Ch 16 The Statement of Cash Flows

Solutions
P16-33A Preparing the statement of cash flows—indirect method
Learning Objective 2
Net Cash Used for Inv. Act. $(16,000)

Accountants for Smithson, Inc. have assembled the following data for the year ended December
31, 2016:

Prepare Smithson’s statement of cash flows using the indirect method. Include an accompanying
schedule of non-cash investing and financing activities.
SOLUTION

ACCOUNTANTS FOR SMITHSON, INC.

Statement of Cash Flows
Year Ended December 31, 2016

Cash Flows from Operating Activities:

Net Income $ 69,500
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation Expense $ 25,000
Gain on Sale of Building (4,000)
Decrease in Accounts Receivable 6,000
Increase in Merchandise Inventory (5,000)
Increase in Accounts Payable 1,900
Decrease in Income Tax Payable (2,600) 21,300
Net Cash Provided by Operating Activities 90,800
Cash Flows from Investing Activities:
Acquisition of Equipment for Cash (73,000)
Cash Receipt from Sale of Building 57,000
Net Cash Used for Investing Activities (16,000)
Cash Flows from Financing Activities:
Cash Receipt from Issuance of Common Stock 42,000
Cash Receipt from Issuance of Notes Payable 60,000
Cash Payment of Notes Payable (42,100)
Cash Payment of Dividends (52,000)
Net Cash Provided by Financing Activities 7,900
Net Increase (Decrease) in Cash 82,700
Cash Balance, December 31, 2015 20,000
Cash Balance, December 31, 2016 $ 102,700

Non-cash Investing and Financing Activities:

Acquisition of Land by issuing Long-term Notes Payable $ 118,000
Total Non-cash Investing and Financing Activities $ 118,000
P16-34A Preparing the statement of cash flows—indirect method with non-cash
transactions
Learning Objective 2
1. Net Cash Prov. by Op. Act. $132,700

The 2016 income statement and comparative balance sheet of McKnight, Inc. follow:
Additionally, McKnight purchased land of $27,800 by financing it 100% with long-term notes
payable during 2016. During the year, there were no sales of land, no retirements of stock, and
no treasury stock transactions. A plant asset was disposed of for $0. The cost and the
accumulated depreciation of the disposed asset was $10,200. The plant acquisition was for cash.

Requirements
1. Prepare the 2016 statement of cash flows, formatting operating activities by the indirect
method.
2. How will what you learned in this problem help you evaluate an investment?
SOLUTION

Requirement 1

MCKNIGHT, INC.
Statement of Cash Flows
Year Ended December 31, 2016

Cash Flows from Operating Activities:

Net Income $ 105,400
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation Expense—Plant Assets $ 14,200
Increase in Accounts Receivable (1,500)
Decrease in Merchandise Inventory 11,900
Increase in Accounts Payable 4,600
Decrease in Accrued Liabilities (1,900) 27,300
Net Cash Provided by Operating Activities 132,700
Cash Flows from Investing Activities:
Acquisition of Plant Asset for Cash (18,400)
Net Cash Used for Investing Activities (18,400)
Cash Flows from Financing Activities:
Cash Receipt from Issuance of Common Stock 23,400
Cash Payment of Notes Payable (60,800)
Cash Payment of Dividends (65,600)
Net Cash Used for Financing Activities (103,000)
Net Increase (Decrease) in Cash 11,300
Cash Balance, December 31, 2015 15,100
Cash Balance, December 31, 2016 $ 26,400

Non-cash Investing and Financing Activities:

Acquisition of Land by issuing Long-term Notes Payable $ 27,800
Total Non-cash Investing and Financing Activities $ 27,800
 P16-34A
Requirement 1, cont.

Plant Assets
12/31/2015 110,310
Acquisition
s 18,400
10,200 Disposed of
12/31/2016 118,510

Accumulated Depreciation—Plant Assets

15,610 12/31/2015
14,200 Depreciation Expense
Disposed of 10,200
19,610 12/31/2016

Retained Earnings
2,300 12/31/2015
105,400 Net Income
Dividend 65,600
42,100 12/31/2016

Notes Payable
106,000 12/31/2015
27,800 Issuance
Payment 60,800
73,000 12/31/2016

Requirement 2

I will be able to evaluate an investment with this information because I can see the cash receipts
and cash payments for a specific period. This information can help me predict future cash flows,
evaluate management decisions, and predict the ability of the company to pay their debts and
dividends.
P16-35A Preparing the statement of cash flows—indirect method, evaluating cash flows,
and measuring free cash flows
Learning Objectives 2, 3
1. Net Cash Used for Inv. Act. $(157,100)

The comparative balance sheet of Morston Educational Supply at December 31, 2016, reported
the following:

Morston’s transactions during 2016 included the following:

Requirements
1. Prepare the statement of cash flows of Morston Educational Supply for the year ended
December 31, 2016. Use the indirect method to report cash flows from operating activities.
2. Evaluate Morston’s cash flows for the year. Mention all three categories of cash flows, and
give the reason for your evaluation.
3. If Morston plans similar activity for 2017, what is its expected free cash flow?
SOLUTION

Requirement 1

MORSTON’S EDUCATIONAL SUPPLY

Statement of Cash Flows
Year Ended December 31, 2016

Cash Flows from Operating Activities:

Net Income $ 59,600
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation Expense—Plant Assets $ 17,000
Decrease in Accounts Receivable 6,700
Increase in Merchandise Inventory (3,600)
Increase in Accounts Payable 1,000
Decrease in Accrued Liabilities (500) 20,600
Net Cash Provided by Operating Activities 80,200
Cash Flows from Investing Activities:
Acquisition of Equipment for Cash (55,100)
Acquisition of Building for Cash (102,000)
Net Cash Used for Investing Activities (157,100)
Cash Flows from Financing Activities:
Cash Receipt from Issuance of Common Stock 114,000
Cash Receipt from Issuance of Notes Payable 47,000
Cash Payment of Dividends (20,200)
Net Cash Provided by Financing Activities 140,800
Net Increase (Decrease) in Cash 63,900
Cash Balance, December 31, 2015 21,500
Cash Balance, December 31, 2016 $ 85,400

Requirement 2

The company shows a strong cash flow. They are generating cash from their operations due
primarily to net income. They are investing in Building and Equipment for their business and are
financing it using the issuance of Common Stock and Notes Payable. The overall cash position
increased over last year by $63,900.

Requirement 3

Net Cash provided by Operating Activities $ 80,200

− Cash payments planned for Long-Term Assets (157,100)
− Cash Dividends (20,200)
= Free Cash Flow $ (97,100)