sm ch (22).doc

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

CHAPTER 22 STATEMENT OF CASH FLOWS ASSIGNMENT CLASSIFICATION TABLE Brief Exercises Exercises

Topics

1. Cash flows from a 1 business perspective. 2. Uses of statement of cash flows.

2

3. Cash and cash equivalents.

3

Problems 2

1

1, 2 3

4. Classifying operating, 4, 5, 6, 7, investing, and 8 financing activities.

2, 3, 4, 5, 6, 3, 4, 5, 6, 7, 8, 9, 10, 10 11

5. Direct and indirect methods of preparing operating activities.

9, 10

3, 12, 13, 14, 15, 16, 17, 18

6. Statement of cash flows-direct method.

9, 11, 12, 13, 14

3, 4, 12, 13, 1, 3, 4, 5, 14, 15, 16, 7, 9, 10, 19, 20 11, 12

7. Statement of cash flows-indirect method.

10, 14, 15, 16

1, 3, 4, 5, 6, 2, 3, 4, 6, 13, 14, 15, 7, 8, 9, 16, 17, 18, 10, 11, 13 20, 21

8. Presentation and disclosure.

7, 8

3, 4, 7, 8, 9, 1, 3, 4, 5, 10, 11, 15, 7, 10, 12, 16 13

9. Interpret a statement of cash flows.

Solutions Manual

Writing Assignments

1, 4, 9, 15, 17

22-1

Chapter 22

1, 2, 4, 6

3, 4, 7, 8

1, 2, 5, 7, 8, 11, 12, 13

1

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

ASSIGNMENT CLASSIFICATION TABLE (Continued) Topics 10. Differences between IFRS and ASPE.

Brief Exercises Exercises

Problems

2, 4

6, 8, 9

Solutions Manual

4, 10, 11, 16

22-2

Chapter 22

Writing Assignments

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

ASSIGNMENT CHARACTERISTICS TABLE Item E22-1 E22-2 E22-3 E22-4 E22-5 E22-6 E22-7 E22-8 E22-9 E22-10 E22-11 E22-12 E22-13 E22-14 E22-15 E22-16 E22-17 E22-18 E22-19 E22-20 E22-21 *E22-22 *E22-23

Level of Time Difficulty (minutes)

Description Prepare statement from transactions, and explanation of changes in cash flow Classification of transactions and calculation of cash flows. Journal entries and classification Long-term equity investment: direct and indirect IFRS and ASPE Partial SCF, indirect method. Analysis of changes in capital asset accounts and related cash flows. Statement presentation—indirect method. Statement presentation – equity accounts Entries and partial comparative SCF for operating and finance lease Classification of transactions and events. Classification of transactions - indirect. Operating activities section—direct method. Bad debt write-offs and recoveries. SCF direct and indirect methods with comments. SCF, direct and indirect methods, then contrast results. SCF, direct and indirect methods Both methods of SCF and analysis. Operating activities section—indirect method. Operating activities section—direct method. Accounting cycle, financial statements, cash account, and SCF, direct and indirect Operating activities section—indirect method (5) Work sheet analysis of selected transactions. Work sheet preparation.

Solutions Manual

22-3

Chapter 22

Moderate

40-45

Moderate

25-35

Moderate Moderate

15-20 15-20

Moderate Moderate

20-25 30-35

Moderate Moderate Moderate

20-30 15-20 20-25

Simple Simple Simple Simple Moderate

10-15 10-15 20-30 15-20 30-40

Moderate

30-40

Moderate Moderate Simple

20-30 35-40 15-20

Moderate Moderate

20-30 40-50

Moderate

20-30

Moderate

20-25

Moderate

45-55

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item P22-1 P22-2 P22-3 P22-4 P22-5 P22-6 P22-7 P22-8 P22-9 P22-10 P22-11 P22-12 P22-13

Level of Time Difficulty (minutes)

Description SCF, direct method and reconciliation and comments SCF, indirect method. Both methods including cash and cash equivalents Operating activities section—direct method and SCF—indirect method, and draft overall comments   SCF, direct method and reconciliation and comments Equity transactions reported on the SCF SCF, indirect method, and net cash flow from operating activities, direct method and comments. Operating activities section—indirect method SCF FV-OCI investment transactions, both formats All financial statements from account activities involving investments. SCF, both methods and analysis Prepare statement of financial position from cash flow and income statements. SCF, indirect method with summary on highlights concerning cash activities, and related questions.

Solutions Manual

22-4

Chapter 22

Complex

50-55

Moderate Complex

40-45 45-50

Moderate

40-50

Moderate

45-60

Moderate Moderate

30-35 30-40

Moderate

20-30

Moderate

20-25

Moderate

30-35

Moderate Complex

40-45 50-55

Moderate

50-60

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 22-1 (a)

A business should have positive cash flows to finance expansion, pay dividends, and remain solvent during economic downturns. Stamford may have a positive cash balance and a solid current ratio as of the date of the company’s most recent statement of financial position, as well as a history of profitability. However, Stamford’s bank manager will also want to assess the business’s ability to generate positive cash flows from operations for the period which will confirm its ability to finance the upcoming expansion and decrease the risk involved in lending to Stamford.

(b)

The statement of cash flows provides information about the business’s sources and uses of cash during the period, and helps investors and creditors assess the business’s earnings quality. With the information on the statement of cash flows, Stamford’s bank manager can assess the business’s ability to generate cash to pay its maturing debt, increase productive capacity, and distribute a return to its owners. The statement of cash flows also allows Stamford’s bank manager to assess the quality of Stamford’s reported profitability by comparing cash flow from operations to accrual basis net income. (For example, if accrual basis net income is much greater than cash flow from operations, the company’s reported net income may be judged to be of lower quality, or less reflective of economic reality).

Solutions Manual

22-5

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-2 (a)

$228,000 ($108,000 + $120,000) Under IFRS, preferred shares acquired close to their maturity date may be included in cash equivalents. Legally restricted cash balances are not included in Cash equivalents. They are reported separately in current assets or noncurrent assets, depending on the date of availability of the cash or of the expected disbursement.

(b)

$108,000 Under ASPE, cash equivalents exclude all equity investments. Legally restricted cash balances are not included in Cash equivalents. They are reported separately in current assets or noncurrent assets, depending on the date of availability of the cash or of the expected disbursement.

BRIEF EXERCISE 22-3

Cash in bank Petty cash Investment in Canada 60-day treasury bill Temporary bank overdraft, chequing account Cash and cash equivalents

Solutions Manual

June 30 June 30 2014 2013 $12,100 $ 9,460 100 125 22,000

Net Decrease

28,300

(13,800) (1,000) $20,400 $ 36,885 $ 16,485

22-6

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-4 (a) IFRS Cash flow from investing activities Proceeds from sale of land Proceeds from sale of bonds Interest received Dividends received Purchase of FV-NI investments Purchase of equipment Purchase of investments in bonds, reported at amortized cost Net cash provided by investing activities

$180,000 415,000 11,000 4,000 (15,000) (495,000) (61,000) $ 39,000

(b) ASPE Cash flow from investing activities Proceeds from sale of land Proceeds from sale of bonds Purchase of FV-NI investments Purchase of equipment Purchase of investments in bonds, reported at amortized cost Net cash provided by investing activities

$180,000 415,000 (15,000) (495,000) (61,000) $ 24,000

BRIEF EXERCISE 22-5 Cash flow from financing activities Proceeds from issuance of common shares Proceeds from issuance of bonds payable Payment of bank loan principal Dividends paid Purchase of company’s own shares Net cash provided by financing activities

Solutions Manual

22-7

Chapter 22

$200,000 410,000 (20,000) (170,000) (47,000) $373,000

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-6 (a) (b) (c) (d) (e) (f) (g)

D A R-F A R-I R-I, D P-F

(h) (i) (j) (k) (l) (m) (n)

P-I P-I A D R-F N D

(o) (p) (q) (r) (s) (t) (u)

R-F P-F R-I, A P-F N N A

BRIEF EXERCISE 22-7 (a)

Land ................................................................................... 149,000 Common Shares.......................................................... 149,000

(b)

No effect

(c)

In the notes to the financial statements: Non-cash Investing and Financing Activities: Purchase of land through issuance of common shares

$149,000

BRIEF EXERCISE 22-8 Financing activities: Cash paid on capital lease.........................................

$(2,330)

In the notes to the financial statements: Non-cash Investing and Financing Activities: Purchase of machinery under capital lease

$85,000

Solutions Manual

22-8

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-9 Cash flows from operating activities Cash received from customers ($205,000 – $17,000) $188,000 Cash paid To suppliers ($120,000 + $11,000 – $13,000) $118,000 For operating expenses ($50,000 – $21,000) 29,000 147,000 Net cash provided by operating activities $ 41,000 BRIEF EXERCISE 22-10 Cash flows from operating activities Net income $35,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $21,000 Increase in accounts payable 13,000 Increase in accounts receivable (17,000) Increase in inventory (11,000) 6,000 Net cash provided by operating activities $41,000 BRIEF EXERCISE 22-11 Sales Less: Sales returns and allowances Less: Sales discounts Add: Decrease in accounts receivable Cash received from customers

Solutions Manual

22-9

Chapter 22

$420,000 (10,000) (1,000) 13,000 $422,000

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-12 Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in accounts payable Cash paid to suppliers

$550,000 23,000 573,000 8,000 $565,000

BRIEF EXERCISE 22-13 (a)

Income tax expense 2014 Future tax benefit 2014 Changes in related SFP accounts: Income tax payable Future tax asset Future tax liability Income taxes paid

Dec. 31 2014

Dec. 31 2013

Effect on Cash $(2,500) 600

$ 1,200 300 1,950

$ 1,400 – 1,600

(200) (300) 350 $ (2,050)

Under ASPE, companies are encouraged to disclosure income taxes paid, but income taxes paid are not required to be disclosed separately. (b) Under IFRS, income taxes paid are required to be disclosed.

Solutions Manual

22-10

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-14 (a) Cash flows from operating activities Cash received from customers Cash paid for expenses ($60,000 – $1,540) Net cash provided by operating activities (b) Cash flows from operating activities Net income Increase in net accounts receivable   ($27,260 – $18,800) Net cash provided by operating activities

$90,000  58,460 $31,540

$40,000   (8,460) $31,540

BRIEF EXERCISE 22-15 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense Unrealized losses on FV-NI investments Increase in accounts payable Increase in accounts receivable Decrease in deferred tax assets Increase in inventory Net cash provided by operating activities

Solutions Manual

22-11

Chapter 22

$46,000 $17,000 3,000 9,300 (11,000) 2,000  (7,400)  12,900 $58,900

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

BRIEF EXERCISE 22-16 Cash flows from operating activities Net loss Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation expense Increase in accounts receivable Net cash provided by operating activities

($56,000)

$87,000 (8,100)

 78,900 $22,900

*BRIEF EXERCISE 22-17 (a)

Operating—Net Income.................................................... 207,000 Retained Earnings....................................................... 207,000

(b)

Retained Earnings............................................................ 60,000 Financing—Dividends Paid........................................60,000

(c)

Equipment......................................................................... 114,000 Investing—Purchase of Equipment........................... 114,000

(d)

Investing—Sale of Equipment......................................... 13,000 Accumulated Depreciation—Equipment........................ 32,000 Equipment...................................................................40,000 Operating—Gain–Sale of Equipment........................ 5,000

Solutions Manual

22-12

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

SOLUTIONS TO EXERCISES EXERCISE 22-1 (40-45 minutes) (a) Strong House, Inc. Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash flows from operating activities Net income $42,000 Adjustments to reconcile net income   to net cash provided by operating activities    Depreciation expense (a) $13,550 Gain on sale of investment in bonds (b)    (500)  13,050 Net cash provided by operating activities $55,050 Cash flows from investing activities Purchase of land (c)   (5,500) Proceeds on sale of investment in bonds (d)  15,500 Net cash provided by investing activities  10,000 Cash flows from financing activities Dividends paid (e) Payments to retire bonds payable (f) Proceeds from issuance of common shares (g) Net cash used by financing activities

(19,000) (10,000)  20,000

  (9,000)

Net increase in cash Cash balance, January 1, 2014 Cash balance, December 31, 2014

 56,050  10,000 $66,050

Non-cash investing and financing activities Issuance of bonds for equipment

$32,000

Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes Solutions Manual

$4,500 $19,500 22-13

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-1 (Continued) (b) Dear Mr. Brauer: Enclosed is your statement of cash flows for the year ending December 31, 2014. I would like to take this opportunity to explain the changes which occurred in your business as a result of cash activities during 2014. (Please refer to the attached statement of cash flows.) The first category shows the net cash flow which resulted from all of your operating activities. Operating activities are those engaged in for the routine conduct of business, involving most of the transactions used to determine net income. The cash inflow from operations which affects this category is net income. However, this figure must be adjusted, first for depreciation (item a)—because this expense did not involve a cash outlay in 2014—and second for the $500 gain on the sale of your bond investment (item b). The gain must be subtracted from this section because it was included in net income, but it is not the result of an operating activity—it is an investing activity. The second category, cash flows from investing activities, results from the acquisition/disposal of plant assets and investments including the purchase of another entity’s debt such as bonds or notes. Your purchase of land (item c) as well as the sale of your investment in bonds (item d) represents your investment activities during 2014, the purchase being a $5,500 outflow and the sale being a $15,500 inflow. Cash flows arising from the issuance and retirement of debt and equity are properly classified as “Cash flows from financing activities.” These inflows and outflows generally include the long-term liability and equity items on the statement of financial position. Examples of your financing activities resulting in cash flows are the payment of dividends (item e), the retirement of your bonds payable (item f), and your issuance of common shares (item g).

Solutions Manual

22-14

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-1 (Continued) Note that, although $32,000 worth of bonds were issued for the purchase of heavy equipment, the transaction has no effect on the change in cash from January 1, 2014 to December 31, 2014. I hope this information helps you to better understand the enclosed statement of cash flows. If I can further assist you, please let me know. Sincerely, (c) Strong House, Inc. Statement of Financial Position December 31, 2014 Assets Cash Current assets other than cash Investment in bonds, at amortized cost Plant assets (net) Land

$66,050 34,000 25,000 (1) 75,950 (2) 44,000 (3) $245,000

Liabilities and Equity Current liabilities Long-term notes payable Bonds payable Share capital Retained earnings

$14,500 30,000 54,000 (4) 100,000 (5) 46,500 (6) $245,000

(1) $40,000 – $15,500 + $500 (2) $57,500 – $13,550 + $32,000 (3) $38,500 + $5,500 (4) $32,000 + $32,000 – $10,000 (5) $80,000 + $20,000 (6) $23,500 + $42,000 – $19,000 Solutions Manual

22-15

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-1 (Continued) (d)

The statement of cash flows used to be called the statement of changes in financial position because it used to report the sources of increase and decrease in working capital. It also included all transactions affecting the entity’s assets and capital structure, regardless of whether or not the transactions involved cash flows.

Solutions Manual

22-16

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (25-35 minutes) (a) Operating activities: Cash received from customers Sales revenue Less: Increase in accounts receivable Cash received from customers (b)

$295,000 (10,000) $285,000

The approach is to prepare a T-account for property, plant, and equipment. Property, Plant & Equipment

12/31/13 Equipment from exchange of B/P Paid for purchase of PP&E 12/31/14

147,000 20,000 ? 177,000

45,000

Equipment sold

Payments = $177,000 + $45,000 – $147,000 – $20,000 = $55,000 The purchase of property, plant, and equipment is an investing activity. Note that the acquisition of property, plant, and equipment in exchange for bonds payable would be disclosed as a non-cash investing and financing activity and the details of this exchange would be provided in a note to the financial statements.

Solutions Manual

22-17

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued) (c)

The approach is to set up a T-account for accumulated depreciation. Accumulated Depreciation

Equipment sold

67,000

12/31/13

33,000

Depreciation expense

78,000

12/31/14

?

Accumulated depreciation on equipment sold = $167,000 + $33,000 – $178,000 = $22,000 The entry to reflect the sale of equipment is: Cash (proceeds from sale of equipment) ($45,000 + $14,500 – $22,000) 37,500 Accumulated depreciation 22,000 Property, Plant, and Equipment Gain on Sale of Equipment

(force) (above) 45,000 (given) 14,500 (given)

The proceeds from the sale of equipment of $37,500 are reported as investing activities inflow.

Solutions Manual

22-18

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued) (d)

The cash dividends paid can be determined by analyzing Taccounts for retained earnings and dividends payable. Retained Earnings

Dividends declared

91,000 31,000 104,000

?

12/31/13 Net income 12/31/14

Dividends declared = $91,000 + $31,000 – $104,000 = $18,000 Dividends Payable 5,000 18,000 Cash dividends paid

12/31/13 Dividends declared

? 8,000

12/31/14

Cash dividends paid = $5,000 + $18,000 – $8,000 = $15,000 Financing activities include all cash flows involving nonoperating liabilities and shareholders’ equity items. Payment of cash dividends is thus a financing activity outflow.

Solutions Manual

22-19

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued) (e)

The redemption of bonds payable amount is determined by setting up a T-account. Bonds Payable

Redemption of B/P

146,000 20,000

12/31/13 Issuance of B/P for PP&E

149,000

12/31/14

?

The problem states that the bonds were issued at par and so the redemption of bonds payable is the only change not accounted for. Redemption of bonds payable = $146,000 + $20,000 – $149,000 = $17,000 Financing activities include all cash flows involving nonoperating liabilities and shareholders’ equity items. Therefore, redemption of bonds payable is considered a financing activity outflow.

Solutions Manual

22-20

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-2 (Continued) (f)

The approach is to set up a T-account for FV-NI Investments. FV-NI Investments

12/31/13

49,000 17,000 3,000

Investments purch. 12/31/14

Investments sold Unrealized loss

? 41,000

Carrying amount of investments sold = $22,000 – $5,000 = $17,000 The entry to reflect the sale of investments is: Cash (proceeds—sale of investments) FV-NI Investments Gain on Sale of Investments

22,000

(given) 17,000 (force) 5,000 (given)

The proceeds from the sale of FV-NI investments of $22,000 is reported as investing activities inflow. (g)

To solve for the amount of the purchase of FV-NI investments, use the “T” account for the FV-NI investments above. ($41,000 + $17,000 + $3,000 – $49,000 = $12,000) The purchase of FV-NI investments of $12,000 is reported as investing activities outflow.

Solutions Manual

22-21

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-3 (15-20 minutes) (a) 2014 May

1 Cash........................................................ 22,500 Accumulated Depreciation-Equipment 38,000 Gain on Sale of Equipment............... Equipment..........................................

June 15 Accumulated Depreciation-Equipment Loss on Disposal of Equipment............ Equipment..........................................

5,500 500

Sept. 1 Equipment............................................... Cash....................................................

7,700

8,500 52,000

6,000 7,700

Dec. 30 Notes Receivable.................................... 75,000 Gain on Sale of Land......................... Land....................................................

30,000 45,000

31 Depreciation Expense............................ 12,600 Accumulated Depreciation-Equip.. . .

12,600

(b) Indirect method: Operating activities: Depreciation expense Loss on disposal of equipment Gain on sale of equipment Gain on sale of land Investing activities: Sale of equipment Purchase of equipment

$12,600 500 (8,500) (30,000) 22,500 (7,700)

Note X:Significant non-cash investing and financing activities: A mortgage note receivable of $75,000 was obtained from the sale of land.

Solutions Manual

22-22

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-3 (Continued) (c) Direct method: Operating activities: Investing activities: Sale of equipment Purchase of equipment

22,500 (7,700)

Note X:Significant non-cash investing and financing activities: A mortgage note receivable of $75,000 was obtained from the sale of land. (d) Although at first glance it might appear as if the results from operating activities using the two formats differ. In fact they do not. In the indirect method, four adjustments appear to remove their effect on net income (the starting point of the indirect method). These four items are listed to adjust accrual net income to cash from operating activities. The four items listed were included in net income, and so their effect has to be removed by these adjustments as they do not involve operating activities.

