Appendix B-1

Appendix B-2

APPENDIX B

REPORTING CASH FLOWS

INTERMEDIATE ACCOUNTING

Principles and Analysis

2nd Edition

Warfield Wyegandt

Kieso

Appendix B-3

1. Identify sources of information for a statement of cash flows.

2. Prepare a statement of cash flows.

3. Discuss special problems in preparing a statement of cash flows.

4. Understand the direct method of calculating net cash flow from operating activities.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Appendix B-4 LO 1 Identify sources of information for a statement of cash flows.

1. Comparative balance sheets.

2. An analysis of the Retained Earnings.

3. All changes that have passed through cash or have resulted in an increase or decrease in cash.

4. Writedowns, amortization charges, and similar “book” entries, such as depreciation.

Section One – Indirect MethodSection One – Indirect MethodSection One – Indirect MethodSection One – Indirect Method

Sources of Information

Appendix B-5

Income

Statement

Items

Operating Activities

Generally Long-Term Asset Items

Investing Activities

Generally Long-Term Liability and

Equity Items

Financing Activities

The term “Cash” = Cash and cash equivalents.

LO 1 Identify sources of information for a statement of cash flows.

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Appendix B-6

Order of Presentation:

1. Operating activities.

2. Investing activities.

3. Financing activities.

Report inflows and outflows from investing and financing activities separately.

Direct Method

Indirect Method

LO 1 Identify sources of information for a statement of cash flows.

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Appendix B-7

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Three Major Steps:

Step 1. Determine net increase/decrease in cash.

Step 2. Determine net cash flow provided/used by operating activities.

Step 3.Determine net cash provided/used by investing and financing activities.

LO 2 Prepare a statement of cash flows.

Appendix B-8

EB-3 Condensed financial data of Pat Metheny Company for 2008 and 2007 are presented on the next slide.Additional Information:

$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.

Investments were sold for cash. No additional investments were purchased in 2008.

Cash was paid to retire bonds. No additional bonds were sold in 2008.

All the dividends declared were paid.

Prepare a statement of cash flows using the Indirect Method.

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

LO 2 Prepare a statement of cash flows.

Appendix B-9

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

Prepare a statement of cash flows.

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)

Step 1

Steps 1 and 2

EB-3Indirec

t Metho

d

Appendix B-10

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)

Balance at Dec. 31, 2007 1,700

+ Plant assets for stock 70 - Sale of plant assets 0Balance at Dec. 31, 2008 1,900$

Balance at Dec. 31, 2007 1,170$

- Sale of plant assets 0Balance at Dec. 31, 2008 1,200$

Analysis of Plant AssetsAnalysis of Plant Assets

Analysis of Accumulated Analysis of Accumulated DepreciationDepreciation

Depreciation expense Depreciation expense 3030

+ Depreciation expense + Depreciation expense 3030

+ Purchases + Purchases 130130Purchase of plant assetsPurchase of plant assets (130)(130)

Steps 2 and 3

EB-3Indirec

t Metho

d

Appendix B-11

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)

Balance at Dec. 31, 2007 1,700$ + Plant assets for stock 70

- Sale of stock 0Balance at Dec. 31, 2008 1,900$

Analysis of Capital StockAnalysis of Capital Stock

Depreciation expense Depreciation expense 3030

+ Sale of stock + Sale of stock 130130

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130

Steps 2 and 3

EB-3Indirec

t Metho

d

$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.

Appendix B-12

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)

Balance at Dec. 31, 2007 1,420$ + Purchase of investments 0

Balance at Dec. 31, 2008 1,300$

Analysis of InvestmentsAnalysis of Investments

Depreciation expense Depreciation expense 3030

- Sale of investments - Sale of investments 120120Purchase of plant assetsPurchase of plant assets (130)(130)

Calculation of Proceeds from SaleCalculation of Proceeds from SaleDecrease in cost from sale Decrease in cost from sale 120120

Gain on sale Gain on sale (income statement)(income statement) 8080

Proceeds from sale Proceeds from sale $ 200$ 200

Gain on sale Gain on sale (80)(80)

Sale of investments Sale of investments 200200

Steps 2 and 3

Investments were sold for cash. No additional investments were purchased in 2008.

