SM Chapter 13

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 13
Statement of Cash Flows
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
1. Describe the purpose 1, 2, 3, 4, 1, 2, 3 1, 2 1A 1B 1, 3, 5

and content of the 5
statement of cash flows.
2. Prepare the operating 6, 7, 8, 14, 3, 13 11A 11B 1, 7

activities section of a 16, 17
statement of cash flows
using one of two
approaches:
(a) the indirect method or 9, 10, 11 3, 4, 5 4, 5, 8, 9, 2A, 3A, 2B, 3B,

12 6A, 7A, 8A 6B, 7B, 8B
(b) the direct method. 12, 13, 15 6, 7, 8, 9, 6, 7, 10, 2A, 3A, 2B, 3B, 6
10 12 6A, 7A 6B, 7B
3. Prepare the investing 14, 15, 17 11, 12 8, 9, 11, 4A, 6A, 4B, 6B, 1, 7
activities section of a 12, 13 7A, 8A, 7B, 8B,
statement of cash flows. 11A 11B
4. Prepare the financing 15, 16, 17 13, 14 8, 9, 11, 5A, 6A, 5B, 6B, 1, 7
activities section of a 12, 13 7A, 8A, 7B, 8B,
statement of cash flows. 11A 11B
5. Complete the statement 18 8, 9, 12 6A, 7A, 6B, 7B, 1, 6, 7

of cash flows. 8A, 11A 8B, 11B
6. Use the statement of 19, 20, 21, 15, 16, 17 8, 9, 13, 9A, 10A 9B, 10B 2, 3, 4,
cash flows to evaluate a 22, 23 14 7
company’s liquidity and
solvency.
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ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Classify activities. Simple 20-30
2A Prepare operating activities section—indirect and Moderate 30-40

direct methods.
3A Prepare operating activities section—indirect and Moderate 30-40

direct methods—and discuss methods.
4A Calculate and classify cash flows for property, plant, Moderate 20-30
and equipment.
5A Calculate and classify cash flows for shareholders’ Moderate 20-30

equity.
6A Prepare statement of cash flows—indirect and direct Moderate 30-40

methods.
7A Prepare statement of cash flows—indirect and direct Moderate 50-60

methods.
8A Prepare statement of cash flows (indirect method) Complex 40-50

and answer questions.
9A Calculate and evaluate liquidity and solvency. Moderate 20-30
10A Evaluate liquidity and solvency. Moderate 20-30
11A Compare cash flows for three companies. Moderate 20-30
1B Classify activities. Simple 20-30
2B Prepare operating activities section—indirect and Moderate 40-50

direct methods.
3B Prepare operating activities section—indirect and Moderate 50-60

direct methods—and discuss methods.
4B Calculate and classify cash flows for property, plant, Moderate 20-30
and equipment.
5B Calculate and classify cash flows for shareholders’ Moderate 30-40

equity.

ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Time

Number Description Level Allotted (min.)
6B Prepare statement of cash flows—indirect and direct Moderate 30-40

methods.
7B Prepare statement of cash flows—indirect and direct Moderate 50-60

methods.
8B Prepare statement of cash flows (indirect method) Complex 40-50

and answer questions.
9B Calculate and evaluate liquidity and solvency. Moderate 20-30
10B Evaluate liquidity and solvency. Moderate 20-30
11B Compare cash flows for three companies. Moderate 20-30

ANSWERS TO QUESTIONS
1. The statement of cash flows reports the cash receipts, cash payments, and net change
in cash resulting from the operating, investing, and financing activities of a company
during a period, in a format that reconciles the beginning and ending cash balances.
The statement of cash flows is useful because it helps investors, lenders and other
creditors, as well as other users, assess the following aspects of a company’s financial
position:
• the reasons for the difference between profit and cash provided (used) by operating
activities.
• the cash investing and financing transactions during a period.
• the company’s ability to generate future cash flows.
2. Cash equivalents are short-term, highly-liquid investments that are readily convertible to
known amounts of cash. Generally, only debt investments with original maturities of
three months or less qualify under this definition. Bank overdrafts that are repayable on
demand are also included (deducted from) cash equivalents.
The statement of cash flows may be prepared using cash, or cash and cash equivalents
as its base. If the latter, cash equivalents must be clearly defined.
3. Operating activities include the cash flow activities arising from a company’s principal
revenue-producing activities and all other activities that are not investing or financing
activities.
Investing activities are those arising from the acquisition and disposal of non-current
assets.
Financing activities include those resulting in changes in the size and composition of
the equity and borrowings of a company.
4. Companies following ASPE classify interest paid, interest revenue, and dividend
revenue, as part of operating activities because they are disclosed on the income
statement as part of profit. Dividend payments are classified as financing activities. This
is the most common practice for both publicly traded and private companies.
Companies following IFRS may classify interest and dividend revenue as either
investing activities or operating activities; and interest and dividend payments as either
financing activities or operating activities. Companies select where these payments and
receipts will be presented and must apply the presentation consistently.
5. Examples of noncash transactions include the issue of shares or a mortgage to

purchase property, plant, and equipment. In both cases, cash is not involved. Noncash
transactions should be reported in the notes to the financial statements and cross-
referenced to the statement of cash flows, but not reported as investing and financing
activities in the body of the statement of cash flows.

Answers to Questions (Continued)

6. (a) and (b)
(1) The adjusted trial balance is not required to prepare the statement of cash flows
because it does not provide necessary data.
(2) A comparative statement of financial position is required to obtain the changes in

individual asset, liability, and equity balances. Changes in the noncash working
capital (current) accounts may affect the operating activities, changes in short-term
investment and long-lived asset accounts may affect the investing activities, and
changes in non-current liability and equity accounts may affect the financing
activities reported in the statement of cash flows.
(3) The income statement is required to obtain the elements of operating activities,
which will be converted from the accrual basis to the cash basis. The income
statement is also required to identify noncash revenues and expenses such as
depreciation and amortization expenses and accounting gains and losses.
(4) The statement of comprehensive income is needed to reconcile certain fair-valued

assets (e.g., revaluation of the fair value of land) and equity (e.g., accumulated
other comprehensive income) accounts appearing in the statement of financial
position. However, changes in comprehensive income do not affect cash and are
not reported on the statement of cash flows.
(5) The statement of changes in equity will provide details of the changes in the share
capital and retained earnings accounts. From these, the cash effects of financing
transactions with shareholders, such as the issue or reacquisition of shares and/or
payment of dividends, can be determined and reported as financing activities on
the statement of cash flows.
7. Although the approaches and format are different, both the direct and indirect methods
will produce the same net cash provided by operating activities.
8. A number of factors could have caused net cash provided by operating activities to
exceed profit. These include (1) a high amount of collections of unearned revenue; (2)
large amounts of depreciation or amortization; and (3) accounting losses. These are
non-cash items deducted in arriving at profit so they are now added back to profit when
determining net cash flow provided by operating activities thereby making it higher than
profit.


9. The indirect method involves converting accrual-based profit to net cash provided by
operating activities. This is done by starting with accrual-based profit from the income
statement and adding or subtracting noncash items included in profit. Examples of
adjustments include adding back noncash expenses, such as depreciation, and
removing any noncash gains or losses from profit. Then changes in the balances of
noncash current asset and current liability accounts from one period to the next are
added or subtracted.
10. Under the indirect method, depreciation and amortization expense is added back to
profit to reconcile profit to net cash provided by operating activities because
depreciation and amortization are expenses that have reduced profit, but do not result
in the use of cash. Adding them back cancels the expenses reported in the income
statement, as accrual profit is the starting point under the indirect method.
Example: Profit before depreciation $5,000

Less: Depreciation expense (1,000)
Profit 4,000
Add: Depreciation expense 1,000
Cash provided by operating activities $5,000
11. Under the indirect method, a gain on disposal of equipment is deducted from profit to
reconcile profit to net cash provided by operating activities. A gain is the difference
between the cash proceeds received when the asset is sold and the carrying amount of
the asset. This gain is not a cash receipt or payment. Therefore, the noncash gain,
which was included in profit, must be deducted from profit on the statement of cash
flows to convert profit to net cash provided by operating activities. The total cash
proceeds received when the asset is disposed would be reported in the statement of
cash flows as an investing activity.
12. Net cash provided by operating activities under the direct method is the difference
between cash revenues and cash expenses. The direct method adjusts the accrual-
based revenues and expenses directly to reflect the cash-based revenues and
expenses, which combine to equal "net cash provided by operating activities."
13. Depreciation and amortization expenses are not listed in the direct method operating
activities section because they are not cash flow items—they do not affect cash. Recall
the journal entry to record depreciation: debit Depreciation Expense and credit
Accumulated Depreciation. The entry to record amortization is similar. As you can see,
there is no cash involved in this journal entry. This is different from the indirect method,
which uses profit as its starting point and must add back depreciation and amortization
as noncash items included in the determination of profit.


14. When a business invests money, it does so outside of its main revenue-generating
operations. It might have excess cash, which it wants to put to use in producing some
interest or dividend revenue. Since the intention is to earn a return on its investment,
the buying and selling of investments is generally reported as investing activities in the
statement of cash flows. The exception occurs when the investments are held for
trading purposes, in which case they are treated similar to inventory acquired for resale.
These types of investments are reported as operating activities.
15. The gain on disposal of equipment and the loss on the sale of land would not appear on
the statement of cash flows prepared using the direct method because these are not
cash flow items. However, the gross proceeds received when the assets are sold would
be reported in the statement of cash flows as investing activities.
16. Short-term loans payable issued for trade purposes (e.g., instead of an accounts
payable) are classified as operating activities. However, short-term loans payable that
are issued for borrowing purposes rather than for trade do not relate to operating
activities. The issue or repayment of such short-term loans payable are consequently
classified as financing activities.
17. A growing company would report low or negative cash flows from operating activities if
it just commenced its operations. Later, as its sales grow, the cash from operating
activities will become positive. The company would also usually show cash used in
investing activities as it invests in its productive capacity. At this stage, the company will
also usually show cash inflows in financing activities to finance the purchase of
productive assets and to cover the shortfall from operating activities.
18. The statement of cash flows is prepared from detailed information about the changes in
account balances that occurred between two periods of time, as shown on the other
financial statements. Unlike the other financial statements, it is not prepared from an
adjusted trial balance. In particular, the information to prepare the statement of cash
flows comes from a comparative statement of financial position, the income statement,
the statement of changes in equity, and additional information.
19. (a) The cash current debt coverage ratio is a cash-based ratio that measures liquidity.
Liquidity can also be measured using the current ratio (accrual-based).
(b) Solvency can be measured by the cash total debt coverage ratio (cash-based).
Solvency can also be measured using the debt to total assets ratio (accrual-
based). Free cash flow is also a cash-based solvency measure, but there is not
accrual-based counterpart to this measure.


