decreased its accounts payable. A creditor might find this an alarming
trend. Alton runs the increased risk of not being able to collect receivables
and sell its entire inventory in the future.
(c) The banker would be worried for the reasons mentioned in part (b) but also
for Alton’s poor performance in obtaining cash from operating activities.
The purchase of the building was financed completely with debt and no
equity. Although some cash was obtained from selling land, this sale was
done at a large loss. Cash paid in dividends was more than three times the
size of the net income and additional cash was spent buying back common
shares. The amount of the investment for the building is disproportionate
to the amount of the retained earnings, which in turn was substantially
depleted from the large dividend payment. The net income level will decline
in the future as a result of servicing the additional debt and depreciating
the new building. Alton Ltd. could not afford to purchase the building
without external financing.

PROBLEM 13-8A
(a)
($ in thousands) Reitmans Le Château
$34,770 – $33,291 – $(14,161) – $9,115 – $0

$12,782
Free cash flow
= $(11,303) = $(23,276)
Both companies have negative free cash flow, but Reitmans has the lesser
negative amount and therefore is in the better free cash flow position.
(b) It is possible that a negative free cash flow is generated by a company,

particularly during the introductory and growth phases of its life cycle. A
negative free cash flow does not necessarily lead to overall cash flows that
are negative. For example, there may be large increases in cash during
the year from the sale of investments, issuance of shares, or borrowing of
funds. In addition, large capital expenditures can turn overall positive cash
flow into negative free cash flow.


PROBLEM 13-9A
(a) Although Second Cup had a loss from the year, it managed to generate
positive cash flows from operating activities. The overall decrease in cash
was absorbed by the high beginning balance of cash leaving an ending
cash balance that is severely reduced.
Starbucks provided cash from operating activities that nearly equalled the
amount of cash consumed by investing and financing activities. The
company generated 36% more cash from operating activities than net
income [($3,749.1 – $2,757.4) ÷ $2,757.4]. Cash decreased modestly by
the end of the year.
(b) Starbucks appears to be in the stronger cash position based on its ability
to generate sufficient cash flow from operations to cover the uses of cash
from investing and financing activities, concluding with a small reduction of
cash for the year.

*PROBLEM 13-10A
(a) (1) TREMBLANT LIMITED

Net income ...................................................................... $111,750
Depreciation expense ............................................. $50,000
Amortization expense ............................................. 15,000
Loss on disposal of equipment ............................... 26,000
Increase in accounts receivable............................... (10,000 )
Decrease in prepaid expenses ................................ 3,000
Decrease in accounts payable ................................. (5,000 )
Decrease in salaries payable ................................... (500 )
Increase in unearned revenue ................................. 3,000
Increase in interest payable ..................................... 1,250
Decrease in income tax payable .............................. (5,250) 77,500
Net cash provided by operating activities .................................. $189,250
(a) (2) TREMBLANT LIMITED

Cash receipts from customers .......................................... $918,000 (1)
Cash payments
For operating expenses ........................................... $(112,000) (2)
To employees .......................................................... (500,500) (3)
For interest............................................................... (73,750) (4)
For income tax ......................................................... (42,500) (5) (728,750)

*PROBLEM 13-10A (CONTINUED)
Note: Calculations follow below.
(1) Cash receipts from customers

Revenues $925,000
Add: Increase in unearned revenues 3,000
Less: Increase in accounts receivable ($57,000 – $47,000) (10,000)
Cash receipts from customers $918,000
(2) Cash payments for operating expenses

Administrative expenses $110,000
Add: Decrease in accounts payable ($41,000 – $36,000) 5,000
Deduct: Decrease in prepaid expenses ($12,000 – $15,000) (3,000)
Cash payments for operating expenses $112,000
(3) Cash payments to employees

Salaries expense $500,000
Add: Decrease in salaries payable ($20,000 – $19,500) 500
Cash payments to employees $500,500
(4) Cash payments for interest expense

Interest expense per income statement $75,000
Deduct: Increase in interest payable ($6,250 – $5,000) (1,250)
Cash payments for interest $73,750
(5) Cash payments for income tax

Income tax expense per income statement $37,250
Add: Decrease in income tax payable ($4,000 – $9,250) 5,250

(b) Both methods are acceptable under both IFRS and ASPE. I would
recommend that the company use the direct method to prepare its
operating activities section. Users usually find this method to be more
informative because it shows cash receipts from customers and other
sources and cash payments for major categories. It is also the preferred
method by the standard setters. Nonetheless, many companies prefer to
use the indirect method because it is easier to prepare and their accounting
system may not be adapted to capture the transaction data required in the
direct method.

*PROBLEM 13-11A
(a)
WHISTLER LTD.
Year Ended November 30, 2018
Cash receipts from customers ................................ $7,793,000 (1)
Cash payments
To suppliers ................................................... $(5,130,000) (2)
For operating expenses ................................. (1,955,000) (3)
For interest..................................................... (110,000) (4)
For income tax ............................................... (280,000) (5) (7,475,000)
Net cash provided by operating activities ........................ $ 318,000

Sales $8,000,000
Deduct: Decrease in unearned revenue (17,000)
Deduct: Increase in accounts receivable (190,000)
Cash receipts from customers $7,793,000
(2) Cash payments to suppliers

Cost of goods sold $5,000,000
Deduct: Decrease in inventory (50,000)
Cost of purchases 4,950,000
Add: Decrease in accounts payable 180,000
Cash payments to suppliers $5,130,000

(a) (continued)

Operating expenses $2,000,000
Deduct: Depreciation expense (75,000)
Deduct: Impairment loss (100,000)
Operating expenses, net of
depreciation and impairment 1,825,000
Add: Increase in prepaid expenses $40,000
Decrease in accrued liabilities 90,000 130,000
Cash payments for operating expenses $1,955,000
(4) Cash payments for interest

Interest expense $100,000
Add: Decrease in interest payable 10,000
Cash payments for interest $110,000

Deduct: Increase in income tax payable (20,000)
(b) If Whistler were a publicly traded company following IFRS, it could choose
to disclose interest expense as part of financing activities rather than in

*PROBLEM 13-12A
(a) E-PERFORM, INC.

