Chapter 3--Income Flows versus Cash Flows: Key

Relationships in the Dynamics of a Business

Student: ___________________________________________________________________________
1. One rationale for the statement of cash flows is to
A. ensure that the cash account balances at year-end.
B. reconcile differences between net income and cash receipts and disbursements.
C. calculate the companys free cash flow.
D. examine the cash effects of income from discontinued operations, extraordinary items and changes in
accounting principles.

2. Which of the following is not one of the reasons why net income differs from cash flows from operations
under the indirect method of calculating cash flows?
A. non-cash items, such as depreciation and amortization
B. changes in working capital accounts
C. gains and losses related to the sale of plant, property and equipment
D. sale or repurchase of capital stock

3. A company in the growth phase of its product life cycle will normally have the following pattern of cash
flows
A. Negative cash flows from operations, negative cash flows from investing and positive cash flows from
financing.
B. Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows
from financing.
C. Positive cash flows from operations, positive cash flows from investing and positive cash flows from
financing.
D. Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows
from financing.

4. Which of the following is an adjustment that would need to be made to net income when calculating cash
flows from operations under the indirect method
A. Subtract depreciation expense
B. add depreciation expense
C. add an increase in accounts receivable
D. add a decrease in accounts payable

5. If a firm is growing and expanding its accounts receivable and inventories faster than its current operating
liabilities its cash flow from operation will normally be
A. greater than net income
B. less than net income
C. greater than the change in working capital from operations
D. greater than the change in cash

6. Firms with short operating cycles will experience less of a lag between the creation and delivery of their
products and the collection of cash from customers, for this reason
A. their cash flow from operations will be much greater than their working capital from operations.
B. their cash flow from operations will not differ much from their working capital from operations.
C. their cash flow from operations will be much less than their working capital from operations.
D. there will be no relation between their cash flow from operations and working capital from operations.

7. Normally, cash flows from operations will peak during which phase of the product life cycle?
A. Introduction
B. Growth
C. Maturity
D. Decline

8. Normally, cash flows from investing activities will start providing cash during which phase of the product life
cycle?
A. Introduction
B. Growth
C. Maturity
D. Decline

9. Normally, cash flows from financing will start using cash during which phase of the product life cycle?
A. Introduction
B. Growth
C. Maturity
D. Decline

10. Free cash flows to all debt and common equity shareholders represents the excess of cash flows from
A. operating activities over cash flows for financing activities
B. investing over cash flows for operating activities
C. investing over cash flows for financing activities
D. operating activities over cash flows for investing activities

11. When preparing the statement of cash flows using the indirect method an increase in inventories would
appear as
A. a decrease in the operating activities section
B. an increase in the operating activities section
C. a use of cash in the investing activities section
D. a source of cash in the investing activities section

12. When preparing the statement of cash flows using the indirect method an increase in accounts payable
would appear as
A. a decrease in the operating activities section
B. an increase in the operating activities section
C. a use of cash in the investing activities section
D. a source of cash in the investing activities section

13. When preparing the statement of cash flows using the indirect method the payment of dividends would
appear as
A. a decrease in the operating activities section
B. an increase in the operating activities section
C. a use of cash in the financing activities section
D. a source of cash in the financing activities section

14. When preparing the statement of cash flows using the indirect method the purchase of equipment would
appear as
A. a use of cash in the investing activities section
B. a source of cash in the investing activities section
C. a use of cash in the financing activities section
D. a source of cash in the financing activities section

15. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows
from
A. lending activities.
B. operating activities.
C. investing activities.
D. financing activities.

16. An example of an item that is deducted from net income when preparing the operating activities section of
the statement of cash using the indirect method is
A. depreciation expense.
B. compensation expense related to stock option plans.
C. income from an investment accounted for using the equity method.
D. unrealized losses on trading investments

17. Which of the following is not an expense excluded when calculating EBITDA?
A. depreciation expense
B. administrative expense
C. interest expense
D. tax expense

18. Which of the following is the correct formula for calculating cash collections from customers?
A. sales for the period plus accounts receivable at the beginning of the period
B. sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the
end of the period
C. sales for the period plus accounts receivable at the end of the period
D. sales for the period plus accounts receivable at the end of the period minus accounts receivable at the
beginning of the period

19. Outback Corp. recorded sales of $1,300,000 in 2006, in addition the companys accounts receivable balance
grew from $120,000 at the beginning of 2006 to $165,000 at the end of 2006. How much cash did Outback
collect from customers in 2006?
A. $1,300,000
B. $1,345,000
C. $1,255,000
D. $1,135,000

20. Toro Company recognized $655,000 of cost of goods sold in 2006, in addition its implementation of a justin-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to
$230,000 at the end of 2006. How much cash did Toro spend for inventory in 2006?
A. $655,000
B. $980,000
C. $560,000
D. $620,000

21. Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the
sale. How should this gain be treated when preparing the operating activities section of the statement of cash
flows using the indirect method?
A. A sale of equipment is a investing activity, the transaction will not affect the operating activities section.
B. The gain is added back to net income in the operating activities section.
C. The gain is subtracted from net income in the operating activities section.
D. The entire sales price is subtracted from net income in the operating activities section.