Solutions Manual

22-23

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-4 (15-20 minutes) (a) Reconciliation of transactions to investment account: Balance Jan. 1, 2014 Purchase of additional shares Jan. 2, 2014 Add share of Black income for 2014 (40% x $33,000) Less dividends received from Black in 2014 (40% X $14,000) Balance Dec. 31, 2014 (b) Operating activities: Equity income of Black Inc. Investing activities: Cash received for dividends Cash paid for Black Inc. shares

Direct

$ 5,600 (65,000)

(c) Operating activities: Direct Cash received for dividends $ 5,600 Equity in income of Black Inc. in excess of dividends received (note 1) Investing activities: Cash paid for Black Inc. shares $(65,000) (note 1) Investment income from Black Inc. Dividends received from Black Inc. Net

Solutions Manual

22-24

$422,000 65,000 13,20 0 (5,600 ) $494,600

Indirect $(13,200)

(65,000) Indirect

$ (7,600) $(65,000) $(13,200) 5,600 $ (7,600)

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-5 (20-25 minutes) Tanaka Limited Statement of Cash Flows (partial, indirect method) For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $16,800 Loss on sale of machinery   5,800 Dividends paid Net cash provided by operating activities Cash flows from investing activities Purchase of machinery Proceeds on sale of machinery * Cost of machinery constructed Net cash used by investing activities .

* [($56,000 – $25,200) – $5,800] = $25,000

Solutions Manual

22-25

Chapter 22

$ 40,000

22,600 (15,000) 47,600

(62,000) 25,000 (48,000) (85,000)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-6 (30-35 minutes) (a) 1. Land (new)............................................................... 91,000 Cash................................................................... Land (old)........................................................... Gain on Disposal of Land................................. Land......................................................................... 27,000 Cash................................................................... ($58,000 – $91,000 + $60,000) 2.

3,000 60,000 28,000

27,000

Accumulated Depreciation—Equipment.............. 10,000 Cash......................................................................... 1,000 Equipment......................................................... Gain on Sale of Equipment..............................

10,000 1,000

Accumulated Depreciation—Equipment.............. 2,300 Loss on Disposal of Equipment............................700 Equipment.........................................................

3,000

Equipment............................................................... 7,500 Cash................................................................... ($67,500 – $10,000 – $3,000 + X = $62,000)

7,500

Depreciation Expense............................................ 3,500 Accumulated Depreciation—Equipment ($24,000 – $10,000 – $2,300 + X = $15,200)

3,500

Solutions Manual

22-26

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-6 (Continued) 3.

Equipment under Lease......................................... 104,247 Obligations under Lease.................................. 104,247 Obligations under Lease........................................ 25,000 Cash................................................................... Interest Expense..................................................... 3,962 Interest Payable................................................ [($104,247 – $25,000) X 10% X 6/12]

3,962

Depreciation Expense.................................. 10,425 Accumulated Depreciation— Leased Equipment........................................ ($104,247 X 6/12 divided by 5 years)

10,42 5

(b) 1. Investing activities: Payment on exchange of land Purchase of land 2.

3.

25,000

(3,000) (27,000)

Investing activities: Proceeds from sale of equipment Purchase of equipment Financing activities: Payment on capital lease

(25,000)

(c) 1. Gain on disposal of land 2. Gain on sale of equipment Loss on disposal of equipment Depreciation expense on equipment 3. Depreciation expense on leased equipment Increase in interest payable

Solutions Manual

22-27

1,000 (7,500)

Chapter 22

(28,000) (1,000) 700 3,500 10,425 3,962

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-6 (Continued) (d) In part (b), no entries appeared for operating activities for any of the entries prepared in part (a) when using the direct method of the statement of cash flows. In part (c) several items needed to appear under the operating activities using the indirect format. Although at first glance it might appear as if the results from operating activities using the two formats differ. In fact they do not. In the indirect method, six adjustments appear in order to remove their effect on net income (the starting point of the indirect method). These six items are listed to adjust accrual net income to cash from operating activities. The six items listed were included in income, and so their effect has to be removed by these adjustments as they do not involve operating activities.

Solutions Manual

22-28

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-7 (20-30 minutes) 1.

Plant assets (cost) Accumulated depreciation ([$40,000  10] X 6) Carrying amount at date of sale Sale proceeds Loss on sale

$40,000) 24,000) 16,000) (5,300) $10,700)

The loss on sale of plant assets is reported in the operating activities section of the statement of cash flows. It is added to net income to arrive at net cash provided by operating activities. The sale proceeds of $5,300 are reported in the investing section of the statement of cash flows as follows: Sale of plant assets

$5,300

2. Shown in the financing activities section of a statement of cash flows as follows: Sale of common shares

$410,000

3. The write off of the uncollectible accounts receivable of $27,000 is not reported on the statement of cash flows. The write off reduces the Allowance for Doubtful Accounts balance and the Accounts Receivable balance. It does not affect cash flows.

Solutions Manual

22-29

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-7 (Continued) 4. The net loss of $10,000 should be reported in the operating activities section of the statement of cash flows. Depreciation of $22,000 is added to income in the operating section of the statement of cash flows. The gain on sale of land is deducted from income (loss) in the operating activities section of the statement of cash flows. The proceeds from the sale of land of $39,000 are reported in the investing activities section of the statement of cash flows. These four items might be reported as follows: Cash flows from operating activities Net loss Adjustments to reconcile net income to net cash provided by operations*: Depreciation expense Gain on sale of land

$(10,000) 22,000 (9,000)

*Either net cash used or provided depending upon other adjustments. Given only the adjustments, the “net cash provided” would be used. Cash flows from investing activities Sale of land

$39,000

5. The purchase of the Canadian Treasury bill is not reported in the statement of cash flows. This instrument is considered a cash equivalent and is therefore included in cash and cash equivalents. 6. The patent amortization of $18,000 is reported in the operating activities section of the statement of cash flows. It is added to net income in arriving at net cash provided by operating activities.

Solutions Manual

22-30

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-7 (Continued) 7. The exchange of common shares for an investment in TransCo Corp. is reported as a “non-cash investing and financing activity”, most likely in the notes. It is shown as follows: Non-cash investing and financing activities Purchase of investment by issuance of common shares

$900,000

8. The accrual of an unrealized loss does not involve cash and would have caused a reduction of net income. It is reported in the operating activities section of the statement of cash flows. It is added to net income in arriving at net cash provided by operating activities.

Solutions Manual

22-31

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-8 (10-15 minutes) (a)

Net income: Retained earnings, end of year Add: Cash dividends – preferred Stock dividend Retained earnings available for dividends Less: beginning balance Retained Earnings Net income (derived)

$300,000 6,250 14,000 320,250 240,000 $ 80,250

(b) Cash flows from financing activities : Preferred dividends paid ($ 6,250) Payments on repurchase of common shares (28,500) ($32,000 – $3,500 Contributed Surplus) Stock dividends do not involve cash (c)

Because Mandrich Inc. is using IFRS, it could choose to classify the preferred dividends paid in the amount of $6,250 as operating cash flows.

Solutions Manual

22-32

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (20-25 minutes) (a) July 1, 2013 Vehicles under Lease..........................  3,064,470 Obligations under Lease............   Obligations under Lease..................... Cash ............................................. December 31, 2013 Interest Expense.................................. Interest Payable.......................... ($201,558 X 6/12 = $100,779)

545,000 545,000 100,779 100,779

Depreciation Expense......................... 218,891 Accumulated Depreciation— Vehicles under Lease ....... ($3,064,470 ÷ 7 years X 6/12 = $218,891) July 1, 2014 Interest Expense.................................. Interest Payable................................... Obligations under Lease..................... Cash ............................................. December 31, 2014 Interest Expense.................................. Interest Payable.......................... ($174,082 X 6/12 = $87,041) Depreciation Expense......................... Accumulated Depreciation— Vehicles under Lease ....... ($3,064,470 ÷ 7 years = $437,781)

Solutions Manual

22-33

Chapter 22

3,064,470

218,891

100,779 100,779 343,442 545,000 87,041 87,041 437,781 437,781

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (Continued) (b) Wagner Inc. Statement of Cash Flows – Partial For the Year ended December 31, 2014 2013 Cash provided by (used in) Operating activities – Direct Method Payments of interest............................ $(201,558) -0Cash provided by (used in) Financing activities Payments on lease obligations........... (343,442) $(545,000) Net decrease in cash................................... $(545,000) $(545,000) Cash provided by (used in) operations – Indirect Method Start with net income effect Interest expense................................... $(187,820)* $(100,779) Depreciation expense.......................... (437,781) Total reduction of income.................... (625,601) ............................................................... Depreciation expense.......................... 437,781 Changes in non-cash working capital: Change in interest payable............. (13,738) Cash used in operating activities............... (201,558) Cash provided by (used in) Financing activities Payments on finance leases............... Net decrease in cash................................... * ($100,779 + $87,041 = $187,720)

(218,891) (319,670) 218,891 100,779 -0-

(343,442) (545,000) $545,000

$545,000

Note X: During 2013, Wagner Inc. signed financing leases to acquire a fleet of trucks for the amount of $3,064,470.

Solutions Manual

22-34

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (Continued) (c) July 1, 2013 Prepaid Rent ............................................. Cash...................................................

545,000 545,000

December 31, 2013 Rent Expense............................................ Prepaid Rent..................................... ($545,000 X 6/12 = $272,500) July 1, 2014 Rent Expense............................................ Cash...................................................

272,500 272,500

545,000 545,000

Wagner Inc. Statement of Cash Flows – Partial For the Year ended December 31, 2014

2013

$(545,000)

$(545,000)

Cash provided by (used in) operations – Indirect Method Start with net income decreased by rent expense................................................. $(545,000)

$(272,500)

Cash provided by (used in) operations – Direct Method Cash paid for rentals.......................

Changes in non-cash working capital: Increase in prepaid rent.......... Net decrease in cash...............................

Solutions Manual

22-35

_______

(272,500)

$(545,000)

(545,000)

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-9 (Continued) (d) When looking at a statement of cash flows, an external user would prefer to see strong cash inflows coming from operations. The cash flows totalling $545,000 per year are all classified as operating cash flows when the lease is classified as an operating lease. On the other hand, when classified as a finance lease, only the interest paid on the lease obligation is classified as an operating cash flow, while the principal repayments are financing cash flows. Consequently external users would interpret a stronger performance when looking at the cash flow where the lease has been capitalized.

Solutions Manual

22-36

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-10 (10-15 minutes) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(a) Not a cash transaction, but activity is an operating activity (a) Not a cash transaction, but activity is an operating activity because of the choice made by management (a) Operating activity (b) Investing activity (a) Operating activity (d) A significant non-cash investing or financing activity (a) Not a cash transaction, but activity is an operating activity (c) Financing activity because of the choice made by management (a) Operating activity (d) A significant non-cash investing and financing activity (b) Investing activity (b) Investing activity because of the policy choice made by management (b) Investing activity for the disposition of the vehicles (a) (e) Not a cash activity or transaction that is reported on the cash flow statement, but the activity itself would be an operating activity as management regards dividends paid as an operating activity. The decision to issue the dividend and as a stock dividend instead of a cash dividend would be an operating-type decision.

Please note: The Instructions ask you to determine what type of activity each transaction is, not where each transaction is reported on the cash flow statement. Because the cash flow statement summarizes the cash flows associated with all the transactions and events that take place in the accounting period, it is important to be able to identify the type of activity each underlying transaction is. This dictates the type of cash flow related to each.

EXERCISE 22-10 (continued) Solutions Manual

22-37

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

For instructors who prefer to answer this question from the perspective of how each transaction is reported on a cash flow statement, the following solution applies: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(a) Operating activity (indirect method only with offsetting adjustments to income) (e) None of these options (a) Operating activity (b) Investing activity (a) Operating activity (d) Non-cash investing and financing activity (e) None of these options (c) Financing activity because of the choice made by management (a) Operating activity (d) Non-cash investing and financing activity (b) Investing activity (b) Investing activity because of the policy choice made by management (a)(b) Operating activity for the gain on disposal (indirect method only) and Investing activity for the proceeds from sale (e) None of these options

Solutions Manual

22-38

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-11 (10-15 minutes) (a) (1) (2)

(3) (4)

(3) (4)

(5) (3)

(5) (6)

(1) (5)

(7) (8) (9) (10) (11) (12) (13)

(4) (1) (4) (5) (1) (1) (2)

(14) (15) (16) (17)

(2) (1) (5) (4)

(18)

(6)

(19)

(6)

(20) (21) (22)

(2) (4) (4)

Investing activity. Financing activity for redemption cash paid (1 or 2) operating add to income any loss and deduct from income any gain resulting from the redemption. Significant non-cash investing and financing activity. Investing activity for any cash proceeds received from the sale, (1 or 2) operating add to income any loss and deduct from income any gain resulting from the sale. Operating—add to net income. Significant non-cash investing activity. (1 or 2) If any gain is recorded on the exchange, deduct from income in operating activities and add back any loss. Financing activity. Operating—add to net income. Financing activity. Significant non-cash investing and financing activity. Operating—add to net income. Operating—add to net income. Operating activity because of the choice made by management. Operating—deduct from net income. Operating—add to net income. Significant non-cash investing and financing activity. Financing activity for principal paid on lease obligation; financing activity for interest paid; operating add to income for the interest expense. None of these options; part of cash and cash equivalents. Operating activity already reflected in the income statement so no adjustment to income is required. Operating—deduct from net income. Financing activity. Financing activity. Solutions Manual

22-39

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-11 (Continued) (23)

(4)

(24)

(3)

(25)

(1)

(26)

(6)

Financing activity because of the choice made by management. Investing activity because of the choice made by management. Operating activity because of the choice made by management. None of these options; part of cash and cash equivalents.

(b) The following answers would be different under ASPE: (13) (23)

(24) (25) (26)

(4)

Financing activity if charged directly to retained earnings. (6) Operating activity if recognized in net income; if already reflected in the income statement, no adjustment to income is required when using the indirect method. (6) Operating activity already reflected in the income statement so no adjustment to income is required when using the indirect method. (6) Operating activity already reflected in the income statement so no adjustment to income is required when using the indirect method. (3) Investing activity.

Solutions Manual

22-40

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-12 (20-30 minutes) (a) Ellis Corp. Partial Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2014 Cash flows from operating activities Cash received from customers Cash paid     To suppliers $486,000 (b)     For income taxes 60,500 (c) Net cash provided by operating activities (a)

(b)

(c)

$797,000 (a) 546,500 $250,500

Computation of cash received from customers: Revenue from fees Add: Decrease in accounts receivable Add:   ($54,000 – $35,000) Cash received from customers Computation of cash paid to suppliers: Operating expenses per income statement Deduct: Increase in accounts payable Deduct:   ($44,000 – $31,000) Cash paid to suppliers Computation of cash paid for taxes: Income tax expense per income statement Add: Decrease in income tax payable Add:   ($8,500 – $6,000) Cash paid for income taxes

Solutions Manual

22-41

Chapter 22

$778,000 19,000 $797,000 $499,000 (13,000) $486,000 $58,000 2,500 $60,500

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-12 (Continued) (b) Current cash debt coverage ratio in 2014 Current cash debt coverage ratio = Net cash provided by operating activities / Average current liabilities = $250,500 / [($31,000 + $8,500) + ($44,000 + $6,000)] / 2 = 5.6 Current cash debt coverage ratio is a measure of the company’s ability to pay off its current liabilities in a specific year from its operations. An increase in the company’s current cash debt coverage ratio from 2 to 5.6 is an improvement and a sign of better liquidity in 2014. A creditor is interested in analyzing the company’s liquidity (short-term ability to repay maturing obligations) and current cash debt coverage ratio, to help determine the level of credit risk associated with lending to the company. A creditor may interpret the increase in current cash debt coverage ratio as an indication that it is less likely that the company will experience difficulty in meeting its current liabilities as they come due, and that the credit risk associated with lending to the company in the short-term has decreased.

Solutions Manual

22-42

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-13 (15-20 minutes) Allowance for Doubtful Accounts................. Accounts Receivable..............................

5,000

Accounts Receivable..................................... Allowance for Doubtful Accounts.........

3,500

Cash................................................................. Accounts Receivable..............................

3,500

Bad Debt Expense.......................................... Allowance for Doubtful Accounts.........

4,400

5,000 3,500 3,500 4,400

Cash provided by (used in) operations — Direct Method Cash received from customers................

$3,500

Cash provided by (used in) operations — Indirect Method Start with net income decreased by bad debt expense............................................... $(4,400) Changes in non-cash working capital: Decrease in accounts receivable net of net write-offs (1)....................... Net increase in cash.......................................

7,900 $3,500

(1) Accounts receivable: Bad debt write-of................................... Bad debt recovery.................................. Collection of bad debt recovered..........

$(5,000) 3,500 (3,500) $(5,000)

Allowance for doubtful accounts: Bad debt write-of................................... Bad debt recovery................................. Accrual of bad debt expense................. Solutions Manual

22-43

Chapter 22

$5,000 (3,500) (4,400)

(2,900)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Decrease in accounts receivable, net $(7,900)

Solutions Manual

22-44

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (30-40 minutes) (a) Tuit Inc. Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2014 Cash flows from operating activities Cash received from customers (1) $331,150 Cash paid to suppliers for goods and 167,000 services (2) Cash paid to and on behalf of 65,000 employees (3) Cash paid for interest 11,400 Cash paid for taxes (4) 6,125 249,525 Net cash provided by operating activities 81,625a Cash flows from investing activities Proceeds on sale of equipment (5) Purchase of equipment (6) Net cash used by investing activities

8,000 (44,000)

Cash flows from financing activities Principal payments on short-term loan Principal payments on long-term loan Dividend paid Net cash used by financing activities Net increase in cash and cash equivalents Cash and cash equivalents, January 1, 2014 Cash and cash equivalents, December 31, 2014

Solutions Manual

22-45

Chapter 22

(36,000) (2,000) (9,000) (6,000) (17,000) 28,625 25,000 $ 53,625

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued) Computations: (1) Cash received from customers Sales revenue Less: Increase in accounts receivable Cash received from customers (2)

(3)

(4)

Cash paid to suppliers for goods and services Cost of goods sold Less: Decrease in inventory Purchases Less: Increase in accounts payable Cash paid to suppliers for goods Operating expenses Less: Salaries and wages expense Depreciation expense (7) Add: Increase in prepaid rent Paid to suppliers for goods and services Cash paid to and on behalf of employees Salaries and wages expense Increase in salaries and wages payable Cash paid to and on behalf of employees Income taxes paid Income tax expense Decrease in income tax payable Income taxes paid

$338,150 (7,000) $331,150 $165,000 (20,000) 145,000 (6,000) 139,000 120,000 (69,000) (24,000) 1,000 $167,000 $69,000 (4,000) $65,000 $4,125 2,000 $6,125

(5) Calculation of proceeds from sale of equipment: Cost of equipment sold $ 20,000 Accumulated depreciation of equipment sold (70%) (14,000) Carrying amount of equipment sold 6,000 Gain on sale of equipment 2,000 Proceeds on sale of equipment $ 8,000

Solutions Manual

22-46

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued) (6) Calculation of cost of new equipment purchased: Equipment Jan. 1, 2014 $ 130,000 Equipment Dec. 31, 2014 154,000 Net increase in equipment 24,000 Cost of equipment sold 20,000 Cost of equipment purchased during year $ 44,000 (7) Calculation of depreciation expense: Accumulated depreciation Jan. 1, 2014 Accumulated depreciation of equipment sold Accumulated depreciation Dec. 31, 2014 Depreciation expense for the year

Solutions Manual

22-47

Chapter 22

$ (25,000) 14,000 35,000 $ 24,000

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued) (b) Tuit Inc. Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $24,000 Impairment loss, goodwill 30,000 Gain on sale of equipment (2,000) Increase in accounts receivable (7,000) Decrease in inventory 20,000 Increase in prepaid rent (1,000) Increase in accounts payable 6,000 Increase in salaries and wages payable 4,000 Decrease in income tax payable (2,000) Total adjustments Net cash provided by operating activities Cash flows from investing activities Proceeds on sale of equipment Purchase of equipment Net cash used by investing activities Cash flows from financing activities Principal payments on short-term loan Principal payments on long-term loan Dividend paid Net cash used by financing activities Net increase in cash and cash equivalents Cash and cash equivalents, January 1, 2014 Cash and cash equivalents, December 31, 2014

Solutions Manual

22-48

Chapter 22

$9,625

72,000 81,625

8,000 (44,000) (36,000) (2,000) (9,000) (6,000) (17,000) 28,625 25,000 $53,625

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-14 (Continued) Supplemental disclosures of cash flow information: Cash paid during the year for: Interest Income taxes (c)

$11,400 $6,125

Because Tuit Inc. follows ASPE, there are no choices on how to classify interest and dividend payments in the statement of cash flows. Companies that adopt IFRS do have some choices. Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders.