20. Leon’s cash current debt coverage was probably lower than its current ratio because its
net cash flows provided by operating activities was significantly lower than its current
assets and/or because the company’s average current liabilities for the year were
higher than its current liabilities on the statement of financial position date. Cash flows
from operating activities could have been lower than current assets because of
receivables, inventory, or prepaids which are included in current assets but do not
increase cash.
21. It is difficult to draw conclusions about the relative solvency of these companies, given
the limited information provided. For instance, one would want to know the composition
of the cash provided by operating activities and the debt of each of the companies. In
addition to this, the times interest earned ratio for each company would prove helpful.
Based on the information provided, Rogers reports a higher debt to total assets ratio
than Shaw, which indicates a worse solvency. However, Rogers also shows a higher
debt coverage ratio than Shaw and this ratio indicates a better solvency as Rogers
seems more able to pay its interest. Consequently, Rogers would be considered more
solvent.
22. Creditors may be concerned about the company’s ability to repay its obligations over
the long-term. The company’s declining cash total debt coverage ratio indicates either a
decline in cash from operating activities, an increasing dependence on borrowed funds,
or both. Creditors may be reluctant to grant loans to the company if these trends
persist.
The lack of cash flows from operating activities may be of concern to investors for
several reasons. First, the decrease in cash flows may have an adverse effect on the
company’s share price. In addition, some investors may be concerned that the
company will not generate enough cash to pay dividends in the future. This concern is
supported by the declining free cash flow, which also indicates the company is
generating less cash from operating activities to pay future dividends and to expand the
business.
23. If net capital expenditures and dividends paid exceed cash provided by operating
activities, then free cash flow will be negative.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 13-1

(a) – (f) +
(b) – (g) NE
(c) NE (h) –
(d) + (i) –
(e) – (j) NE
BRIEF EXERCISE 13-2
(a) F
(b) O if reporting under ASPE but if reporting under IFRS a choice exists between showing
this as an operating or financing activity
(c) NC – an exchange of land (investing activity) for shares (financing activity) that does not
involve cash
(d) F
(e) O
(f) O
(g) Not a cash activity – a reduction of retained earnings and an increase in dividends
payable
(h) F if reporting under ASPE but if reporting under IFRS a choice exists between showing
this as a financing or operating activity
(i) O
(j) Not a cash activity – a cost allocation
BRIEF EXERCISE 13-3

(a) 1. F
2. O
3. I
4. F
5. F
6. O
(b) Mega Brands uses the indirect method as indicated by the changes in noncash operating
working capital items and the depreciation expense.

BRIEF EXERCISE 13-4
(a) +
(b) –
(c) +
(d) +
(e) –
(f) –
(g) +
(h) –
(i) +
BRIEF EXERCISE 13-5
DUPIGNE CORPORATION
Statement of Cash Flows (Partial)—Indirect Method
Year Ended March 31, 2015
Operating activities
Profit ............................................................................. $275,000
Adjustments to reconcile profit to
net cash provided (used) by operating activities
Depreciation expense ........................................... $60,000
Loss on disposal of land ....................................... 15,000
Accounts receivable increase ............................... (20,000)
Merchandise inventory increase ........................... (5,000)
Prepaid expenses increase .................................. (2,000)
Accounts payable decrease ................................. (5,000)
Interest payable decrease .................................... (2,500)
Income tax payable increase ................................ 5,000 45,500
Net cash provided by operating activities ............................... $320,500

BRIEF EXERCISE 13-6
+ Decrease in accounts receivable

Cash receipts Sales
=
from customers revenues
– Increase in accounts receivable
Thus, cash receipts from customers must have equalled = $160,000 [$170,000 – ($24,000 –
$14,000)].
BRIEF EXERCISE 13-7

(in USD millions)
+ Increase in inventory + Decrease in accounts payable

Cash payments to
= Cost of goods
suppliers – Decrease in inventory – Increase in accounts payable
Thus, the cash payments to suppliers must have equalled = $958,028 ($953,169 - $1,874 +
$6,733).
BRIEF EXERCISE 13-8
Operating + Increase in prepaid expenses

Cash expenses – Decrease in prepaid expenses
payments for (excluding
= and
operating depreciation
+ Decrease in accrued expenses payable
expenses and
amortization) – Increase in accrued expenses payable
Thus, the cash payments for operating expenses must have equalled = $92,000 ($100,000 –
$15,000 – $2,500 + $500 + $6,600 + $2,400).

BRIEF EXERCISE 13-9
(a)
Income tax expense $90,000

Less: Increase in income tax payable (2,000)
Cash payments for income tax $88,000
(b)

Add: Decrease in income tax payable 2,000
BRIEF EXERCISE 13-10
Cash receipts from customers ................................................. $830,0001
Cash payments
To suppliers ........................................................................... $474,0002
For operating expenses ......................................................... 212,0003
For interest ............................................................................ 51,0004
For income tax....................................................................... 10,0005 747,000*
Net cash provided by operating activities ....................................... $ 83,000*
1
$850,000 – $20,000 = $830,000
2
$475,000 – $6,000 + $5,000 = $474,000
3
$230,000 – $20,000 + $2,000 = $212,000
4
$50,000 + $1,000 = $51,000
5
$15,000 – $5,000 = $10,000

Original cost of equipment sold ............................................................ $20,000

Less: Accumulated depreciation.......................................................... (5,500)
Carrying amount of equipment sold...................................................... 14,500
Less: Loss on disposal ........................................................................ (1,500)
Cash received from disposal of equipment .......................................... $13,000
The following journal entry may be helpful in understanding this brief exercise:
Cash ............................................................................. 13,000

Accumulated Depreciation—Equipment ....................... 5,500
Loss on Disposal .......................................................... 1,500
Equipment ......................................................... 20,000
(a) Cash provided by disposal of equipment = $13,000
(b) Investing activities


($ in thousands)
Investing activities
Purchase of long-term investments ($150 – $100) ................ $ (50)
Disposal of equipment ........................................................... 60 *
Purchase of equipment [$500 – ($400 – $100)] .................... (200)
Net cash used by investing activities .............................................. $(190)
Equipment
400
XXX
100
500
*Cost of equipment sold ........................................................ $100

*Accumulated depreciation ($100 – carrying amount of $50) 50
*Carrying amount .................................................................. 50
*Gain on disposal .................................................................. 10)
*Cash proceeds from disposal............................................... $ 60)

($ in millions)
Beginning balance, retained earnings .......................... $3,686.4

Add: Profit .................................................................. 499.2
Less: Ending balance, retained earnings ..................... (4,074.4)
Dividends paid .............................................................. $ 111.2
Retained Earnings
3,686.4
499.2
111.2
4,074.4
The answer would change if the Dividends Payable account increased during the year. In this
case, the $111.2 decrease in Retained Earnings would be reduced by the increase in
Dividends Payable to arrive at the amount of dividends paid.


($ in thousands)
Financing activities
Payment of cash dividends.................................................... $(195) 1
Repayment of bank loan payable .......................................... (200)2
Issue of common shares ($600 – $400) ................................ 200
Net cash used by financing activities .............................................. $(195)
Note X to the Statement of Cash Flows: During the year, the company purchased equipment
costing $500 by paying $200 cash and issuing a $300 bank loan payable.
1
Beginning balance, retained earnings ................. $500
Add: Profit............................................................ 400
Less: Ending balance, retained earnings ............ (700)
Dividends declared .............................................. $200
Beginning balance, dividends payable ................ $ 10

Add: Dividends declared (from above) ............... 200
Less: Ending balance, dividends payable ........... (15)
Dividends paid ..................................................... $195
2
Beginning balance, bank loan ($200 + $300) ...... $500
Additional borrowings .......................................... 300
800
Ending balance, bank loan ($200 + $400) ........... (600)
Loan payments made .......................................... $200
(a) Cash current debt $325,000

= = 1.5 times
coverage $215,000
(b) Cash total debt $325,000

= = 0.9 times
coverage $360,000
(c) Free cash flow = $325,000 – $200,000 – $25,000 = $100,000


Both ratios are indicators of liquidity. An increase in the two ratios indicates improving liquidity
and an improvement in the company’s ability to pay current liabilities in the short-term. A
number of factors could have contributed to Big Rock Brewery’s improving liquidity. A
decrease in current liabilities during the year would cause both ratios to increase.
Alternatively, an increase in sales would cause an increase in cash flows from operating
activities and cause an increase in current assets due to higher accounts receivable.
A decrease in the debt to total asset ratio shows an improvement in solvency as more of the
assets on hand have been financed by equity rather than by debt compared to the prior year.
The slight increase in the cash total debt coverage also indicates an improvement in solvency
as more cash is available to pay off total debts.

SOLUTIONS TO EXERCISES
EXERCISE 13-1
(a) (b)
Cash Effect Classification
1. + $50,000 F
2. – $5,000 I / NC*
3. + $16,000 O
4. – $25,000 F
5. + $18,000 I
6. + $1,000 O
7. – $18,000 O
8. – $100,000 O
9. NE **
10. + $1,000 O
* Investing activity; Cash payment of $5,000.

Also requires note disclosure of the $25,000 noncash transaction acquisition of
machine in exchange for long-term note payable.
** No effect on cash flows; increase in merchandise inventory offset by increase in
accounts payable.