Cash receipts from customers (1) ..................................... $459,980
Cash payments
To suppliers (2) ........................................................ $(199,410)
For operating expenses (3) ...................................... (50,310)
For income tax ......................................................... (45,000)
For interest............................................................... (4,730) (299,450)
Net cash provided by operating activities .................................. 160,530
Disposal of equipment .................................................... $ 1,500
Purchase of equipment (Note X) .................................... (25,000)
Net cash used by investing activities ....................................... (23,500)
Sale of common shares .................................................. $ 25,000
Repayment of bank loan payable ................................... (100,000)
Payment of cash dividends ............................................. (12,630)
Net cash used by financing activities ....................................... (87,630)
Net increase in cash ................................................................ 49,400

Cash, January 1 ...................................................................... 48,400
Cash, December 31 ................................................................. $ 97,800
Note X to the Statement of Cash Flows: During the year, the company purchased equipment
costing $85,000 by paying $25,000 cash and issuing a $60,000 bank loan payable.

(a) (continued)
Calculations

Sales .................................................................................................. $492,780
Deduct: Increase in accounts receivable .......................................... (32,800)
Cash receipts from customers ........................................................... $459,980

Cost of goods sold ............................................................................. $185,460
Add: Increase in inventory ................................................................ 29,650
Cost of purchases .............................................................................. 215,110
Deduct: Increase in accounts payable .............................................. (15,700)
Cash payments to suppliers............................................................... $199,410

Operating expenses from income statement ..................................... $116,410
Deduct: Depreciation expense ........................................................ (46,500)
Loss on disposal of equipment .......................................... (7,500)
Decrease in prepaid expenses .......................................... (7,600)
Increase in accrued liabilities ............................................. (4,500)
Cash payments for operating expenses ............................................ $ 50,310
(b) E-Perform’s cash position has increased primarily because of significant

amounts of cash generated from its operating activities. Cash from
operating activities increased the company’s cash account by $160,530.
Some of this cash was used to purchase equipment, repay its bank loans,
and pay dividends, but sufficient cash remained at the end of the year to
increase its cash position by $49,400.

PROBLEM 13-1B
(a) (b) (c)

Transaction Classification Cash Flow Net Income
1. Collected an account O + NE
receivable.
2. Sold equipment for I + –
cash, at a loss. (loss
decreases
income)
3. Recorded an NE NE +
unrealized gain on a
held for trading
investment.
4. Acquired land by NC NE NE
issuing common
shares.
5. Expired prepaid O NE –
insurance.
6. Paid dividends to F – NE
preferred shareholders.
7. Recorded depreciation NE NE –
expense.
8. Issued preferred shares F + NE
for cash.
9. Purchased inventory for O – NE

cash. The company
uses a perpetual
inventory system.
10. Provided services on NE NE +
account.

*PROBLEM 13-1B (CONTINUED)
(a) (continued)
(d) Because of the accrual basis of accounting, it is not surprising that
transactions can impact cash and profit differently. For example, in
transaction #8 above, cash was received from the issue of preferred shares
without profit being affected in any way. In transaction #10 above, revenue
and profit were affected by providing services but because they were
provided on account, cash was not affected.

PROBLEM 13-2B
(a)
GUM SAN LTD.
Net income .................................................................... $768,000
Depreciation expense ........................................... $150,000
Gain on disposal ................................................... (12,000)
Increase in accounts receivable............................ (500,000)
Decrease in inventory ........................................... 220,000
Increase in prepaid expenses ............................... (170,000)
Increase in accounts payable ............................... 50,000
Decrease in accrued liabilities .............................. (165,000)
Increase in interest payable .................................. 5,000
Increase in unearned revenue .............................. 8,000
Decrease in income tax payable ........................... (16,000) (430,000)
Net cash provided by operating activities ............................... $338,000
(b) If Gum San were a publicly traded company following IFRS, it would have
the choice to disclose interest expense as part of financing activities rather
than in operating activities. Reporting interest paid as in part (a) in the
operating activities section above is the usual practice for a publicly traded
company and the required practice followed by a private company using
ASPE.

PROBLEM 13-3B
(a) Cash receipts and payments related to property, plant, and equipment 2018:
Equipment purchase $(80,000)

Land purchase (20,000)
Proceeds from equipment disposal 24,000*
* Cost of equipment sold: $480,000 + $80,000 – $500,000 = $60,000
Accumulated depreciation removed from accounts = ($192,000 +

$128,000 – $288,000) = $32,000
Carrying amount = $60,000 Cost – Accumulated depreciation $32,000 = $28,000
Cash proceeds = Carrying amount $28,000 – Loss on disposal $4,000 = $24,000
Note to instructor: Students may find journal entries helpful in understanding this
problem.
Equipment .............................................................................................. 80,000

Cash ............................................................................................... 80,000
Land ....................................................................................................... 50,000

Cash ............................................................................................... 20,000
Mortgage Payable .......................................................................... 30,000
Cash (calculated) .................................................................................... 24,000

Accumulated Depreciation—Equipment ................................................. 32,000
Loss on Disposal .................................................................................... 4,000
Equipment ...................................................................................... 60,000

(b) Equipment purchase Investing activities (use) $(80,000)

Land purchase Investing activities (use) $(20,000)
Proceeds from equipment disposal Investing activities (source) $24,000
Also include the following note to the financial statements:

Note: During the year, the company purchased land for $50,000 by paying
$20,000 cash and issuing a mortgage payable for $30,000.
(c) A growing company must invest in productive assets so it can be expected

to use cash in its investing activities.

