Accounting Principles Manual

Brief Exercises
BE17.1 Each of these items must be considered in preparing a statement of
cash flows for Irvin Co. for the year ended December 31, 2022. For each
item, state how it should be shown in the statement of cash flows for 2022.
(a) Issued bonds for $300000 cash.
(b) Purchased equipment for $140000 cash.
(c) Sold land costing $20000 for $20000 cash.
(d) Declared and paid a $50000 cash dividend.

Solution: Required decisions are stated below:

(a) Cash inflow from financing activity, $300000.
(b) Cash outflow from investing activity, $140000.
(c) Cash inflow from investing activity, $20000.
(d) Cash outflow from financing activity, $50000.

BE17.2 Classify the following items as an operating, investing, or financing

activity. Assume all items involve cash unless there is information to the
contrary.

(a) Purchase of equipment. (d) Depreciation.

(b) Sale of building. (e) Payment of dividends.
(c) Redemption of bonds. (f) Issuance of capital stock.

Solution: Required classification is stated below:

(a) Investing activity.
(b) Investing activity.
(c) Financing activity.
(d) Operating activity.
(e) Financing activity.
(f) Financing activity.

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BE17.3 The following T-account is a summary of the Cash account of Alixon
Company.

What amount of net cash provided (used) by financing activities should be

reported in the statement of cash flows?

Solution: Net cash provided by financing activities is calculated as follows:

Cash flows from financing activities
Proceeds from issuance of bonds payable $300000
Payment of dividends (40000)
Net cash provided by financing activities $260000
Answer: Net cash provided by financing activities = $260000

BE17.4 Miguel, Inc. reported net income of $2.5 million in 2022. Depreciation
for the year was $160,000, accounts receivable decreased $350,000, and
accounts payable decreased $280,000. Compute net cash provided by operating
activities using the indirect method.

Solution:
Miguel, Inc.
Statement of Cash Flows (Partial)
For the Year Ended December 31, 2022
Particulars Amount Amount
Cash flows from operating activities:
Net income $2500000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation expense $160000
Decrease in accounts receivable 350000
Decrease in accounts payable (280000) 230000
Net cash provided by operating activities 2730000
Answer: Net cash provided by operating activities = $2730000
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BE17.5 The net income for Mongan Co. for 2022 was $280,000. For 2022,
depreciation on plant assets was $70,000, and the company incurred a loss on
disposal of plant assets of $28,000. Compute net cash provided by operating
activities under the indirect method, assuming there were no other changes in
the company’s accounts.

Solution:
Mongan Co.
Statement of Cash Flows (Partial)
For the Year Ended December 31, 2022
Particulars Amount Amount
Cash flows from operating activities:
Net income $280000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation expense $70000
Loss on disposal of plant assets 28000 98000
Net cash provided by operating activities 378000
Answer: Net cash provided by operating activities = $378000

BE17.6 The comparative balance sheets for Gale Company show these changes
in noncash current asset accounts: accounts receivable decreased $80,000,
prepaid expenses increased $28,000, and inventories increased $40,000.
Compute net cash provided by operating activities using the indirect method,
assuming that net income is $186,000.

Solution:
Gale Company
Statement of Cash Flows (Partial)
For the Year Ended December 31, 2022
Particulars Amount Amount
Cash flows from operating activities:
Net income $186000
Adjustments to reconcile net income to net cash
provided by operating activities
Decrease in accounts receivable $80000
Increase in prepaid expenses (28000)
Increase in inventories (40000) 12000
Net cash provided by operating activities 198000
Answer: Net cash provided by operating activities = $ 198000

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BE17.7 The T-accounts for Equipment and the related Accumulated
Depreciation— Equipment for Goldstone Company at the end of 2022 are
shown here.

In addition, Goldstone’s income statement reported a loss on the disposal of

plant assets of $3,500. What amount was reported on the statement of cash
flows as ―cash flow from sale of equipment‖?