EB-3Indirec

t Metho

d

Appendix B-13

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)

Balance at Dec. 31, 2007 1,550$ + Sale of bonds 0

Balance at Dec. 31, 2008 1,400$

Analysis of Bonds PayableAnalysis of Bonds Payable

Depreciation expense Depreciation expense 3030

- Retirement of bonds - Retirement of bonds 150150

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130Retirement of bondsRetirement of bonds (150)(150)

Sale of investments Sale of investments 200200

Steps 2 and 3

EB-3Indirec

t Metho

d

Cash was paid to retire bonds. No additional bonds were sold in 2008.

Gain on sale Gain on sale (80)(80)

Appendix B-14

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)

Balance at Dec. 31, 2007 1,900$ + Net income 810

Balance at Dec. 31, 2008 2,450$

Analysis of Retained Analysis of Retained EarningsEarnings

Depreciation expense Depreciation expense 3030- Dividends (paid) - Dividends (paid) 260260

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130Retirement of bondsRetirement of bonds (150)(150)Dividends paidDividends paid (260)(260)

Sale of investments Sale of investments 200200

Steps 2 and 3

EB-3Indirec

t Metho

d

All the dividends declared were paid.

Gain on sale Gain on sale (80)(80)

Appendix B-15

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Adjustments to reconcile:Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$

Increase in receivables Increase in receivables (450)(450)

Net Change in CashNet Change in Cash 650650

Net income Net income 810810

Decrease in inventory Decrease in inventory 300300Increase in accounts payable Increase in accounts payable 300300Decrease in accrued liabilitiesDecrease in accrued liabilities (50)(50)Depreciation expense Depreciation expense 3030

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130Retirement of bondsRetirement of bonds (150)(150)Dividends paidDividends paid (260)(260)

Sale of investments Sale of investments 200200

860860

7070

(280)(280)

Statement of cash flows.EB-3

Indirect

Method

Gain on sale Gain on sale (80)(80)

Appendix B-16

Net Income

Indirect MethodIndirect MethodIndirect MethodIndirect Method

Net Cash Flows from Operating

Activities

Appendix B-17

Special Problems in Statement Special Problems in Statement PreparationPreparation

Special Problems in Statement Special Problems in Statement PreparationPreparation

LO 3 Discuss special problems in preparing a statement of cash flows.

1. Adjustments similar to depreciation

Amortization of limited-life intangible assets.

Amortization of deferred costs.

Amortization of bond discount or premium.

Changes in deferred income taxes.

Change related to an investment when recording income or loss under the equity method.

Appendix B-18

Special Problems in Statement Special Problems in Statement PreparationPreparation

Special Problems in Statement Special Problems in Statement PreparationPreparation

LO 3 Discuss special problems in preparing a statement of cash flows.

2. Accounts receivable, net

3. Other working capital changes

4. Net losses

5. Gains

6. Stock options

7. Postretirement benefits

8. Extraordinary items

9. Significant noncash transactions

Appendix B-19

Under the Direct Method, companies adjust each item in the income statement from accrual basis to the cash basis.

Section Two – Direct MethodSection Two – Direct MethodSection Two – Direct MethodSection Two – Direct Method

LO 4 Understand the direct method of calculating net cash flows from operating activities.

Illustration B-15

Appendix B-20

EB-4 Condensed financial data of Pat Metheny Company for 2008 and 2007 are presented on the next slide.Additional Information:

$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.

Investments were sold for cash. No additional investments were purchased in 2008.

Cash was paid to retire bonds. No additional bonds were sold in 2008.

All the dividends declared were paid.

Prepare a statement of cash flows using the Direct Method.

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

LO 4 Understand the direct method of calculating net cash flows from operating activities.