22. The expense incurred by issuing stock options should be

A. classified as a financing activity.
B. added back to net income in the operating activities section.
C. subtracted from net income in the operating activities section.
D. does not appear in the statement of cash flows.

23. Lagos Corp. recorded sales of $345,000 in 2006, in addition its accounts receivable and accounts payable
balances at the beginning and end of 2006 were as follows:
Jan. 1, 2006
Accounts Receivable
Accounts Payable

$65,000
$32,000

Dec. 31, 2006

$90,000
$28,000

How much cash did Lagos collect from customers in 2006?

A. $345,000
B. $320,000
C. $324,000
D. $316,000
24. Which of the following companies would you expect to report significant amounts of cash provided by
financing activities?
A. A yet to be profitable biotechnology company.
B. A mature company operating in the oil refinery industry.
C. A profitable established company in the retail industry.
D. A large multinational pharmaceutical company.

25. Under the _________________________, firms begin with net income to calculate cash flow from
operations for the period.
________________________________________

26. An increase in accounts receivable during a period indicates that a firm did not collect as much
____________________ as the amount of revenues included in net income.
________________________________________

27. The period in which a firm commences the manufacture of its product to the time it receives cash is called
the ______________________________.
________________________________________

28. The length of the operating cycle is another factor that may cause cash flow from operations to differ from
__________________________________________________.
________________________________________

29. Cash flows from ____________________ activities will normally be positive during the introduction and
growth phases of the product life cycle.
________________________________________

30. Cash flows from ____________________ activities will normally be negative during all of the introduction
and growth phase of the product life cycle.
________________________________________

31. ____________________ activities relate to the normal operations of the firm, selling goods and providing
services.
________________________________________

32. ____________________ activities relate to the acquisition and sale of noncurrent assets, particularly
property, plant and equipment.
________________________________________

33. ____________________ activities relate to transactions between the firm and its creditors and owners.
________________________________________

34. Free cash flows to all debt and common equity shareholders represents the excess of cash flow from
operations over cash flows from ___________________________________.
________________________________________

35. Interest expense and interest revenue would be classified as ____________________ activities in the
statement of cash flows.
________________________________________

36. The acquisition of new investments would be classified as ____________________ activities in the
statement of cash flows.
________________________________________

37. The receipt of dividends from an investee would be classified as ____________________ activities in the
statement of cash flows.
________________________________________

38. The payment of dividends would be classified as ____________________ activities in the statement of cash
flows.
________________________________________

39. Under the ______________________________ of preparing the statement of cash flows operating
activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to
providers of goods and services.
________________________________________

40. One factor that may cause cash flow from operations to differ from net income is the length of the
______________________________.
________________________________________

41. Many analysts use ____________________ as a crude measure of a firms ability to pay down debt.
________________________________________

42. EBITDA not only ignores four expenses but also ignores changes in
__________________________________________________ accounts.
________________________________________

43. Cash flow from operations should include none of the cash flows associated with marketable securities if
such transactions are viewed as ___________________________________.
________________________________________

44. The issuance of debt would be classified as a (an) ____________________ activity in the statement of cash
flows.
________________________________________

45. Cash collected from customers would appear in the operating activities section of a statement of cash flows
prepared using the ____________________ method
________________________________________

46. The receipt of cash when employees exercise stock options is a (an) ____________________ activity.
________________________________________

47. The calculation of cash flow from operations under the indirect method involves two types of adjustments.
Discuss each type of adjustment and provide an example of each type of adjustment.

48. Discuss operating, investing and financing cash flows in relation to the various stages of the product life
cycle.

49. What is working capital from operations? Discuss what types of firms will have similar net income and
working capital from operations? For which types of firms will net income and working capital from operations
be significantly different?

50. For the following types of companies discuss whether you think their cash flows from operations, investing
and financing will be positive (the activity provides cash) or negative (the activity uses cash). Provide support
for your answer.

1.

2.
3.

Tech Corporation is a developer of computer software for the gaming industry. The company recently launched its first software title. The
company is expanding its operations by hiring additional developers and administrative staff. The company is not yet profitable, but
expects to break even within two years. Investors view it as having a first mover advantage and have been happy to invest in the
company.
Midwest Corporation is a supplier to the agricultural industry. The company is experiencing its 25th year of profitability, but is concerned
that sales have contracted for the fifth year in a row. Midwest prides itself in paying dividends and having no debt on its balance sheet.
Semi Inc. manufactures semiconductors. The company has just introduced its ninth new product and is the leader in market share for the
industry. The company continues to invest in research and development and expand by purchasing competitors. The company has yet to
pay dividends, but is considering it in the future. The companys largest current asset is cash, due to its high profit margin.