Solution: Cash received from sale of equipment is calculated as follows:

Original cost of equipment sold $22000
Less: Accumulated depreciation (5100)
Book value of equipment sold 16900
Less: Loss on sale of equipment (3500)
Cash received from sale of equipment $ 13400
Answer: Cash received from sale of equipment = $13400

BE17.8 Suppose that during 2022 Cypress Semiconductor Corporation

reported net cash provided by operating activities of $89,303,000, cash used in
investing of $43,126,000, and cash used in financing of $7,368,000. In addition,
cash spent for plant assets during the period was $25,823,000. No dividends
were paid. Calculate free cash flow.

Solution:
Free cash flow = Cash provided by operating activities – Capital expenditures
– Cash dividends.
= $89,303,000 – $25,823,000 – $0
= $63480000 [Ans.]

BE17.9 Sprouts Corporation reported net cash provided by operating activities

of $412,000, net cash used by investing activities of $250,000, and net cash
provided by financing activities of $70,000. In addition, cash spent for capital
assets during the period was $200,000. No dividends were paid. Calculate free
cash flow.

Solution:
Free cash flow = Cash provided by operating activities – Capital expenditures
– Cash dividends.
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= $412,000 – $200,000 – $0
= $212,000 [Ans.]

BE17.10 Suppose Shaw Communications reported net cash used by operating

activities of $104,539,000 and sales revenue of $2,867,459,000 during 2022.
Cash spent on plant asset additions during the year was $79,330,000. Calculate
free cash flow.

Solution:
Free cash flow = Cash provided by operating activities – Capital expenditures
– Cash dividends.
= – $104,539,000 – $79,330,000 – $0
= – $183,869,000
= 0 [No free cash flow] [Ans.]

Note: Negative free cash flow is not allowed.

BE17.11 The management of Uhuru Inc. is trying to decide whether it can

increase its dividend. During the current year, it reported net income of
$875,000. It had net cash provided by operating activities of $734,000, paid
cash dividends of $92,000, and had capital expenditures of $310,000. Compute
the company’s free cash flow, and discuss whether an increase in the dividend
appears warranted. What other factors should be considered?

Solution: Free cash flow is cash provided by operations less capital

expenditures and cash dividends paid. For Morrow Inc. this would be $332,000
($734,000 – $310,000 – $92,000). Since it has positive free cash flow that far
exceeds its dividend, an increase in the dividend might be possible. However,
other factors should be considered. For example, it must have adequate retained
earnings, and it should be convinced that a larger dividend can be sustained over
future years. It could also use the free cash flow to expand its operations or pay
down its debt.

BE17.12 Suppose Columbia Sportswear Company had accounts receivable

of $299,585,000 at January 1, 2022, and $226,548,000 at December 31, 2022.
Assume sales revenue was $1,244,023,000 for the year 2022. What is the
amount of cash receipts from customers in 2022?

Solution: Cash receipts from customers are calculated as follows:

Sales revenues $1,244,023,000
Add: Decrease in accounts receivable 73037000
($299,585,000 – $226,548,000)
Cash receipts from customers $1317060000
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Answer: Cash receipts from customers = $1317060000

BE17.13 Hoffman Corporation reported income taxes of $370,000,000 on its

2022 income statement. Its balance sheet reported income taxes payable of
$277,000,000 at December 31, 2021, and $528,000,000 at December 31, 2022.
What amount of cash payments were made for income taxes during 2022?

Solution: Cash payment for income taxes is calculated as follows:

Income tax expense $370,000,000
Less: Increase in income tax payable (251000000)
($528,000,000 – $277,000,000)
Cash payment for income taxes $1190000000
Answer: Cash payment for income taxes = $1190000000

BE17.14 Pietr Corporation reports operating expenses of $90,000, excluding

depreciation expense of $15,000, for 2022. During the year, prepaid expenses
decreased $7,200 and accrued expenses payable increased $4,400. Compute the
cash payments for operating expenses in 2022.

Solution: Cash payment for operating expenses is calculated as follows:

Operating expense (excluding depreciation) $90,000
Less: Decrease in prepaid expenses ($7,200)
Less: Increase in accrued expenses payable ($4,400)
Cash payment for operating expenses $78400
Answer: Cash payment for operating expenses = $78400

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