Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 13 Statement of Cash Flows 623

After reviewing the statement, O’Brien telephoned you and commented, “Are you sure this

statement is right?” O’Brien then raised the following questions:

1. “How can depreciation be a cash flow?”


2. “Issuing common stock for the land is listed in a separate schedule. This transaction has
   nothing to do with cash! Shouldn’t this transaction be eliminated from the statement?”


3. “How can the gain on sale of investments be a deduction from net income in determining
   the cash flow from operating activities?”


4. “Why does the bank need this statement anyway? They can compute the increase in cash
   from the balance sheets for the last two years.”

After jotting down O’Brien’s questions, you assured him that this statement was “right.”

However, to alleviate O’Brien’s concern, you arranged a meeting for the following day.

a. How would you respond to each of O’Brien’s questions?

b. Do you think that the statement of cash flows enhances the chances of Fluff N’ Stuff, Inc.,

receiving the loan? Discuss.

A schedule of current assets and current liabilities for Lexmark International, Inc., a leading

manufacturer of laser and inkjet printers, for three comparative years is as follows:

As a close family friend, O’Brien asked you to prepare a statement of cash flows. From the

records provided, you prepared the following statement.

Cash flows from operating activities:

Net income, per income statement $ 86,400

Add: Depreciation $31,000

Decrease in accounts receivable 11,500 42,500

$128,900

Deduct: Increase in inventory $12,000

Increase in prepaid expenses 1,500

Decrease in accounts payable 3,000

Gain on sale of investments 7,500 24,000

Net cash flow from operating activities $104,900

Cash flows from investing activities:

Cash received from investments sold $ 40,500

Less cash paid for purchase of store equipment 31,000

Net cash flow from investing activities 9,500

Cash flows from financing activities:

Cash paid for dividends $ 40,000

Net cash flow used for financing activities (40,000)

Increase in cash $ 74,400

Cash at the beginning of the year 27,500

Cash at the end of the year $101,900

Schedule of Noncash Financing and Investing

Activities: Issued common stock at par for land $ 40,000

Fluff N’ Stuff, Inc.

Statement of Cash Flows

For the Year Ended December 31, 2007

Case 13-3

Analyzing cash conversion
cycle over time