EXERCISE 13-2
1. An impairment loss on goodwill involves the recording of a loss and a reduction of the
asset account Goodwill. This transaction does not involve cash in any way. This would
not be reported on the statement of cash flows when using the direct method but the
impairment might be discussed in the accompanying notes. (The amount would be
shown as an adjustment to profit to reverse this loss in the operating activities section
prepared using the indirect method.)
2. Depreciation is a cost allocation technique. The cash transaction occurred with the
purchase of the property, plant, and equipment. Depreciation charges the cost to
expense as the assets are being consumed. This transaction does not involve cash.
This would not be reported on the statement of cash flows or in the accompanying
notes. (The amount would be shown as an adjustment to profit to reverse this expense
in the operating activities section prepared using the indirect method.)
3. The recording of the fair value adjustment through profit or loss for an unrealized gain
on a trading investment does not involve cash, but increases profit for the gain that is
accrued and the carrying amount of the investment on the statement of financial
position. This would not be reported on the statement of cash flows if the direct
method was used or shown in the accompanying notes. (The amount would be shown
as reduction in profit in the operating activities section prepared using the indirect
method.)
4. The purchase of a new vehicle by signing a bank loan payable does not involve cash.
Since this transaction does not involve cash directly, it is not reported on the statement
of cash flows. This is, however, an example of a significant noncash investing
(acquisition of vehicle) and financing (issue of the bank loan payable) activity and
would be disclosed in the notes to the financial statements.
5. A stock dividend results in the reduction of Retained Earnings and the increase of the
share capital account and does not involve cash. This would not be reported on the
statement of cash flows or in the accompanying notes, but would be reported in the
statement of changes in equity.
6. A stock split results in additional shares being issued and does not involve cash in any
way. This would not be reported on the statement of cash flows or in the
accompanying notes, but would be reported in the statement of changes in equity.
7. The conversion occurs as a result of non-payment of the outstanding receivable and

does not involve cash. This would not be reported on the statement of cash flows or in
the accompanying notes.
8. The equipment was purchased by paying with shares rather than cash. Since this
transaction does not involve cash directly, it is not reported on the statement of cash
flows. This is, however, an example of a significant noncash investing (acquisition of
equipment) and financing (issue of shares) activity and would be disclosed in the notes
to the financial statements.

EXERCISE 13-3
Cash Provided (Used)

Transaction Profit by Operating Activities
1. Sold merchandise inventory for
+ +
cash at a higher price than cost.
2. Collected cash in advance from a
customer for a service to be NE +
provided in the future.
3. Purchased merchandise inventory
on account in a perpetual inventory NE NE
system.
4. Declared and paid dividends. NE NE
5. Recorded and paid salaries. – –
6. Recorded income tax payable. – NE
7. Accrued interest receivable. + NE
8. Recorded depreciation expense. – NE
9. Paid an amount owing on account
NE –
to a supplier.
10. Collected an amount owing from a
NE +
customer.

EXERCISE 13-4
Operating Investing Financing Noncash

Transaction Activities Activities Activities Activities
1. Purchased merchandise inventory for
– NE NE NE
cash.
2. Sold merchandise inventory on
(+/–) NE NE NE NE
account.
3. Sold equipment for cash at a loss. + + NE NE
4. Recorded depreciation on equipment. + NE NE NE
5. Paid dividends. NE NE – NE
6. Recorded an unrealized loss on a
long-term equity investment carried at + NE NE NE
fair value through profit or loss.
7. Collected an account from a customer. + NE NE NE
8. Signed and received a mortgage
NE NE + NE
payable.
9. Paid, in full, the current portion of a
NE NE – NE
mortgage payable.
10. Purchased land by issuing common
NE NE NE +/–
shares.

EXERCISE 13-5
JUNO LTD.
Year Ended December 31, 2015
Profit ..................................................................................... $21,000
Adjustments to reconcile profit to net
cash provided (used) by operating activities
Depreciation expense ................................................... $11,000
Loss on disposal of equipment ..................................... 5,000
Decrease in accounts receivable .................................. 5,000
Increase in merchandise inventory ............................... (1,400)
Increase in prepaid expenses....................................... (500)
Increase in accounts payable ....................................... 1,250
Increase in income tax payable .................................... 400
Increase in accrued liabilities ........................................ 1,000 21,750
Net cash provided by operating activities ....................................... $42,750
Note: The current portion of the bank loan payable was not included because this bank loan
was issued for borrowing purposes rather than trade.

EXERCISE 13-6
(a)
Add to (+) or
Deduct from
Income Change in Current (–) Income (b)
Statement Asset / Current Statement Related Cash Receipt or
Account Liability Account Account Payment
1. Sales revenue Increase in accounts – Cash receipts from

receivable customers
2. Dividend Decrease in + Cash receipts from

revenue dividends receivable dividends
3. Interest Increase in interest – Cash receipts from

revenue receivable interest
4. Rent revenue Increase in + Cash receipts from

unearned rent customers
5. Cost of goods Increase in + Cash payments to

sold merchandise suppliers
inventory
6. Cost of goods Increase in accounts – Cash payments to

sold payable suppliers
7. Insurance Increase in prepaid + Cash payments for

expense insurance operating expenses
8. Salaries Increase in salaries – Cash payments to

expense payable employees
9. Interest Decrease in interest + Cash payments for

expense payable interest
10. Income tax Increase in income – Cash payments for

expense tax payable income tax

EXERCISE 13-7
(a) Sales revenue $160,000

Add: Decrease in accounts receivable 2,000
Cash receipts from customers $162,000
(b) Cost of goods sold $96,000

Add: Increase in inventory 1,700
Add: Decrease in accounts payable 800
Cash payments to suppliers $98,500
(c) Salaries expense $35,000

Less: Increase in salaries payable (175)
Cash payments to employees $34,825
(d) Operating expenses $50,000

Add: Decrease in accrued expenses payable 300
Less: Decrease in prepaid expenses (450)
Cash payments for operating expenses $49,850

EXERCISE 13-8
CHARMAINE RETAILERS LTD.

Statement of Cash Flows—Indirect Method
Profit ............................................................................ $62,000
Depreciation expense .......................................... $21,000
Increase in accounts receivable
($50,000 – $42,000) ......................................... (8,000)
Increase in inventory ($168,000 – $143,000) ...... (25,000)
Increase in accounts payable ($45,000 – $35,000) 10,000 (2,000)
Net cash provided by operating activities .............................. 60,000
Purchase of furniture ($163,000 – $80,000) ................. $(83,000)
Net cash used by investing activities ..................................... (83,000)
Increase in bank loans ($103,000 + $10,000 – $76,000) $37,000
Repayment of bank loan .............................................. (10,000)
Issue of common shares ($60,000 – $55,000) ............. 5,000
Net cash provided by financing activities ............................... 32,000
Net increase in cash .............................................................. 9,000)

Cash, January 1 .................................................................... 9,000)
Cash, December 31 .............................................................. $18,000)
The company was able to generate a sufficient amount of operating cash flows and to obtain
bank financing and use both of these sources of cash to purchase additional furniture. The
net cash from operating activities seems sufficiently large enough to make any loan
payments in the future. One needs to ask however, why the inventory rose as much as it did
because it did lower cash from operating activities.

EXERCISE 13-9
DAGENAIS RETAILERS LTD.

Profit ............................................................................ $32,000
Gain on disposal of furniture ................................ $ (2,000)
Depreciation expense .......................................... 19,000
($76,000 – $50,000) ......................................... (26,000)
Increase in inventory ($219,000 – $168,000) ...... (51,000)
Increase in accounts payable ($58,000 – $45,000) 13,000 (47,000)
Net cash used by operating activities .................................... (15,000)
Disposal of furniture (see calculations below) .............. $6,000
Net cash provided by investing activities ............................... 6,000
Payment of cash dividends
($173,000 + $32,000 – $146,000) ............................. $(5,000)
Repayment of bank loan ($103,000 – $100,000) ......... (3,000)
Net cash used by financing activities ..................................... (8,000)
Net decrease in cash ............................................................. (17,000)

Cash, January 1 .................................................................... 18,000)
Cash, December 31 .............................................................. $ 1,000)

EXERCISE 13-9 (Continued)

Calculations:
Transactions involving Furniture:
Furniture
Dec. 31, 2014 163,000 Disposal 33,000
Dec. 31, 2015 130,000
Accumulated Depreciation—Furniture
Dec. 31, 2014 45,000
Disposal (derived) 29,000 Depreciation 19,000
Dec. 31, 2015 35,000
Cost of equipment sold (derived)...................................... $33,000

Accumulated depreciation ................................................ 29,000
Net carrying amount (derived) .......................................... 4,000
Add: Gain on disposal of furniture ................................... 2,000
Cash proceeds from disposal ........................................... $ 6,000
Cash ................................................................................. 6,000

Accumulated Depreciation—Furniture.............................. 29,000
Gain on Disposal......................................................... 2,000
Furniture....................................................................... 33,000
In 2015, Degenais suffered a significant decline in cash. This decline was principally caused
by the mismanagement of current assets including accounts receivable and merchandise
inventories. The increase in accounts receivable is most likely attributable to difficulty in
collecting these receivables and the increase in inventory has probably occurred because of
slowing inventory turnover. Under the circumstances, management should have postponed
the payment of dividends. This year the negative cash from operations may have lead to the
disposal of furniture in an attempt to generate cash to finance day to day operations. When a
company cannot generate positive cash flows from its operating activities and drains its cash
balances, bankruptcy will follow without the support of creditors like a bank or the support of
shareholders who are willing to provide more equity to the company.

