Financial Accounting: An Integrated Statements Approach, 2nd Edition

activities.^3 The gain is also included in net income. To avoid double reporting, the gain

of $12,000 is deducted from net income in determining cash flows from operating ac-

tivities as follows:

Cash flows from operating activities:

Net income $108,000

Deduct gain on sale of land 12,000

Reporting Cash Flows from Operating Activities

We have now presented all the necessary adjustments to convert the net income to cash

flows from operating activities for Rundell Inc. These adjustments are summarized in

Exhibit 5 in a format suitable for the statement of cash flows.

Cash Flows Used for Payment of Dividends

According to the retained earnings account of Rundell Inc., shown earlier in the chapter,

cash dividends of $28,000 were declared during the year. However, the dividends payable

account, shown below, indicates that dividends of only $24,000 were paid during the year.

588 Chapter 13 Statement of Cash Flows

Backdating Contracts

PurchasePro.com, once high-flying Internet darling, crashed

into bankruptcy in the early 2000s. Adding to this was a set

of grand jury indictments against key executives of PurchasePro

andAOLfor allegedly inflating revenues by backdating con-

tracts into earlier quarters. One executive allegedly stated, “the

quarter ends when I say it ends” when discussing the timing of

revenue with the accountants. Naturally, manipulating the tim-

ing of revenue is misleading and illegal. The cash flows from

operations, however, would not be impacted by manipulating

revenue timing. This is why many analysts evaluate the rela-

tionship between earnings and cash flows from operations to

evaluate abnormal accruals.

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

3 Reporting the proceeds (cash flows) from the sale of land as part of investing activities is discussed later

in this chapter.

Exhibit 5

Cash Flows from

Operating Activities—

Indirect Method

Cash flows from operating activities:

Net income $108,000

Add: Depreciation $ 7,000

Decrease in inventories 8,000

Increase in accrued expenses 2,200 17,200

$125,200

Deduct: Increase in accounts receivable $ 9,000

Decrease in accounts payable 3,200

Decrease in income taxes payable 500

Gain on sale of land 12,000 24,700

Net cash flow from operating activities $100,500

DIVIDENDS PAYABLE

Jan. 10 Cash paid 10,000 Jan. 1 Balance 10,000

July 10 Cash paid 14,000 June 20 Dividends declared 14,000

Dec. 20 Dividends declared 14,000

24,000 38,000

Dec. 31 Balance 14,000

Rundell Inc.

Cash Flows from Operating Activities

For the Year Ended December 31, 2007