PROBLEM 13-4B
(a) Cash receipts: Issue preferred shares $25,000

Cash payments: Payment of cash dividends, $7,500
Repurchase of common shares, $30,000
Common Shares
200,000 Beg. balance
Share repurchase 30,000
20,400 Stock dividends distributed
(not a cash flow)
190,400 End. balance
Journal entry for share repurchase:

Common Shares 3,000 x ($200,000 ÷ 20,000) .................. 30,000
Cash (3,000 x $10) ..................................................... 30,000
Journal entry for stock dividend:

(20,000 - 3,000) 17,000 shares x 10% = 1,700 shares at $12 = $20,400
Dividends Declared ............................................................ 20,400

Common Shares ......................................................... 20,400
The T-account for Retained Earnings is provided to illustrate that all

transactions have been considered:
Retained Earnings
250,000 Beg. balance
Cash dividends 7,500
declared
Stock dividends 20,400
declared
37,500 Net income
259,600 End. balance
(b) All of the above activities (issuance of preferred shares, payment of cash
dividends, and repurchase of shares) would be classified as financing
activities on the statement of cash flows.

(c) A growing company would usually be generating cash from its financing
activities, whereas Mathur has used cash of $12,500. Cash is needed to
invest in productive assets, such as buildings and equipment, and most
companies are not able to generate sufficient cash from their operating
activities. To finance these purchases, companies have to issue debt or
shares.

PROBLEM 13-5B
(a)
NACKAWIC INC.
Net income ............................................................................ $87,810
Loss on sale of long-term investments ......................... 7,500
Gain on disposal of equipment ..................................... (8,750)
Increase in accounts receivable.................................... (43,800)
Increase in inventory..................................................... (29,250)
Decrease in accrued liabilities ...................................... (6,730) (7,910)
Proceeds from sale of long-term investments........................ $ 5,000
Proceeds from disposal of equipment.................................... 15,550
Purchase of equipment .......................................................... (71,000)
Issue of common shares ($240,000 – $200,000) .................. $40,000
Payment of cash dividends ($121,790 + $87,810 – $175,600) (34,000)
Net cash provided by financing activities ........................................ 6,000

Cash, January 1 ............................................................................. 47,250
Cash, December 31 ........................................................................ $82,700
Note X to the Statement of Cash Flows: Equipment costing $141,000 was

purchased by paying $71,000 cash and issuing a bank loan payable for $70,000.

(b) Nackawic’s cash position has increased primarily because of the amount
of cash generated from its operating activities. Cash from operating
activities increased the company’s cash account by $79,900. Some of this
cash was used to purchase equipment and pay dividends with additional
cash generated from selling common shares. Sufficient cash remained at
the end of the year to increase its cash position by $35,450.

PROBLEM 13-6B
(a) ANDERSON LTD.

Net income....................................................................... $53,000
Increase in accounts receivable .............................. (18,000)
Increase in inventory ............................................... (14,000)
Decrease in accounts payable ................................ (26,000)
Decrease in interest payable .................................. (1,000)
Increase in income tax payable .............................. 1,000 (21,000)
Proceeds from disposal of land
($110,000 – $95,000 + $14,000 gain) .................... 29,000
Issue of common shares .................................................. $ 10,000
Repurchase of common shares (6) .................................. (8,000)
Repayments of bank loan ................................................ (36,000)
Dividends paid (4) ............................................................ (33,000)

PROBLEM 13-6B (CONTINUED)
(a) (continued)
Net decrease in cash ................................................................ (41,000)
Cash, January 1........................................................................ 36,000
Bank overdraft, December 31 ................................................... $ ( 5,000)
Calculations:
Buildings
Dec. 31, 2017 263,000 Disposal 90,000
Purchases 304,000
Dec. 31, 2018 477,000
Dec. 31, 2017 100,000
Dec. 31, 2018 67,000

Add: Gain on disposal..................................................... 28,000
Cash ................................................................................ 40,000

Gain on Disposal ........................................................ 28,000
Buildings...................................................................... 90,000

(a) (continued)
Equipment
Dec. 31, 2017 40,000 Disposal 30,000
Purchases 125,000
Dec. 31, 2018 135,000
Dec. 31, 2017 10,000
Disposal 21,000 Depreciation 29,000
Dec. 31, 2018 18,000

Cash ................................................................................ 4,000

Loss on Disposal ............................................................. 5,000
Equipment ................................................................... 30,000

For buildings: ............................................................... $45,000
For equipment: (derived) ............................................. 29,000

(a) (continued)
Retained Earnings
Dec. 31, 2017 30,000
Dividends (derived) 33,000 Net income 53,000
Dec. 31, 2018 50,000

Current portion ........................................................... $ 20,000
Total ........................................................................... $232,000

Current portion ........................................................... $ 26,000
Total ........................................................................... $546,000
Net increase during the year ($546,000 − $232,000) ...... $314,000


(a) (continued)
(6) Transactions involving Common Shares:
Common Shares
Dec. 31, 2017 88,000
Repurchase (derived) 8,000 Issued (given) 10,000
Dec. 31, 2018 90,000
(b) Anderson Ltd. did not manage its noncash working capital efficiently. It
increased its accounts receivable and inventory while at the same time
decreasing its accounts payable. Taken together this shows a bad trend
and possible issues with overstocking or slowing sales.
(c) The purchase of the building was financed primarily through the use of
bank loans, which are now at a fairly high level. The required repayments
to the bank loan this year were $26,000 and this may rise in the future
because of the additional debt incurred this year. To pay for this, the
company has only generated $32,000 from operating activities. The bank
will be concerned about this. Furthermore, the bank will notice that
dividends paid were $1,000 greater than the amount of cash derived from
operating activities and the bank may ask for dividends to be reduced.