51. Cilca Corporation is a supplier to the pulp and paper industry. Selected financial information about Cilca is
listed below:

Purchased real estate for $440,000 in cash. The cash was borrowed from a bank.
Sold investments for $400,000.
Paid dividends of $480,000.
Issued shares of common stock for $200,000.
Purchased machinery and equipment for $100,000 cash.
Paid $360,000 on a bank loan.
Reduced accounts receivable by $80,000.
Increased accounts payable $160,000.

Use the above information to calculate Cilcas:

a.
cash used or provided by investing activities
b.
cash used or provided by financing activities

52. Luke Corporation is a manufacturer of home furnishings. Selected financial information about Luke is listed
below:

Borrowed $850,000 from a bank.

Purchased equipment for $210,000 in cash.
Purchase investments for $285,000.
Received dividends of $51,000 from an investment in Davis Corp.
Paid dividends of $55,000.
Issued shares of preferred stock for $500,000.
Repurchased outstanding common shares using $100,000 in cash.
Purchased land for $100,000 cash.
Paid $36,000 interest expense on a bank loan.
Increased Inventories by $320,000
Increased accounts receivable by $217,000.
Increased accounts payable $85,000.

Use the above information to calculate Lukes:

a.
cash used or provided by investing activities
b.
cash used or provided by financing activities

53. Discuss the correlations that have been found between net income, net income plus or minus Type 1
adjustments ( adjustments to net income for revenues, expenses, gains and losses that are recognized in income
and are associated with changes in noncurrent assets, noncurrent liabilities, and shareholders equity, but do not
affect cash by the same amounts for the period), and cash flow from operations.

54. Selected financial statement information for Filmco appears below:

Balance Sheet accounts

Jan. 1, 2006

Dec. 31, 2006

Inventory
Accounts Receivable

$210,000
$85,000

$340,000
$60,000

Income Statement (partial)

For the year ended Dec. 31, 2006

Sales
Cost of Goods Sold
Gross Profit

$824,000
($658,000)
$166,000

Calculate the amount of cash collected from customers and the amount of cash spent on inventory for 2006 by Filmco.

55. J. Jill is a womens clothing retailer. The company started as a mail order company and has expanded into
mall department stores. The company now receives approximately half of its revenues from mail order and half
from retail outlets. Over the time period 2002 to 2004 sales increased approximately 25%. Discuss the
relationship between net income, working capital from operations and cash flow from operations and between
cash flows from operating, investing and financing activities over the three year period.

CASH FLOW STATEMENT (in thousands)

Cash from operations
Net income
Depreciation & amortization
Net increase (decrease) in assets & liab.
Other adjustments, net
Net cash provided by (used in) operations

12/25/2004
8,706
18,663
6,696
1,396
35,461

12/27/2003
7,025
16,131
26,659
924
50,739

12/28/2002
18,434
12,672
10,623
3,996
45,725

Cash from investments

(Increase) decrease in property & plant
Other cash inflow (outflow)
Net cash provided by (used in) investing

-28,784
-35,434
-64,218

-34,265
-1,143
-35,408

-34,734
-2,454
-37,188

3,142
-1,706
1,436
-27,321
59,287
31,966

870
-1,648
-778
14,553
44,734
59,287

7,800
-1,755
6,045
14,582
30,152
44,734

Cash from financing

Issuances (purchases) of equity shares
Increase (decrease) in borrowings
Net cash provided by (used in) financing
Net change cash & cash equivalents
Cash and cash equivalents at start of year
Cash and cash equivalents at year end

56. Olive Corporation manufactures food processing equipment. Use Olive Corporations two most recent
balance sheets and most recent income statement to prepare a statement of cash flows for 2006. The company
paid dividends of $6,250 during 2006.

Olive Corporation
Balance Sheet
As of December 31,
Assets:
Cash and cash equivalents
Accounts Receivable
Inventory
Current Assets
Equipment
Less: Accumulated depreciation
Land

2006

2005

$41,900
24,000
30,000
95,900

$25,000
6,250
36,000
67,250

42,000
-14,000
25,000

38,500
-7,000
10,000

Total assets

$148,900

$108,750

Liabilities
Accounts Payable
Accrued Salaries Payable
Rent Expense Payable
Income Tax Payable
Current Liabilities

$17,500
5,500
2,200
6,900
32,100

$22,500
8,000
1,000
4,000
35,500

Long-term note payable

Total Liabilities

50,000
82,100

30,000
65,500

Stockholders Equity:
Common stock
Retained earnings

42,000
24,800

30,000
13,250

Total liabilities and stockholders equity

$148,900

$108,750

Olive Corporation
Income Statement
For the year ended December 31, 2006
Revenues
Cost of goods sold
Gross Profit
Operating Expenses
Depreciation expense
Salary expense
Insurance Expense
Rent Expense
Interest Expense
Total Operating Expenses
Income from Operations
Income Tax Expense
Net income

$147,000
-84,000
63,000
-7,000
-14,600
-2,500
-10,000
-4,200
-38,300
24,700
-6,900
$17,800

57. Listed below is a list of cash inflows and cash outflows for Toggle Inc.
1. Cash received from issuing debt
2. Cash received from interest earned on a bond investment
3. Cash used to purchase property
4. Cash used to repay debt
5. Cash received from collections of loans
6. Cash paid for retiring common stock
7. Cash paid to employees for salaries
8. Cash from the sale of marketable securities
9. Cash used to pay dividends
10. Cash from the sale of services to customers
11. Cash paid to government agencies for taxes
12. Cash received from the sale of equipment
For each item indicate where it should appear on Toggles statement of cash flows. Select from:
a.
b.
c.
d.
e.
f.

