Chapter 15
Statement of Cash Flows
Solutions to Questions
15-1 The statement of cash flows highlights among numbers should also be considered
the major activities impacting cash flows and rather than evaluating each number in isolation.
the overall cash balance.
15-5 Since the entire cash proceeds from the
15-2 Cash equivalents are short-term, highly sale of a noncurrent asset appear as a cash
liquid investments such as Treasury bills, inflow from investing activities, the gain is
commercial paper, and money market funds. deducted from net income to avoid double
They are included with cash because counting a portion of those proceeds.
investments of this type are made solely for the
purpose of generating a return on temporarily 15-6 Transactions involving accounts payable
idle funds and they can be easily converted to are not financing activities because they relate
cash. to a company’s day-to-day operating activities
rather than its financing activities.
15-3 (1) Operating activities: Include cash
inflows and outflows related to revenue and 15-7 The repayment of $300,000 and the
expense transactions that affect net income. borrowing of $500,000 are both shown ―gross‖
(2) Investing activities: Include cash on the statement of cash flows. That is, the
inflows and outflows related to acquiring or company would show $500,000 of cash provided
disposing of noncurrent assets. by financing activities and then show $300,000
(3) Financing activities: Include cash of cash used by financing activities.
inflows and outflows related to borrowing from
and repaying principal to creditors and 15-8 The direct method reconstructs the
completing transactions with the company’s income statement on a cash basis by restating
owners. revenues and expenses in terms of cash inflows
and outflows. The indirect method starts with
15-4 The company’s specific circumstances net income and adjusts it to a cash basis to
should be considered when interpreting the determine the net cash provided by operating
statement of cash flows. The relationships activities.
© The McGraw-Hill Companies, Inc., 2012
368 Managerial Accounting, 14th Edition
,15-9 Depreciation is not a cash inflow, even
though it is added to net income on the
statement of cash flows. Adding depreciation to
net income to compute the amount of net cash
provided by operating activities creates the
illusion that depreciation is a cash inflow. It isn’t.
15-10 An increase in Accounts Receivable is
subtracted from net income under the indirect
method because this is an increase in a noncash
asset.
15-11 A sale of equipment for cash is classified
as an investing activity. Any transaction involving
the acquisition or disposition of noncurrent
assets is classified as an investing activity.
15-12 Free cash flow is net cash provided by
operating activities minus capital expenditures
and dividends.
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
Solutions Manual, Chapter 14 369
,The Foundational 15
1. The net change in cash and cash equivalents would be a decrease of
$9,000 (from $57,000 to $48,000) as shown on the balance sheet.
2. The basic equation for stockholders’ equity accounts can be applied to
the Retained Earnings account to compute the net income of $2,000
as follows:
Beginning balance – Debits + Credits = Ending balance
$61,000 – $6,000 + Credits = $57,000
$55,000 + Credits = $57,000
Credits = $2,000
3. The basic equation for contra-asset accounts can be applied to the
Accumulated Depreciation account to compute the depreciation of
$19,000 that needs to be added to net income as follows:
Beginning balance – Debits + Credits = Ending balance
$35,000 – $4,000 + Credits = $50,000
$31,000 + Credits = $50,000
Credits = $19,000
Note to Instructors: Questions 4-9 are intended to help students move
past strict memorization to better understand the underlying reasons
for the adjustments in step 2 of the indirect method.
4. The completed T-account is as follows:
Accounts Receivable
Beg. Bal. 44,000
Sales on account 600,000 Cash collections 603,000
End. Bal. 41,000
The total amount of credits recorded in accounts receivable is
$603,000. This amount represents the cash collections from
customers.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 15
, The Foundational 15 (continued)
5. The accounts receivable balance decreased by $3,000; therefore, the
$3,000 decrease is added to net income. This adjustment reflects the
fact (as depicted in the solution to question 4) that cash collections
from customers of $603,000 were $3,000 higher than the credit sales
of $600,000 included in the income statement.
6. The completed T-accounts are as follows:
Inventory
Beg. Bal. 50,000
Purchases 405,000 Goods sold 400,000
End. Bal. 55,000
Accounts Payable
Beg. Bal. 57,000
Supplier payments 430,000 Purchases 405,000
End. Bal. 32,000
The total amount of inventory purchases debited to inventory and
credited to accounts payable is $405,000. Therefore, the total amount
of the debits to accounts payable is $430,000. The debits to accounts
payable represents the total cash paid to suppliers.
7. The inventory balance increased by $5,000; therefore, this amount is
subtracted from net income. The accounts payable balance decreased
by $25,000; therefore, this amount is also subtracted from net income.
The combined amount of these adjustments is a $30,000 deduction
from net income. This adjustment reflects the fact (as shown in the
solution to question 6) that cash paid to suppliers of $430,000 is
$30,000 higher than the cost of goods sold of $400,000 included in the
income statement.
8. The completed T-account is as follows;
Income Taxes Payable
Beg. Bal. 28,000
Tax payments 3,700 Taxes payable 700
End. Bal. 25,000
The total amount of debits recorded in income taxes payable is $3,700.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 15 371
Statement of Cash Flows
Solutions to Questions
15-1 The statement of cash flows highlights among numbers should also be considered
the major activities impacting cash flows and rather than evaluating each number in isolation.
the overall cash balance.