PROBLEM 13-7B
(a) SUMMERVILLE LTD.

Net income....................................................................... $89,000
Decrease in accounts receivable ............................ 10,000
Decrease in inventory ............................................. 42,000
Increase in accounts payable ................................. 18,000
Increase in interest payable .................................... 4,000
Increase in income tax payable .............................. 2,000 77,000
Proceeds from disposal of land (3) .................................. 27,000
Repurchase of common shares ....................................... $ (26,000)
Issuance of common shares (7)....................................... 250,000
Dividends paid (5) ............................................................ (28,000)

(a) (continued)
Net increase in cash and cash equivalents ............................... 57,000

Cash and cash equivalents, January 1 ..................................... 12,000
Cash and cash equivalents, December 31 ............................... $69,000
Calculations:
Buildings
Dec. 31, 2017 466,000 Disposal (derived) 87,000
Purchases 564,000
Dec. 31, 2018 943,000
Dec. 31, 2018 150,000
Dec. 31, 2018 130,000

Add: Gain on disposal of buildings ................................. 78,000
Cash ................................................................................ 90,000

Gain on Disposal ........................................................ 78,000
Buildings...................................................................... 87,000

(a) (continued)
Equipment
Dec. 31, 2017 80,000 Disposal (derived) 30,000
Purchases 140,000
Dec. 31, 2018 190,000
Dec. 31, 2017 20,000
Disposal 5,000 Depreciation (derived) 21,000
Dec. 31, 2018 36,000

Cash proceeds from disposal (derived) ........................... $15,000
Cash ................................................................................ 15,000

Loss on Disposal ............................................................. 10,000
Equipment ................................................................... 30,000
(3) Transaction involving land:
Cash (derived) ................................................................. 27,000

Gain on Disposal ........................................................ 7,000
Land ($220,000 - $200,000) ........................................ 20,000

(a) (continued)

For buildings ................................................................ $55,000
For equipment ............................................................. 21,000

Retained Earnings
Dec. 31, 2018 120,000
Dividends Payable
Dec. 31, 2017 2,000
Dividends paid 28,000 Dividends declared 29,000
Dec. 31, 2018 3,000

Current portion ........................................................... $ 40,000
Total ........................................................................... $458,000

Current portion ........................................................... $ 52,000
Total ........................................................................... $725,000

(a) (continued)

Total Bank Loan

Dec. 31, 2017 458,000
Loan payments 33,000 New loans 300,000
Dec. 31, 2018 725,000
(7) Transactions involving Common Shares:
Common Shares
Dec. 31, 2017 172,000
Shares repurchase 26,000 Shares issued 250,000
Dec. 31, 2018 396,000
(b) Summerville Ltd. did a great job managing its noncash working capital
efficiently. It decreased both its accounts receivable and inventory while at
the same time increased its accounts payable. A creditor might find this
alarming because suppliers don’t look as if they are being paid on time. As
well, a decline in inventory might not necessarily mean that the company
is making sure that inventory is on hand to secure sales.
(c) Summerville financed the majority of the purchase of the building by

issuing common shares for $250,000 and by borrowing $300,000 from the
bank. These two amounts are well balanced between debt and equity.
Summerville had excellent performance in obtaining cash from operating
activities. The amount of dividends paid is reasonable given the net income
for the year.

PROBLEM 13-8B
(a)
(USD millions) Google Microsoft
$26,024 – $9,915 – $0 $33,325 – $23,950 – $11,006

Free cash flow
= $16,109 = $(1,631)
Although Microsoft has a negative free cash flow, this result can be
explained by the distribution of cash for a large dividend and the substantial
amount of capital expenditures made during the year. Had Google done
proportionate investments and distributions, it too would have experienced
a negative free cash flow. The results of the calculation do indicate that
Google has a better free cash flow, because it is positive.
(b) Microsoft has been profitable for many years during its growth phase of its
life cycle and has amassed significant amounts of cash allowing it to pay
dividends. Microsoft is currently in the mature phase of its life cycle, with
less growth year over year in its stock price. Consequently, shareholders
are demanding a return on their investments in the form of dividends.
Google, on the other hand is in the growth phase of its life cycle and needs
to use the cash it generates from operations to finance its growth. It is not
unusual in that situation for companies not to pay dividends.


PROBLEM 13-9B
(a) Both companies generated cash from operating activities. McDonald’s

made significant investments back into the business, while Wendy’s
obtained more cash from disposals than the amounts it spent on capital
investments. For financing activities, the cash flow trends for these two
companies were also opposite. While McDonald’s managed to increase its
cash from financing activities, Wendy’s used substantial amounts of cash
in financing activities. Both companies produced more cash from operating
activities than net income with McDonald’s showing the larger proportion
of cash from operating activities to net income. Overall increases in cash
were modest for Wendy’s while close to tripling in the case of McDonald’s.
($ in USD millions) McDonald’s Wendy’s

Net income $4,529.3 $161.1
Net cash provided by operating $6,539.1 $212.5
activities
Net cash provided by operating $2,009.8 $51.4
activities in excess of net income
Net cash provided by operating 144% 132%
activities as a % of net income
% increase in cash from prior year 270% 22%
(b) McDonald’s is in the stronger position. One would need to look at the
detailed information behind the totals of each activity. Specific large
transactions may have offsetting effects in a particular cash flow activity.
As a consequence, the netting of amounts masks the real effects of those
transactions, which may have been unique to that fiscal year. More
information in terms of past trends would also be helpful to properly
compare these two companies.