Cash inflows from operating activities

Cash outflows from operating activities
Cash inflows from investing activities
Cash outflows from investing activities
Cash inflows from financing activities
Cash outflows from financing activities

58. Plano Corporation presented the following account balances for 2006 and 2005:

Dividends payable
Additional Paid-in-Capital
Treasury Stock
Equipment
Accumulated Depreciation
Common Stock
Long-Term Notes Payable

December 31, 2006

December 31, 2005

$20,000
$580,000
$185,000
$800,000
$225,000
$630,000
$225,000

$25,000
$230,000
$100,000
$700,000
$140,000
$560,000
$125,000

Additional information:
1.
Cash dividends of $20,000 were declared on December 15, 2006, payable on January 15, 2007.
2.
The company issued 70,000 shares of $1 par value common stock during 2006.
3.
The company repurchased 34,000 shares of its own common stock during the period. No treasury stock was sold during the period.
4.
Additional equipment was purchased by issuing a $100,000 long-term note payable.

Required:
1. Prepare the financing section of Planos 2006 statement of cash flows.
2. Indicate if any of the events will be reported as a significant noncash transaction.

Chapter 3--Income Flows versus Cash Flows: Key Relationships in

the Dynamics of a Business Key

1. One rationale for the statement of cash flows is to

A. ensure that the cash account balances at year-end.
B. reconcile differences between net income and cash receipts and disbursements.
C. calculate the companys free cash flow.
D. examine the cash effects of income from discontinued operations, extraordinary items and changes in
accounting principles.

2. Which of the following is not one of the reasons why net income differs from cash flows from operations
under the indirect method of calculating cash flows?
A. non-cash items, such as depreciation and amortization
B. changes in working capital accounts
C. gains and losses related to the sale of plant, property and equipment
D. sale or repurchase of capital stock

3. A company in the growth phase of its product life cycle will normally have the following pattern of cash
flows
A. Negative cash flows from operations, negative cash flows from investing and positive cash flows from
financing.
B. Negative or positive cash flows from operations, negative cash flows from investing and positive cash flows
from financing.
C. Positive cash flows from operations, positive cash flows from investing and positive cash flows from
financing.
D. Negative or positive cash flows from operations, negative cash flows from investing and negative cash flows
from financing.

4. Which of the following is an adjustment that would need to be made to net income when calculating cash
flows from operations under the indirect method
A. Subtract depreciation expense
B. add depreciation expense
C. add an increase in accounts receivable
D. add a decrease in accounts payable

5. If a firm is growing and expanding its accounts receivable and inventories faster than its current operating
liabilities its cash flow from operation will normally be
A. greater than net income
B. less than net income
C. greater than the change in working capital from operations
D. greater than the change in cash

6. Firms with short operating cycles will experience less of a lag between the creation and delivery of their
products and the collection of cash from customers, for this reason
A. their cash flow from operations will be much greater than their working capital from operations.
B. their cash flow from operations will not differ much from their working capital from operations.
C. their cash flow from operations will be much less than their working capital from operations.
D. there will be no relation between their cash flow from operations and working capital from operations.

7. Normally, cash flows from operations will peak during which phase of the product life cycle?
A. Introduction
B. Growth
C. Maturity
D. Decline

8. Normally, cash flows from investing activities will start providing cash during which phase of the product life
cycle?
A. Introduction
B. Growth
C. Maturity
D. Decline

9. Normally, cash flows from financing will start using cash during which phase of the product life cycle?
A. Introduction
B. Growth
C. Maturity
D. Decline

10. Free cash flows to all debt and common equity shareholders represents the excess of cash flows from
A. operating activities over cash flows for financing activities
B. investing over cash flows for operating activities
C. investing over cash flows for financing activities
D. operating activities over cash flows for investing activities

11. When preparing the statement of cash flows using the indirect method an increase in inventories would
appear as
A. a decrease in the operating activities section
B. an increase in the operating activities section
C. a use of cash in the investing activities section
D. a source of cash in the investing activities section

12. When preparing the statement of cash flows using the indirect method an increase in accounts payable
would appear as
A. a decrease in the operating activities section
B. an increase in the operating activities section
C. a use of cash in the investing activities section
D. a source of cash in the investing activities section

13. When preparing the statement of cash flows using the indirect method the payment of dividends would
appear as
A. a decrease in the operating activities section
B. an increase in the operating activities section
C. a use of cash in the financing activities section
D. a source of cash in the financing activities section

14. When preparing the statement of cash flows using the indirect method the purchase of equipment would
appear as
A. a use of cash in the investing activities section
B. a source of cash in the investing activities section
C. a use of cash in the financing activities section
D. a source of cash in the financing activities section

15. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows
from
A. lending activities.
B. operating activities.
C. investing activities.
D. financing activities.