EXERCISE 13-10
JUNO LTD.
Cash receipts from customers ................................................. $195,000 1
Cash payments
To suppliers ........................................................................... $114,1502
For operating expenses ......................................................... 33,5003
For interest ............................................................................ 1,200
For income tax....................................................................... 3,4004 152,250
Net cash provided by operating activities ....................................... $ 42,750
Note: The current portion of the bank loan payable was not included because this bank loan
was issued for lending purposes rather than trade.
1
$190,000 + $5,000 = $195,000
2
$114,000 + $1,400 – $1,250 = $114,150
3
$50,000 – $11,000 – $5,000 + $500 – $1,000 = $33,500
4
$3,800 – $400 = $3,400

EXERCISE 13-11
DUPRÉ CORP.
Statement of Cash Flows (Partial)
Year Ended December 31
Disposal of equipment ........................................................... $ 6,000*
Purchase of land ................................................................... (6,000)
Purchase of equipment [$70,000 + ($53,000 – $43,000)] ..... (80,000)
Net cash used by investing activities .............................................. $(80,000)
Payment of cash dividends.................................................... (4,000)
*Cost of equipment sold ........................................................ $39,000

*Accumulated depreciation .................................................... 30,000
*Carrying amount .................................................................. 9,000
*Loss on disposal of equipment............................................. 3,000)
*Cash proceeds ..................................................................... $ 6,000)
Cash ................................................................................. 6,000

Accumulated Depreciation—Equipment ........................... 30,000
Loss on Disposal .............................................................. 3,000
Equipment .................................................................... 39,000
Notes to the financial statements: Equipment of $53,000 was purchased by paying $10,000
cash and issuing a bank loan payable for $43,000.

EXERCISE 13-12
(a)
PUFFY LTD.
Profit ............................................................................ $115,000
Gain on disposal of land ...................................... $ (5,000)
Depreciation expense .......................................... 34,000
($80,000 – $76,000) ......................................... (4,000)
Decrease in inventory ($189,000 – $185,000) ..... 4,000
Decrease in accounts payable ($47,000 – $39,000) (8,000) 21,000
Disposal of land ............................................................ $35,000*
Purchase of equipment................................................. (65,000)
($134,000 + $115,000 – $199,000) ........................... $(50,000)
Repayment of bank loan .............................................. (50,000)
Issue of common shares .............................................. 25,000

Cash, January 1 .................................................................... 22,000)
Cash, December 31 .............................................................. $ 53,000)
* Cash proceeds received from disposal of land:

Cash ....................................................................... 35,000
Land ($100,000 – $70,000) ............................ 30,000
Gain on Disposal ............................................ 5,000

(b)
PUFFY LTD.
Statement of Cash Flows—Direct Method
Cash receipts from customers* .................................... $974,000
Cash payments
To suppliers** ......................................................... $755,000
For operating expenses.......................................... 43,000
For interest ............................................................. 14,000
For income tax ....................................................... 26,000 838,000
Disposal of land*** ........................................................ $35,000
Purchase of equipment................................................. (65,000)
($134,000 + $115,000 – $199,000) .............................. $(50,000)
Repayment of bank loan............................................... (50,000)
Issue of common shares .............................................. 25,000

Cash, January 1 .................................................................... 22,000
Cash, December 31 .............................................................. $ 53,000)

(b) (Continued)
Calculations:
* Cash receipts = sales – increase in accounts receivable

$978,000 – $4,000 = $974,000
** Cash payments to suppliers = cost of goods sold – decrease in inventories + decrease in

accounts payable
$751,000 – $4,000 + $8,000 = $755,000
*** Cash proceeds received from disposal of land:

Cash ....................................................................... 35,000
Land ($100,000 – $70,000) ............................ 30,000
Gain on Disposal ........................................... 5,000

EXERCISE 13-13
Company A is clearly in a better financial condition than company B and C. Company C had
a loss for the year. While all three companies experienced exactly the same increases in
cash for the year, it should be noted that Company A’s cash flow comes from its operations,
while company B’s cash was acquired through financing, as evidenced by the large amount
of cash generated through financing activities. Company C appears to be in the weakest
financial position since not only did it have a loss for the year, it also depended on the sale of
investments or property, plant and equipment to generate cash. By contrast, Company A
appears to be able to buy investments or property, plant, and equipment and is also paying
down debt, as its cash flow from financing activities is negative. Essentially, Company A
appears to be more self-sustaining compared to Company B and C.
EXERCISE 13-14
(a) Ria Les

Corporation Corporation
$200,000 $200,000
Cash current debt coverage $50,000 $150,000
= 4.0 times = 1.3 times
$200,000 $200,000
Cash total debt coverage $200,000 $200,000
$200,000 – $20,000 – $200,000 – $35,000 –

Free cash flow
$24,000 = $156,000 $18,000 = $147,000
(b) Ria’s liquidity is better than Les’s. In particular, Ria’s cash current debt coverage ratio
is three times as high as that of Les’s. This ratio indicates that Ria is substantially
more liquid than Les.
Ria’s solvency, as measured by the cash total debt coverage ratio, is the same as
Les’s. However, Ria has a slightly higher free cash flow than Les, which would better
enable the company to invest in new opportunities without having to obtain outside
financing. So, Ria has better overall liquidity and solvency than Les.

SOLUTIONS TO PROBLEMS
PROBLEM 13-1A
(b)
(a) Cash (c)
Receipt or
Transaction Classification Payment Profit
1. Paid salaries to employees. O – –
2. Sold land for cash, at a gain. I + +
(gain
increases
profit)
3. Purchased a building by making a I – NE
down payment in cash and signing (for the cash (for the
a mortgage payable for the balance. down- cash down-
payment) payment)
NC
(for the
exchange)
4. Made a principal repayment on the F – NE
mortgage.
5. Paid interest on the mortgage. O – –
6. Issued common shares for cash. F + NE
7. Purchased shares of another I – NE
company to be held as a long-term
non-strategic investment.
8. Paid dividends to shareholders. F – NE
9. Sold merchandise inventory on NE NE +
account, at a price greater than
cost. The company uses a perpetual
inventory system.
10. Wrote down the cost of the NE NE –
remaining inventory to its net
realizable value.

PROBLEM 13-1A (Continued)
(d) Because of the accrual basis of accounting, it is not surprising that transactions can
impact cash and profit differently. For example, in transaction #6 above, cash was
received from the issue of common shares without profit being affected in any way. In
transaction #9 above, revenue and profit were affected by the sale of merchandise
inventory but because it was sold on account, cash was not affected.

PROBLEM 13-2A
(a) (1) WHISTLER LTD.

Year Ended November 30, 2015
Profit ....................................................................... $600,000
Adjustments to reconcile profit to net cash
provided (used) by operating activities
Depreciation expense ..................................... $ 75,000
Impairment loss on property, plant,
and equipment .......................................... 100,000
Increase in accounts receivable ..................... (190,000)
Decrease in inventory ..................................... 50,000
Increase in prepaid expenses ......................... (40,000)
Decrease in accounts payable ....................... (180,000)
Decrease in accrued liabilities ........................ (90,000)
Decrease in interest payable .......................... (10,000)
Decrease in unearned revenue ...................... (17,000)
Increase in income tax payable ...................... 20,000 (282,000)
Net cash provided by operating activities ......................... $318,000
(2) WHISTLER LTD.

Statement of Cash Flows (Partial)—Direct Method
Year Ended November 30, 2015
Cash receipts from customers ................................. $7,793,000 (1)
Cash payments
To suppliers .................................................... $(5,130,000) (2)
For operating expenses .................................. (1,955,000) (3)
For interest ..................................................... (110,000) (4)
For income tax ................................................ (280,000) (5) (7,475,000 )
Net cash provided by operating activities ......................... $ 318,000
Note: Calculations on following page.

(a) (2) (Continued)
(1) Cash receipts from customers

Sales $8,000,000
Deduct: Decrease in unearned revenue (17,000)
Deduct: Increase in accounts receivable (190,000)
Cash receipts from customers $7,793,000
(2) Cash payments to suppliers

Cost of goods sold $5,000,000
Deduct: Decrease in inventories (50,000)
Cost of purchases 4,950,000
Add: Decrease in accounts payable 180,000
Cash payments to suppliers $5,130,000
(3) Cash payments for operating expenses

Operating expenses $2,000,000
Deduct: Depreciation expense (75,000)
Deduct: Impairment loss (100,000)
Operating expenses, net of
depreciation and impairment 1,825,000
Add: Increase in prepaid expenses $40,000
Decrease in accrued expenses payable 90,000 130,000
Cash payments for operating expenses $1,955,000
(4) Cash payments for interest

Interest expense $100,000
Add: Decrease in interest payable 10,000
(5) Cash payments for income tax

Deduct: Increase in income tax payable (20,000)

(b) The answer would remain the same if Whistler were a private company. As a publicly
traded company following IFRS, Whistler has the choice to disclose interest expense as
part of financing activities rather than in operating activities. We have chosen to report
this in the operating activities section above, which is the usual practice for a publicly-
traded company and also the practice that would be followed by a private company.

PROBLEM 13-3A
(a) (1) TREMBLANT LIMITED

Profit ............................................................................... $111,750
Depreciation expense ............................................. $50,000
Amortization expense ............................................. 15,000
Loss on disposal of equipment ............................... 26,000
Increase in accounts receivable .............................. (10,000 )
Decrease in prepaid expenses ................................ 3,000
Decrease in accounts payable ................................ (5,000 )
Decrease in salaries payable .................................. (500 )
Increase in unearned revenue ................................. 3,000
Increase in interest payable ..................................... 1,250
Decrease in income tax payable ............................. (5,250) 77,500
Net cash provided by operating activities .................................. $189,250
(2) TREMBLANT LIMITED

Cash receipts from customers .......................................... $918,000 (1)
Cash payments
For operating expenses ........................................... $(112,000) (2)
To employees .......................................................... (500,500) (3)
For interest .............................................................. (73,750) (4)
For income tax ......................................................... (42,500) (5) (728,750)

(a) (2) (Continued)

Revenues $925,000
Add: Increase in unearned revenues 3,000
Less: Increase in accounts receivable ($57,000 – $47,000) (10,000)
Cash receipts from customers $918,000

Administrative expenses $110,000
Add: Decrease in accounts payable ($41,000 – $36,000) 5,000
Deduct: Decrease in prepaid expenses ($12,000 – $15,000) (3,000)
Cash payments for operating expenses $112,000
(3) Cash payments to employees

Salaries expense $500,000
Add: Decrease in salaries payable ($20,000 – $19,500) 500
Cash payments to employees $500,500
(4) Cash payments for interest expense

Interest expense per income statement $75,000
Deduct: Increase in interest payable ($6,250 – $5,000) (1,250)
Cash payments for interest $73,750

Income tax expense per income statement $37,250
Add: Decrease in income tax payable ($4,000 – $9,250) 5,250
(b) Both methods are acceptable under both IFRS and ASPE. I would recommend that the
company use the direct method to prepare its operating activities section. Users usually
find this method to be more informative because it shows cash receipts from customer
and other sources and cash payments for major categories. It is also the preferred
method by the standard setters. Nonetheless, many companies prefer to use the indirect
approach because it is easier to prepare and their accounting system may not be
adapted to capture the transaction data required in the direct method.