*PROBLEM 13-10B
(a) (1)
HANALEI INTERNATIONAL INC.
Net income ....................................................................... $142,500
Depreciation expense .............................................. $45,000
Amortization expense .............................................. 5,000
Gain on disposal ...................................................... (25,000)
Decrease in accounts receivable ............................. 10,000
Decrease in prepaid insurance ................................ 3,000
Increase in accounts payable .................................. 9,000
Increase in salaries payable .................................... 3,000
Decrease in unearned revenue................................ (4,000)
Increase in income tax payable ............................... 1,000 47,000
(2) HANALEI INTERNATIONAL INC.

Cash receipts from customers ............................ $571,000 (1)
Cash payments
For operating expenses ............................. $(28,000) (2)
To employees ............................................ (297,000) (3)
For interest expense .................................. (10,000)
For income tax ........................................... (46,500) (4) (381,500)
Net cash provided by operating activities .................... $189,500

(a) (continued)
Calculations

Revenues.................................................................................. $565,000
Add: Decrease in accounts receivable ($60,000 – $50,000) ... 10,000
Deduct: Decrease in unearned revenue ($14,000 – $10,000) .. (4,000)

Administrative expenses ........................................................... $40,000
Deduct: Decrease in prepaid expenses .................................... (3,000)
Increase on accounts payable .................................... (9,000)
Cash payments for operating expenses ................................... $28,000
(3) Cash payments to employees

Salaries expense ...................................................................... $300,000
Deduct: Increase in salaries payable ($10,000 – $7,000) ....... (3,000)
Cash payments to employees................................................... $297,000

Income tax expense .................................................................. $47,500
Deduct: Increase in income tax payable ($4,000 – $3,000) .... (1,000)
Cash payments for income tax ................................................. $46,500

(b) Both methods are acceptable under both IFRS and ASPE. I would
recommend that the company use the direct method to prepare its
operating activities section. Users usually find this method to be more
informative because it shows cash receipts from customers and other
sources, and cash payments for major categories. It is also the preferred
method by the standard setters. Nonetheless, many companies prefer to
use the indirect method because it is easier to prepare and their accounting
system may not be adapted to capture the transaction data required in the
direct method.

*PROBLEM 13-11B
(a)
GUM SAN LTD.
Cash receipts
From customers .................................... $4,008,000 (1)
Cash payments
To suppliers .......................................... $(2,120,000) (2)
For operating expenses ........................ (1,267,000) (3)
For interest............................................ (7,000) (4)
For income tax ...................................... (276,000) (5) (3,670,000)
Net cash provided by operating activities ............... $ 338,000
Calculations

Sales ....................................................................................... $4,500,000
Add: Increase in unearned revenue ........................................ 8,000
Deduct: Increase in accounts receivable ................................ (500,000)
Cash receipts from customers ................................................ $4,008,000

Cost of goods sold .................................................................. $2,390,000
Deduct: Decrease in inventory ............................................... (220,000)
Cost of purchases ................................................................... 2,170,000
Deduct: Increase in accounts payable ................................... (50,000)
Cash payments to suppliers.................................................... $2,120,000

(a) (continued)

Operating expenses ................................................................ $1,070,000
Add: Gain on disposal .............................................................. 12,000
Decrease in accrued liabilities ....................................... 165,000
Increase in prepaid expenses ........................................ 170,000
Deduct: Depreciation expense ............................................... (150,000)
Cash payments for operating expenses .................................. $1,267,000
(4) Cash payments for interest

Interest expense ...................................................................... $12,000
Deduct: Increase in interest payable........................................ (5,000)
Cash payments for interest ...................................................... $ 7,000

Income tax expense ............................................................... $260,000
Add: Decrease in income tax payable .................................. 16,000
Cash payments for income tax .............................................. $276,000
(b) If Gum San were a publicly traded company following IFRS, it could choose
to disclose interest expense as part of financing activities rather than

*PROBLEM 13-12B
(a)
NACKAWIC INC.
Cash receipts from customers (1) ......................................... $273,700
Cash payments
To suppliers (2) ............................................................ $(114,290)
For operating expenses (3) .......................................... (38,900)
For interest................................................................... (12,940)
For income tax ............................................................. (27,670) (193,800)
Sale of long-term investments ............................................... $ 5,000
Disposal of equipment ........................................................... 15,550
Purchase of equipment .......................................................... (71,000)
Issue of common shares ($240,000 – $200,000) .................. $40,000
Payment of cash dividends ($121,790 + $87,810 – $175,600) (34,000)
Net cash provided by financing activities ........................................ 6,000

Cash, January 1 ............................................................................. 47,250
Cash, December 31 ........................................................................ $ 82,700
Note X to the Statement of Cash Flows: Equipment costing $141,000 was

purchased by paying $71,000 cash and issuing a bank loan payable for $70,000.

(a) (continued)
Calculations

Revenues.................................................................................. $317,500
Deduct: Increase in accounts receivable ................................. (43,800)

Cost of goods sold .................................................................. $ 99,460
Add: Increase in inventory ..................................................... 29,250
Cost of purchases ................................................................... 128,710
Deduct: Increase in accounts payable ................................... (14,420)
Cash payments to suppliers.................................................... $114,290

Operating expenses .................................................................. $82,120
Add: Decrease in accrued liabilities ........................................ 6,730
Gain on disposal ............................................................ 8,750
Deduct: Depreciation expense ................................................ (58,700)
Cash payments for operating expenses .................................... $38,900
(b) Nackawic’s cash position has increased primarily because of the amount
of cash generated from its operating activities. Cash from operating
activities increased the company’s cash account by $79,900. Some of this
cash was used to purchase equipment and pay dividends with additional
cash generated from selling common shares. Sufficient cash remained at
the end of the year to increase its cash position by $35,450.