16. An example of an item that is deducted from net income when preparing the operating activities section of
the statement of cash using the indirect method is
A. depreciation expense.
B. compensation expense related to stock option plans.
C. income from an investment accounted for using the equity method.
D. unrealized losses on trading investments

17. Which of the following is not an expense excluded when calculating EBITDA?
A. depreciation expense
B. administrative expense
C. interest expense
D. tax expense

18. Which of the following is the correct formula for calculating cash collections from customers?
A. sales for the period plus accounts receivable at the beginning of the period
B. sales for the period plus accounts receivable at the beginning of the period minus accounts receivable at the
end of the period
C. sales for the period plus accounts receivable at the end of the period
D. sales for the period plus accounts receivable at the end of the period minus accounts receivable at the
beginning of the period

19. Outback Corp. recorded sales of $1,300,000 in 2006, in addition the companys accounts receivable balance
grew from $120,000 at the beginning of 2006 to $165,000 at the end of 2006. How much cash did Outback
collect from customers in 2006?
A. $1,300,000
B. $1,345,000
C. $1,255,000
D. $1,135,000

20. Toro Company recognized $655,000 of cost of goods sold in 2006, in addition its implementation of a justin-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to
$230,000 at the end of 2006. How much cash did Toro spend for inventory in 2006?
A. $655,000
B. $980,000
C. $560,000
D. $620,000

21. Fizzzle Inc. sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000 on the
sale. How should this gain be treated when preparing the operating activities section of the statement of cash
flows using the indirect method?
A. A sale of equipment is a investing activity, the transaction will not affect the operating activities section.
B. The gain is added back to net income in the operating activities section.
C. The gain is subtracted from net income in the operating activities section.
D. The entire sales price is subtracted from net income in the operating activities section.

22. The expense incurred by issuing stock options should be

A. classified as a financing activity.
B. added back to net income in the operating activities section.
C. subtracted from net income in the operating activities section.
D. does not appear in the statement of cash flows.

23. Lagos Corp. recorded sales of $345,000 in 2006, in addition its accounts receivable and accounts payable
balances at the beginning and end of 2006 were as follows:
Jan. 1, 2006
Accounts Receivable
Accounts Payable

$65,000
$32,000

Dec. 31, 2006

$90,000
$28,000

How much cash did Lagos collect from customers in 2006?

A. $345,000
B. $320,000
C. $324,000
D. $316,000
24. Which of the following companies would you expect to report significant amounts of cash provided by
financing activities?
A. A yet to be profitable biotechnology company.
B. A mature company operating in the oil refinery industry.
C. A profitable established company in the retail industry.
D. A large multinational pharmaceutical company.

25. Under the _________________________, firms begin with net income to calculate cash flow from
operations for the period.
indirect method

26. An increase in accounts receivable during a period indicates that a firm did not collect as much
____________________ as the amount of revenues included in net income.
cash

27. The period in which a firm commences the manufacture of its product to the time it receives cash is called
the ______________________________.
operating cycle

28. The length of the operating cycle is another factor that may cause cash flow from operations to differ from
__________________________________________________.
working capital from operations

29. Cash flows from ____________________ activities will normally be positive during the introduction and
growth phases of the product life cycle.
financing

30. Cash flows from ____________________ activities will normally be negative during all of the introduction
and growth phase of the product life cycle.
investing

31. ____________________ activities relate to the normal operations of the firm, selling goods and providing
services.
Operating

32. ____________________ activities relate to the acquisition and sale of noncurrent assets, particularly
property, plant and equipment.
Investing

33. ____________________ activities relate to transactions between the firm and its creditors and owners.
Financing

34. Free cash flows to all debt and common equity shareholders represents the excess of cash flow from
operations over cash flows from ___________________________________.
investing activities

35. Interest expense and interest revenue would be classified as ____________________ activities in the
statement of cash flows.
operating

36. The acquisition of new investments would be classified as ____________________ activities in the
statement of cash flows.
investing

37. The receipt of dividends from an investee would be classified as ____________________ activities in the
statement of cash flows.
operating

38. The payment of dividends would be classified as ____________________ activities in the statement of cash
flows.
financing

39. Under the ______________________________ of preparing the statement of cash flows operating
activities section firms list the cash flows from selling goods and services and then subtract the cash outflows to
providers of goods and services.
direct method

40. One factor that may cause cash flow from operations to differ from net income is the length of the
______________________________.
operating cycle