Appendix B-21

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Step 1

Step 1

Preparing a Statement of Cash FlowsEB-4Direct Metho

d

Appendix B-22

Cash Collections from Customers

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Cash collections from customers Cash collections from customers 6,4506,450

Balance at Dec. 31, 2007 1,300$ + Sales 6,900

Balance at Dec. 31, 2008 1,750$

Analysis of Accounts Analysis of Accounts ReceivablesReceivables

- Collections from customers - Collections from customers 6,4506,450

EB-4Direct Metho

dStep 2

Appendix B-23

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

EB-4Direct Metho

d

Cash collections from customers Cash collections from customers 6,4506,450

Cost of goods sold 4,700$ - Decrease in inventory (300)

4,400 - I ncrease in accounts payable (300)

Analysis of Inventory & Accounts Analysis of Inventory & Accounts PayablePayable

Cash paid for merchandise Cash paid for merchandise 4,1004,100

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

Cash Cash payments for payments for merchandisemerchandise

Illustration B-17

Appendix B-24

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

EB-4Direct Metho

d

Cash collections from customers Cash collections from customers 6,4506,450

Balance at December 31, 2007 250$ + Selling and admin. expense 930 - Depreciation expense (not accrued) (30)

Balance at December 31, 2008 200$

Analysis of Accrued LiabilitiesAnalysis of Accrued Liabilities

- Cash paid for selling/admin. exp. - Cash paid for selling/admin. exp. (950)(950)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)

Cash Paid for Selling and Administrative Expense Step 2

Appendix B-25

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

EB-4Direct Metho

d

Cash collections from customers Cash collections from customers 6,4506,450

Balance at December 31, 2007 0+ I ncome tax expense 540

Balance at December 31, 2008 0

Analysis of Income Tax PayableAnalysis of Income Tax Payable

- Cash paid for income taxes - Cash paid for income taxes (540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)

Cash Paid for Income Taxes

Cash paid for income taxesCash paid for income taxes(540)(540)

$$

$$

Step 2

Appendix B-26

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

EB-4Direct Metho

d

Cash collections from customers Cash collections from customers 6,4506,450Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)

Net Cash Provided by Operating Activities

Cash paid for income taxesCash paid for income taxes(540)(540)

860860

Step 2

Appendix B-27

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Balance at Dec. 31, 2007 1,700

+ Plant assets for stock 70 - Sale of plant assets 0Balance at Dec. 31, 2008 1,900$

Balance at Dec. 31, 2007 1,170$

- Sale of plant assets 0Balance at Dec. 31, 2008 1,200$

Analysis of Plant AssetsAnalysis of Plant Assets

Analysis of Accumulated Analysis of Accumulated DepreciationDepreciation+ Depreciation expense + Depreciation expense 3030

+ Purchases + Purchases 130130Purchase of plant assetsPurchase of plant assets (130)(130)

Cash collections from customers Cash collections from customers 6,4506,450

Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)Cash paid for income taxesCash paid for income taxes(540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

860860

Step 3

$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.

EB-4Direct Metho

d

Appendix B-28

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Balance at Dec. 31, 2007 1,700$ + Plant assets for stock 70

- Sale of stock 0Balance at Dec. 31, 2008 1,900$

Analysis of Capital StockAnalysis of Capital Stock

+ Sale of stock + Sale of stock 130130

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130

Cash collections from customers Cash collections from customers 6,4506,450

Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)Cash paid for income taxesCash paid for income taxes(540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

860860

Step 3

$70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2008.

EB-4Direct Metho

d

Appendix B-29

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Balance at Dec. 31, 2007 1,420$ + Purchase of investments 0

Balance at Dec. 31, 2008 1,300$

Analysis of InvestmentsAnalysis of Investments

- Sale of investments - Sale of investments 120120Purchase of plant assetsPurchase of plant assets (130)(130)

Calculation of Proceeds from SaleCalculation of Proceeds from SaleDecrease in cost from sale Decrease in cost from sale 120120

Gain on sale Gain on sale (income statement)(income statement) 8080

Proceeds from sale Proceeds from sale $ 200$ 200

Sale of investments Sale of investments 200200

Cash collections from customers Cash collections from customers 6,4506,450

Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)Cash paid for income taxesCash paid for income taxes(540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

860860

Step 3

Investments were sold for cash. No additional investments were purchased in 2008.