(d)

Tuit Inc.’s operating activities generate significant positive cash flow, which supports the company’s investing and financing activities. The company is using the significant cash generated from its operations to expand by purchasing equipment and to repay creditors and pay dividends to shareholders, which is a sign of a mature, successful company. The company is expanding by purchasing equipment, likely due to high forecasted demand for the company’s product(s). The company repaid creditors and paid dividends to shareholders, and still generated a significant increase in net cash and cash equivalents in 2014. An investor who is interested in investing in mature, successful companies may view Tuit Inc. favourably, and decide to invest in the company.

Solutions Manual

22-49

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (30-40 minutes) (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. However, accounting standards encourage the use of the direct method. Under the direct method, the statement of cash flows reports the major classes of cash received 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 statement of financial position.

(b)

The Statement of Cash Flows for Guas Inc., for the year ended May 31, 2014, using the direct method, is presented below.

Solutions Manual

22-50

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued) Guas Inc. Statement of Cash Flows (Direct Method) For the Year Ended May 31, 2014 Cash flows from operating activities Cash received from customers Cash paid To suppliers for goods and services To and on behalf of employees For interest For income taxes Net cash provided by operating activities

$1,326,600 $822,300 218,800 64,600   65,400

Cash flows from investing activities Purchase of plant assets

1,171,100 155,500   (44,000)

Cash flows from financing activities Proceeds from issuance of common shares Dividends paid Paid on retirement of bonds payable Net cash used by financing activities

$ 4,750 (78,000)   (25,000)  (98,250)  13,250  20,000 $33,250

Net increase in cash Cash, June 1, 2013 Cash, May 31, 2014

Note 1: Schedule of non-cash investing and financing activities: Issuance of common shares for plant assets $51,000

Solutions Manual

22-51

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued) Supporting calculations: Collections from customers Sales Less: Increase in accounts receivable Cash collected from customers Cash paid to suppliers for goods and services Cost of goods sold Less: Decrease in inventory Increase in accounts payable Cash paid for goods for resale Other expenses Add: Increase in prepaid expenses Cash paid to suppliers for goods and services Cash paid to and on behalf of employees Salaries and wages expense Add: Decrease in salaries and wages payable Cash paid to and on behalf of employees Cash paid for interest Interest expense Less: Increase in interest payable Cash paid for interest

Solutions Manual

22-52

Chapter 22

$1,345,800 19,200 $1,326,600 $814,000 10,300 8,000 795,700 24,800 1,800 $822,300 $207,800 11,000 $218,800 $66,700 2,100 $64,600

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued) (c)

The calculation of the cash flow from operating activities for Guas Inc., for the year ended May 31, 2014, using the indirect method, is presented below.

Guas Inc. Statement of Cash Flows (partial) For the Year Ended May 31, 2014 Cash flows from operating activities Net earnings $141,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $26,000 Decrease in inventory 10,300 Increase in accounts payable 8,000 Increase in interest payable 2,100 Increase in accounts receivable (19,200) Increase in prepaid expenses (1,800) Decrease in salaries and wages payable (11,000) 14,400 Net cash provided by operating activities $155,500 (d)

Under IFRS, a choice is permitted for dividends paid: a financing flow as a return to equity holders, or an operating flow as a measure of the ability of operations to cover returns to shareholders. However management views these specific flows, once the choice is made, it is applied consistently from period to period.

Solutions Manual

22-53

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-15 (Continued) (e)

The dividend payout ratio for the year ending May 31, 2014 can be easily calculated using amounts reported on the statement of cash flows. The dividend payout ratio is 55% [$78,000 (dividends paid) divided by $141,100, (net earnings)]. From the perspective of a shareholder, this would be a positive ratio, as shareholders are recipients of this return on investment. The company’s operations generated the cash required to pay this dividend, which is a positive sign that the company may be able to sustain payment of dividends in the future.

Solutions Manual

22-54

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-16 (20-30 minutes) (a) NORTH ROAD INC. Statement of Cash Flows — Indirect Method Year Ended December 31, 2014 Cash flows from operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense $ 58,700 Gain on sale of equipment (8,750) Increase in accounts receivable (53,800) Increase in inventory (19,250) Increase in accounts payable 4,420 Decrease in accrued liabilities (6,730) Net cash provided by operating activities

(25,410) 66,070

Cash flows from investing activities Sale of investments Sale of equipment Purchase of equipment Net cash used by investing activities

(52,950)

22,500 15,550 (91,000)

Cash flows from financing activities Issuance of notes payable 70,000 Payment of cash dividends (37,670) Net cash flows provided by financing activities Net increase in Cash Cash, January 1 Cash, December 31

Solutions Manual

$91,480

32,330 45,450 47,250 $92,700

22-55

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-16 (Continued) (a) (Continued) Note X:Significant non-cash investing and financing activities: Equipment with a cost of $50,000 was exchanged for common shares. Supplemental disclosures of cash flow information: Cash paid during the year for: Interest

$2,940

(b) NORTH ROAD INC. Cash Flow Statement — Direct Method Year Ended December 31, 2014 Operating Activities Cash collections from customers Cash payments to suppliers

(1) (2)

Cash payments for operating expenses Cash payments for interest Cash payments for income taxes Net cash provided by operating activities

Solutions Manual

22-56

Chapter 22

(3)

$243,700 (114,290) (21,400 ) (2,940 ) (39,000 ) $66,070

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-16 (Continued) Calculations: (1) Cash receipts from customers Sales revenue ........................................................ Less: Increase in accounts receivable................ (2)

(3)

(c)

Cash payments to suppliers Cost of goods sold................................................. Add: Increase in inventory................................... Less: Increase in accounts payable..................... Cash payments for operating expenses Operating expenses............................................... Add: Decrease in accrued liabilities....................

$297,500 (53,800) $243,700 $99,460 19,250 (4,420) $114,290 $14,670 6,730 $21,400

Since North Road Inc. follows ASPE it does not have the choice in the classification of the payment of dividends on the statement of cash flows. Dividends paid must be classified as financing outflows. Had North Road Inc. followed IFRS, a choice would be permitted for dividends paid: a financing flow as a return to equity holders, or an operating flow as a measure of the ability of operations to cover returns to shareholders. However management views these specific flows, once the choice is made, it is applied consistently from period to period.

Solutions Manual

22-57

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-17 (35-40 minutes) (a) Tobita Limited Statement of Cash Flows For the Year Ended December 31, 2014 (Indirect Method) Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense ($1,200 – $1,170) Gain on sale of investments (FV-NI) Increase in accounts receivable Decrease in inventory Increase in accounts payable Decrease in accrued liabilities Net cash provided by operating activities

$945 $ 30  (80) (450)  300  300   (50)

Cash flows from investing activities Sale of FV-NI investments * Purchase of plant assets ** Net cash provided by investing activities

 200 (130)

Cash flows from financing activities Issuance of common shares *** Retirement of bonds payable Payment of cash dividends **** Net cash used by financing activities

130 (150) (260)

Net increase in cash Cash, January 1, 2014 Cash, December 31, 2014

50 995

70

(280) 785 1,150 $1,935

*

($1,420 – $1,300) + $80 gain ** ($1,900 – $1,700) – $70 *** ($1,900 – $1,700) – $70 ****($1,900 – $2,585) + $945 income Non-cash investing and financing activities Issuance of common shares for plant assets $70 Cash paid for interest during the year $20 Solutions Manual

22-58

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-17 (Continued) (b) Tobita Limited Statement of Cash Flows For the Year Ended December 31, 2014 (Direct Method) Cash flows from operating activities Cash received from customers* Less: Cash paid to suppliers for goods and services** Cash paid for interest Cash paid for income taxes

$6,450 $5,030 20 405

Net cash provided by operating activities

995

Cash flows from investing activities Proceeds from sale of FV-NI investments Purchase of plant assets Net cash provided by investing activities

200 (130)

Cash flows from financing activities Proceeds on issuance of common shares Payment to retire bonds payable Dividends paid Net cash used by financing activities

130 (150) (260)

Net increase in cash Cash, January 1, 2014 Cash, December 31, 2014

70

(280) 785 1,150 $1,935

Non-cash investing and financing activities Issuance of common shares for plant assets * $1,300 + $6,900 – $1,750 ** $4,700 + ($910 – $30) – $300 – $300 + $50

Solutions Manual

5,455

22-59

Chapter 22

$70

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-17 (Continued) (c)

Because Tobita Limited follows ASPE, there are no choices on how to classify interest and dividend payments in the statement of cash flows. Companies that adopt IFRS do have some choices. Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders.

(d)

There is an alarming trend that is flagged by the indirect format of the statement of cash flows illustrated above. Tobita decreased its inventory 16% while at the same time increasing its accounts payable 33%. Attention should be paid to the possibility of inventory stock outs or poor relationships developing with suppliers for non payment of accounts within payment terms. The direct format of the statement of cash flows does not highlight this change, although the trends could be noticed from a comparison of balances taken from the statement of financial position.

Solutions Manual

22-60

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-18 (15-20 minutes) Ellis Corp. Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash flows from operating activities Net income $137,000 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation expense $66,000 Loss on sale of equipment 14,000 Unrealized loss—FV-NI investments 4,000 Decrease in accounts receivable 19,000 Increase in accounts payable 13,000 Decrease in income tax payable (2,500) 113,500 Net cash provided by operating activities $250,500

Solutions Manual

22-61

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-19 (20-30 minutes) (a)

Sales revenue Deduct: Increase in accounts receivable,   net of write-offs Cash collected from customers

$557,400

(b)

Cost of goods sold Deduct: Decrease in inventory Purchases Deduct: Increase in accounts payable Cash paid to suppliers for goods Selling expenses Administrative expenses Less depreciation expense Less bad debt expense Cash paid to suppliers for goods and services

$253,000 (16,000) 237,000 (9,500) 227,500 138,000 140,000 (1,500) (5,000) $499,000

(c)

Interest expense Deduct: Decrease in unamortized bond discount netted with the liability Cash paid for interest

$15,600

Income tax expense Add: Decrease in income tax payable Deduct: Increase in deferred tax liability Cash paid for income taxes

$20,200 8,100 (700) $27,600

(d)

Solutions Manual

22-62

Chapter 22

(7,800) $549,600

(500) $15,100

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (40-50 minutes) (a) Sept.

1 2 4

Cash Common Shares

31,000

Equipment Cash

17,280

31,000 17,280

Prepaid Rent ($680 X 3) Cash

2,040 2,040

7

No entry

8

Supplies Accounts Payable

1,142

Cash Service Revenue

1,690

9

1,142 1,690

10 Office Expense Cash

430 430

14 Accounts Receivable Service Revenue

5,120 5,120

18 Accounts Payable Cash

600 600

19 Retained Earnings Cash (5,000 X $1.00)

5,000 5,000

20 Cash Accounts Receivable

980

21 Salaries and Wages Expense Cash

600

Solutions Manual

22-63

Chapter 22

980 600

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) Sept. 28 29

Accounts Receivable Service Revenue

2,110 2,110

Utilities Expenses Office Expense Cash

Sept. 1 Sept. 9 Sept. 20

Bal. Sept. 30

135 85 220

Cash 31,000 Sept. 2 1,690 Sept. 4 980 Sept. 10 Sept. 18 Sept. 19 Sept. 21 Sept. 29 7,500

17,280 2,040 430 600 5,000 600 220

(b) Sept.

30

Depreciation Expense

263

Accumulated Depreciation ($17,280 – $1,500) ÷ 5 X 1/12 30 30

30 30

263

Salaries and Wages Expense Salaries and Wages Payable

300

Supplies Expense Supplies ($1,142 – $825)

317

Rent Expense Prepaid Rent

680

Utilities Expense Accounts Payable

195

Solutions Manual

300 317

680

22-64

195 Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) (c) A.S. Design Limited Adjusted Trial Balance September 30, 2014 Cash Accounts Receivable ($5,120 – $980 + $2,110) Supplies Prepaid Rent Equipment Accumulated Depreciation-Equipment Accounts Payable ($1,142 – $600 + $195) Salaries and Wages Payable Common Shares Retained Earnings Service Revenue (1,690 + 5,120 + 2,110) Rent Expense Supplies Expense Salaries and Wages Expense ($600 + $300) Utilities Expenses ($135 + $195) Office Expense ($430 + $85) Depreciation Expense

Solutions Manual

22-65

Chapter 22

Debit $7,500 6,250 825 1,360 17,280

Credit

$263 737 300 31,000 5,000 8,920 680 317 900 330 515 263 $41,220

$41,220

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) (d) A. S. Design Limited Income Statement For the Month Ended September 30, 2014 Service revenue Expenses: Rent expense Supplies expense Salaries and wages expense Depreciation expense Utilities expenses Office expense Total expenses Net Income

Solutions Manual

22-66

$8,920 $ 680 317 900 263 330 515 3,005 $5,915

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) A. S. Design Limited Statement of Financial Position As at September 30, 2014 Assets Cash Accounts receivable Supplies Prepaid rent Current assets Equipment Accumulated depreciation

$ 7,500 6,250 825 1,360 15,935 17,280 263 17,017 $32,952

Total assets Liabilities Accounts payable Salaries and wages payable Total liabilities Shareholder’s Equity Common shares Retained earnings Total shareholder’s equity Total liabilities and shareholder’s equity

Solutions Manual

22-67

Chapter 22

$

737 300 1,037

31,000 915 31,915 $32,952

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) (e) A. S. Design Limited Statement of Cash Flows For the Month Ended September 30, 2014 (Indirect Method) Cash flows from operating activities Net income $5,915 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $263 Increase in accounts receivable (6,250) Increase in supplies (825) Increase in prepaid rent (1,360) Increase in accounts payable  737 Increase in salaries and wages payable   300 (7,135) Net cash used in operating activities (1,220) Cash flows from investing activities Purchase of equipment

(17,280)

Cash flows from financing activities Issuance of common shares Payment of cash dividends Net cash provided by financing activities Net increase in cash Cash, September 1, 2014 Cash, September 30, 2014

Solutions Manual

31,000 (5,000) 26,000 7,500 0 $7,500

22-68

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) (f) A. S. Design Limited Statement of Cash Flows – Partial For the Month Ended September 30, 2014 (Direct Method) Cash flows from operating activities Cash received from customers (1) Less: Cash paid to suppliers for goods and services (2) Cash paid for salaries and wages Net cash used in operating activities

$2,670 $3,290 600

Computations: (1) Cash received from customers Service revenue Less: Increase in accounts receivable Cash received from customers (2)

Cash paid to suppliers for goods and services Total expenses Less: Depreciation expense Less: Salaries and wages expense

3,890 $(1,220)

$8,920 (6,250) $2,670

Less: Increase in accounts payable Add: Increase in supplies Add: Increase in prepaid rent

$3,005 (263) (900) 1,842 (737) 825 1,360

Paid to suppliers for goods and services

$3,290

(g) The statement of cash flows balance at September 30, 2014 corresponds to the balance at September 30, 2014 for the cash account, arrived at in part (a) to the exercise. The operating activities section using the direct format in (f) more closely resembles the activity in the cash account as the amounts of the entries correspond (when aggregated) to the amounts appearing as increases and decreases in the cash account. Solutions Manual

22-69

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-20 (Continued) (h) If this were an established company, it might be considered alarming (in the indirect format of the statement of cash flows prepared in part (e) above), that operating cash flows are well below net income levels. Typically, the amount of net cash provided by operating activities exceeds the amount for net income. This is mainly due to the adjustment to income for non-cash items for expenses such as depreciation. In the case of A. S. Design Limited, increases in its accounts receivable and prepaid rent exceed the amount of the income. Prepaid rent does not represent a potential collection risk but accounts receivable certainly do. However, as a company that is just beginning to grow its business, this is often the case and is to be expected as cash resources are invested in inventories, receivables and other necessary working capital. The direct format of the statement of cash flows does not highlight this issue, although the same situation could be noticed from a comparison of balances on the statement of financial position.

Solutions Manual

22-70

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-21 (20-30 minutes)

(a) Cash flows from operating activities Net income Adjustment to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable $1,500 Decrease in inventory 1,400 Decrease in accounts payable (300) Net cash provided by operating activities (b) Cash flows from operating activities Net income Adjustment to reconcile net income to net cash provided by operating activities: Increase in accounts receivable $(3,000) Decrease in inventory 3,200 Increase in accounts payable 4,400 Net cash provided by operating activities (c) Cash flows from operating activities Net income Adjustment to reconcile net income to net cash provided by operating activities: Increase in accounts receivable $(20,000) Increase in inventory (12,000) Increase in accounts payable 7,000 Net cash provided by operating activities (d) Cash flows from operating activities Net income Adjustment to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable $1,500 Increase in inventory (3,900) Decrease in accounts payable (3,900) Net cash provided by operating activities Solutions Manual

22-71

Chapter 22

$32,000

2,600 $34,600

$32,000

4,600 $36,600

$32,000

(25,000) $7,000

$32,000

(6,300) $25,700

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

EXERCISE 22-21 (Continued) (e) Cash flows from operating activities Net income Adjustment to reconcile net income to net cash provided by operating activities: Decrease in accounts $2,500 receivable Decrease in inventory 1,100 Increase in accounts payable 2,000 Net cash provided by operating activities

Solutions Manual

22-72

Chapter 22

$32,000

5,600 $37,600

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

*EXERCISE 22-22 (20-25 minutes) 1.

Bonds Payable........................................................ 300,000 Contributed Surplus—Conversion Rights 9,000 Common Shares............................................... 309,000 (Non-cash investing and financing activity)

2.

Operating—Net income.......................................... 410,000 Retained Earnings............................................. 410,000

3.

Operating—Depreciation Expense........................ 90,000 Accumulated Depreciation—Buildings...........

4.

5.

6.

Investment in Associate......................................... 34,440 Operating—Investment Income or Loss............................................................. ($123,000 X 28% = $34,440) Accumulated Depreciation 30,00 —Equipment...................................................... 0 Equipment............................................................... 10,000 Operating—Gain on Disposal of Equipment..................................................... Investing—Purchase of Equipment.................