41. Many analysts use ____________________ as a crude measure of a firms ability to pay down debt.
EBITDA

42. EBITDA not only ignores four expenses but also ignores changes in
__________________________________________________ accounts.
operating working capital

43. Cash flow from operations should include none of the cash flows associated with marketable securities if
such transactions are viewed as ___________________________________.
investing activities

44. The issuance of debt would be classified as a (an) ____________________ activity in the statement of cash
flows.
financing

45. Cash collected from customers would appear in the operating activities section of a statement of cash flows
prepared using the ____________________ method
indirect

46. The receipt of cash when employees exercise stock options is a (an) ____________________ activity.
financing

47. The calculation of cash flow from operations under the indirect method involves two types of adjustments.
Discuss each type of adjustment and provide an example of each type of adjustment.

1.
2.

Adjusting revenues and expenses for changes in non-working capital accounts, for example depreciation, amortization and deferred
income tax.
Adjusting revenues and expenses for changes in operating working capital accounts, for example accounts receivable and accounts
payable, inventories.

48. Discuss operating, investing and financing cash flows in relation to the various stages of the product life
cycle.

1.
2.
3.

Operating Cash Flows--Operating cash flows begin negative in the introduction phase and start becoming positive in the growth phase,
operating cash flows reach their peak in the maturity phase and start to decrease at the end of the maturity phase and into the decline
phase.
Investing Cash Flows--Investing cash flows begin negative in the introduction phase and stays negative in the growth phase, investing
cash flows become positive in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase.
Financing Cash Flows--Financing cash flows are positive in the introduction and growth phase. Financing cash flows start to decrease at
the end of the maturity phase and continue to decrease in the decline phase.

49. What is working capital from operations? Discuss what types of firms will have similar net income and
working capital from operations? For which types of firms will net income and working capital from operations
be significantly different?
Working capital from operations is defined as net income adjusted for changes in non-working capital accounts.
These changes include depreciation, amortization, the equity method, deferred tax amounts, the minority
interest in the earnings of consolidated subsidiaries and some restructuring charges. Companies that have mostly
current operating assets, such as retailers who rent their space, will likely have similar net income and working
capital from operations. Capital intensive firms are more likely to have significantly different net incomes and
working capital from operations.

50. For the following types of companies discuss whether you think their cash flows from operations, investing
and financing will be positive (the activity provides cash) or negative (the activity uses cash). Provide support
for your answer.

1.

2.
3.

1.
2.
3.

Tech Corporation is a developer of computer software for the gaming industry. The company recently launched its first software title. The
company is expanding its operations by hiring additional developers and administrative staff. The company is not yet profitable, but
expects to break even within two years. Investors view it as having a first mover advantage and have been happy to invest in the
company.
Midwest Corporation is a supplier to the agricultural industry. The company is experiencing its 25th year of profitability, but is concerned
that sales have contracted for the fifth year in a row. Midwest prides itself in paying dividends and having no debt on its balance sheet.
Semi Inc. manufactures semiconductors. The company has just introduced its ninth new product and is the leader in market share for the
industry. The company continues to invest in research and development and expand by purchasing competitors. The company has yet to
pay dividends, but is considering it in the future. The companys largest current asset is cash, due to its high profit margin.

This company is in the introduction phase. CFO--negative, CFI--negative, CFF--positive

This company is in the late mature to early decline phase. CFO--positive and declining, CFI--positive and declining, CFF--negative due
to dividends.
This company is in the growth phase. CFO--positive, CFI--negative, CFF--positive maybe starting to turn negative.

51. Cilca Corporation is a supplier to the pulp and paper industry. Selected financial information about Cilca is
listed below:

Purchased real estate for $440,000 in cash. The cash was borrowed from a bank.
Sold investments for $400,000.
Paid dividends of $480,000.
Issued shares of common stock for $200,000.
Purchased machinery and equipment for $100,000 cash.
Paid $360,000 on a bank loan.
Reduced accounts receivable by $80,000.
Increased accounts payable $160,000.

Use the above information to calculate Cilcas:

a.
cash used or provided by investing activities

b.

cash used or provided by financing activities

a.

cash used or provided by investing activities:

+Sold investments for $400,000.
- Purchased real estate for $440,000
- Purchased machinery and equipment for $100,000 cash.
= $140,000 cash used by investing activities.

b.

cash used or provided by investing activities

+Received $440,000 of cash that was borrowed from a bank to purchase real estate
+Issued shares of common stock for $200,000
- Paid dividends of $480,000
- Paid $360,000 on a bank loan.
= $200,000 cash used by financing activities

52. Luke Corporation is a manufacturer of home furnishings. Selected financial information about Luke is listed
below:

Borrowed $850,000 from a bank.