CT13-1 FINANCIAL REPORTING CASE

(a) The North West Company Inc. uses the indirect method of calculating
operating activities.
(b) North West generated cash from operating activities in the amount of
$132,987,000 for the year ended January 31, 2016 and $115,086,000 for
the year ended January 31, 2015.
(c) The most significant investing activity for North West is cash used for the
purchase of property and equipment, in the amount of $63,179,000 The
largest use of cash from financing activities was from the payment of
dividends, in the amount of $58,210,000.
(d) Cash increased by $8,114,000 for the year ended January 31, 2016, and
by $6,776,000 for the year ended January 31, 2015.
(e) North West increased its spending for property and equipment for the year
ended January 31, 2016 by approximately $14 million compared to the
previous year. Dividends increased by about $2 million. These increases
were made possible by an increase of about $18 million in the amount of
cash generated by operating activities.
(f) North West used the cash generated from operating activities to increase
capital expenditures and dividends paid, as mentioned in (e) above. An
increase in long-term debt was closely offset by intangible asset additions
of $12,804,000. Besides these three differences, other cash trends were
similar when comparing the two years.
LO 1,4 BT: AN Difficulty: M Time: 25 min. AACSB: Analytic and Communication

CPA: cpa-t001 CM: Reporting

CT13-2 FINANCIAL ANALYSIS CASE

(a) Companies following ASPE classify interest paid, interest revenue, and
dividend revenue, as part of operating activities because they are disclosed
on the income statement as part of net income. Dividend payments are
classified as financing activities. This is the most common practice for both
publicly traded and private companies. Companies following IFRS may
classify interest and dividend revenue as either investing activities or
operating activities; and interest and dividend payments as either financing
activities or operating activities. In order to present the strongest (largest)
performance for cash obtained from operating activities, Discount Ltd.’s
management probably chose to classify interest and dividend revenue as
operating activities as these can only be positive cash flows and likely
would have chosen to classify interest and dividend payments under
financing activities as these can only be negative cash flows.
(b) Increasing the cash flows from operating activities by using the
classification choices described in part (a) will provide for a larger (better)
free cash flow as the amount of cash flow from operating activities will be
larger, leaving more cash remaining after covering capital expenditures
and dividend payments.
LO 1,4 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic and Communication
CPA: cpa-t001, cpa-t005 CM: Reporting and Finance

CT13-3 PROFESSIONAL JUDGEMENT CASE

Note to instructors: All of the material supplementing this group activity, including
a suggested solution, can be found in the Collaborative Learning section of the
Instructor Resource site accompanying this textbook as well as in the Prepare
and Present section of WileyPLUS.
(a) During 2017, the purchase of property, plant, and equipment in the amount
of $2 billion dollars was financed differently by the three companies. While
some of the financing came from using cash generated from operations, A
Limited chose to finance the balance needed with a blend of debt and
equity financing that was similar in amount. B Limited chose to use only
equity and C Limited financed with mostly debt. For 2018, expansion
continued at an even greater pace for A Limited, which spent $2,350 million
on property, plant, and equipment, while B and C acquired far fewer of
these assets. A Limited financed this higher level of expenditures by using
net cash from operating activities and by issuing more common shares.
Because the majority of the investments in 2017 made by C Limited were

financed with debt, even though C Limited was able to pay down some of
this debt in 2018 and reduce it to a lower amount than the debt held by A
Limited, relative to its assets, of the three companies, C Limited still has
the greatest percentage of its assets financed with debt as the other two
companies have used equity more extensively than C Limited.
(b) C Limited is the only company that had a decrease in the net cash from its
operating activities in 2018. This happened because too much cash was
tied up in accounts receivable and inventory. The increases in these
current assets, particularly during 2018, caused a large reduction of cash
that could have been used instead to reduce the high levels of debt.
(c) C Limited likely did not have a choice to pay down its bank loans in 2018.
It was forced to do so by the bank. C Limited had poor performance in
managing accounts receivable and inventory that in turn caused a shortage
of cash needed to satisfy the bank’s concerns with regard to its liquidity
and solvency. C Limited resorted to the desperate measure of selling off
some its non-current assets at a loss of $70 million to raise the cash
needed to pay down the bank loans.

CT13-3 (CONTINUED)
(d) As a shareholder interested in dividends and not in growth in the value of

my investment, I would consider investing in B Limited. The amount of
dividends paid by B Limited in 2018 was $120 million, which is 10% of the
total value of shares issued. This percentage is lower for the other two
companies so shareholders in B Limited are receiving the largest dividend
relative to the amount invested.
(e) A Limited is the company most committed to growth as demonstrated by
the large investment in property, plant, and equipment that continued into
2018. So long as shareholders feel that the cash spent provides for growth
in the market value of the common shares issued, the pace of expansion
is not excessive since it was financed with equity, which will not cause a
reduction in cash flow due to interest payments.
(f) C Limited has the highest free cash flow.
A Limited B Limited C Limited

Net cash provided by operating activities $1,030 $980 $820
Purchases of property, plant, and equipment (2,350) (830) (430)
Dividends paid (100) (120) (5)
Free cash flow $(1,420) $30 $385
(g) If I was interested in owning the shares of one of these companies, I would
likely not invest in C Limited due to the build up of inventory and accounts
receivable shown in the operating activities section of the statement of
cash flows. I would also be concerned about a management team that
raised funds in 2017 to buy non-current assets, and then sold some of them
in 2018 at a loss. As an investor, I would like the fact that A Limited is
growing, but I would like to know at what point the expansion occurred in
2018. If it occurred early in the year, one would expect, given the larger
asset base of this company, that net income would be higher. However, if
the expansion occurred very late in 2018, the extra asset base could trigger
much higher amounts of net income next year compared to 2018. On the
other hand, B Limited seems to be conservatively financed with little debt,
so it has the potential to expand very easily in the future. So before making
a decision, I would need more information about the success of A Limited’s
2018 expansion before buying their shares.