90,000

34,440

6,000 34,000

Retained Earnings.................................................. 123,000 Dividends Payable............................................ 123,000 (Non-cash financing activity)

Solutions Manual

22-73

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, , McConomy Intermediate Accounting, Tenth Canadian Edition

*EXERCISE 22-23 (45-55 minutes) Cosky Corporation WORK SHEET FOR PREPARATION OF STATEMENT OF CASH FLOWS For the Year Ended December 31, 2014 Acct. Reconciling TransAcct. Bal. At actions during 2014 Bal. at end of end of 2013 2014 Debits Debit Credit Cash $ 21,000 (17) $ 4,500 $16,500 FV-NI investments 19,000 (2) $ 6,000 25,000 Accounts receivable 45,000 (3) 2,000 43,000 Prepaid expenses 2,500 (4) 1,700 4,200 Inventory 65,000 (5) 16,500 81,500 Land 50,000 50,000 Buildings 73,500 (10) 51,500 125,000 Equipment 46,000 (11) 7,000 53,000 Delivery equipment 39,000 39,000 Patents _______ (12) 15,000 15,000 Total debits $361,000 $452,200

Solutions Manual

22-74 Chapter 22 Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited

Kieso, Weygandt, Warfield, Young, Wiecek, , McConomy Intermediate Accounting, Tenth Canadian Edition

*EXERCISE 22-23 (Continued)

Credits Accounts payable Short-term notes payable (trade) Accrued liabilities Allowance for doubtful accounts Accumulated depreciation—buildings Accumulated depreciation—equipment Accumulated depreciation—delivery equipment Mortgage payable Bonds payable Share capital Retained earnings Total credits

Solutions Manual

Acct. Reconciling TransAcct. Bal. At actions During 2014 Bal. At end of end of 2013 2014 Debit Credit $ 16,000 (6) $10,000 $ 26,000 6,000 (7) $ 2,000 4,000 4,600 (8) 1,600 3,000 2,000 (3) 200 1,800 23,000 (13) 7,000 30,000 15,500 (13) 3,500 19,000 20,500 (13) 1,500 22,000 53,400 (14) 19,600 73,000 62,500 (16) 12,500 50,000 106,000 (15) 44,000 150,000 51,500 (9) 15,000 (1) 36,900 73,400 $361,000 $452,200

22-75 Chapter 22 Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited

Kieso, Weygandt, Warfield, Young, Wiecek, , McConomy Intermediate Accounting, Tenth Canadian Edition

*EXERCISE 22-23 (Continued) Debit Statement of Cash Flows effects Operating activities Net income Depreciation expense Decrease in accounts receivable (net) Increase in prepaid expenses Increase in inventory Increase in accounts payable Decrease in notes payable Decrease in accrued liabilities Investing activities Purchase of FV-NI investments Purchase of building Purchase of equipment Purchase of patents Financing activities Dividends paid Issuance of mortgage payable Proceeds from sale of shares Payments to retire bonds Totals Decrease in cash Totals Solutions Manual

(1) (13) (3) (6)

(14) (15)

(17)

Credit

36,900 12,000 1,800 (4) (5)

1,700 16,500

(7) (8)

2,000 1,600

(2) (10) (11) (12)

6,000 51,500 7,000 15,000

(9)

15,000

10,000

19,600 44,000 _______ (16) 124,300 4,500 $128,800

22-76 Chapter 22 Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited

12,500 128,800 _______ $128,800

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS Problem 22-1 

(Time 50-55 minutes)

Purpose—to provide the student with a comprehensive set of financial statements and supporting notes to arrive at a statement of cash flows using the direct method. The student must first analyze some of the changes in the statement of financial position amounts in order to calculate the activity of certain accounts such as development costs. The indirect format of the cash flow from operating activities is then required, along with some comments explaining the cash crunch experienced by the entity.

Problem 22-2 

(Time 40-45 minutes)

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows. The student is required to prepare the statement using the indirect method, provide the necessary disclosure notes, and present an alternative treatment for the payment and collection of interest. Comments highlighting the investment strategy of the business as well as assessing the company’s liquidity position are required in the problem.

Problem 22-3

(Time 45-50 minutes)

Purpose—to provide a comprehensive problem involving the preparation of a statement of cash flows. The student is required to prepare the statement using the indirect method. The student must also calculate the net cash flows from operating activities using the direct method. Long-term investments accounted for using the equity method are included in this problem. The original instructions have the student report the change in cash and cash equivalents, including temporary bank overdrafts. At the end of the problem, the student must discuss the effect of excluding or including cash equivalents from cash and cash equivalents.

Problem 22-4

(Time 40-50 minutes)

Purpose—to develop an understanding of both the direct and indirect method. The student is first asked to prepare the statement of cash flows using the indirect method. In addition the student is asked to calculate the net cash flows from operating activities using the direct method and then provide overall comments about cash activities.

Solutions Manual

22-77

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 22-5 

(Time 45-60 minutes)

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows. The student is required to prepare the statement using the direct method, including a reconciliation schedule and must then provide short comments summarizing the cash flow activities. FV-NI investments at fair value are included in this problem.

Problem 22-6

(Time 30-35 minutes)

Purpose—to provide the student with the opportunity to analyze the effects of several different transactions on several equity accounts. The student is required to prepare the entries for the transactions and is then asked to prepare the corresponding captions on a partial statement of cash flows using the indirect method and well as prepare any necessary additional disclosure notes. This is not a long problem but it required a thorough understanding of the equity transactions including the recording a property dividends involving a FV-OCI Investment.

Problem 22-7

(Time 30-40 minutes)

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows. The student is required to prepare the statement using the indirect method. The student also must calculate the net cash flow from operating activities using the direct method. As a final task, the student must take on the role of a member of an investment club, preparing a report of the cash activities of the company for the club’s consideration.

Problem 22-8

(Time 20-30 minutes)

Purpose—to give the opportunity to the student to prepare the operating activities of the cash flow statement, using the indirect format from the description of several items and transactions occurring during the year. Since the whole statement is not being prepared the student needs to distinguish which items do or do not affect the operating activities section of the statement. Since some of the transactions described are not simple, the task is not simple either.

Solutions Manual

22-78

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 22-9

(Time 20-25 minutes)

Purpose—to provide the student with the opportunity to analyze the effects of transactions on the accounts: FV-OCI Investments and Accumulated Other Comprehensive Income. Once the reconciliation is prepared of the activity of these two accounts for the year, the student is asked to prepare the corresponding captions on the statement of cash flows using both the direct and the indirect methods. This is not a long problem but it required a thorough understanding of the accounting of FV-OCI investments.

Problem 22-10

(Time 30-35 minutes)

Purpose—to provide the student with the opportunity to analyze the effects of several transactions affecting investment and related accounts over a two year period. The student must prepare partial statements of income, comprehensive income, changes in accumulated other comprehensive income and financial position. After the preparation selected journal entries, a partial statement of cash flows is required, using both the direct and indirect methods. Finally, some comparisons between IFRS and ASPE are discussed. Although this question involves only investments, it is thorough in all aspects of financial statement presentation and disclosure.

Problem 22-11

(Time 60-70 minutes)

Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows. The student is required to prepare the statement using the indirect method. The student also must calculate some specific captions appearing in the net cash flow from operating activities using the direct method and must then reconcile the amounts in total to the cash obtained from operating activities arrived at using the indirect method. Investments accounted for by the equity method have been included in this problem. The cash flow is reporting cash and cash equivalents in this problem.

Solutions Manual

22-79

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 22-12  (Time 50-55 minutes) Purpose—to provide the student with a comprehensive problem in a style that the student has likely not encountered in the past. From a set of financial statements including the statement of income, the cash flow statement, prepared using the indirect format, and the opening balances from a statement of financial position, the student must calculate the ending balances for the statement of financial position. By working from this new perspective, the student has the opportunity to practice reconciling all changes to the statement of financial position, that are ultimately reported on the other financial statements that have been provided. This should be a challenging problem for most students.

Problem 22-13  (Time 50-60 minutes) Purpose—to develop an understanding of the procedures involved in the preparation of a statement of cash flows, including a schedule of non-cash investing and financing activities. The student is required to prepare the statement using the indirect method, and consider the proper treatment of an extraordinary item. A memorandum of the highlights of the cash flow activity for the year is also required. In the last part, the student is asked to determine how operating, investing and financing sections of the statement of cash flows will change under various situations.

Solutions Manual

22-80

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

SOLUTIONS TO PROBLEMS PROBLEM 22-1 (a) Jeopardy Inc. Consolidated Statement of Cash Flows For the Year Ended April 30, 2014 ($000 omitted) Cash flows from operating activities Cash received from customers (1) $84,476 Cash received for interest 1,310 Payments for goods and services (2) 48,952 Payments to and on behalf of employees (3) 46,633 Interest paid 1,289 Income taxes paid (4) 0 Net cash used in operating activities Cash flows from investing activities Purchase of capital asset Purchase of other investments Proceeds from sale of property plant and equipment Payments for franchise fees (5) Net cash used in investing activities

96,874 (11,088)

(2,290) (1,516) 250 (2,686) (6,242)

Cash flows from financing activities Proceeds from bank term loans Repayments of bank term loans (6) Proceeds from sale of shares Proceeds from sale of warrants Net cash provided by financing activities Decrease in cash and cash equivalents Cash and cash equivalents, May 1, 2013 Cash and cash equivalents, April 30, 2014

Solutions Manual

$85,786

22-81

2,200 (1,200) 14,393 899 16,292 (1,038) (2,541) $ (3,579)

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued) Cash and cash equivalents consist of cash on hand and balances with banks, 60-day treasury bills and temporary bank overdraft. Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position accounts (amounts in thousands of dollars):

Cash and 60-day treasury bills Bank overdraft Total cash and cash equivalents

2014 $ 3,265 (6,844) $ (3,579)

2013 $ 3,739 (6,280) $ (2,541)

(1) Cash received from customers Operating revenue Less: increase in accounts receivable Cash received from customers

$ 89,821 (5,345) $ 84,476

(2) Cash paid to suppliers for goods and services Operating expenses General and administrative expenses Deduct: salaries and wages expense Add: increase in inventory Less: decrease in prepaid expenses Add: decrease in accounts payable Paid to suppliers for goods and services

$ 76,766 13,039 (46,624) 4,522 (211) 1,460 $ 48,952

(3) Cash paid to and on behalf of employees Salaries and wages expense Add: decrease in salaries and wages payable Cash paid to and on behalf of employees

$ 46,624 9 $ 46,633

Solutions Manual

22-82

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued) (4) Income taxes paid/collected Income tax benefit Add: increase in deferred tax asset Add: increase in income tax receivable Cash paid/received for income taxes

$(2,775) 2,630 145 $ –

Reconciliation of Property Plant and Equipment (net): Opening Balance $45,700 Additions – given 2,290 Ending Balance – given (37,332) Loss on disposal – given (394) Proceeds on disposal – given (250) Depreciation expense – force 10,014 Total depreciation and amortization recorded Less depreciation for capital assets (above) Amortization for franchises

$10,220 (10,014) $ 206

(5) Reconciliation of Franchises (net): Opening Balance Amortization recorded (above) Ending Balance – given Additions – force

$ 1,911 (206) (4,391) $(2,686)

(6) Reconciliation of Bank Loans: Opening Balance New loans during the year Ending Balance – given Repaid during the year ($100 X 12)

$3,200 2,200 (4,200) $1,200

Solutions Manual

22-83

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued) Reconciliation of Share Capital: Opening Balance Proceeds from sale of shares Proceeds from sale of warrants Stock dividend Ending Balance

$ 62,965 14,393 899 1,000 $ 79,257

(b) Jeopardy Inc. Consolidated Statement of Cash Flows (partial) For the Year Ended April 30, 2014 ($000 omitted) Cash flows from operating activities Net loss $(23,057) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation expense $10,014 Amortization expense 206 Loss on impairment of goodwill 12,737 Loss on sale of capital assets 394 Loss on equity investment 2,518 Increase in accounts receivable (5,345) Increase in inventory (4,522) Increase in income tax receivable (145) Decrease in prepaid expenses 211 Decrease in accounts payable (1,469 and accrued liabilities ) Increase in deferred tax asset (2,630) 11,969 Net cash used by operating activities $(11,088)

Solutions Manual

22-84

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-1 (Continued) (c)

Memo to President

Jeopardy Inc. is experiencing a severe cash crunch in spite of having acceptable liquidity ratios and several non-cash expenses on its income statement. The following is a list of factors, which have contributed to this problem: 1. There are disturbing trends in the management of working capital. This is evidenced from the operating activities of the statement of cash flows prepared using the indirect format. Jeopardy had significant increases in accounts receivable and inventory combined of ($9,867) while at the same time reduction in accounts payable of $1,469 were achieved. This represents a deterioration amounting to $11.3 million in working capital position in one fiscal year. 2. Significant purchases of long-term investments, reported at amortized cost were made during the year ($1,516), although investments did generate some cash from interest. We should look carefully at the rates of interest earned on these investments, compared to the rates of interest paid on our debt. 3. Although the company recorded income tax benefits on the income statement from its losses, and the corresponding additions to deferred tax assets on the statement of financial position ($2,630), we were unable to recover in cash any taxes paid in the past. The carryback of losses was disallowed because of the continued losses incurred in the past. 4. The majority of the cash obtained from selling shares and warrants to shareholders was consumed in operating activities. Closer attention to costs will have to be paid in order to restore profitability and corresponding positive cash flows from operations.

Solutions Manual

22-85

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (a) Mann Corp. Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash flows from operating activities Net earnings $240,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense (1) $181,000 Loss on sale of equipment (2) 2,000 Equity in earnings of Bligh Corp. (3) (22,000) Increase in accounts receivable (79,700) Increase in inventory (42,600) Decrease in accounts payable (61,000) Decrease in income tax payable (9,000) (31,300) Net cash provided by operating activities 208,700 Cash flows from investing activities: Proceeds from sale of equipment Loan to TMC Corp. Principal collected of loan receivable Net cash used by investing activities

42,000 (285,000) 33,500 (209,500)

Cash flows from financing activities: Increases in bank loan Dividends paid Net cash used by financing activities

69,700 (85,000) (15,300)

Net decrease in cash Cash, January 1, 2014 Cash, December 31, 2014

(16,100) 44,400 $28,300

Non-cash investing and financing activities: Issuance of lease obligation for equipment

Solutions Manual

22-86

$270,000

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (Continued) Additional disclosures: During the year Mann Corp. had the following operating cash flows relating to interest: Interest paid on operating line of credit and finance lease: $14,900 Interest collected on loans to TMC Corp. 9,400 Income taxes paid during the year 151,000 (1) Calculation of depreciation expense: Original cost of equipment sold Carrying amount of equipment sold Accumulated depreciation equipment sold Accumulated depreciation Jan. 1, 2014 Accumulated depreciation Dec. 31, 2014 Depreciation expense

$ 70,000 (44,000) 26,000 (1,010,000) 1,165,000 $ 181,000

(2) Calculation of gain on disposal of equipment: Proceeds on sale of equipment Carrying amount of equipment sold Loss on disposal of equipment

$ 42,000 (44,000) $ 2,000

(3) Calculation of undistributed earnings of Bligh Corp. Net income of Bligh Corp. $ 88,000 Percentage owned by Mann Corp. 25% Undistributed earnings of Bligh Corp. $ 22,000

Solutions Manual

22-87

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (Continued) (b) ('000 $) Prop, plant, and equipment Accumulated depreciation

Depreciation expense Loss on sale of equipment Proceeds on sale of equipment Non-cash finance lease

(c)

2014 $3,066.4 (1,165.0) 1,901.4

2013 $2,866.4 (1,010.0) 1,856.4

chang e

$45

181 2 42 225 (270) $(45)

At first glance, a financial statement reader of the cash flow statement might come to the quick conclusion that all of the cash flows generated from operations were used up in investing activities; this is really not the case. The cash generated from operations is almost exactly the amount as the cash used in investing activities. This makes it appear as if Mann Corp. is leaving itself very little cash to allow it any flexibility in dealing with future cash demands. The reconciliation brings into the view the non-cash financing investing transaction of the finance lease of $270,000. This can then be easily compared with the amount of the depreciation on property plant and equipment recorded during the year. This comparison is often used to assess if management is properly dealing with the timely replacement of ageing capital assets.

(d) Since Mann Corp. follows IFRS, interest paid and received can be recognized as operating flows on the basis they are included in determining net income. Alternatively, interest paid could be a financing outflow while interest and received could be considered investment flows. Once the choice is made, it is applied consistently from period to period . Solutions Manual

22-88

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-2 (Continued) (d) (Continued) Had Mann Corp. classified interest paid as financing activities, and interest received as investing activities, those amounts would need to become adjustments to the operating activities section of the statement of cash flows prepared using the indirect format as those amount were included in net earnings. These amounts are fairly small (interest paid $14,900 and interest received $9,400) and would increase the cash flows from operations by $5,500. Correspondingly, the investing activities net outflow of cash would decrease by $9,400 and financing activities outflow would increase by $14,900. These changes are minor, and would not impact conclusions reached concerning Mann’s liquidity position and ability to generate cash. (e)

Mann Corp. has very low cash positions at its statement of financial position dates. It also appears as if some large current liabilities must be paid, in amounts that are far larger than the amount of cash on hand. That being the case, Mann remains able to meet these obligations because it has secured a line of credit which has an upper limit of $600,000. It is never the intention of management to use the line of credit to the limit, but rather use it for the short term financing of operating needs. The balances of the term line at the statement of financial position dates are not out of line when compared to other important balances such as the amount of accounts receivable. In fact the accounts receivable are likely securing the operating line of credit.

Solutions Manual

22-89

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (a) Preliminary calculations and reconciliations: A. Reconciliation of long-term investment at equity: Opening Balance $400,000 Equity in earnings of investee 62,000 Dividend received (derived) (44,000) Ending Balance $418,000 B. Reconciliation of investment income: Total investment income on income statement Less: Equity in earnings of investee Interest income on investments C. Reconciliation of Equipment: Opening Balance Original cost of equipment sold Ending balance Purchases of equipment (derived)

$90,000 (62,000) $28,000 $640,000 (46,000) (632,000) ($38,000)

D. Reconciliation of accumulated depreciation equipment: Opening Balance ($135,000) Accumulated depreciation of equipment sold 32,000 Ending balance 160,000 Derive depreciation for year $57,000 E. Carrying amount of equipment sold Proceeds on sale of equipment (derived) Loss on disposal

($14,000) 3,000 ($11,000)

F. Reconciliation of common shares: Opening balance Stock dividends Shares issued during year (derived) Ending balance

$666,000 18,000 62,000 $746,000

Solutions Manual

22-90

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (Continued) (a) (Continued) G. Reconciliation of retained earnings: Opening balance Add net income Less stock dividends Cash dividends declared (derived) Ending balance

$294,000 195,000 (18,000) (51,000) $420,000

H. Reconciliation of dividends payable Opening balance Add dividends declared (G) Cash dividends paid (derived) Ending balance

$50,000 51,000 (81,000) $20,000

Laflamme Inc. Statement of Cash Flows (Indirect Method) for the year ended December 31, 2014 Cash Flows from Operating Activities Net Income $195,000 Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of equipment $11,000 Depreciation – Buildings 40,000 Depreciation – Equipment (D) 57,000 Amortization – Patent 5,000 Amortization of bond discount 4,000 Equity in earnings in long-term investee (62,000) Dividends received from LT investee (A) 44,000 Increase in accounts receivable (77,000) Decrease in prepaid insurance 19,000 Increase in inventory (48,000) Decrease in supplies 4,000 Increase in accounts payable 15,000 Decrease in income tax payable (9,000) Solutions Manual

22-91

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

Increase in accrued liabilities Net cash provided by operating activities PROBLEM 22-3 (Continued)

16,000

19,000 214,000

(a) (Continued) Cash Flows from Investing Activities Purchase of land Purchase of building Purchase of equipment (C) Proceeds from sale of equipment Net cash used in investing activities

$(40,000) (30,000) (38,000) 3,000 (105,000)

Cash Flows from Financing Activities Proceeds from issuance of preferred shares Proceeds from issuance of common shares (F) Repayment of long-term notes principal Dividend paid (H) Net cash used in financing activities

24,000 * 62,000 (40,000) (81,000) (35,000)

Increase in cash and cash equivalents Cash and cash equivalents balance Dec. 31, 2013 Cash and cash equivalents balance Dec. 31, 2014 Cash and Cash Equivalents: Cash Cash equivalents Temporary bank overdrafts

2014 $46,000 36,000 0 $82,000

74,000 8,000 $82,000 2013 $56,000 45,000 (93,000) $8,000

Note X: During the year the Laflamme Inc. obtained land having a fair value of $100,000 for its preferred shares. Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $91,000 Income taxes $105,000 Solutions Manual

22-92

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

* (Increase of $124,000 less Note X non-cash financing— investing above of $100,000 = $24,000)

Solutions Manual

22-93

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (Continued) (b) Laflamme Inc. Statement of Cash Flows (Direct Method) for the year ended December 31, 2014 Cash Flows from Operating Activities Cash received from customers (1) Cash received from interest – short term (B) Cash received from dividends – long term (A) Payments to suppliers for goods and services (2) Payments to and on behalf of employees (3) Interest paid (4) Income taxes paid (5) Net cash flows provided by operating activities 1. Cash collected from customers: Sales revenue Increase in accounts receivable

$999,000 (77,000) $922,000

2. Payments to suppliers for goods for resale: Cost of goods sold Increase in inventory Increase in accounts payable Operating expenses Less: Depreciation – Buildings Depreciation – Equipment Amortization – Patent Decrease in prepaid insurance Increase in accrued liabilities Decrease in supplies

Solutions Manual

$922,000 28,000 44,000 (372,000) (212,000) (91,000) (105,000) $214,000

22-94

$314,000 48,000 (15,000) 166,000 (40,000) (57,000) (5,000) (19,000) (16,000) (4,000) $372,000

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-3 (Continued) (b) (Continued) 3. Payments to and on behalf of employees: Sales commission expense Salaries and wages expense

$108,000 104,000 $212,000

4. Interest paid: Interest expense Amortization of bond discount

$95,000 (4,000) $91,000

5. Income taxes paid: Income tax expense Decrease in income tax payable (c)

$96,000 9,000 $105,000

Laflamme follows ASPE and so does not have choices. Companies that adopt IFRS do have some choices. Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders.