Purchased equipment for $210,000 in cash.
Purchase investments for $285,000.
Received dividends of $51,000 from an investment in Davis Corp.
Paid dividends of $55,000.
Issued shares of preferred stock for $500,000.
Repurchased outstanding common shares using $100,000 in cash.
Purchased land for $100,000 cash.
Paid $36,000 interest expense on a bank loan.
Increased Inventories by $320,000
Increased accounts receivable by $217,000.
Increased accounts payable $85,000.

Use the above information to calculate Lukes:

a.
cash used or provided by investing activities
b.
cash used or provided by financing activities

a.

cash used or provided by investing activities:

-Purchased investments for $285,000
- Purchased land for $100,000
- Purchased equipment for $210,000 cash.
= $595,000 cash used by investing activities.

b.

cash used or provided by investing activities

+Received $850,000 from bank borrowing
+Issued shares of preferred stock for $500,000
- Paid dividends of $55,000
- Paid $100,000 to repurchase outstanding common stock
= $1,1950,000 cash provided by financing activities

53. Discuss the correlations that have been found between net income, net income plus or minus Type 1
adjustments ( adjustments to net income for revenues, expenses, gains and losses that are recognized in income
and are associated with changes in noncurrent assets, noncurrent liabilities, and shareholders equity, but do not
affect cash by the same amounts for the period), and cash flow from operations.
The study by Robert M. Bowen, David Burgstahler, and Lane A. Daley, Evidence on the Relationships
Between Earnings and Various Measures of Cash Flow, Accounting Review (October, 1986) revealed (1) a high
correlation between net income and net income plus or minus Type 1 adjustments, and (2) a low correlation
between net income and cash flow from operations, and (3) a low correlation between cash flow from
operations and net income plus or minus Type 1 adjustments over time

54. Selected financial statement information for Filmco appears below:

Balance Sheet accounts

Jan. 1, 2006

Dec. 31, 2006

Inventory
Accounts Receivable

$210,000
$85,000

$340,000
$60,000

Income Statement (partial)

For the year ended Dec. 31, 2006

Sales
Cost of Goods Sold
Gross Profit

$824,000
($658,000)
$166,000

Calculate the amount of cash collected from customers and the amount of cash spent on inventory for 2006 by Filmco.

cash collected from customers: $824,000 + $85,000 - $60,000 = $849,000

cash spent on inventory: $658,000 + $340,000 -$210,000 = $788,000

55. J. Jill is a womens clothing retailer. The company started as a mail order company and has expanded into
mall department stores. The company now receives approximately half of its revenues from mail order and half
from retail outlets. Over the time period 2002 to 2004 sales increased approximately 25%. Discuss the
relationship between net income, working capital from operations and cash flow from operations and between
cash flows from operating, investing and financing activities over the three year period.

CASH FLOW STATEMENT (in thousands)

Cash from operations
Net income
Depreciation & amortization
Net increase (decrease) in assets & liab.
Other adjustments, net
Net cash provided by (used in) operations

12/25/2004
8,706
18,663
6,696
1,396
35,461

12/27/2003
7,025
16,131
26,659
924
50,739

12/28/2002
18,434
12,672
10,623
3,996
45,725

Cash from investments

(Increase) decrease in property & plant

-28,784

-34,265

-34,734

Other cash inflow (outflow)

Net cash provided by (used in) investing
Cash from financing
Issuances (purchases) of equity shares
Increase (decrease) in borrowings
Net cash provided by (used in) financing
Net change cash & cash equivalents
Cash and cash equivalents at start of year
Cash and cash equivalents at year end

-35,434
-64,218

-1,143
-35,408

-2,454
-37,188

3,142
-1,706
1,436
-27,321
59,287
31,966

870
-1,648
-778
14,553
44,734
59,287

7,800
-1,755
6,045
14,582
30,152
44,734

Some points that may be addressed:

1.

2.
3.
4.
5.

J. Jill is expanding into retail space which results in additional capital expenditures to construct the interiors of the companys retail
space. From J. Jills annual report management estimates that the company spends approximately $1 million dollars decorating each store
to its uniform design. These cash flows can be observed by recognizing the cash used by property and equipment investing activities
section of the cash flow statement. We can also0 observe increasing depreciation charges, which is consistent with larger amounts of
property and equipment.
As sales have increased so has its need for working capital, it is important to ensure that the company has adequate controls over its
working capital.
J. Jill is experiencing a net growth in current operating liabilities (as can be noted in the operating activities section of the cash flow
statement). This attributable to expansion into retail space as rental commitments and other store opening costs are accrued for.
Cash flows from operations are beginning to be exceed cash required by investing activities, but only because of the net change in current
operating liabilities. Income is also increasing as well as working capital from operations.
J. Jill is still issuing equity (but to a lesser degree than in 2004 and 2003) and paying down debt.

56. Olive Corporation manufactures food processing equipment. Use Olive Corporations two most recent
balance sheets and most recent income statement to prepare a statement of cash flows for 2006. The company
paid dividends of $6,250 during 2006.

