PROBLEM 23-7 (a) Both the direct method and the indirect method for reporting cash flows from operating activities are acceptable in preparing a statement of cash flows according to GAAP; however, the FASB encourages the use of the direct method. Under the direct method, the statement of cash flows reports the major classes of cash receipts and cash disbursements, and discloses more information; this may be the statement’s principal advantage. Under the indirect method, net income on the accrual basis is adjusted to the cash basis by adding or deducting noncash items included in net income, thereby providing a useful link between the statement of cash flows and the income statement and balance sheet. (b) The Statement of Cash Flows for Chapman Company, for the year ended May 31, 2010, using the direct method, is presented below. CHAPMAN COMPANY Statement of Cash Flows For the Year Ended May 31, 2010 Cash flows from operating activities Cash received from customers ............................ Cash payments: To suppliers...................................................... $684,000 Require "Accrual" to To employees................................................... 276,850 "Cash"Conversion. For other expenses ........................................ 10,150 Think your way through For interest ....................................................... 73,000 the calculations. For income taxes ............................................ 43,000 Net cash provided by operating activities ........ Cash flows from investing activities Purchase of plant assets ........................................
Kieso, Intermediate Accounting, 13/e, Solutions Manual
1,087,000 151,250
(28,000)
Cash flows from financing activities Cash received from common stock issue ........ $ 20,000 Cash paid For dividends ................................................... (105,000) To retire bonds payable ............................... (30,000) Net cash used by financing activities ................ Net increase in cash ........................................................... Cash, June 1, 2009 .............................................................. Cash, May 31, 2010 ............................................................. Copyright © 2010 John Wiley & Sons, Inc.
$1,238,250
(115,000) 8,250 20,000 $ 28,250
(For Instructor Use Only)
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PROBLEM 23-7 (Continued) Note 1:
Noncash investing and financing activities: Issuance of common stock for plant assets $70,000.
Supporting Calculations: Collections from customers Sales ............................................................................ Less: Increase in accounts receivable ........... Cash collected from customers ............
$1,255,250 17,000 $1,238,250
Cash paid to suppliers ................................................... Cost of merchandise sold .................................... Less: Decrease in merchandise inventory .... Increase in accounts payable ................ Cash paid to suppliers .............................
$ 722,000 30,000 8,000 $ 684,000
Cash paid to employees Salary expense......................................................... Add: Decrease in salaries payable................... Cash paid to employees............................
$ 252,100 24,750 $ 276,850
Cash paid for other expenses Other expenses........................................................ Add: Increase in prepaid expenses ................. Cash paid for other expenses .................
$ $
8,150 2,000 10,150
Cash paid for interest Interest expense ...................................................... Less: Increase in interest payable.................... Cash paid for interest ...............................
$
75,000 2,000 73,000
Cash paid for income taxes: Income tax expense (given)................................
$
43,000
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Copyright © 2010 John Wiley & Sons, Inc.
$
NOTE the STARTING POINT in the Accrual-toCash conversion. Income statement line item +/_ change in related balance sheet account (s). You may need to use the ANALYSIS OF AN ACCOUNT format to reason your way through the adjustments. The "debit" to one account is the "credit" to another.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 23-7 (Continued) (c) The calculation of the cash flow from operating activities for Chapman Company, for the year ended May 31, 2010, using the indirect method, is presented below. CHAPMAN COMPANY Statement of Cash Flows For the Year Ended May 31, 2010 Cash flows from operating activities Net income .................................................................. Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ................................... $25,000 Decrease in merchandise inventory ........ 30,000 Increase in accounts payable .................... 8,000 Increase in interest payable........................ 2,000 Increase in accounts receivable................ (17,000) Increase in prepaid expenses .................... (2,000) Decrease in salaries payable...................... (24,750) Net cash provided by operating activities ..................
$130,000
21,250 $151,250
Cash provided by operating activities is EXACTLY THE SAME under either method (direct or indirect). The ONLY DIFFERENCE is in the way the story is told to the reader of the statement.
Copyright © 2010 John Wiley & Sons, Inc.
Kieso, Intermediate Accounting, 13/e, Solutions Manual
(For Instructor Use Only)
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