CT13-3 (CONTINUED)
(g) (continued)
It should be noted that B Limited is probably the safest company to lend

money to, given its low level of debt and its reasonably high operating cash
flows.
LO 4 BT: E Difficulty: C Time: 45 min. AACSB: Analytic and Communication CPA: cpa-t001, cpa-t005

CT13-4 FINANCIAL ANALYSIS CASE

(a) Based on the changes in cash flows in the 10-year period, Apple was in its
introductory phase of its operating cycle in 2005 and by 2010 through to
2015 continued to be in the growth phase of its operating cycle. In 2005 no
dividends were paid, to assist in financing investments that exceeded cash
generated from operations. In 2010, there were no dividends paid but
Apple could likely have made such a payment and was under pressure
from some shareholders to do so. Investors were satisfied with increases
in stock prices and most shareholders bought the stock for price
appreciation potential. By 2015 Apple was still growing but the stock price
declined or increased more modestly, which likely did not satisfy
shareholders. Dividends had to be paid to provide shareholders with a
return on their investment.
(b) Free cash flow in millions of US dollars:

2015 2010 2005
Cash provided by operating cash flows $81,266 $18,595 $2,535
Capital expenditures paid during the year 11,831 2,759 281
Dividends paid during the year 11,561 ______ _____
Free cash flow $57,874 $15,836 $2,254
As a % of cash from operating cash flows 71.2% 85.2% 88.9%
The free cash flow as a percentage of operating cash flows is declining but
not at the same rate as the rate of increase in the cash provided by
operating cash flows. We can conclude that the amount of investments and
distributions are in line with the performance of the business and its ability
to generate cash from operations. Apple is reacting to the needs of its
shareholders, which is consistent with the responses in part (a) above.


CT13-5 ETHICS CASE

(a) A company’s dividend policy should be based on several factors other than
the requirement to pay the “usual” dividend. Some of these factors include:
• Legal requirements such as the Business Corporations Acts for the

jurisdiction in which the company is incorporated. For example, the
Canada Business Corporations Act specifies certain requirements
that must be met in order for companies to be able to pay dividends;
these requirements include solvency and a positive (credit) balance
in Retained Earnings.
• Creditor or other contractual requirements: some creditor loan
agreements can specify financial ratios that must be maintained or
limit the amounts of dividends that can be paid out to shareholders.
• The company’s short-term and long-term budgets and goals. The
payment of dividends uses the company’s cash, and management
has to ensure that sufficient cash remains to operate the business and
meet its short-term and long-term goals, such as property, plant, and
equipment purchases, expansion, and debt repayment.
(b) The stakeholders in this situation are:
Phil Monat, president and CEO of Onwards and Upwards Corporation

Leland Yee, controller
The board of directors
The shareholders of Onwards and Upwards Corporation
(c) The president’s statement, “We must get that amount above $1 million,”
puts undue pressure on the controller. This statement along with his
statement, “I know you won’t let me down, Leland,” encourages Leland to
do something unethical.
Controller Leland Yee’s reclassification (intentional misclassification) of

cash payments from interest as an operating activity to a financing activity
is inappropriate and unethical. Although companies reporting under IFRS
have the choice to show interest payments under either operating or
financing activities, the presentation must be consistent from year to year.

CT13-5 (CONTINUED)
(d) Yes. Under IFRS, it is permissible to show interest paid as a financing

rather than an operating cash payment but such a change should be
consistent from year to year. Companies reporting under ASPE must
classify interest paid as part of operating activities and do not have the
choice to show these payments as part of financing activities.
LO 1 BT: C Difficulty: M Time: 30 min. AACSB: Ethics and Communication CPA: cpa-t001, cpa-e001
CM: Reporting and Ethics

CT13-6 STUDENT VIEW CASE

(a) Statement of Cash Flows—Direct Method
Year Ended (date)
Cash receipts from salary ..................................... $45,000
Cash payments
For rent and utilities ..................................... $(16,600)
For interest................................................... (1,400)
For car expenses ......................................... (4,800)
For food, entertainment, and recreation ....... (6,000) (28,800 )
Net cash provided by operating activities ...................... 16,200
Purchase of car..................................................... $(20,000 )
Purchase of investments ...................................... (5,500)
Purchase of computer ........................................... (1,500)
Disposal of computer ............................................ 100
Disposal of motorcycle .......................................... 1,000
Net cash used in investing activities .............................. (25,900)
Increase in credit card debt ($2,500 – $1,000) ...... $ 1,500
Decrease in line of credit ($2,500 – $1,200) ......... (1,300)
Car loan obtained .................................................. 15,000
Repayment of student loan ($15,000 – $10,000) ... (5,000)
Net cash provided by financing activities ........................ 10,200
Net increase in cash ....................................................... 500

Cash, beginning of year .................................................. 500
Cash, end of year ........................................................... $ 1,000

CT13-6 (CONTINUED)
(b) Depending on the level of security for the large investment made during
the year, your friend should likely consider the benefits of eliminating some
interest expenses by reducing debt that carries a higher interest rate than
the yield obtained from the investment.
LO 5 BT: AN Difficulty: M Time: 20 min. AACSB: Analytic CPA: cpa-t001, cpa-e003
CM: Reporting and Comm.