Olive Corporation
Balance Sheet
As of December 31,
Assets:
Cash and cash equivalents
Accounts Receivable
Inventory
Current Assets

2006

2005

$41,900
24,000
30,000
95,900

$25,000
6,250
36,000
67,250

Equipment
Less: Accumulated depreciation
Land

42,000
-14,000
25,000

38,500
-7,000
10,000

Total assets

$148,900

$108,750

Liabilities
Accounts Payable
Accrued Salaries Payable
Rent Expense Payable
Income Tax Payable
Current Liabilities

$17,500
5,500
2,200
6,900
32,100

$22,500
8,000
1,000
4,000
35,500

Long-term note payable

Total Liabilities

50,000
82,100

30,000
65,500

Stockholders Equity:

Common stock
Retained earnings

42,000
24,800

30,000
13,250

Total liabilities and stockholders equity

$148,900

$108,750

Olive Corporation
Income Statement
For the year ended December 31, 2006
Revenues
Cost of goods sold
Gross Profit
Operating Expenses
Depreciation expense
Salary expense
Insurance Expense
Rent Expense
Interest Expense
Total Operating Expenses

$147,000
-84,000
63,000
-7,000
-14,600
-2,500
-10,000
-4,200
-38,300

Income from Operations

Income Tax Expense

24,700
-6,900

Net income

$17,800

Olive Corporation
Statement of Cash Flows
For the year ended December 31, 2006
Operations
Net income
Depreciation Expense
Increase in Accounts Receivable
Decrease in Inventory
Decrease in Accounts Payable
Decrease in Salaries Payable
Increase in Rent Payable
Increase in Taxes Payable

$17,800
$ 7,000
(17,750)
6,000
(5,000)
(2,500)
1,200
2,900

Cash Flow from Operations

$ 9,650

Investing
Purchases of Equipment
Purchase of land
Cash Flows from Investing

(3,500)
(15,000)

Financing
Sale of common stock
Issuance of Long-Term Debt
Payment of dividends
Cash Flows from Financing

12,000
20,000
(6,250)

Net change in cash

Cash balance at beginning of year
Cash balance at end of year

(8,150)

(18,500)

25,750
16,900
25,000
$41,900

57. Listed below is a list of cash inflows and cash outflows for Toggle Inc.
1. Cash received from issuing debt
2. Cash received from interest earned on a bond investment
3. Cash used to purchase property
4. Cash used to repay debt
5. Cash received from collections of loans
6. Cash paid for retiring common stock
7. Cash paid to employees for salaries
8. Cash from the sale of marketable securities
9. Cash used to pay dividends
10. Cash from the sale of services to customers
11. Cash paid to government agencies for taxes
12. Cash received from the sale of equipment
For each item indicate where it should appear on Toggles statement of cash flows. Select from:
a.
b.
c.
d.
e.
f.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Cash inflows from operating activities

Cash outflows from operating activities
Cash inflows from investing activities
Cash outflows from investing activities
Cash inflows from financing activities
Cash outflows from financing activities

Cash received from issuing debt - Cash inflows from financing activities
Cash received from interest earned on a bond investment - Cash inflows from operating activities
Cash used to purchase property - Cash outflows from investing activities
Cash used to repay debt - Cash outflows from financing activities
Cash received from collections of loans - Cash inflows from investing activities
Cash paid for retiring common stock - Cash outflows from financing activities
Cash paid to employees for salaries - Cash outflows from operating activities
Cash from the sale of marketable securities - Cash inflows from investing activities
Cash used to pay dividends - Cash outflows from financing activities
Cash from the sale of services to customers - Cash inflows from operating activities
Cash paid to government agencies for taxes - Cash outflows from operating activities
Cash received from the sale of equipment - Cash inflows from investing activities

58. Plano Corporation presented the following account balances for 2006 and 2005:

Dividends payable
Additional Paid-in-Capital
Treasury Stock
Equipment
Accumulated Depreciation
Common Stock
Long-Term Notes Payable

December 31, 2006

December 31, 2005

$20,000
$580,000
$185,000
$800,000
$225,000
$630,000
$225,000

$25,000
$230,000
$100,000
$700,000
$140,000
$560,000
$125,000

Additional information:
1.
Cash dividends of $20,000 were declared on December 15, 2006, payable on January 15, 2007.
2.
The company issued 70,000 shares of $1 par value common stock during 2006.

3.
4.

The company repurchased 34,000 shares of its own common stock during the period. No treasury stock was sold during the period.
Additional equipment was purchased by issuing a $100,000 long-term note payable.

Required:
1. Prepare the financing section of Planos 2006 statement of cash flows.
2. Indicate if any of the events will be reported as a significant noncash transaction.

1.
Plan Corporation
Partial Statement of Cash Flows
For the period ended December 31, 2006
Financing

Cash Flow from Financing

2.

Cash dividends paid

Repurchase of treasury stock
Sale of Common Stock
$310,000

($25,000)
($85,000)
$420,000

The issuance of the $100,000 long-term note in exchange for equipment should be disclosed as a significant non-cash transaction.