Issuance of stockIssuance of stock 130130

EB-4Direct Metho

d

Appendix B-30

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Balance at Dec. 31, 2007 1,550$ + Sale of bonds 0

Balance at Dec. 31, 2008 1,400$

Analysis of Bonds PayableAnalysis of Bonds Payable

- Retirement of bonds - Retirement of bonds 150150

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130Retirement of bondsRetirement of bonds (150)(150)

Sale of investments Sale of investments 200200

Cash collections from customers Cash collections from customers 6,4506,450

Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)Cash paid for income taxesCash paid for income taxes(540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

860860

Step 3

Cash was paid to retire bonds. No additional bonds were sold in 2008.

EB-4Direct Metho

d

Appendix B-31

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. Expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Balance at Dec. 31, 2007 1,900$ + Net income 810

Balance at Dec. 31, 2008 2,450$

Analysis of Retained Analysis of Retained EarningsEarnings

- Dividends (paid) - Dividends (paid) 260260

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130Retirement of bondsRetirement of bonds (150)(150)Dividends paidDividends paid (260)(260)

Sale of investments Sale of investments 200200

Cash collections from customers Cash collections from customers 6,4506,450

Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)Cash paid for income taxesCash paid for income taxes(540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

860860

Step 3

All the dividends declared were paid. EB-4Direct Metho

d

Appendix B-32

Balance Sheet 2008 2007 Statement of Cash Flows 2008Cash 1,800$ 1,150$ Operating Activities:Accounts receivable 1,750 1,300 Inventory 1,600 1,900 Plant assets 1,900 1,700 Accumulated depreciation (1,200) (1,170) Long-term investments 1,300 1,420

Total assets 7,150$ 6,300$

Accounts payable 1,200$ 900$ Accrued liabilities 200 250 Cash from operatingBonds payable 1,400 1,550 Capital stock 1,900 1,700 Investing Activities:Retained earnings 2,450 1,900

Total liabilities & equity 7,150$ 6,300$ Cash from investing

Income Statement 2008Sales 6,900$ Financing Activities:Cost of goods sold (4,700) Selling and admin. expense (930) Gain on sale 80 Income tax expense (540) Cash from financingNet income 810$ Net Change in CashNet Change in Cash 650650

Purchase of plant assetsPurchase of plant assets (130)(130)

Issuance of stockIssuance of stock 130130Retirement of bondsRetirement of bonds (150)(150)Dividends paidDividends paid (260)(260)

Sale of investments Sale of investments 2002007070

(280)(280)

Cash collections from customers Cash collections from customers 6,4506,450

Cash paid for selling/admin. exp.Cash paid for selling/admin. exp.(950)(950)Cash paid for income taxesCash paid for income taxes(540)(540)

Cash paid for merchandise Cash paid for merchandise (4,100)(4,100)

860860

Statement of Cash Flows

EB-4Direct Metho

d

Appendix B-33

Add CashAdjustments (Subtract) Basis

Sales 6,900$ Accts. receivable (450)$ 6,450$

Cost of goods sold (4,700) Inventory 300 Accts. Payable 300 (4,100)

Selling / admin. expense (930) Accrued liabilities (50) Depreciation 30 (950)

Gain on sale 80 Gain on sale (80) 0Income tax expense (540) (540) Net income 810$ 860$

Accrual Basis

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Summary of Net Cash Flow from Operating Activities—Direct Method

Direct MethodDirect Method

Indirect Indirect MethodMethod

==

LO 4 Understand the direct method of calculating net cash flows from operating activities.

Appendix B-34

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