PROBLEM 13-4A
(a)
Cash receipts and payments related to property, plant, and equipment in 2015:
Land purchase $(40,000)

Equipment purchase (10,000)
Proceeds from disposal of equipment 8,000*
* Cost of equipment sold: $240,000 + $75,000 – $300,000 = $15,000
Accumulated depreciation of equipment sold

$96,000 + $60,000 – $144,000 = $12,000
Cash proceeds = Carrying amount (cost $15,000 – accumulated depreciation

$12,000) + gain $5,000 = $8,000
Note to instructor–some students may find journal entries helpful in understanding this
exercise.
Equipment .............................................................................................. 75,000

Bank Loan Payable ........................................................................ 65,000
Cash ............................................................................................... 10,000
Land ....................................................................................................... 40,000

Cash ............................................................................................... 40,000
Cash ....................................................................................................... 8,000

Accumulated Depreciation—Equipment ................................................. 12,000
Gain on Disposal ............................................................................ 5,000
Equipment ...................................................................................... 15,000

(b)
Land purchase Investing activities (use)

Equipment purchase Investing activities (use)
Proceeds from equipment disposal Investing activities (source)
Also include the following note to the financial statements:

Note: During the year the company purchased equipment costing $75,000 by paying
$10,000 cash and issuing a bank loan payable for $65,000.
(c) A growing company must invest in productive assets so it would normally be using cash
in its investing activities.

PROBLEM 13-5A
(a) Cash receipts: Issue of common shares

$600,000 – $400,000 = $200,000
Issuance of preferred shares
$325,000 – $275,000 = $50,000
Cash payments: Payment of dividends = $11,876
Note to instructor: Students may find summary journal entries helpful in understanding this
problem.
Cash .................................................................................... 200,000

Common Shares ($600,000 – $400,000) .................... 200,000
Cash Dividends ................................................................... 11,250

Dividends Payable ($3,438 – $2,812).................................. 626
Cash ............................................................................ 11,876
(b) All of the above activities would be classified as financing activities on the statement of
cash flows.
(c) A growing company would usually be generating cash from its financing activities. Cash
is needed to invest in productive assets, such as buildings and equipment and most
companies are not able to generate sufficient cash from their operating activities. To
finance these purchases, companies normally have to issue debt or shares.

PROBLEM 13-6A
(a) (1)
E-PERFORM, INC.
Profit ..................................................................................... $155,180
Loss on disposal of equipment ..................................... 7,500
Unrealized gain on trading investments........................ (14,000)
Increase in accounts receivable ................................... (32,800)
Increase in inventories.................................................. (29,650)
Decrease in prepaid expenses ..................................... 7,600
Increase in accrued liabilities ........................................ 4,500 5,350
Net cash provided by operating activities ....................................... 160,530
Disposal of equipment ........................................................... $ 1,500
Purchase of equipment (Note X) ........................................... (25,000)
Net cash used by investing activities .............................................. (23,500)
Sale of common shares ......................................................... $ 25,000
Repayment of bank loan payable .......................................... (100,000)
($105,450 + $155,180 – $248,000) ............................. (12,630)
Net cash used by financing activities .............................................. (87,630)
Net increase in cash ....................................................................... 49,400

Cash, January 1 ............................................................................. 48,400
Cash, December 31 ....................................................................... $ 97,800
costing $85,000 by paying $25,000 cash and issuing a $60,000 bank loan payable.

(a) (2) (Continued)

E-PERFORM, INC.
Cash receipts from customers (1) .................................... $459,980
Cash payments
To suppliers (2) ....................................................... $(199,410)
For operating expenses (3) ..................................... (50,310)
For income tax ......................................................... (45,000)
For interest .............................................................. (4,730) (299,450)
Net cash provided by operating activities .................................. 160,530
Disposal of equipment ..................................................... $ 1,500
Purchase of equipment (Note X) ..................................... (25,000)
Net cash used by investing activities ........................................ (23,500)
Sale of common shares ................................................... $ 25,000
Repayment of bank loan payable .................................... (100,000)
Payment of cash dividends.............................................. (12,630)
Net cash used by financing activities ........................................ (87,630)
Net increase in cash ................................................................. 49,400

Cash, January 1 ....................................................................... 48,400
Cash, December 31 ................................................................. $ 97,800
costing $85,000 by paying $25,000 cash and issuing a $60,000 bank loan payable.

(a) (2) (Continued)
Calculations

Sales .................................................................................................. $492,780
Deduct: Increase in accounts receivable ........................................... (32,800)
Cash receipts from customers ............................................................ $459,980

Cost of goods sold .............................................................................. $185,460
Add: Increase in inventory ................................................................. 29,650
Cost of purchases............................................................................... 215,110
Deduct: Increase in accounts payable ............................................... (15,700)
Cash payments to suppliers ............................................................... $199,410

Operating expenses from income statement ...................................... $116,410
Deduct: Depreciation expense ......................................................... (46,500)
Loss on disposal of equipment ........................................... (7,500)
Decrease in prepaid expenses ........................................... (7,600)
Increase in accrued liabilities .............................................. (4,500)
Cash payments for operating expenses ............................................. $ 50,310
(b) E-Perform’s cash position has increased primarily because of significant amounts of cash
generated from its operating activities. Cash from operating activities increased the
company’s cash account by $160,530. Some of this cash was used to purchase
equipment, repay its bank loans and pay dividends, but sufficient cash remained at the
end of the year to increase its cash position by $49,400.

PROBLEM 13-7A
(a) (1) RESOLUTE INC.

Profit ............................................................................... $27,750
provided by operating activities
Depreciation expense ............................................. $ 9,500
Impairment loss on goodwill ................................... 11,000
Increase in accounts receivable ............................. (14,000)
Increase in merchandise inventory ......................... (7,000)
Increase in accounts payable ................................. 2,000
Decrease in salaries payable.................................. (200)
Decrease in income tax payable............................. (3,000) (1,700)
Net cash provided by operating activities ................................. 26,050
Purchase of equipment (Note X) ..................................... $(4,000)
Disposal of equipment ..................................................... 8,500
Net cash provided by investing activities .................................. 4,500
Issue of common shares ................................................. $ 4,000
Repayment of bank loan payable .................................... (26,550)*
Net cash used by financing activities ........................................ (22,550)

Cash, January 1 ....................................................................... 5,000
Cash, December 31 ................................................................. $13,000
Note X to the Statement of Cash Flows: During the year, the company purchased
equipment costing $14,000 by paying $4,000 cash and issuing a $10,000 bank loan
payable.
* $50,650 + $10,000 – $34,100 = $26,550

(a) (2) RESOLUTE INC.

Statement of Cash Flows —Direct Method
Cash receipts from customers .............................. $242,000 (1)
Cash payments
To suppliers ................................................. $(145,000) (2)
For operating expenses ............................... (57,950) (3)
For interest .................................................. (4,000)
For income tax ............................................. (9,000) (4) (215,950)
Net cash provided by operating activities ...................... 26,050
Purchase of equipment (Note X) .......................... $(4,000 )
Disposal of equipment .......................................... 8,500
Net cash provided by investing activities ....................... 4,500
Issue of common shares ........................................ $ 4,000
Repayment of bank loan payable ........................... (26,550)
Net cash used by financing activities ............................... (22,550)
Net increase in cash ........................................................ 8,000

Cash, January 1 .............................................................. 5,000
Cash, December 31 ........................................................ $13,000
Note X to the Statement of Cash Flows: During the year, the company purchased
equipment costing $14,000 by paying $4,000 cash and issuing a $10,000 bank loan
payable.
(See calculations on following page.)

(a) (2) (Continued)
Calculations

Revenues ................................................................................... $256,000
Deduct: Increase in accounts receivable ................................... (14,000)
Cash receipts from customers .................................................... $242,000

Cost of goods sold ...................................................................... $140,000
Add: Increase in inventories ...................................................... 7,000
Cost of purchases....................................................................... 147,000
Deduct: Increase in accounts payable ....................................... (2,000)
Cash payments to suppliers ....................................................... $145,000

Operating expenses .................................................................. $78,250
Add: Decrease in salaries payable ............................................ 200
Deduct: Depreciation expense ................................................. (9,500)
Impairment loss on goodwill ....................................... (11,000)
Cash payments for operating expenses ..................................... $57,950
Alternatively we could isolate the portion of the cash payments relating to salaries and
show them as a separate item. Salaries paid is equal to salaries expense of $50,000
plus the decrease in salaries payable of $200 ($2,100 − $1,900) = $50,200. Cash
payments for other operating expenses would then be $57,950 − $50,200 = $7,750.

Income tax expense .................................................................. $6,000
Add: Decrease in income tax payable ....................................... 3,000
Cash payments for income tax ................................................... $9,000
(b) Resolute’s cash position has increased primarily because of significant amounts of cash
company’s cash account by $26,050. In addition, the disposal of equipment resulted in a
net increase (after the purchase of equipment) of $4,500 from investing activities. Some
of this cash was used to repay its bank loans, but sufficient cash remained at the end of
the year to increase its cash position by $8,000.

PROBLEM 13-8A
(a) SYLVESTER LTD.