(d) Had the cash equivalents not been included in cash and cash equivalents, transactions of purchases and maturities of principal of these investments would have been treated as investing activities on the statement of cash flows. Had the temporary bank overdrafts not been included in cash and cash equivalents, transactions of loans and cash advances by the bank and repayments of these loans would be treated as financing activities on the statement of cash flows. Solutions Manual

22-95

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (a) Jensen Limited Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash flows from operating activities Net income $76,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense* $20,000 Gain on FV-NI investments (24,000) Loss on sale of equipment 3,000 Increase in accounts receivable (net) (17,500) Increase in inventory (14,000) Decrease in deferred tax asset 4,500 Increase in accounts payable 12,500 Decrease in accrued pension liability (2,500) Increase in income tax payable 2,000 (16,000) Net cash provided by operating activities 60,000 Cash flows from investing activities Purchase of FV-NI investments ** Purchase of equipment Proceeds on sale of FV-NI investments Proceeds on sale of equipment Net cash provided by investing activities

(5,000) (32,000) 50,000 3,000

Cash flows from financing activities Payment of long-term notes payable Dividends paid Proceeds on issuance of common shares Net cash used by financing activities

(8,000) (74,000) 35,000

16,000

(47,000)

Net increase in cash 29,000 Cash, January 1, 2014 51,000 Cash, December 31, 2014 $80,000 * $21,000 + $4,000 – $14,000 + $37,000 – $28,000 = $20,000 ** $59,000 – $24,000 + $50,000 – $80,000 = $5,000 Solutions Manual

22-96

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (Continued) Non-cash investing and financing activities Issuance of common shares for land

$15,000

Additional disclosures: During the year Jenson Limited had the following operating cash flows relating to interest and income taxes: Interest paid $10,000 Income taxes paid 38,500 (b) Net Cash Provided by Operating Activities Cash received from customers (1) Cash paid to suppliers for goods and services (2) Cash paid to and on behalf of employees (3) Interest paid Income taxes paid (4) Net cash provided by operating activities (1) Cash received from customers Sales Less increase in accounts receivable Cash received from customers

Solutions Manual

$940,500 $618,80 0 213,20 0 10,000 38,500

880,500 $ 60,000

$ 960,000 (19,500) $ 940,500

22-97

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (Continued) (2) Cash paid to suppliers for goods and services Cost of goods sold Deduct: direct labour Deduct: pension expense Add: increase in inventory Deduct: increase in accounts payable Payment to suppliers for goods for resale Operating expenses Deduct: salaries and wages expense Deduct: pension benefits expense Deduct: depreciation expense Deduct: bad debt expense Paid to suppliers for goods and services

$ 600,000 (115,000) (11,700) 14,000 (12,500) 474,800 250,000 (76,000) (8,000) (20,000) (2,000) $ 618,800

(3) Cash paid to and on behalf of employees Direct labour Salaries and wages expense Pension benefits expense Add: decrease in accrued pension liability Cash paid to and on behalf of employees

$ 115,000 76,000 19,700 2,500 $ 213,200

(4) Income taxes paid Income tax expense Deduct: decrease in deferred tax asset Deduct: increase in income tax payable Income taxes paid

$ 45,000 (4,500) (2,000) $ 38,500

Solutions Manual

22-98

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-4 (Continued) (c)

Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders.

(d)

In spite of a very large dividend paid during the year that was almost as large as net income, the company managed to generate significant amounts of cash from operations and from the sale of some of its investments. The issuance of additional common shares helped finance the purchase of equipment and the acquisition of land.

(e) The dividend payout ratio for the year ending December 31, 2014 can be easily calculated using amounts reported on the statement of cash flows. The payout ratio is 97% [$74,000 (dividends paid) divided by $76,000, (net income)]. From the perspective of an investor, this might be a welcomed ratio, as investors are recipients of this extremely high return on investment. On the other hand, paying out more dividends than the cash flow from operations might be worrisome, and a shareholder should not expect that to continue. The $50,000 proceeds on the sale of investments might be part of the reason for such a large payout this year, but again, this is not usually a replicable (continuing type of) cash flow. It would be unrealistic to expect the company to sustain this additional source of cash in the future.

Solutions Manual

22-99

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (a) Ashley Limited Statement of Cash Flows For the Year Ended December 31, 2014 (Direct Method) Cash flows from operating activities Cash received from customers (1) Dividends received Proceeds on sale of FV-NI investments* Cash paid to suppliers for goods and services (2) Cash paid to and on behalf of employees (3) Income taxes paid (4) Interest paid Net cash provided by operating activities

$1,159,450 2,400

Cash flows from investing activities Proceeds from sale of land** Purchase of equipment Net cash used by investing activities

14,000 (889,35 0) (90,00 0) (33,400)    (51,750) $111,350 58,000   (125,000) (67,000)

Cash flows from financing activities Proceeds from issuance of common shares Principal payment on long-term debt Dividends paid Net cash used by financing activities

22,5 00 (10,000)   (19,450) (6,950)

Net increase in cash and cash equivalents Cash and cash equivalents January 1, 2014 Cash and cash equivalents, December 31, 2014

37,400 (12,000) $25,400

* Decrease in FV-NI investments $10,000 + gain of $4,000 ** Decrease in land of $50,000 + gain of $8,000 Solutions Manual

22-100

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (Continued) Cash and cash equivalents consist of cash on hand and balances with banks, and temporary bank overdrafts. Cash and cash equivalents included in the statement of cash flows comprise the following statement of financial position accounts: Cash Temporary bank overdraft Total cash and cash equivalents

2014 $ 25,400 – $ 25,400

(1) Sales Revenue Less increase in accounts receivable Cash received from customers

2013 – $ (12,000) $ (12,000) $1,160,000 (550) $1,159,450

(2) Cash paid to suppliers for goods and services Cost of goods sold Add increase in inventory Less increase in accounts payable Cash paid to suppliers for goods for resale Add selling expenses Add administrative expenses Less decrease in prepaid rent Add increase in prepaid insurance Add increase in office supplies Cash paid to suppliers for goods and services (3) Salaries and wages expense Less increase in salaries and wages payable Cash paid to and on behalf of employees (4) Income tax expense Less increase in deferred tax liability Less increase in income tax payable Income taxes paid Solutions Manual

$748,000 7,000 (2,000) 753,000 19,200 124,700 (9,000) 1,200 250 $889,350 $92,000 (2,000) $90,000 $39,400 (5,000) (1,000) $33,400

22-101

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (Continued) Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Amortization expense Gain on sale of land Gain on sale of FV-NI investments Proceeds from sale of FV-NI investments Decrease in prepaid rent Increase in income tax payable Increase in salaries and wages payable Increase in accounts receivable Increase in inventory Increase in prepaid insurance Increase in office supplies Increase in accounts payable Increase in deferred tax liability Net cash provided by operating activities (b)

$58,850 $35,500 5,000 (8,000) (4,000) 14,000 9,000 1,000 2,000 (550) (7,000) (1,200) (250) 2,000 5,000

52,500 $111,350

Ashley Limited follows ASPE and so does not have choices. Companies that adopt IFRS do have some choices. Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders.

Solutions Manual

22-102

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-5 (Continued) (c)

Memo Ashley has managed to generate sufficient cash from operations in the current year to overcome a cash and cash equivalent deficiency while at the same time making substantial investments in equipment and paying out dividends of 33% of net income for the year. Additional increases in cash came from the sale of land and FV-NI investments as well as further investments from shareholders through the issuance of shares.

(d) Cash payments to suppliers for goods for resale: Cost of goods sold Add: Increase in inventory Less: Increase in accounts payable Cash paid to suppliers for goods for resale

$748,000 7,000 (2,000) $753,000

Cash paid to suppliers for services: Selling expenses Administrative expenses Less: Decrease in prepaid rent Add: Increase in prepaid insurance Add: Increase in office supplies Cash paid to suppliers for services

Solutions Manual

$19,200 124,700 (9,000) 1,200 250 $136,350

22-103

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-6 (a) Common Shares (4,000 X $34.20)................. 136,800 Contributed Surplus (Common Shares)....... 22,700 Retained Earnings..........................................    18,100 Cash (4,000 X $44.40).............................

177,600

Land................................................................. Cash......................................................... Common Shares (5,000 X $41.50).........

240,500 33,000 207,500

Unrealized Gain or Loss - OCI....................... FV-OCI Investments................................

3,650 3,650

Original cost of shares..............$68,400 Fair value adj. to beg. of year.... (2,350) Carrying amount beg. of year.....66,050 Fair value date of declaration.....62,400 Fair value adjust. required..........$3,650 Loss on Sale of Investments......................... Unrealized Gain or Loss - OCI............... (Reclassification $2,350 + $3,650)

6,000

Retained Earnings.......................................... Dividends Payable..................................

62,400

Dividends Payable.......................................... FV-OCI Investments................................

62,400

Retained Earnings.......................................... Common Stock Dividends Distributable 85,752 (43,200 X 5% X $39.70)

85,752

Solutions Manual

22-104

6,000

62,400 62,400

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-6 (Continued) Common Stock Dividends Distributable...... Common Shares.....................................

85,752

Land................................................................. Contributed Surplus - Donated Land....

42,000

Share Subscriptions Receivable................... Cash ($385,000 X 10%)...................................

346,500 38,500

85,752 42,000

Common Shares Subscribed................. (10,000 X $38.50) Dividend Expense.......................................... Dividends Payable.................................. (b) Cash provided by (used in) operations Add back: non-cash expenses: Loss on sale of investments.................. Changes in non-cash working capital: Dividends payable, term preferred shares

385,000 3,800 3,800

$6,000 3,800

Cash provided by (used in) investing activities Purchase of land (Note x)......................

(33,000)

Cash provided by (used in) financing activities Collection of subscription for shares... Common shares repurchased...............

38,500 (177,600)

Note X: During the year Gao Limited purchased land with a fair value of $240,500 in exchange for cash of $33,000 and 5,000 common shares.

Solutions Manual

22-105

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-6 (Continued) Additional disclosures: A property dividend in the amount of $62,400, charged to retained earnings, was declared and distributed to preferred shareholders. A 10% stock dividend for $85,752 was declared and distributed to the common shareholders. During the year, a shareholder donated land at an appraised value of $42,000. (c) If Gao’s investment in Trivex was accounted using the fair value through income model, the changes in fair value would have been included in net income, instead of being reported in other comprehensive income. There would be no Accumulated other comprehensive income on the statement of financial position at October 31, 2014, and therefore no reclassification entry would be needed following the declaration of the property dividend. As for the statement of cash flows, the amounts reported would not change, but the captions and descriptions would change to FV-NI, instead of FV-OCI. (d) If Gao were using ASPE, it would be not be allowed to follow the FV-OCI model.

Solutions Manual

22-106

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-7 (a) Net Cash Flow from Operating Activities Cash received from customers (1) Cash paid to suppliers for goods and services (2) Income taxes paid (3) Net cash provided by operating activities

$627,850 $545,92 5 40,500

(586,425) $ 41,425

(1) Cash received from customers Sales revenue $ 640,000 Less increase in accounts receivable * (12,150) Cash received from customers $ 627,850 * – $67,500 + $60,000 + $2,250 – $1,500 – $5,400 expense (2) Cash paid to suppliers for goods and services Cost of goods sold Add: increase in inventory Deduct: increase in accounts payable Payment to suppliers for goods for resale Increase in accrued liabilities Operating expenses Deduct: depreciation expense Deduct: bad debt expense Paid to suppliers for goods and services (3) Income taxes paid Income tax expense Add: decrease in income tax payable Income taxes paid

Solutions Manual

$ 380,000 6,000 (5,250) 380,750 (1,250) 180,450 (8,625) (5,400) $ 545,925

$ 40,000 500 $ 40,500

22-107

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-7 (Continued) (b) Secada Inc. Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash flows from operating activities Net income $37,750 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 8,625 Loss on FV-NI investments 1,000 Loss on sale of machinery 800 Increase in accounts receivable (net) (6,750) Increase in inventory (6,000) Increase in accounts payable 5,250 Increase in accrued liabilities 1,250 Decrease in income tax payable (500) 3,675 Net cash provided by operating activities 41,425 Cash flows from investing activities Purchase of investments* Purchase of machinery** Addition to buildings Proceeds from sale of investments Proceeds from sale of machinery Net cash used by investing activities

(7,500) (15,000) (11,250) 23,750 2,200 (7,800)

Cash flows from financing activities Principal payments on long-term note payable Dividends paid Net cash used in financing activities

(5,000) (25,375) (30,375)

Net increase in cash Cash, January 1, 2014 Cash, December 31, 2014 * $24,750 + $23,250 – $40,500 = $7,500 ** $18,750 – $3,750 – $30,000

Solutions Manual

3,250 33,750 $37,000

22-108

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-7 (Continued) (c)

Memo Fellow investment club members: The following is a short summary of the highlights from a cursory review of the operations of Secada Inc., which the club is considering for investment. From an investor’s perspective, we are interested in the profitability, financial stability and dividend paying ability of Secada. Based on the performance for the year ending December 31, 2014, Secada has demonstrated an extremely strong dividend paying ability. In fact the company was able to distribute 67% of the net earnings as cash dividends ($25,375 ÷ $37,750). This is a very high dividend payout ratio. Over and above the cash dividends paid out, Secada also distributed a 20% stock dividend. Although this dividend did not provide cash to the shareholders, it did allow them to receive additional common shares, which they can choose to sell. The statement of cash flows demonstrates some positive trends, particularly in the cash flows generated from operations. Secada managed to increase its cash position by the end of the fiscal year, while making some substantial investments in machinery and in buildings.

(d) Cash paid to suppliers for goods for resale Cost of goods sold Add: Increase in inventory Less: Increase in accounts payable Payment to suppliers for goods for resale

$ 380,000 6,000 (5,250)) $ 380,750

Cash paid to suppliers for services Operating expenses Less: Increase in accrued liabilities Less: Depreciation expense Less: Bad debt expense Payments to suppliers for services

180,450 (1,250) (8,625) (5,400) $ 165,175

Solutions Manual

22-109

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-8 (a) Cash flows from operating activities Net income $145,000 Adjustments to reconcile net income to to net cash provided by operating activities: Depreciation expense $38,000 Loss on sale of equipment 16,500 Gain on sale of investment at fair value with gains and losses in net income (5,500) Decrease in accounts receivable 15,000 Income from investment accounted using the equity method (10,800) Dividends received from investment accounted using the equity method 1,120 54,320 Net cash provided by operating activities $199,320 Other comments: No. 1 the proceeds from the sale of the equipment will be shown as cash received from investing activities, but the loss or $16,500 ($23,500 – $7,000) must be an added back to income. No. 2 is shown as a cash inflow from investing activities of $20,000 (sale of 100 Lontel Corporation shares at $200 per share) and the gain of $5,500 is deducted from net income in the operating section. No. 3 does not affect the statement of cash flows as it does not involve nor does it affect cash. No. 4 is a non-cash expense (Bad Debt Expense) in the income statement. Bad debt expense is not handled separately when using the indirect method. It is part of the change in net accounts receivable.

Solutions Manual

22-110

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-8 (Continued) No. 5 is a significant non-cash investing and financing activity. No. 6 depreciation is added to income when using the indirect method. No. 7 and 8 the equity pick-up is deducted and the dividends received are added to net income. Another alternative is to net the Company’s pro-rata share of the dividend against the income from equity method amount reported in the cash flows from operating activities. No. 9 is not shown on a statement of cash flows. No. 10 dividends of $2,500 on term preferred shares properly represent cash outflows in the operating activities, included in the calculation of net income, while the remaining dividends of $7,500 would be shown as outflows in the financing activities section of the statement of cash flows. (b)

If Neilson Corp. were following IFRS, there would be choices available on the treatment of dividends and interest paid or received. Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders. However management views these specific flows, once the choice is made, it is applied consistently from period to period.

Solutions Manual

22-111

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-9 (a) Reconciliation of transactions to Fair Value through Other Comprehensive Income (FV-OCI) Investments account: Balance Jan. 1, 2014 at fair value (cost $40,000 – unrealized loss to date $2,400) Unrealized gain to date of sale ($40,000 – $37,900) Proceeds from sale of all shares Purchase of new shares as investment Unrealized gain to December 31, 2014 Balance Dec. 31, 2014

$37,900 2,100 (40,000) 23,600 400 $24,000

Reconciliation of transactions to Accumulated Other Comprehensive Income: Balance Jan. 1, 2014 - unrealized loss ($37,900 - $40,300) Unrealized gain to date of sale ($40,000 – $37,900) Transfer to Retained Earnings realized loss Unrealized gain to December 31, 2014 Balance Dec. 31, 2014 (b) Operating activities: Cash received for dividends Loss on sale of fair value through other comprehensive income investments

Direct $200

Indirect

$300

Investing activities: Proceeds from sale of fair value through other comprehensive income investments Purchase of fair value through other comprehensive income investments

Solutions Manual

$(2,400) 2,100 300 400 $ 400

22-112

$40,000

$40,000

(23,600)

(23,600)

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-9 (Continued) (c) If MFI Inc.’s investments were accounted using the fair value through net income (FV-NI) model, the amounts reported on the statement of financial position would remain the same, but their captions for description would change accordingly. All of the investment income, including the dividends received would have been included in net income. The changes in fair value would also have been included in net income, instead of being reported in Other Comprehensive Income. There would be no Accumulated Other Comprehensive Income on the statement of financial position. There would therefore be no need to reconcile the activity to the Accumulated Other Comprehensive Income as given in part (a) of the question. As for part (b) of the question, the amounts in the statement of cash flows would not change, but the captions and descriptions would change to FV-NI, instead of FV-OCI. (d) If MFI Inc were to follow ASPE, it would be not be allowed to follow the FV-OCI model.