CT13-7 SERIAL CASE
(a)
Software Compuhelp
ABC Ltd. Solutions Inc. Limited
$225,279 – $6,821,000 –
$159,400 –
Free cash $54,000 – $3,414,000 –
$144,800 – $0
flow $80,000 $580,000
= $14,600
= $91,279 = $2,827,000
(b) ABC is able to generate a significant amount of cash from its operating
activities—in excess of its net income. It uses cash for both its investing
activities and financing activities. The use of cash in investing activities
indicates that ABC is investing in its property and equipment, which is a
good sign for future growth. Its use of cash in financing activities indicates
that it is either repaying more debt than it is raising (through debt or equity)
or using cash for dividends. From the additional information, we can
determine that an $80,000 dividend was paid.
Software Solutions is also generating a significant amount of cash from its

operating activities—far in excess of its net income. It is also using cash in
both its investing and financing activities. From this, it appears to be in the
maturity stage of its corporate life cycle.
Compuhelp’s cash flows tell a bit of a different story. Although it is also

generating a significant amount of cash from its operating activities in
excess of its net income, it is insufficient to cover the investing and
financing activities. It does not pay a dividend so most of its cash used for
financing activities is likely repaying debt on its capital expenditures. All of
this has resulted in a net decrease in cash during the year, leaving the
company with a low ending cash balance and an inability to declare
dividends.

CT13-7 (CONTINUED)
(c) As we saw above, ABC is generating positive cash from its operating
activities. While its free cash flow is reduced (because of its investment in
capital expenditures and relatively large dividend), it has little debt and is
able to pay a generous dividend. Overall, the company appears to report
strong net income and cash flow, which are likely two of the financial
reasons Software Solutions and Compuhelp are interested in acquiring
ABC, in addition to strategic reasons discussed earlier.
(d) The Anthonys will likely favour Software Solutions over Compuhelp.
Software Solutions appears to have a stronger financial position. It has
more cash available to pay for its investment in ABC. Compuhelp does not
pay a dividend and has decreased its overall cash position during 2019.
Compuhelp’s free cash flow is significantly less than that of Software
Solutions.
Other issues the Anthony family should consider before finalizing their
decision could include:
• Determining what percentage of ownership Emily and Daniel will

have going forward.
• How will Emily and Daniel feel about the change in control?
• Will they be paid in cash for the purchase of their shares or will they
be asked to take back a note or preferred shares in partial payment?
• What are the income tax consequences of this sale?
LO 4 BT: E Difficulty: M Time: 45 min. AACSB: Analytic and Communication
CPA: cpa-t001, cpa-t005, cpa-e003 CM: Reporting, Finance, and Comm.

Legal Notice
Copyright © 2017 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create derivative
works, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording, scanning, or otherwise without the prior written
permission of John Wiley & Sons Canada, Ltd.
(MMXVII VI F2)


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What is the purpose of the statement of cash flows?

What is the purpose of the statement of cash flows?

What information can be learned from analyzing a company's statement of cash flows?

What information can be learned from analyzing a company's statement of cash flows?

Kimmel, Weygandt, Kieso, Trenholm, Irvine, Burnley Financial Accounting, Seventh Canadian Edition

SUMMARY OF QUESTIONS BY LEARNING

Solutions Manual 13-1 Chapter 13

Legend: The following abbreviations will appear throughout the solutions

AACSB Association to Advance Collegiate Schools of Business

Solutions Manual 13-2 Chapter 13

2. Cash equivalents are short-term, highly liquid investments that are

The statement of cash flows may be prepared using cash, or cash

Solutions Manual 13-3 Chapter 13

3. Operating activities include the cash flow activities arising from a

Investing activities are those arising from the acquisition and

Financing activities include those resulting in changes in the size

4. Companies following ASPE classify interest paid, interest revenue,

5. Examples of noncash transactions include the issue of shares or a

Solutions Manual 13-4 Chapter 13

7. (a) and (b)

(2) A comparative statement of financial position is required to

(3) The income statement is required to obtain the elements of

(4) The statement of comprehensive income is needed to

Solutions Manual 13-5 Chapter 13

(5) The statement of changes in equity will provide details of the

8. The indirect method involves converting accrual-based net income

9. A number of factors could have caused a positive amount of net

Solutions Manual 13-6 Chapter 13

10. Under the indirect method, depreciation and amortization expense

Example: Income before depreciation $5,000

11. Under the indirect method, a gain on disposal of equipment is

12. When a business invests money, it does so outside of its main

Solutions Manual 13-7 Chapter 13

14. Dividends declared reduce retained earnings once the declaration

15. The statement of cash flows is prepared from detailed information

Solutions Manual 13-8 Chapter 13

17. A company that just commenced its operations would be expected

Solutions Manual 13-9 Chapter 13

LO 4 BT: C Difficulty: M Time: 2 min. AACSB: Analytic CPA: cpa-t001, cpa-t005

*21. Depreciation and amortization expenses are not listed in the

Solutions Manual 13-10 Chapter 13

Solutions Manual 13-11 Chapter 13

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13-1

BRIEF EXERCISE 13-2

Solutions Manual 13-12 Chapter 13

BRIEF EXERCISE 13-3

BRIEF EXERCISE 13-4

Solutions Manual 13-13 Chapter 13

BRIEF EXERCISE 13-5

Solutions Manual 13-14 Chapter 13

BRIEF EXERCISE 13-6

Original cost of equipment sold ........................................................... $20,000

Cash ............................................................................ 13,000

(a) Cash provided by disposal of equipment = $13,000

Solutions Manual 13-15 Chapter 13

BRIEF EXERCISE 13-7

*Cost of equipment sold ......................................................... $100

Solutions Manual 13-16 Chapter 13

BRIEF EXERCISE 13-8