Profit ............................................................................... $57,000
Depreciation expense (3) ....................................... $ 74,000
Gain on disposal of land ......................................... (7,000)
Gain on disposal of building (1) .............................. (38,000)
Loss on disposal of equipment (2) .......................... 4,000
Decrease in accounts receivable ............................ 5,000
Decrease in merchandise inventory ....................... 21,000
Increase in accounts payable ................................. 11,000
Decrease in interest payable .................................. (1,000)
Increase in income tax payable .............................. 1,000 70,000
Purchase of building (1)................................................... $(364,000)
Purchase of equipment (2) .............................................. (65,000)
Disposal of land ($110,000 – $100,000 + $7,000 gain) ... 17,000
Disposal of equipment (2)................................................ 5,000
Disposal of building (1) .................................................... 50,000
Issue of common shares ($198,000 – $88,000) .............. $110,000
Additions to bank loan ..................................................... 210,000
Repayments of bank loan ................................................ (36,000)
Dividends paid (4)............................................................ (37,000)
Net cash provided by financing activities .................................. 247,000

Cash, January 1 ....................................................................... 6,000
Cash, December 31 ................................................................. $ 23,000


Calculations:
(1) Transactions involving Buildings:
Buildings
Dec. 31, 2014 263,000 Disposal 100,000
Purchases 364,000
Dec. 31, 2015 527,000
Accumulated Depreciation—Buildings
Dec. 31, 2014 100,000
Dec. 31, 2015 67,000

Add: Gain on disposal of buildings .................................. 38,000
Cash proceeds from disposal ........................................... $50,000
Cash ................................................................................. 50,000

Accumulated Depreciation—Buildings ............................. 88,000
Gain on Disposal......................................................... 38,000
Buildings ...................................................................... 100,000
(2) Transactions involving Equipment:

Equipment
Dec. 31, 2014 40,000 Disposal 20,000
Purchases 65,000
Dec. 31, 2015 85,000
Accumulated Depreciation—Equipment
Dec. 31, 2014 10,000
Disposal 11,000 Depreciation 19,000
Dec. 31, 2015 18,000

Net carrying amount ......................................................... 9,000
Less: Loss on disposal .................................................... 4,000
Cash ................................................................................. 5,000

Loss on Disposal .............................................................. 4,000
Equipment .................................................................... 20,000

(3) Total depreciation recorded during the year:

For buildings ................................................................ $55,000
For equipment .............................................................. 19,000
Total depreciation expense for the year: ...................... $74,000
(4) Transactions involving Retained Earnings:
Retained Earnings
Dec. 31, 2014 30,000
Dividends (derived) 37,000 Profit 57,000
Dec. 31, 2015 50,000
(5) Transactions involving Bank Loan Payable:
Bank loan balance Dec. 31, 2014:

Current portion ............................................................ $ 20,000
Non-current portion ..................................................... 212,000
Total ............................................................................ $232,000

Current portion ............................................................ $ 26,000
Total ............................................................................ $406,000
Net increase during the year ($406,000 – $232,000) ....... $174,000

Additions to the bank loans during the year (given).......... 210,000
Repayments made on bank loans during the year ........... $ 36,000
(b) On the surface, Sylvester Ltd. looks as if it is managing its noncash working capital
efficiently. It decreased its accounts receivable and merchandise inventory while at the
same time increased its accounts payable. A creditor might find this alarming because,
suppliers don’t look as if they are being paid on time. As well, a decline in inventory
might not necessarily mean that the company is making sure that inventory is on hand
to secure sales.
(c) The purchase of the building was financed partially from the issuance of common
shares and mostly from increasing the bank loan. The amount of the investment for
the building is disproportionate to the amount of the retained earnings, which in turn
was substantially depleted from a large dividend payment. Profit is modest and is
made up of a one-time gain realized on the disposal of the old building. The profit level
will decline in the future as a result of servicing the additional debt. Sylvester Ltd.
could not afford to purchase the building without external financing.

PROBLEM 13-9A
(a)
($ in thousands) Reitmans Le Château
$51,797 $6,602
Cash current debt coverage $95,474 $44,871
$51,797 $6,602
Cash total debt coverage $147,724 $85,550
$51,797 – $84,433 – $6,602 – $8,723 – $0

Free cash flow $52,068
= $(84,704) = $(2,121)
(b) Reitmans is more liquid than Le Château. As evidenced by its cash current debt
coverage ratio, Reitmans is able to generate more cash to meet all of its currently
maturing liabilities than Le Château.
In terms of solvency, we again see that Reitmans has a higher cash total debt
coverage ratio than Le Château, which indicates that Reitmans is the more solvent of
the two retailers.
There is negative free cash flow for both companies, but in the case of Reitmans it is
far larger than that of Le Château because of the substantial dividends paid. Unlike Le
Château, Reitmans can afford to pay a higher level of dividends because of its greater
liquidity and solvency.

PROBLEM 13-10A
(a) Grenville appears to be the more liquid of the two companies. The company has more
assets to repay its currently maturing liabilities as evidenced by its higher current and
cash current debt coverage ratios. Grenville is moving its inventory faster than
Portage, as indicated by the company’s higher inventory turnover ratio, which again
indicates that the company is more liquid. Moreover, Grenville’s superior cash current
debt coverage ratio indicates that the company is generating more cash from
operating activities that can be used to repay current obligations.
One area of concern would be Grenville’s receivable turnover ratio, which is half of
Portage’s. Grenville is turning its receivables into cash every 37 days (365 ÷ 10 times),
which is slower than Portage who is currently taking only 18 days (365 ÷ 20) on the
average to collect its receivables. This could also partially explain Grenville’s higher
current ratio, although it would not explain all of it. In addition to this, 37 days may not
be a bad collection period, depending on Grenville’s credit policies. However, investors
may want to compare the credit terms offered by the two companies to see why there
is such a discrepancy.
(b) Grenville has a much higher percentage of debt to total assets than Portage, which
would indicate that the company is the less solvent of the two. Portage also has a much
higher times interest earned ratio than Grenville, indicating that Portage is better able to
meet its interest obligations out of current earnings. However, Grenville seems to be
generating slightly more cash that can be used toward the repayment of long-term debt
as indicated by the company’s higher cash total debt coverage ratio. Given Portage’s
significantly lower debt to total assets and higher times interest earned ratio, the
company appears to be more solvent than Grenville.

PROBLEM 13-11A
(a) Tim Hortons provided cash from operating activities that almost equalled the cash
used in investing and financing activities. The amount of cash generated from
operating activities was 37% [($559.3 – $407.8) ÷ $407.8] larger than the amount of
the profit for the year.
Although Second Cup had a loss from the year, it managed to generate positive cash
flows from operating activities that were sufficient enough to offset the negative
investing activities and most of the financing activities. By the end of the year it had
reduced its cash balance by a large margin.
Starbucks provided cash from operating activities that nearly equalled the amount of
cash consumed by investing and financing activities. The company generated 26%
more cash from operating activities than profit [($1,750.3 – $1,383.8) ÷ $1,383.8].
Cash increased modestly by the end of the year.
(b) Starbucks appears to be in the strongest cash position. It was the only company of the
three that managed to increase its cash.

PROBLEM 13-1B
(a) (b) (c)
Transaction Classification Cash Flow Profit
1. Collected an account O + NE
receivable.
2. Sold equipment for I + –
cash, at a loss. (loss
decreases
profit)
3. Recorded an NE NE +
unrealized gain on a
trading investment.
4. Acquired land by NC NE NE
issuing common
shares.
5. Expired prepaid O NE –
insurance.
6. Paid dividends to F – NE
preferred shareholders.
7. Recorded depreciation NE NE –
expense.
8. Issued preferred shares F + NE
for cash.
9. Purchased inventory for O – NE

cash. The company
uses a perpetual
inventory system.
10. Provided services on NE NE +
account.
(d) Because of the accrual basis of accounting, it is not surprising that transactions can
impact cash and profit differently. For example, in transaction #8 above, cash was
received from the issue of preferred shares without profit being affected in any way. In
transaction #10 above, revenue and profit were affected by providing services but
because they were provided on account, cash was not affected.

PROBLEM 13-2B
(a) (1)
GUM SAN LTD.
Profit ............................................................................. $768,000
Depreciation expense ........................................... $150,000
Gain on disposal ................................................... (12,000)
Increase in accounts receivable ........................... (500,000)
Decrease in inventory ........................................... 220,000
Increase in prepaid expenses ............................... (170,000)
Increase in accounts payable ............................... 50,000
Decrease in accrued expenses payable ............... (165,000)
Increase in interest payable .................................. 5,000
Increase in unearned revenue .............................. 8,000
Decrease in income tax payable .......................... (16,000) (430,000)
Net cash provided by operating activities ............................... $338,000
(2)
GUM SAN LTD.
Cash receipts
From customers.................................... $4,008,000 (1)
Cash payments
To suppliers .......................................... $(2,120,000) (2)
For operating expenses ........................ (1,267,000) (3)
For interest ........................................... (7,000) (4)
For income tax ...................................... (276,000) (5) (3,670,000)
Net cash provided by operating activities ............... $ 338,000

PROBLEM 13-2B (Continued)
Calculations
Sales ...................................................................................... $4,500,000
Add: Increase in unearned revenue........................................ 8,000
Deduct: Increase in accounts receivable ................................ (500,000)
Cash receipts from customers ................................................ $4,008,000

Cost of goods sold .................................................................. $2,390,000
Deduct: Decrease in inventories ............................................ (220,000)
Cost of purchases................................................................... 2,170,000
Deduct: Increase in accounts payable ................................... (50,000)
Cash payments to suppliers ................................................... $2,120,000

Operating expenses ............................................................... $1,070,000
Add: Gain on disposal ............................................................. 12,000
Decrease in accrued expenses payable ....................... 165,000
Increase in prepaid expenses ....................................... 170,000
Deduct: Depreciation expense .............................................. (150,000)
Cash payments for operating expenses .................................. $1,267,000
(4) Cash payments for interest

Interest expense ...................................................................... $12,000
Deduct: Increase in interest payable ....................................... (5,000)
Cash payments for interest...................................................... $ 7,000

Income tax expense ............................................................... $260,000
Add: Decrease in income tax payable ................................... 16,000
Cash payments for income tax ............................................... $276,000
(b) The answer would remain the same if Gum San were a private company. As a publicly
traded company following IFRS, Gum San has the choice to disclose interest expense
as part of investing activities rather than in operating activities. We have chosen to
report this in the operating activities section above, which is the usual practice for a
publicly-traded company and also the practice that would be followed by a private
company.