Solutions Manual

22-113

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-10 (a) SAMSON INC. Statement of Financial Position December 31, 2014 Long-term Investments Investments, at fair value with gains and losses in OCI

2013

$ 872,245 $883,400

Shareholders’ Equity Accumulated other comprehensive income (loss)

$10,278 $(10,100)

(b) SAMSON INC. Income Statement For the Year ended December 31, 2014 Other revenues and gains Dividend revenue Gain on sale of investments

$37,500 3,592

SAMSON INC. Statement of Comprehensive Income For the Year ended December 31, 2014 Net income (including items above) Other comprehensive income: Unrealized gains on FV-OCI investments during year ($4,350 + $19,620) Reclassification adjustment for realized gains Other comprehensive income Comprehensive income

Solutions Manual

22-114

$

x

$23,970 (3,592) 20,378 $ x + 20,378

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-10 (Continued) SAMSON INC. Statement of Changes in Accumulated Other Comprehensive Income For the Year ended December 31, 2014 Accumulated other comprehensive income (loss), January 1, 2014 $(10,100) Other comprehensive income, 2014 20,378 Accumulated other comprehensive income (loss), December 31, 2014 $ 10,278 (c) June 30, 2014 Cash................................................................ 37,500 Dividend Revenue.................................. 37,500 Dividends received from Anderson Corp. August 15, 2014 Investment in Anderson Corp...................... 4,350 Unrealized Gain or Loss - OCI.............. Fair value adjustment for the 3,000 shares sold Cash................................................................ 70,605 Investment in Anderson Corp...............

4,350

70,605

Sale of 3,000 Anderson Corp. shares Unrealized Gain or Loss - OCI...................... Gain on Sale of Investment...................

3,592  3,592

Reclassification adjustment to transfer unrealized gains to realized gains November 3, 2014 Investment in Anderson Corp...................... 35,480 Cash........................................................ Purchase of 2,000 shares of Anderson Corp.

Solutions Manual

22-115

Chapter 22

35,480

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-10 (Continued) (d) Operating activities: Cash received for dividends Gain on sale of fair value through other comprehensive income investments

Direct $37,500

Indirect

$(3,592)

Investing activities: Proceeds from sale of fair value through other comprehensive income investments Purchase of fair value through other comprehensive income investments

$70,605

$70,605

(35,480)

(35,480)

Samson could have adopted the practice of classifying the dividends received as investing cash flows, so long as that classification was followed consistently from year to year. (e) If Samson Inc.’s investments were accounted using the fair value through net income model, the amounts reported on the statement of financial position would remain the same, but their captions for description would change accordingly. All of the investment income, including the dividends received would have been included in net income. The changes in fair value would also have been included in net income, instead of being reported in Other Comprehensive Income. There would be no Accumulated Other Comprehensive Income on the statement of financial position. As for part (d) of the question, the cash flow statement would not change in amounts reported, but the captions and descriptions would change to FV-NI, instead of FV-OCI. (f)

If Samson Inc. were to follow ASPE, it would be not be allowed to follow the FV-OCI model.

Solutions Manual

22-116

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-11 (a) Davis Inc. should be reporting in the statement of cash flows the change in cash and cash equivalents. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value. The balances of cash equivalents for Davis Inc. at the fiscal year ends follow. March 31 2014 2013 Cash $ 5,200 $4,400 Investments – 30 day T-Bills 20,000 6,200 Total cash and cash equivalents $25,200 $10,600 Davis Inc. will be explaining the increase in cash and cash equivalents of $14,600 ($25,200 – $10,600)

Solutions Manual

22-117

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-11 (Continued) (b) Davis Inc. Statement of Cash Flows (Partial – Indirect Method) For the Year Ended March 31, 2014 Cash flows from operating activities Net income $72,650 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $7,500 Amortization of patents 1,500 Amortization of bond discount 750 Gain on retirement of bonds (16,600) Unrealized gain on FV-NI investments (3,000) Equity in earnings of Jessa Ltd. (12,500) Dividends received from Jessa Ltd. 2,000 Increase in accounts receivable (2,800) Increase in inventory (6,200) Decrease in prepaid expenses 150 Increase in prepaid rent (4,000) Decrease in accounts payable (1,400) Decrease in salaries and wages payable (800) Decrease in income tax payable (16,500) Increase in interest payable 1,500 Increase in accrued pension liability 1,600 Increase in deferred tax liability 10,300 (38,500) $ 34,150 Net cash provided by operating activities

Solutions Manual

22-118

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-11 (Continued) (c) 1. Cash payments to and on behalf of employees Salaries and wages expense Less: increase in pension liability Add: decrease in salaries and wages payable Cash paid to and on behalf of employees

$ 64,500 (1,600) 800 $ 63,700

2. Cash received from customers Sales revenue Less: increase in accounts receivable Cash received from customers

$450,000 (2,800) $447,200

3. Income taxes paid Income tax expense Add: decrease in income tax payable Less: increase in deferred tax liability Income taxes paid

$ 30,200 16,500 (10,300) $ 36,400

4. Cash payments to suppliers for goods and services Cost of goods sold $260,000 Administrative expenses 21,000 Rent expense 18,000 Add: increase in inventory 6,200 Less: decrease in prepaid expenses (150) Add: increase in prepaid rent 4,000 Add: decrease in accounts payable 1,400 Payments to suppliers for goods and services $310,450 5. Interest paid Bond Interest expense Less: increase in interest payable Less: bond discount amortization Interest paid

Solutions Manual

$ 6,750 (1,500) (750) $ 4,500

22-119

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-11 (Continued) (d) The sum of the cash flows arrived at in part (c) using the direct method has one item omitted to arrive at net cash provided from operating activities. This omission is for the dividends received from Davis’ investee Jessa Ltd. in the amount of $2,000. Cash received from customers Payments to suppliers for goods and services Cash paid to and on behalf of employees Interest paid Income taxes paid Cash received from dividends Cash provided from operating activities

Solutions Manual

22-120

$447,200 (310,450) (63,700) (4,500) (36,400) 32,150 2,000 $ 34,150

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-12 (a) SORKIN CORPORATION Statement of Financial Position Accounts Comparative December 31, 2014 and 2013 ($ in millions) 2014 Cash (from statement of cash flows) $87

2013 $ 21

FV-NI investment (2) Accounts receivable ($194 – $4)

30 190

– 194

Inventory ($200 + $5)

205

200

10

12

Long-term inv. in shares of Stokes Inc. (1)

130

125

Land ($150 + $46 note 1 of statement of cash flows) Buildings and equipment (3) Accumulated depreciation (4) Patents Accumulated amortization Goodwill ($60 – $20)

196 412 (97) 60 (30) 40

150 400 (120) 60 (28) 60

Prepaid expenses ($12 – $2)

Total assets Accounts payable ($65 – $15)

$1,233

$1,074

$50

$65

Salaries and wages payable ($11 – $5)

6

11

Bond interest payable ($4 + $4)

8

4

Income tax payable ($14 – $2)

12

14

Deferred tax liability ($8 + $3)

11

8

82 193

– 250

Lease obligation Bonds payable ($250 – $60 + $3) Solutions Manual

22-121

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

Note payable Preferred shares Common shares (5) Contributed surplus (6) Retained earnings (7) Total liabilities and equity

Solutions Manual

22-122

23 75 513

– – 495

3 257 $1,233

– 227 $1,074

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-12 (Continued) 1.

Opening balance L. Term Invest. In Stokes Investment income – from L. Term Equity Inv. Dividends received from Stokes Balance December 31, 2014

2. Opening balance FV-NI investment Purchased for cash Unrealized gain for 2014 Balance December 31, 2014

$125 11 (6) $130 $25 5 $ 30

3. Opening balance Buildings and equipment Equipment acquired with finance lease Equipment cost lost in flood Balance December 31, 2014

$400 82 (70) $ 412

4. Opening balance Accumulated depreciation Acc. depr. of equipment lost in flood (below) Depreciation expense on income statement Balance December 31, 2014

($120) 42 (19) ($97)

Equipment cost lost in flood Loss recorded Proceeds obtained from damaged equipment Acc. depreciation of equipment lost in flood

$70 (18) (10) $42

5. Opening balance Common shares Stock dividend (4 M shares X $7.50 per share) Price paid for shares repurchased Balance December 31, 2014

$495 30 (12) $ 513

Solutions Manual

22-123

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-12(Continued) 6. Opening balance Contributed surplus Price paid for shares repurchased Weighted average original cost of shares Balance December 31, 2014

– $(9) 12 $3

7. Opening balance Retained earnings Net income Dividends paid (none payable) Stock dividend – see item 5 above Balance December 31, 2014

$227 67 (7) (30) $257

(b) SORKIN CORPORATION Statement of Cash Flows (Direct Method) – Operating Activities For the Year Ended December 31, 2014 Cash flows from operating activities Cash receipts from customers (1) Cash receipts for dividends (2) Payments to suppliers for goods and services (3) Payments to and on behalf of employees (4) Payments for interest (5) Income taxes paid (6) Cash provided by operating activities

$414 6 (198) (70) (21) (26) $105

1. Sales Decrease in accounts receivable

$410 4

$414

$11 (11) 6

$6

2. Investment income – from LT Equity Inv. Income from equity investment Receipt of dividend from equity investment

Solutions Manual

22-124

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-12 (Continued) (b) (Continued)

3. Cost of goods sold Increase in inventory Decrease in accounts payable Administrative expenses Decrease in prepaid expenses 4. Salaries and wages expense Decrease in salaries and wages payable 5. Bond interest expense Increase in bond interest payable Amortization of bond discount 6. Income tax expense Increase in deferred tax liability Decrease in income tax payable

$158 5 15 22 (2)

$198

$65 5

$ 70

$28 (4) (3)

$ 21

$27 (3) 2

$ 26

(c) If the seller of the land does not at the same time become the creditor (by taking back a note for example) in the sale of the land, then a third party, in this case the mortgage company, would have become the creditor. A separate and additional transaction would have been recorded for the borrowing of $23 million in cash from the mortgage company. That financing transaction would be reported on the statement of cash flows directly as an inflow of cash from financing activities. Entering into a financing arrangement at the same time as buying property is often confused as being combined. This is due to the fact that the cash transactions involved flow through the trust account of the lawyer handling the conveyance of the property. In the case of Sorkin Corporation, only two entities were involved. Consequently handling the transaction with a note disclosure for the non-cash portion of the transaction is appropriate.

Solutions Manual

22-125

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-13 (a)

Seneca Corporation Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014

Cash flows from operating activities Profit (1) $16,700 Adjustments to reconcile net income to net   cash provided by operating activities: Loss on sale of equipment (2) $ 2,650 Gain from flood damage (1,000) Depreciation expense (3)   3,950 Patent amortization   1,250 Gain on sale of investment   (3,300) Increase in accounts receivable (net)   (1,950) Increase in inventory   (1,500) Increase in accounts payable   1,100 Interest paid included in earnings 2,200 Dividends paid (6,000) (2,600 ) Net cash flow provided by operating activities     14,100 Cash flows from investing activities Proceeds on sale of FV-NI investments Proceeds on sale of equipment Purchase of equipment Proceeds from flood damage to building Net cash provided by investing activities Cash flows from financing activities Payment of interest Payment of short-term note payable Net cash used by financing activities )

  5,800   2,600 (17,000)  23,000

(2,200)   (600)

  (2,800  25,700  13,000 $38,700

Increase in cash Cash, January 1, 2014 Cash, December 31, 2014 Solutions Manual

 14,400

22-126

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes 5,600

Solutions Manual

22-127

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-13 (Continued) Non-cash investing and financing activities: Retired note payable by issuing common shares Purchased equipment by issuing note payable

$10,000  15,500 $25,500

Supporting Computations: 1.

Ending retained earnings Beginning retained earnings

$21,700   (5,000

) Profit

$16,700

2. Cost of equipment sold Accumulated depreciation (50% X $10,500) ) Carrying amount of equipment sold Proceeds from sale of equipment ) Loss on sale of equipment

$10,500   (5,250  5,250   (2,600 $ 2,650

3. Accumulated depreciation on equipment sold Decrease in accumulated depreciation ) Depreciation expense (b) Buildings Accumulated depreciation Equipment Accumulated depreciation Depreciation expense Loss on sale of equipment Gain on flood damage Proceeds on sale of equipment Purchase of equipment Proceeds on disposal of building Solutions Manual

2014

$40,500 (2,000) $38,500

2013 $27,700 (5,700) 18,500 (3,300) $37,200

$3,950 2,650 (1,000) 2,600 (17,000) 23,000 22-128

Chapter 22

$5,250 (1,300 $3,950 chang e

$1,300

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Non-cash purchase of equip.

Intermediate Accounting, Tenth Canadian

14,200 (15,500) $(1,300)

PROBLEM 22-13 (Continued) (c)

At first glance, a financial statement reader of the statement of cash flows might come to the quick conclusion that equal amounts of cash flows were generated from operating and investing activities; this is really not the case. The cash generated from operations ($14,100) is almost exactly the same amount as the cash generated from investing activities ($14,400). This makes it appear as if Seneca is not reinvesting into the business to replace ageing capital assets. The reconciliation on the other hand takes into account the non-cash investing and financing transaction of the equipment of $15,500. Although some of the replacements of assets were necessitated from the flood damages, Seneca has demonstrated the ability to obtain the financing to acquire the necessary capital assets.

(d) A portion of the profit came from the gain recorded on the destruction of the building from a flood. The proceeds from the insurance claim totalling $23,000 were classified as investing activities, and gain had to be deducted from income to arrive at cash flows from operating activities. Similarly the gain on the sale of the investments must be deducted from income as the proceeds from the sale of investments are also classified as investing activities. These two items help explain why the cash flow from operating activities were lower than profit. Cash flows from investing activities provided another large cash increase for the year, as assets sold or destroyed were not all replaced. The only significant outflow of cash for investments was related to purchases of equipment. Some refinancing from debt to equity took place as well, as there was non-cash financing of further acquisitions of Solutions Manual

22-129

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

equipment. Outstanding dividends from the previous year were paid.

Solutions Manual

22-130

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-13 (Continued) (e) Under IFRS, interest paid and received and dividends paid and received can be recognized as operating flows. Alternatively, interest paid can be recognized as a financing outflow while interest and dividends received can be recognized as investing inflows. A choice is permitted for dividends paid: a financing outflow as a return to equity holders, or an operating outflow as a measure of the ability of operations to cover returns to shareholders. However management views these specific flows, once the classification choice is made, it is applied consistently from period to period. (f)

(1)

For a severely financially troubled firm: Operating: Investing: Financing:

Probably a small cash inflow or a cash outflow. Probably a cash inflow as assets are sold to provide needed cash. Probably a cash inflow from debt financing (borrowing funds) as a source of cash at high interest cost.

(2) For a recently formed firm which is experiencing rapid growth: Operating: Probably a cash inflow. Investing: Probably a large cash outflow as the firm expands. Financing: Probably a large cash inflow to finance expansion. For Seneca, excluding the unusual transaction of the flood, the company is likely type (2), a company experiencing growth.

Solutions Manual

22-131

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

PROBLEM 22-13 (Continued) (g) At first glance, an investor might come to the quick conclusion that Seneca’s net cash flow provided by operating activities ($14,100) is less than Seneca’s accrual basis profit ($16,700), and that the net cash flow provided by operating activities does not support the amount of accrual basis profit that the company has reported. Seneca’s reported profit, which is affected by estimates and management’s choice of accounting policies, may be judged to be of lower quality and perhaps less reliable. However upon analyzing Seneca’s net cash flow provided by operating activities, the investor may note that a significant return to shareholders (dividends paid of $6,000) is classified as an operating activity and that the amount was not deducted in the company’s calculation of accrual basis profit. The investor may conclude that Seneca’s quality of earnings may be higher, with a lower margin of potential misstatement.

Solutions Manual

22-132

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

CASES Note: See the Case Primer on the Student website, as well as the Summary of the Case Primer in the front of the text. Note that the first few chapters in volume 1 lay the foundation for financial reporting decision making. CA 22-1 Papadopoulos Ltd. Overview -

The bank is the main user of the financial statements and will use them to assist in determining whether a loan will be granted.

-

ASPE financial statements will enhance credibility and reliability.

-

The financial statements prepared will be different from the statements prepared in the past (tax basis).

-

Further, the statement prepared by Tonya does not conform with ASPE and must therefore be converted.

Recommendations and Analysis Before any issues are dealt with, the statement must be redrafted as follows: Papadopoulos Ltd. Statement of Cash Flows (for the year-ended December 31, 2014) Cash from operations: Sales Purchases of inventory Operating expenses (net of depreciation) Interest income Interest on debt Cash used in operating activities

Solutions Manual

$350,00 0 (250,000) (90,000) 10,000 (30,000) $(10,000)

22-133

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

CA 22-1 (Continued) Cash from investing: Term deposit cashed in Fixed asset purchases Investment purchase Truck purchase Cash used in investing activities

$100,000 (100,000) (55,000) (50,000) (105,000)

Cash from financing: Shareholder loan Truck financing Cash from financing activities Net cash inflows

$150,000 50,000 200,000 $85,000

-

This statement shows that operations are not generating cash; rather, cash is required to maintain operations.

-

This will be looked upon in a negative light by the bank, since internally generated cash from operations is what the company should be using to repay any loan granted.

-

However, since it is only the second year of operations, the company is profitable, and the cash required to run operations is not that great, the bank may be somewhat flexible.

-

That the company is liquidating what appear to be non-essential assets (term deposit) and using the money to buy productive assets to be used to generate income will be seen in a positive light.

-

That excess cash is being invested will also be seen in a positive light as good management (i.e., will maximize return on excess cash by investing).

-

The excess cash is only present, however, due to a shareholder loan.

-

This is better than outside borrowings since the shareholders (all family) may be more flexible if the company cannot make interest and principal repayments on time.

In conclusion, when the financial statements are redrafted, PL will be seen in an unfavourable light by the bank primarily because it is a new company and the Solutions Manual

22-134

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

cash flow from operations is negative. The only reason there is excess cash is due to a shareholder loan.

Solutions Manual

22-135

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

IC 22-1 Earthcom Overview - Public company and therefore IFRS is a constraint -

Shares are declining in value due to the loss of one of the company’s major assets, therefore the pressure to make things look more positive (potential for bias).

-

Loss of CFO— auditors will have to be careful.

-

High risk for auditors who will have to ensure assets/income are not overstated.

-

As controller (since CFO has left) it is better to be safe and provide transparency during this time of crisis. Conservatism would be the safest route especially since the share price has already plummeted.

Analysis and recommendations Issue: Impairment of telecommunications lines Leave as is Recognize impairment - Company is in the process of - Severance of line represents an event doing a substantial amount of that reduces the potential future work to recover the services. benefits of the asset. - Once this is done – the asset would retain its value. - No reason to think that they will not be able to find the problem. - Note disclosure would suffice.

- Cannot provide services to customers and therefore not able to generate future benefits. - Customers have currently lost service. - Company uncertain as to how long (if at all) it will take to restore service as do not have backup plan. - They stand to lose customers over this – many customers threatening to sue. - The company is already restoring other lines using better and newer technology and so these older lines will likely be obsolete and receive less and less use as time goes on.

Solutions Manual

22-136

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

IC 22-1 (Continued) Recommendations: It is too early to tell if the asset is indeed impaired. Full note disclosure should suffice at this point. Care should be taken at the next quarter with this valuation since by then the company will have a better idea as to the feasibility of restoring service. Issue: How to treat the amounts spent on lawyers and consultants regarding severed line. Capitalize costs

Expense

- Without these expenditures, significant goodwill will be lost.

- Expenditures do not add any future value.

- Many customers may also leave the company— this is an opportunity to show how the company deals with a crisis.

- Really just maintaining reputation. - Internally generated goodwill may not be capitalized.

Recommendations: More conservative to expense as these costs are really to maintain the status quo and do damage control. Issue: How to account for expenditures to track down the problem Capitalize costs - May argue that the work being done is creating an asset with future benefits – this will allow them to deal with any problems in a much more expedient way in the future. - As long as this has future benefit (it does – as noted above) – it is accounted for as an asset.