15-5 Since the entire cash proceeds from the
15-2 Cash equivalents are short-term, highly sale of a noncurrent asset appear as a cash
liquid investments such as Treasury bills, inflow from investing activities, the gain is
commercial paper, and money market funds. deducted from net income to avoid double
They are included with cash because counting a portion of those proceeds.
investments of this type are made solely for the
purpose of generating a return on temporarily 15-6 Transactions involving accounts payable
idle funds and they can be easily converted to are not financing activities because they relate
cash. to a company’s day-to-day operating activities
rather than its financing activities.
15-3 (1) Operating activities: Include cash
inflows and outflows related to revenue and 15-7 The repayment of $300,000 and the
expense transactions that affect net income. borrowing of $500,000 are both shown ―gross‖
(2) Investing activities: Include cash on the statement of cash flows. That is, the
inflows and outflows related to acquiring or company would show $500,000 of cash provided
disposing of noncurrent assets. by financing activities and then show $300,000
(3) Financing activities: Include cash of cash used by financing activities.
inflows and outflows related to borrowing from
and repaying principal to creditors and 15-8 The direct method reconstructs the
completing transactions with the company’s income statement on a cash basis by restating
owners. revenues and expenses in terms of cash inflows
and outflows. The indirect method starts with
15-4 The company’s specific circumstances net income and adjusts it to a cash basis to
should be considered when interpreting the determine the net cash provided by operating
statement of cash flows. The relationships activities.
© The McGraw-Hill Companies, Inc., 2012
368 Managerial Accounting, 14th Edition
,15-9 Depreciation is not a cash inflow, even
though it is added to net income on the
statement of cash flows. Adding depreciation to
net income to compute the amount of net cash
provided by operating activities creates the
illusion that depreciation is a cash inflow. It isn’t.
15-10 An increase in Accounts Receivable is
subtracted from net income under the indirect
method because this is an increase in a noncash
asset.
15-11 A sale of equipment for cash is classified
as an investing activity. Any transaction involving
the acquisition or disposition of noncurrent
assets is classified as an investing activity.
15-12 Free cash flow is net cash provided by
operating activities minus capital expenditures
and dividends.
© The McGraw-Hill Companies, Inc., 2012. All rights reserved.
Solutions Manual, Chapter 14 369
,The Foundational 15
1. The net change in cash and cash equivalents would be a decrease of
$9,000 (from $57,000 to $48,000) as shown on the balance sheet.
2. The basic equation for stockholders’ equity accounts can be applied to
the Retained Earnings account to compute the net income of $2,000
as follows:
Beginning balance – Debits + Credits = Ending balance
$61,000 – $6,000 + Credits = $57,000
$55,000 + Credits = $57,000
Credits = $2,000
3. The basic equation for contra-asset accounts can be applied to the
Accumulated Depreciation account to compute the depreciation of
$19,000 that needs to be added to net income as follows:
Beginning balance – Debits + Credits = Ending balance
$35,000 – $4,000 + Credits = $50,000
$31,000 + Credits = $50,000
Credits = $19,000
Note to Instructors: Questions 4-9 are intended to help students move
past strict memorization to better understand the underlying reasons
for the adjustments in step 2 of the indirect method.
4. The completed T-account is as follows:
Accounts Receivable
Beg. Bal. 44,000
Sales on account 600,000 Cash collections 603,000
End. Bal. 41,000
The total amount of credits recorded in accounts receivable is
$603,000. This amount represents the cash collections from
customers.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 15
, The Foundational 15 (continued)
5. The accounts receivable balance decreased by $3,000; therefore, the
$3,000 decrease is added to net income. This adjustment reflects the
fact (as depicted in the solution to question 4) that cash collections
from customers of $603,000 were $3,000 higher than the credit sales
of $600,000 included in the income statement.
6. The completed T-accounts are as follows:
Inventory
Beg. Bal. 50,000
Purchases 405,000 Goods sold 400,000
End. Bal. 55,000
Accounts Payable
Beg. Bal. 57,000
Supplier payments 430,000 Purchases 405,000
End. Bal. 32,000
The total amount of inventory purchases debited to inventory and
credited to accounts payable is $405,000. Therefore, the total amount
of the debits to accounts payable is $430,000. The debits to accounts
payable represents the total cash paid to suppliers.
7. The inventory balance increased by $5,000; therefore, this amount is
subtracted from net income. The accounts payable balance decreased
by $25,000; therefore, this amount is also subtracted from net income.
The combined amount of these adjustments is a $30,000 deduction
from net income. This adjustment reflects the fact (as shown in the
solution to question 6) that cash paid to suppliers of $430,000 is
$30,000 higher than the cost of goods sold of $400,000 included in the
income statement.
8. The completed T-account is as follows;
Income Taxes Payable
Beg. Bal. 28,000
Tax payments 3,700 Taxes payable 700
End. Bal. 25,000
The total amount of debits recorded in income taxes payable is $3,700.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 15 371