PROBLEM 13-3B
(a) (1)
HANALEI INTERNATIONAL INC.
Profit ................................................................................ $142,500
Depreciation expense .............................................. $45,000
Amortization expense .............................................. 5,000
Gain on disposal ...................................................... (25,000)
Decrease in accounts receivable ............................. 10,000
Decrease in prepaid insurance ................................ 3,000
Increase in accounts payable .................................. 9,000
Increase in salaries payable .................................... 3,000
Decrease in unearned revenue ............................... (4,000)
Increase in income tax payable ............................... 1,000 47,000
(2) HANALEI INTERNATIONAL INC.

Cash receipts from customers ............................. $571,000 (1)
Cash payments
For operating expenses .............................. $(28,000) (2)
To employees ............................................. (297,000) (3)
For interest expense ................................... (10,000)
For income tax ............................................ (46,500) (4) (381,500)
Net cash provided by operating activities ..................... $189,500

Calculations
Revenues ................................................................................. $565,000
Add: Decrease in accounts receivable ($60,000 – $50,000) ... 10,000
Deduct: Decrease in unearned revenue ($14,000 – $10,000) .. (4,000)
Cash receipts from customers .................................................. $571,000

Administrative expenses........................................................... $40,000
Deduct: Decrease in prepaid expenses .................................... (3,000)
Increase on accounts payable ................................. (9,000)
Cash payments for operating expenses ................................... $28,000
(3) Cash payments to employees

Salaries expense ...................................................................... $300,000
Deduct: Increase in salaries payable ($10,000 – $7,000) ....... (3,000)
Cash payments to employees .................................................. $297,000

Income tax expense ................................................................. $47,500
Deduct: Increase in income tax payable ($4,000 – $3,000) .... (1,000)
Cash payments for income tax ................................................. $46,500
(b) Both methods are acceptable under both IFRS and ASPE. I would recommend that the
company use the direct method to prepare its operating activities section. Users usually
find this method to be more informative because it shows cash receipts from customer
and other sources and cash payments for major categories. It is also the preferred
method by the standard setters. Nonetheless, many companies prefer to use the indirect
approach because it is easier to prepare and their accounting system may not be
adapted to capture the transaction data required in the direct method.

PROBLEM 13-4B
(a) Cash receipts and payments related to property, plant, and equipment 2015:
Equipment purchase ($80,000)

Land purchase (20,000)
Proceeds from equipment disposal 24,000*
* Cost of equipment sold: $480,000 + $80,000 – $500,000 = $60,000
Accumulated depreciation removed from accounts = ($192,000 + $128,000 –

$288,000) = $32,000
Carrying amount = $60,000 Cost – Accumulated depreciation $32,000 = $28,000
Cash proceeds = Carrying amount $28,000 – Loss on disposal $4,000 = $24,000
Note to instructor: Students may find journal entries helpful in understanding this problem.
Equipment .............................................................................................. 80,000

Cash ............................................................................................... 80,000
Land ....................................................................................................... 50,000

Cash ............................................................................................... 20,000
Mortgage Payable .......................................................................... 30,000
Cash (calculated) ................................................................................... 24,000

Accumulated Depreciation—Equipment ................................................. 32,000
Loss on Disposal .................................................................................... 4,000
Equipment ...................................................................................... 60,000

(b) Equipment purchase Investing activities (use) $(80,000)

Land purchase Investing activities (use) $(20,000)
Proceeds from equipment disposal Investing activities (source) $24,000
Also note to the financial statements:

During the year the company purchased land for $50,000 by paying $20,000 cash and
issuing a mortgage payable for $30,000.
(c) A growing company must invest in productive assets so it can be expected to use cash
in its investing activities.

PROBLEM 13-5B
(a) Cash receipts: Issue preferred shares $25,000

Cash payments: Payment of cash dividends, $7,500
Journal entry for stock dividend:
Stock Dividends (1,000 × $40) ........................................... 40,000

Common Shares.......................................................... 40,000
The T-account for Retained Earnings is provided to illustrate that all transactions have
been considered:
Retained Earnings
250,000 Beg. balance
Cash dividends 7,500
Stock dividends 40,000
37,500 Profit
240,000 End. balance
(b) Both of the above activities (issuance of preferred shares and payment of dividends)
would be classified as financing activities on the statement of cash flows.
(c) A growing company would usually be generating cash from its financing activities. Cash
is needed to invest in productive assets, such as buildings and equipment and most
companies are not able to generate sufficient cash from their operating activities. To
finance these purchases, companies have to issue debt or shares.

PROBLEM 13-6B
(a) (1)
NACKAWIC INC.
Profit ..................................................................................... $87,810
Loss on sale of long-term investments ......................... 7,500
Gain on disposal of equipment ..................................... (8,750)
Increase in accounts receivable ................................... (43,800)
Increase in inventories.................................................. (29,250)
Decrease in accrued liabilities ...................................... (6,730) (7,910)
Sale of long-term investments ............................................... $ 5,000
Disposal of property, plant, and equipment ........................... 15,550
Purchase of property, plant, and equipment .......................... (71,000)
Issue of common shares ($240,000 – $200,000) .................. $40,000
Payment of cash dividends ($121,790 + $87,810 – $175,600) (34,000)
Net cash provided by financing activities ........................................ 6,000

Cash, January 1 ............................................................................. 47,250
Cash, December 31 ....................................................................... $82,700
Note X to the Statement of Cash Flows: Equipment costing $141,000 was purchased by
paying $71,000 cash and issuing a bank loan payable for $70,000.


(a) (2)
NACKAWIC INC.
Cash receipts from customers (1) ........................................ $273,700
Cash payments
To suppliers (2) ........................................................... $(114,290)
For operating expenses (3) ......................................... (38,900)
For interest .................................................................. (12,940)
For income tax ............................................................. (27,670) (193,800)
Sale of long-term investments ............................................... $ 5,000
Disposal of property, plant, and equipment ........................... 15,550
Purchase of property, plant, and equipment .......................... (71,000)
Issue of common shares ($240,000 – $200,000) .................. $40,000
Payment of cash dividends ($121,790 + $87,810 – $175,600) (34,000)
Net cash provided by financing activities ........................................ 6,000

Cash, January 1 ............................................................................. 47,250
Cash, December 31 ....................................................................... $ 82,700
Note X to the Statement of Cash Flows: Equipment costing $141,000 was purchased by
paying $71,000 cash and issuing a bank loan payable for $70,000.


(a) (Continued)
Calculations
Revenues ................................................................................. $317,500
Deduct: Increase in accounts receivable ................................. (43,800)
Cash receipts from customers .................................................. $273,700

Cost of goods sold .................................................................. $ 99,460
Add: Increase in inventories .................................................. 29,250
Cost of purchases................................................................... 128,710
Deduct: Increase in accounts payable ................................... (14,420)
Cash payments to suppliers ................................................... $114,290

Add: Decrease in accrued liabilities ........................................ 6,730
Gain on disposal ............................................................. 8,750
(b) Nackawic’s cash position has increased primarily because of the amount of cash
company’s cash account by $79,900. Some of this cash was used to purchase
equipment and pay dividends with additional cash generated from selling common
shares. Sufficient cash remained at the end of the year to increase its cash position by
$35,450.

PROBLEM 13-7B
(a) (1) WETASKIWIN LIMITED

Profit ............................................................................... $36,000
Depreciation expense (given) ................................. $11,000
Unrealized loss on trading investments .................. 9,000
Loss on disposal ..................................................... 2,000
Decrease in accounts payable................................ (26,000)
Decrease in income tax payable............................. (8,000) (30,000)
Disposal of equipment ..................................................... $8,000
Purchase of equipment (Note X) ..................................... (5,000)
Net cash provided by investing activities .................................. 3,000
Repayment of bank loan payable .................................... $(10,000)*
Net cash used in financing activities ...................................... (10,000)
Net decrease in cash .......................................................... (1,000)

Cash, January 1 .......................................................... 10,000
Cash, December 31 .......................................................... $ 9,000
* $20,000 + $5,000 – $15,000 = $10,000
Note X to the Statement of Cash Flows: Equipment of $10,000 was purchased for
$5,000 cash and issue of a $5,000 bank loan payable.

(a) (2) WETASKIWIN LIMITED

Cash receipts from customers (1) ...................................... $272,000
Cash payments
To suppliers (2) ............................................................ $(184,000)
For operating expenses (3) .......................................... (61,000)
For interest ................................................................... (3,000)
For income tax (4) ........................................................ (18,000) (266,000)
Net cash provided by operating activities ........................... 6,000
Disposal of equipment .................................................. $8,000
Purchase of equipment (Note X) .................................. (5,000 )
Net cash provided by investing activities ............................... 3,000
Repayment of bank loan payable .................................... $(10,000)*
Net cash used in financing activities ...................................... (10,000)
Net decrease in cash ............................................................. (1,000)

Cash, January 1 .................................................................... 10,000
Cash, December 31 .............................................................. $ 9,000
*$20,000 + $5,000 – $15,000 = $10,000
Note X to the Statement of Cash Flows: Equipment of $10,000 was purchased for
$5,000 cash and issue of a $5,000 bank loan payable.
(See calculations on following page.)

(a) (2) (Continued)
Calculations
Revenues ................................................................................... $286,000
Deduct: Increase in accounts receivable ................................... (14,000)
Cash receipts from customers .................................................... $272,000

Cost of goods sold ...................................................................... $154,000
Add: Increase in inventories ...................................................... 4,000
Cost of purchases....................................................................... 158,000
Add: Decrease in accounts payable .......................................... 26,000
Cash payments to suppliers ....................................................... $184,000

Loss on disposal ......................................................... (2,000)
Alternatively we could isolate the portion of the cash payments relating to salaries and
show them as a separate item. Salaries paid are equal to salaries expense of $49,000
plus the decrease in salaries payable or minus the increase in salaries payable. There
are no salaries payable so the salaries paid are equal to salaries expense. Cash
payments for other operating expenses would then be $61,000 − $49,000 = $11,000.