Solutions Manual

Expense - Really being spent just to restore service and put its assets back into use. - Is not an asset, i.e., it will not necessarily make the service better or more enhanced. - With high tech equipment, maintenance of the technology is an ongoing cost of doing business – there is always a risk that the technology will fail or become outdated. The company must keep on top of this on an annual basis.

22-137

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

IC 22-1 (Continued) Recommendations: certain costs may add value (mapping) and may be capitalized. Those costs that are being spent just to restore capacity to prior level are maintenance and must be expensed. Issue: How to present the funds spent on upgrading old telecommunications lines Capitalize/treat as investing activity on the statement of cash flows

Expense/treat as operating activity on the statement of cash flows

- Must be able to argue that these expenditures will provide future benefit.

- All significant assets such as these degrade over time and need to be maintained.

- This sounds like it is a major upgrade and given fast-paced technology it could be argued that this is an asset.

- This is merely part of the ordinary ongoing activities of the company to maintain the service potential of its assets.

- May have to treat as separate component for depreciation purposes if the amount is significant the expected life and usage differs from the lines.

- This will show as an operating activity on the cash flow statement as this is a normal ongoing cost of doing business that will likely recur annually or frequently due to the high tech nature of the assets.

- This will show as an investing activity on the cash flow statement as the company is investing in its future.

Solutions Manual

22-138

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

IC 22-1 (Continued) Recommendation: May be able to argue that these are capitalizable due to changes in technology and therefore capitalization and presentation as investing activity is acceptable. Issue: Lawsuit Accrue

Do not

- Company will want to settle quickly to minimize uncertainty in marketplace especially since the company at present does not have a leader.

- Too early to be able to assess probability and measurement.

- May want to accrue a reasonable amount for settlement so that it can hire a new CFO and move forward to deal with the crisis.

Recommendation: Too early to tell on this one. Do not recognize. There is no lawsuit. The news will likely already be in the marketplace via newspapers, etc. The company can best deal with this by putting a new CFO in place (not really a financial reporting issue).

Solutions Manual

22-139

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

TIME AND PURPOSE OF WRITING ASSIGNMENTS WA 22-1 (Time 30–35 minutes) Purpose—to help the student identify and indicate whether a transaction creates a cash inflow or a cash outflow. The student must also discuss the proper reporting of the transaction under IFRS.

WA 22-2 (Time 30–35 minutes) Purpose—to help the student identify the appropriate treatment of some complex transactions for the statement of cash flows under IFRS. The student is required to indicate whether a transaction belongs in the investing, financing, or operating section of the statement.

WA 22-3 (Time 15–20 minutes) Purpose—to provide the student the opportunity to provide advice to the president on the effects of transactions, desperately arrived at as the means to generate cash flows from operations in order to secure a loan. Ethical issues must be considered by the student in arriving at the advice to the president.

WA 22-4 (Time 30–40 minutes) Purpose—to identify and explain reasons and purposes for preparing a statement of cash flows and to identify the categories of activities reported in the statement of cash flows. To identify and describe the two methods of reporting cash flows from operations, and to describe the presentation of non-cash transactions. The student is required to express a preference on which format he or she believes to be preferable, and to comment on the cash flow statement’s use from the perspective of an investor.

WA 22-5 (Time 30–40 minutes) Purpose—to provide the student with the opportunity to become familiar with the current international accounting trends and issues. The student is required to research IASB project and to identify discussions relevant to statements of cash flows.

WA 22-6 (Time 15–20 minutes) Purpose—to provide the student with an opportunity to understand the differences between ASPE and IFRS and the conceptual reasons for any differences. Solutions Manual

22-140

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

SOLUTIONS TO WRITING ASSIGNMENTS WA 22-1 1.

2.

3.

4.

5.

6.

(a)

The earnings are treated as a source of cash and should be reported as part of the net cash flow from operating activities in the statement of cash flows.

(b)

There should be $800,000 of income shown in operating activities as the first item on the statement of cash flows.

(a)

Neither.

(b)

Because depreciation is an expense it was deducted in the computation of net income. Accordingly, the $315,000 must be added back to income in the operating section. This is because it was deducted in determining earnings, but it was not a use of cash.

(a)

Neither.

(b)

An adjustment to income is only necessary if the net receivable amount increases or decreases. Because the net receivable amount is the same before and after the write-off, an adjustment to income would not be made. Although bad debt expense is not usually treated as a separate item to be added back to income from operations, it is accounted for by analyzing the accounts receivable at the net amount and then making the necessary adjustment to income based on the change in the net amount of receivables.

(a)

The $9,000 gain realized on the sale of the machine is a gain to be reported on the income statement. The gain itself does not involve any cash flows, but the proceeds from the sale do involve cash inflows.

(b)

This $9,000 gain must be deducted from net income to arrive at net cash provided by operations. The proceeds of $54,000 ($75,000 – $30,000 + $9,000) are shown as a cash inflow from investing activities.

(a)

The change in fair value is a non-cash event so it is neither a source nor use of cash.

(b)

This is no adjustment required to the net income in the statement of cash flows since this unrealized gain was allocated to OCI and not net earnings.

(a)

Neither. The $45,000 loss in value is not a cash transaction.

(b)

The loss in fair value for investment properties would have been deducted in the computation of net income. Accordingly, the $45,000 must be added back to income in the operating section. This is because it was deducted in determining earnings, but it was not a use of cash. Solutions Manual

22-141

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-1 (Continued) 7.

8.

9.

(a)

$75,000 use of cash should be reported as a cash outflow from investing activities.

(b)

The $200,000 issuance of common shares and the $425,000 issuance of the mortgage note, neither of which affects cash, should be reported as non-cash financing and investing activities. Note disclosure is required to explain this transaction detailing the asset purchased and the nature and total of consideration paid.

(a)

Neither.

(b)

The conversion is a significant non-cash financing activity and should be reported in a separate schedule or note.

(a)

This redemption is a use of cash in the amount of the redemption price of 99.5 or $99,500.

(b)

The redemption will be reported under the operating activities section of the statement as an adjustment to income for the loss experienced on the conversion of $1,500 ($100,000 less balance of discount $2,000 compared to the redemption price of $99,500). The loss will be added back to income as that portion of the transaction does not involve cash. In the financing activities section of the statement, the outflow of $99,500 will appear.

10. (a) (b) 11. (a) (b)

The proceeds from issuing bonds are a source of cash. The proceeds of $505,000 should be reported as a cash inflow from financing activities. Neither. $49,000 of accrued expense will be added back to income because it was deducted in determining earnings, but it was not a use of cash.

Solutions Manual

22-142

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-2 (a)

Income earned as interest and dividends from these investments that are purchased for trading purposes and have been classified at fair value through net income is included in income for the year. Under IFRS, the interest received and dividends received should be disclosed separately on the statement of cash flow and shown as an operating activity as this income relates to investments held for trading purposes. If the indirect approach is used, then the interest income and dividend income will be deducted from net earnings and the actual amount of interest and dividends received will be shown separately. In addition, assuming the indirect method is used, gains on disposals will have to be deducted from income, just as losses will need to be added back. Any gains or losses from disposals of these investments would be left out of the cash flow statement, if the direct method were adopted. Amounts accrued for unrealized gains and losses will require adjustment to income as they do not involve cash. Any proceeds from sale or cash spent on these investments would be reported as cash flows in the operating activities section of the cash flow statement as these investments were acquired for trading purposes.

(b)

Income earned from dividends on equity investments classified as fair value through OCI would be included in net income for the year. However, the amount of dividends received must be separately disclosed and can be shown as either an operating or investing activity. Therefore, if the indirect method is used, dividend income will be deducted from net income in the operating activities and the dividends received can be shown as either operating or investing. Any proceeds from the sale or purchase of these investments are treated as investing flows. Amounts accrued for unrealized gains and losses or gains or losses on disposal will not require adjustment to income as they are not included in income on the income statement; they are taken to OCI and never recycled to net income.

(c)

An investment in bonds reported at amortized cost will have the interest earned reported on the income statement using the effective interest method. This amount will be deducted from net earnings under operating activities if the indirect method is used. The actual amount of the interest received can then be either reported as an investing or an operating activity. Any cash used to buy these bonds will be reported as an investing activity.

Solutions Manual

22-143

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-2 (Continued) (d)

Development costs incurred and paid would be reported as investing activities outflows on the cash flow statement. The obligation for the mine’s retirement increases both the mine’s carrying amount and the asset retirement obligation. This amount is a non-cash investing and financing transaction and would be disclosed in the notes. The interest expense for the year (that increased the liability) would have to be added back to net income in the operating activities section (under the indirect method) as it was a non-cash expense.

(e)

Stock options granted as compensatory rewards to top executives would require a charge on the income statement and a corresponding increase in equity, although no cash was given up or received. Since the amount appears on the income statement as an expense, the expense will be added back to income as an adjustment if the indirect format of the cash flow statement is used to report cash flows from operations. Details of the transaction would nonetheless be reported in the notes to the financial statements.

(f)

The total compensation expense would have been calculated on the grant date, based on the fair value, and recognized during the service period. At exercise date, there will be a cash inflow amounting to the option price per share multiplied by the number of shares issued. This would be reported as cash inflows in financing activities. Additional disclosures regarding the stock options, such as values of options exercised, would be made.

Solutions Manual

22-144

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-3 (a)

Selling current assets, such as receivables to factors and selling raw material inventories, will generate cash flows for the company although for amounts less than their carrying values. The sale and leaseback of equipment will not achieve the goal of increasing cash flow from operations, required by the bank. Rather, this transaction will lead to the reductions in future operating cash flows from the future payments of rents. Cash obtained from selling off equipment will be reported as a cash inflow from investing activities. Any gains generated from the sale will be deferred and not help profitability immediately.

(b)

The transactions that are suggested by Laraine do not cure the systemic cash problems for the organization. In short, it may be a bad business practice to liquidate assets, thereby incurring expenses and losses, in order to “window dress” the cash flow statement. The ethical implications are that Durocher creates a short-term cash flow at the longer-term expense of the company’s operations and financial position. Laraine’s idea creates the illusion that the company is successfully generating positive cash flows.

(c)

Laraine Durocher should be told that if she executes her plan the company may not survive. While the factoring of receivables and the liquidation of inventory will indeed generate cash, the actual amount of cash the company receives will be less than the carrying amount of these assets. The sale and leaseback will also generate cash which may be more or less than the related property’s carrying amount, depending on its fair value less costs to sell. In addition, the company would still have the future expenditure of replenishing its raw materials inventories at a cost higher than the sales price, plus the additional expense of rent from the lease of the equipment. As the company’s (ethical) accountant, it is your responsibility to work with the company’s chief financial officer to devise a coherent strategy for improving the company’s cash flow problems. One strategy may be to downsize the organization by selling excess property, plant, and equipment to repay long-term debt. In addition, Durocher Guitar may be a good candidate for a partial reorganization.

Solutions Manual

22-145

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-4 (a)

The primary purpose of the Statement of Cash Flows is to provide information concerning the cash receipts (cash inflows) and cash payments (cash outflows) of a company during the period. The information contained in the statement, together with related disclosures in other financial statements, may help investors and creditors: 1. assess the company’s ability to generate future net cash inflows. 2. assess the company’s ability to meet its obligations; e.g., pay dividends and meet needs for external financing. 3. analyze the differences between net income and the associated cash receipts and payments.

(b)

Cash is defined as cash on hand and demand deposits. Cash equivalents includes highly liquid investments with maturity dates of 3 months or less from their date of purchase, and that have insignificant risk of change in value. These definitions are the same for IFRS and ASPE. Examples of these types of investments would be treasury bills and commercial paper and money market funds. ASPE does not allow any equity investment to be included in cash equivalents. IFRS allows one type and that is a mandatory redeemable preferred share that will be redeemed within 3 months of acquisition date. Bank overdrafts may only be included in cash and cash equivalents if they are an integral part of the company’s cash management policies and the overdraft fluctuates between negative and positive balances throughout the year. If the bank overdraft has been in an overdraft position for the entire year, it will not be allowed to be included in cash and cash equivalents. This treatment is also the same under IFRS and ASPE.

(c)

The statement of cash flows classifies cash flows as those resulting from operating activities, investing activities, and financing activities. Cash inflows from operating activities include receipts from the sale of goods and services, and interest and dividends that appear on the income statement. Under IFRS, the organization may choose to report interest and dividends received as either operating or investing activities. Also included are all other receipts (for example from rents and royalties) that do not arise from transactions defined as financing and investing activities. Cash outflows from operating activities include payments to buy goods for manufacture, resale payments to or on behalf of employees for services, tax payments, and all other payments that do not arise from transactions defined as financing and investing activities. Cash inflows and outflows related to the sale and purchases of loans and equity securities that are purchased for trading purposes are also included in operating activities. Payments to creditors for interest can be included as a financing or operating activity

Solutions Manual

22-146

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-4 (Continued) under IFRS. Under ASPE, the interest paid will be an operating activity if the debt is classified as a liability and a financing activity if the debt is classified as equity. Under IFRS, dividends paid may be classified as an operating activity or a financing activity. Under ASPE dividends paid are financing activities if charged to retained earnings (operating if a “dividend expense”). Cash inflows from investing activities include receipts from collections or sales of debt instruments of other companies that are reported at amortized cost, and receipts from the sales of various property, plant, and equipment. Cash outflows for investing activities include payments for shares of other companies, purchases of productive property, plant and equipment, and debt instruments of other companies. Sales and purchases of debt instruments or shares of other companies not purchased for trading purposes are included in investing activities. Also under IFRS, investing activities could include dividends and interest received on these investments, if this choice is made. Cash inflows from financing activities include proceeds from the company issuing its own shares or its own debt. Cash outflows for financing activities include payments to shareholders for dividends (unless these dividends were reported as expenses on the income statement, in which case they would be reported in operating activities) or payments to debt holders for retirement of its own shares and bonds. Interest paid may also be classified as a financing activity under IFRS. Additionally, under IFRS, the company may report dividends paid as an operating activity. Under ASPE, only if the debt is classified as equity, can the interest paid be reported under financing activities. Cash flow activities directly relate to the statement of financial position in that the changes in the SFP accounts ultimately translate into the change in cash over the business cycle of an entity. (d)

Cash flows from operations may be presented using the direct method or the indirect method. Under the direct method, the major classes of operating cash receipts and cash payments are shown separately. The indirect method involves adjusting net income to net cash flow from operating activities by removing the effects of deferrals of past cash receipts and payments, accruals of future cash receipts and payments, and non-cash items from net income. Both are permitted under IFRS and ASPE, although both standards strongly encourage the use of the direct method. In addition, new standards being considered under IFRS would allow only the direct method to be used.

Solutions Manual

22-147

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-4 (Continued) The information obtained from the indirect format can be easily linked back to the statement of financial position and the income statement and therefore is useful from this standpoint. On the other hand, the direct format allows for better information on gross cash flows from customers, and to suppliers and employees, which enables better forecasting of future cash flows. (e)

All significant non-cash investing and financing transactions are not reported on the statement but are required to be disclosed elsewhere on the financial statements. Examples of common non-cash transactions are the conversion of debt to equity and the acquiring of assets by assuming directly related liabilities or issuing equity. For transactions that are part cash and part non-cash, only the cash portion should be reported in the Statement of Cash Flows.

(f)

From the perspective of an investor, while it is true that it is difficult to assess the impact of estimates and judgement used in the preparation of the income statement, using the cash flow from operations of the statement of cash flow alone is not recommended when making investment decisions. A great deal of insight into the nature of the transactions reported on all financial statements can be derived from reading the notes to the financial statements. As well, financial statements must be viewed together in order to properly assess performance, financial position, and ability to generate income and cash into the future to best ensure a return on investment to the shareholder. While cash flow from operating activities is a strong indicator and a very good tool, it should not be used in isolation. Also note that although net income is arrived at by using estimates, it is important to consider the trade-off between relevance and reliability of financial information. If net income were to be based solely on historic costs that can be determined reliably, the relevance of this information to investors would be poor in helping to determine the true value of the company.

Solutions Manual

22-148

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-4 (Continued) Readers should also be aware that accounting policies can affect the cash flows from operations. Consider a company that defers much “capital-type” expenditure versus another company that expenses many similar ones. The first company ends up reporting the cash outflow as an investing flow whereas the other reports lower operating cash flows. This reinforces the fact that cash flow from operations can be influenced by accounting policy choice. Another example is the treatment of leases. Operating lease payments are reflected as an operating outflow, but payments on capital leases are shown partially as an operating outflow (the interest portion) and partially as a financing outflow (the principal portion of the payment). Securitization of receivables is another example. When receivables are securitized, the cash inflows are reported as operating activities and will result in an increase in operating cash flows. This is, of course, not sustainable cash flow since the sale of receivables has only resulted from hastening the collection of the receivables and the change in receivables cannot recur annually.

Solutions Manual

22-149

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-5 The Discussion Paper proposes that the statement of financial position, statement of comprehensive income and statement of cash flows should have similar categories as outlined below. Statement of Financial Position Business Operating assets and liabilities Investing assets and liabilities Financing Financing assets Financing liabilities

Statement of Comprehensive Income Business Operating income and expenses Investment income and expenses Financing Financing asset income Financing liability expenses

Income Taxes

Income Taxes on continuing operations (business & financing) Discontinued operations, net of tax Other Comprehensive Income, net of tax

Discontinued operations Equity

Statement of Cash Flows Business Operating cash flows Investment cash flows Financing Financing asset cash flows Financing liability cash flows Income Taxes Discontinued operations Equity

This consistency across all the statements will assist users in providing a clearer picture of the organization in the financial statements, and a more cohesive picture of the organization’s activities.

Solutions Manual

22-150

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-5 (Continued) The Statement of Cash Flows The following is a list of the changes and format proposed for the statement of cash flows:  The direct method would be used (no longer would there be a choice to use the indirect approach). The reasons for deciding that this method was the best were: to improve user understandability; to provide better predictive value; to increase transparency; and to enable users to see trends that were not clear under the indirect method.  The classification would still be operating, investing and financing, but would be based on the classification that was used for the related assets and liabilities on the statement of financial position.  The statement of cash flow would reconcile the beginning and ending balance of cash (and not cash and cash equivalents).  Cash receipts and payments are to be disaggregated within each section to provide information for users. Cash flows are to be disaggregated based on the purchase or sale of assets based on their nature, and the issuance or settlement of liabilities, based on their nature.  In a later Staff paper, dated February 12, 2010, the Board decided that the cash flow line items did not have to line up exactly with the line items on the statement of comprehensive income. Reconciliation of the Statement of Cash Flows to the Statement of Comprehensive Income An entity would present a schedule that reconciles the line items on the statement of cash flows to the line items on the statement of comprehensive income. That schedule would include the line-item captions for each of those statements and disaggregate the differences in amounts into components that have different predictive values, as explained below. As illustrated on pages 138 and 139 of the Discussion Paper, the resulting schedule would be a multi-column reconciliation. This schedule is to disaggregate the comprehensive income into the following components:  Cash received or paid ( excluding cash transactions with owners);  Accruals and systematic allocations such as depreciation;  Recurring changes in fair value or other recurring valuation changes;  Other - which might include non-recurring valuation adjustments. This schedule would be provided in the notes. Solutions Manual

22-151

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

WA 22-6 There are only some minor differences between IFRS and ASPE with respect to the statement of cash flows. Primarily, ASPE has been written using historical Canadian practice, and has not adopted some of the differences under IFRS. The following highlights the major differences:  



 

Cash equivalents exclude all equity investments under ASPE. In contrast, IFRS allows preferred shares that will be redeemed within three months from the time of purchase to be included in cash equivalents. Interest and dividends received are included in operating cash flows under ASPE. IFRS allows a choice for interest and dividends received to be either operating or investing. Also, IFRS requires that these amounts be disclosed separately. Under ASPE, interest and dividends paid are operating cash flows only if recognized in net income; otherwise they are included in financing cash flows as a result of being charged to retained earnings. If these amounts are included in financing, then separate line disclosure is required. Under IFRS, companies have a choice to report interest and dividends paid as either operating or financing cash flows and these amounts must be shown as separate line items on the statement. IFRS requires that income tax paid be disclosed separately. ASPE does not have this requirement but requires supplemental disclosure. Under both ASPE and IFRS, the amount of restricted cash must be disclosed. IFRS requires additional disclosure explaining the restrictions. ASPE does not require this, as the goal is to reduce required disclosure in private enterprises’ financial statements.

Solutions Manual

22-152

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RESEARCH AND FINANCIAL ANALYSIS RA22-1

Shopper Drug Mart

(a) A comparison of the major categories of sources and uses of cash for 2011 and 2010 is provided below. (CDN$ in thousands) Net cash from operating activities Net cash used in investing activities Net cash used in financing activities Net increase in cash Cash beginning of the year Cash at end of year

2011 973,838 (349,172) (570,454)

2010 828,201 (424,675) (383,563)

54,212 64,354 118,566

19,963 44,391 $64,354

The cash flows from operations have been very steady over the past two years with minor fluctuations in amount. In 2010, the company had a positive cash flow and in 2011, this remained positive. The main reason for this is steady cash inflows from net earnings, and the adjustments related to non-cash charges for depreciation and amortization. Cash flows for investing activities were negative in both years. In 2011, in particular, the net cash outflow from investing activities was $349,172 thousand compared to $424,675 thousand in 2010. The main reason for this is due to the fact that SDM made fewer acquisitions and development of property and equipment. As for the financing activity outflow increase in 2011, it is almost entirely explained by the company’s repurchase of common shares for a total of $206,779 thousand. In 2011 and 2010, with strong positive operating cash flows that were able to cover investing and finance outflows, the company was able to increase net cash by $54,212 and $19,963 thousand.

Solutions Manual

22-153

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-1 (Continued) (b)

SDM uses the indirect method to report operating cash flows in the statement of cash flows. The indirect approach is useful in giving the user information about how the net earnings of the company translate into cash. The indirect method provides adjustments to net income and arrives at a single cash flow from operations line. It does provide a useful link between the statement of cash flows and the income statement and balance sheet. This format is the most commonly used format for public companies and has the advantage of being a familiar format to users. In contrast, the direct approach would provide more detailed information on the various sources of cash flows in operations, and provide more predictive value and more transparency to users.

(c)

Using the details of the changes in working capital accounts taken from Note 27 to the financial statement, the amounts can be calculated as below.

(CDN$ in thousands) Trade receivable Inventories Accounts payable and accrued liabilities

January 1, 2011 balances 432,089 DR 1,957,525 DR 990,244

CR

2011 Cash inflow (outflow) (36,242)

Dec. 31, 2011 Balances Calculated

Dec. 31, 2011 Balances Actual

468,331

DR

493,338

(84,242) 2,041,767

DR

2,042,302

119,891 1,110,135 CR

1,109,444

There are insignificant differences between the calculated amounts and the actual balances at December 31, 2011, except for accounts receivable, as follows:  The calculated balance of trade receivables is lower by $25,007, likely due to the change in the allowance for doubtful accounts.  The calculated balance of inventories is lower by $535;  The actual balance of accounts payable and accrued liabilities is lower by $691.

Solutions Manual

22-154

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Solutions Manual

Intermediate Accounting, Tenth Canadian

22-155

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-1 (Continued) (d)

The interest paid must be deducted and the finance costs must be added back to net income because the statement of cash flows must disclose the actual interest paid. As seen in SDM’s statement of cash flow, the interest paid has been classified as operating cash flows and the amount of finance expense is net of amounts capitalized based on SDP’s weighted average cost of borrowing (the capitalized amount is attributed to those items of PPE which meet the definition of a qualifying asset that takes a substantial period of time to get ready for its intended use).

(e)

Based only on the information provided in the financing section of the cash flow statement, it is not possible to be sure whether the debt-to-equity ratio increased or decreased in 2011 or 2010. This is because, although the increase or decrease in debt from cash transactions can be determined from this information, the net increase or decrease in equity involves other amounts such as net income. Also, because the statement of cash flows does not show non-cash financing transactions, this information is not sufficient on its own to determine whether the debt to equity ratio increased or decreased. In addition, although there was $206,779 thousand cash paid to repurchase the company’s own shares, this amount does not correspond exactly to the amount of the reduction in share capital that appears in the consolidated balance sheet.

(f)

SDM’s operating capability was expanding in 2011 in two ways: by acquiring businesses (minimal amount) and by purchasing or developing property and equipment and intangible assets. In 2010, the amount of capital expenditures on property, plant and equipment was higher but not by a significant amount and SDM would still be considered to be expanding its operational capability. These investments are likely to increase the company’s future operating cash flows as the company can produce higher revenues leading to higher income from operations. The Company acquired properties that will be utilized as stores in the future, further contributing to future cash inflows, offset somewhat by expected outflows for repayment of debt used to finance the expansion, as financing cash outflows.

Solutions Manual

22-156

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-1 (Continued) (g)

The Debt to Total Assets ratio is a solvency ratio that measures the percentage of total assets provided by creditors (2011 = (3,032,480/7,300,310 = 41.5%]. It provides a measurement of whether a company could add to its debt financing if needed. In addition Free Cash Flow can be used to assess SDM’s financial flexibility, based on cash provided by operating activities in comparison to capital expenditures and dividends [973,838 – (10,496 + 341,868 + 53,836) – 211,479]. Overall the free cash flow is quite significant at $356,159 thousand and the debt/total assets ratio seems quite reasonable. It is also relatively easy to assess SDM’s financial solvency and financial flexibility in general terms, as the financial performance and cash flows have been quite steady the past two years. In 2010 and 2011, the cash flows from operations were positive and in substantial amounts which means that it was able to cover the capital expenditures of the company. In addition to solvency, it appears that the company’s liquidity did not change significantly from 2010 to 2011. In 2010 the current ratio was 1.66 and in 2011 the ratio reduced to 1.52. The decline in the ratio is primarily due to a current portion of long-term debt in the amount of $249,971 thousand coming due in the next year. The current ratio remains strong and demonstrates that the company has flexibility to meet short term obligations as they come due in spite of large amounts of debt coming due in the next fiscal year. From an overall solvency perspective, the amount of total liabilities continue to be much lower than the total amount of shareholders’ equity.

Solutions Manual

22-157

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

RA22-2

Intermediate Accounting, Tenth Canadian

BOMBARDIER INC

(a) Bombardier Inc. manufactures and sells state-of-the-art trains and airplanes. As a result, they have a long manufacturing and cash cycle. As described in note 2:  Revenues from long-term contracts related to designing, engineering or manufacturing specifically designed products (including rail vehicles and component overhaul) and service contracts are recognized using the percentage-of-completion method.  Revenues from the sale of commercial aircraft are recognized when the aircraft has been delivered, risks and rewards of ownership have been transferred, the amount of revenue can be reliably measured, and collection of the related account receivable is reasonably assured.  Revenues from the sale of aircraft fractional shares are considered together with the related service agreement. So, revenues from these sales are recognized over the period during which the related services rendered to the customer, generally five years. At the time of sale, the proceeds from the sale are initially recorded in other liabilities.  Revenues from sale of pre-owned aircraft and spare parts are recognized when the goods have been delivered, risks and rewards of ownership have been transferred to the customer, the amount of revenue can be reliably measured, and collection of the related receivable is reasonably assured. As can be seen from the above, there may be significant timing differences between the time that cash is received on a sale or from billings on long-term construction contracts and the time revenue is recognized. In addition, there will also be significant differences in timing as to when cash payments are made for costs and costs are reported in net income.

Solutions Manual

22-158

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-2 (Continued) (b) The schedule below shows the net income and operating cash flows for each year. Note the change in year end from January 31, to December 31, will affect comparisons. In US$ millions

2012

2011 (11 months for some parts of Bombardier’s business)

Net income

598

837

1,348

243

750

(594)

Year over year percentage increases (decreases) in net earnings

(29%)

8%

Year over year percentage increases (decreases) in operating cash flows

455%

(86%)

Net cash flow from operating activities Difference

For 2012 and 2011, the net earnings were higher/lower than the operating cash flows by US$750 million and US$594 million, respectively. It appears that operating cash flows do not trend by the same amount or in the same direction as earnings as can been seen through the volatile figures. From 2010 to 2011, although net income increased by 8%, operating cash flows actually declined by 86%. From 2011 to 2012, both net income and operating cash flows declined/increased by significant amounts, (29%) for net income and 455% for operating cash flows. These large differences can be explained in part by the exceeding large decrease in “Net change in non-cash balances” in the 2011 statement of cash flows (an amount of over US $1 Billion). As explained in note 28 to the December 31, 2011 financial statements this amount is made up in large part by a single change related to the balances of advances and progress billings, in excess of related long-term contract inventories.

Solutions Manual

22-159

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-2 (Continued) (c) The schedule below highlights the causes of significant differences between net income and operating cash flows. Note 29 (2012 financial statements) provides information for major differences in the non-cash balances. US$ millions

2012

2011

Net income

598

837

775

Amortization

371

410

371

Total of Other Non-cash items

(17)

89

89

Changes in non cash working capital

396

(1,028)

457

1,348

243

1,692

Significant changes period over period (Note below):

2012

2011

Jan. 31,2011

Change in inventories

(205)

(148)

303

Change in trade and other payables

348

156

143

Advances and progress billings in excess of related long term contract inventories

102

(436)

392

Advances on aerospace programs

599

(128)

(247)

Retirement benefits liability

(88)

(178)

(209)

(360)

(294)

75

396

(1,028)

457

Net cash flow from operating activities

Jan. 31,2011

Changes in non cash working capital:

Total of other items Net change in non-cash balances.

Note: Often the change in the balance sheet account will not agree to the change as reported in the cash flow statement due to non-cash transactions that might take place. As can be seen from the above schedule, there are significant changes in inventories, accounts payable, advances and billings in excess of long term Solutions Manual

22-160

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

contracts and advances on aerospace programs. All of these accounts are impacted by the timing of recognizing revenue (and related costs) and cash receipts from customers and payments for expenses. These large variations each year indicate that cash flows for this particular company from operating activities are very different from reported earnings.

Solutions Manual

22-161

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-2 (Continued) (d) As seen from the above analysis, predicting of cash flows will be extremely difficult given the large variations from year and year, with little tie to net earnings trends. In this case, a direct approach might be more helpful, given that the cash flows from customers and payments to suppliers and employees would be more transparent. Using the indirect approach, it is not possible to calculate the cash receipts and cash payments from normal operating activities.

Solutions Manual

22-162

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

RA22-3

Intermediate Accounting, Tenth Canadian

AltaGas INC

(a) In thousand of $ Cash inflow from operations Cash used in investing activities Cash provided by financing activities

2012

2011

146,357

185,402

(1,624,464)

(564,358)

1,487,141

380,808

9,034

1,852

Net change in cash and cash equivalents

Altagas Inc. is not financing its capital investments using cash flow from operations. As discussed in note 3 to the financial statements, cash in the amount of $771,315 was spent during the fiscal year ending December 31, 2012 for the acquisition of Semco. This acquisition was financed by the issuance of long-term debt and the issuance of common and preferred shares. The cash flow from operations are similar to the amount of dividends paid during the year to the common and preferred shareholders. Dividends paid totaled $145,333 thousand. To the extent that AltaGas can obtain the necessary financing from the issuance of debt and shares to finance expansion, it can continue to acquire other business and pay out dividends to its shareholders.

Solutions Manual

22-163

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-3 (Continued) (b) In thousands of $

$

Opening balance for property, plant and equipment

2,486,050

Depreciation, depletion and amortization from income statement

(102,128)

Acquisition of property, plant and equipment from statement of cash flows

768,651

Business acquisitions (per statement of cash flows; includes acquisition of Semco (note 3)

806,014

Calculated balance

3,958,587

Unreconciled difference

(9.421)

Closing balance on Consolidated Balance Sheet

Solutions Manual

22-164

3,949,166

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

RA22-4 (a)

Intermediate Accounting, Tenth Canadian

ALLON THERAPEUTICS INC. VERSUS ONCOTHYREON INC. COMPARATIVE ANALYSIS

Allon Therapeutics and Oncothyreon are in the biotechnology and pharmaceutical industries. Their primary objective is the discovery and development, through research, of new drugs and products for the treatment of diseases. As such they are not manufacturers or distributors of product and so their sources of revenue (if any) are from the sale of patents or technology developed through their efforts. During the many years in which the investment of the research is performed, very little revenue might be generated. The statements of operations of Oncothyreon reveal revenue from collaborative and licensing of some of its technology to other research firms or to pharmaceutical companies. The only source of income on the statement of operations for Allon Therapeutics Inc. is from interest and other income. Because of the modest amounts of revenue realized compared to the significant research and development costs expended, predictably, these companies experience continued losses. Since the majority of the activity is basic research, the expenditures do not qualify to be capitalized and later amortized. The conditions under which this would be allowed are very restrictive and are usually only applicable at the end of the development phase of a product or process. In general, investors in this industry know and expect the operating results to be negative. They continue to invest in these companies on the hopes of realizing a substantial return on their investment in the future when a powerful and lucrative drug is developed and sold to the giant pharmaceutical firms for subsequent sale and distribution. The large and continued losses on the statements of operations are therefore not a surprise to anyone and are not a sign of failure. Success is measured rather in the progress towards the development of lucrative products, which can bring large royalties or gains from the sale of the product and/or technology itself.

Solutions Manual

22-165

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-4 (Continued) (b)

In order to finance what are expected to be several years of losses, biotechnology companies must obtain long-term financing. Since debt is impractical considering the risks surrounding the company’s future ability to repay debt, the sources of financing are generally from equity. Large sums of cash are obtained from the sale of shares. Share offerings are done every few years to replenish cash and cash equivalents to fund the company for the next few years. Per the statement of cash flows of Allon Therapeutics, large cash inflows occurred in fiscal year 2010 of $9.9 million from proceeds from convertible royalty and revenue agreement. These inflows assisted in offsetting the cash outflows from operations of 2010 and 2009 of $13.0 million. This approach to financing is similar for Oncothyreon, which had large amounts of cash received from shares and warrants issues of $13.7 million in 2010. The statement of financial positions of both companies show high levels of cash and short-term investments and capital stock. For Oncothyreon, the warrants issued in 2010 are reported as liabilities as they have a price that may vary under certain circumstances and may be required to be settled in cash. The high levels of capital stock are needed to offset the huge deficits that have been accumulated over the years.

(c)

For both companies, in the last two fiscal years, it appears cash was mainly used for operations. Since these companies do not make substantial investments in property, plant, and equipment, their investment activities are mostly restricted. Oncothyreon invested cash from the issuance of common shares in shortterm investments and later liquidated to fund operations. In 20108 Oncothyreon had large cash inflows from the issue of common shares and warrants. In both years, small amounts were invested in property, plant and equipment, representing $324 thousand in 2010, $1.4 million in 2009 and $744 thousand in 2008. In both years, Allon invested small amounts in property and equipment, totalling $13,195 in 2010 and $22,533 in 2009. For both companies, financing activities are principal sources of cash. Cash generated from the sale of common shares is used to finance current and future years’ operations. It appears that Allon invested the cash from the issue of common shares in highly liquid short-term investments, which were classified as cash and cash equivalents (e.g. short-term investments with terms to maturity when acquired for three months or less), as the statement of financial position shows the large balance of cash and cash equivalents and no account for short-term investments.

Solutions Manual

22-166

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-4 (Continued) (d)

Due to the nature of the operations and the expectations of shareholders, biotechnology companies do not have substantial investments in property, plant, and equipment. Their ability to obtain debt financing is restricted by the risk involved concerning the company’s ability to repay debt from future operations. Therefore, equipment might be financed through capital leases or from the sale of equity instruments. Facilities are rented instead of owned. This provides more flexibility to the companies involved although the overall costs might be higher. This strategy is confirmed by the modest amounts of property and equipment reported on the balance sheets. Other businesses that are able to generate cash from operations and demonstrate an ability to service debt can expect to be financed partially with debt. They can therefore obtain the financing necessary to make long-term investments in plant and facilities. In those industries it would not be surprising to find balance sheets with higher amounts in both property, plant and equipment assets and long-term debt.

(e)

Because of the continued commitment on the part of shareholders to provide the necessary equity financing required by these companies to continue their research activity, Allon and Oncothyreon are in fact very liquid companies. They ensure that the amounts of cash and cash equivalents and short-term investments are at a level adequate to continue operating well into the future to reach their goals. So long as the biotech firms can demonstrate progress toward reaching the discovery and development of new products, investors will continue to fund these businesses by purchasing more common shares and warrants. This explains why investors are not necessarily as concerned about the financial condition of the company in which they invest as they are about the progress reports concerning research results provided by the firms on a regular basis.

Solutions Manual

22-167

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

RA22-5

Intermediate Accounting, Tenth Canadian

NESTLÉ GROUP

(a) The amounts of cash inflows and outflows at the sub-total level in 2012 and 2011 are presented below. (in millions of Swiss Francs or CHF) Operating Investing Financing Currency translations Net increase/decrease Cash and Cash Equivalents, beginning of the year Cash and Cash Equivalents, end of the year

2012

2011

15,772 (14,587) (57) (226) 902 4,938

10,180 (4,508) (8,810) 19 (3,119) 8,057

5,840

4,938

The operating cash flows in 2012 were enough to cover cash outflows from both investing and financing activities. During 2012 major investments were made in the acquisition of businesses. After considering an outflow due to currency translations, the net impact was an increase of CHF 902 million in cash and cash equivalents. The major reason for the decrease in the cash outflows from financing activities came from the purchase of treasury shares in 2011 (5,480 CHF) vs. 2012 (532 CHF) (together with the impact of the issuance in 2012 of bonds and other non-current financial debt of 5,226 CHF vs. 688 CHF in 2011) For both 2011 and 2012, the company is using excess cash flows from operations, after including the impact of investing cash flows to buy back shares and pay dividends to shareholders.

Solutions Manual

22-168

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-5 (Continued) (b) Information is taken from the statement of cash flows and note 17. In millions of CHF

2012

2011

Profit for the year (Note 17.1)

11,060

9,804

Share of results of associates

(1,060)

(866)

Depreciation and amortization

3,150

2,925

268

(1,280)

(219)

(628)

Trade payables

807

497

Other current assets

122

(733)

1,010

161

634

300

15,772

10,180

Inventories Trade receivables

Other current liabilities Total of other smaller amounts Operating cash flow

As can be seen from the above schedule, the profit each year and the large amounts of depreciation, and amortization add backs resulted in significant operating cash flow in 2011 and 2012, and accounted for much of the increase in operating cash flow.

Solutions Manual

22-169

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Intermediate Accounting, Tenth Canadian

RA22-5 (Continued) (c) Investing activities presented on Nestlé’s statements of cash flows show the details of investing cash transactions for 2012. The major items are capital expenditures and business acquisitions, the latter being substantially higher in 2012 when compared to 2011. There was a small amount of inflow from the disposal of a business and sale of assets and financial investments. Much of the investment activity outflows made in 2011 were funded by the sale of short-term financial investments in 2011. The majority of the recurring outflows from financing activities occurred for the payment of dividends. Sources of cash came from the issuance of bonds and other non-current financial debt, particularly in 2012. There were also sales and repurchases of treasury shares, the latter being much more significant during 2011. (d) As indicated in note 17 and cash flow statement, the company paid or received the following amounts: In millions of CHF Finance expense (not necessarily amount paid) Financing income (not necessarily amount received) Taxes paid Dividends received from associates Dividends paid

Solutions Manual

Amount Classification (591)

Operating

110

Operating

(3,201)

Operating

446

Operating

(6,417)

Financing

22-170

Chapter 22

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Edition

Solutions Manual

Intermediate Accounting, Tenth Canadian

22-171

Chapter 22