Income tax expense .................................................................. $10,000
Add: Decrease in income tax payable ....................................... 8,000
Cash payments for income tax ................................................... $18,000
(b) Wetaskiwin’s cash position has decreased primarily because a relatively small amount of
cash, $6,000, was generated by its operating activities. Despite also generating cash
from the disposal of equipment in investing activities, this amount of cash was not
sufficient to cover the bank loan repayments of $10,000 and triggered a net decrease of
cash of $1,000 for the year.

PROBLEM 13-8B
(a) ANDERSON LTD.

Profit ............................................................................... $53,000
Depreciation expense (3) ....................................... $ 74,000
Gain on disposal of land ......................................... (14,000)
Gain on disposal of building (1) .............................. (28,000)
Loss on disposal of equipment (2) .......................... 5,000
Decrease in accounts payable................................ (21,000)
Decrease in interest payable .................................. (1,000)
Increase in income tax payable .............................. 1,000 (13,000)
Purchase of building (1)................................................... $(304,000)
Purchase of equipment (2) .............................................. (125,000)
Disposal of land ($110,000 – $95,000 + $14,000 gain) ... 29,000
Disposal of equipment (2)................................................ 4,000
Disposal of building (1) .................................................... 40,000
Issue of common shares ($90,000 – $88,000) ................ $ 2,000
Additions to bank loan ..................................................... 350,000
Repayments of bank loan ................................................ (36,000)
Dividends paid (4)............................................................ (33,000)
Net cash provided by financing activities .................................. 283,000
Net decrease in cash ................................................................ (33,000)

Cash, January 1 ....................................................................... 36,000
Cash, December 31 ................................................................. $ 3,000


Calculations:
(1) Transactions involving Buildings:
Buildings
Dec. 31, 2014 263,000 Disposal 90,000
Purchases 304,000
Dec. 31, 2015 477,000
Accumulated Depreciation—Buildings
Dec. 31, 2014 100,000
Dec. 31, 2015 67,000
Cost of building sold (derived) .......................................... $90,000

Add: Gain on disposal ..................................................... 28,000
Cash proceeds from disposal ........................................... $40,000
Cash ................................................................................. 40,000

Accumulated Depreciation—Buildings ............................. 78,000
Gain on Disposal......................................................... 28,000
Buildings ...................................................................... 90,000
(2) Transactions involving Equipment:

Equipment
Dec. 31, 2014 40,000 Disposal 30,000
Purchases 125,000
Dec. 31, 2015 135,000
Accumulated Depreciation—Equipment
Dec. 31, 2014 10,000
Disposal 21,000 Depreciation 29,000
Dec. 31, 2015 18,000

Net carrying amount ......................................................... 9,000
Less: Loss on disposal .................................................... 5,000
Cash ................................................................................. 4,000

Loss on Disposal .............................................................. 5,000
Equipment .................................................................... 30,000

(3) Total depreciation recorded during the year:

For buildings: ............................................................... $45,000
For equipment: ............................................................. 29,000
Total depreciation expense for the year: ...................... $74,000
(4) Transactions involving Retained Earnings:
Retained Earnings
Dec. 31, 2014 30,000
Dividends (derived) 33,000 Profit 53,000
Dec. 31, 2015 50,000
(5) Transactions involving Bank Loan Payable:

Current portion ............................................................ $ 20,000
Total ............................................................................ $232,000

Current portion ............................................................ $ 26,000
Total ............................................................................ $546,000
Net increase during the year ($546,000 − $232,000) ....... $314,000

Additions to the bank loans during the year (given).......... 350,000
Repayments made on bank loans during the year ........... $ 36,000
(b) Anderson Ltd. did not manage its noncash working capital efficiently. It increased its
accounts receivable and merchandise inventory while at the same time decreasing its
accounts payable. Taken together this shows a bad trend and possible issues with
overstocking or slowing sales.
(c) The purchase of the building was financed primarily through the use of bank loans,
which are now at a fairly high level. The required repayments to the bank loan this
year were $36,000 and this may rise in the future because of the additional debt
incurred this year. To pay for this, the company has only generated $40,000 from
operating activities. The bank will be concerned about this. Furthermore, the bank will
notice that dividends paid were over 80% of the cash from operating activities and the
bank may ask for dividends to be reduced.

PROBLEM 13-9B
(a)
(USD millions) Google Yahoo!
$16,619 ÷ $11,625 $(281.6) ÷ $1,248.8

Cash current debt coverage
= 1.4 times = N/A as negative
$16,619 ÷ $18,256 $(281.6) ÷ $2,349.5

Cash total debt coverage
= 0.9 times = N/A as negative
$16,619 – $3,273 – $0 $(281.6) – $505.5 – $0

Free cash flow
= $13,346 = $(787.1)
(b) Google is significantly more liquid than Yahoo! as evidenced by its cash current debt
coverage ratio. Google is able to generate significantly more cash to meet all of its
currently maturing liabilities.
Google is also more solvent than Yahoo! Google has a higher cash total debt
coverage ratio than Yahoo!, which indicates that Google is the more solvent of the two
companies.
Only Google has positive free cash flows. Google is both more liquid and more solvent
than Yahoo!.

PROBLEM 13-10B
(a) Barrington is definitely the more liquid of the two companies. The company has more
current assets to repay its currently maturing liabilities as evidenced by its higher
current ratio. Also, Barrington is turning its receivables into cash every 60 days (365 ÷ 6
times), which is quicker than Ste-Croix who is currently taking over 90 days on the
average to collect its receivables. As well, Barrington is moving its inventory faster than
Ste-Croix, which again, indicates Barrington is more liquid. Finally, Barrington’s cash
current debt coverage is higher than Ste-Croix’s. This indicates that Barrington is
generating more cash from operating activities that can be used to repay current
obligations.
(b) Barrington has a much higher percentage of debt to total assets than Ste-Croix, which
would indicate that the company is the less solvent of the two. However, Barrington is
generating more cash to use for the repayment of long-term debt as can be seen by
examining the cash total debt coverage ratios of the two companies. Finally, the times
interest earned ratio indicates that Barrington’s profit when compared to its required
interest payments (the company’s times interest earned ratio is 6 times) is higher than
the same ratio for Ste-Croix. Therefore, although Barrington carries more debt relative
to total assets than Ste-Croix, Barrington seems to be in a better position than Ste-
Croix to meet its obligations regarding repayment of principal and interest.

PROBLEM 13-11B
(a) All three companies generated cash from operating activities and used cash in
investing and financing activities, with the exception that Burger King which generated
cash from investing activities. All three companies produced more cash from operating
activities than profit with Wendy’s showing the largest proportion of cash from
operating activities to profit. McDonald’s showed no increase in cash and cash
equivalents while Burger King showed a 19.1% increase in cash and cash equivalents,
whereas Wendy’s showed a net decrease in cash and cash equivalents.
($ in USD millions) McDonald’s Burger King Wendy’s

Profit $5,464.8 $117.7 $9.5
Net cash provided by $6,966.1 $224.4 $190.4
operating activities
Net cash provided by $1,501.3 $106.7 $180.9
operating activities in
excess of profit
Net cash provided by 127.5% 190.7% 2,004.2%
operating activities as a %
of profit
% increase in cash from 0% 19.1% (4.6)%
prior year
(b) Burger King is in the strongest position. It shows the highest percentage increase in
cash during the year. Because we need to ignore the comparisons to profit for
Wendy’s due to the extremely small profit, Burger King has the highest proportion of
net cash provided by operating activities to profit. Despite McDonald’s far larger profit
and cash amounts, proportionately, Burger King appears to be the stronger of the two
from a “cash generated by operating activities” perspective. More information in terms
of past trends would be helpful to properly compare the two.

BYP 13-1 FINANCIAL REPORTING
(a) Shoppers Drug Mart uses the indirect method of calculating operating activities.
(b) Shoppers generated cash from operating activities in the amount of $916,816,000 in
2012 and $973,838,000 in 2011.
(c) The most significant investing activity for Shoppers is cash used in the acquisition and
development of property and equipment in the amount of $254,259,000. For financing
activities, Shoppers did a refinancing of debt by issuing one quarter of a billion dollars
of commercial paper and repaying long-term debt of the same amount.
(d) Cash decreased in 2012 by $14,037,000 and increased in 2011 in the amount of
$54,212,000.
(e) Shoppers grew from acquiring property and equipment, and from developing property
with a cost that was approximately one quarter of a billion dollars in total. It also spent
considerable amounts of cash buying other businesses.
(f) Shoppers used the cash generated from operating activities to repurchase its own
shares and to pay dividends. These payments were also made in similar amounts in
2011.

BYP 13-2 COMPARATIVE ANALYSIS

Shoppers Jean Coutu
(a) Ratio (in thousands $) (in millions $)
Cash $916,816 $223.8
current = 0.4 times = 0.7 times
1. ($2,334,917 + $1,776,238) ÷ 2 ($265.2 + $408.7) ÷ 2
debt
coverage
Current $2,764,997 $421.9
2. ratio = 1.2 :1 = 1.6 :1
$2,334,917 $265.2
Cash total $916,816 $223.8
3. debt = 0.3 times = 0.6 times
coverage ($3,150,394 + $3,032,480) ÷ 2 ($281.9 + $423.6) ÷ 2
Debt to $3,150,394 $281.9
4. total = 42.2% = 20.2%
assets $7,473,721 $1,392.7
Times $608,481 + $57,595 + $214,845 $558.4 + $2.0 + $78.9
5. interest = 15.3 times = 319.7 times
earned $57,595 $2.0
Free cash
6. flow $916,816 – $395,074 – $218,732 = $303,010 $223.8 – $66.0 – $60.8 = $97.0
(b) From all measures arrived at in part (a), we can conclude that Jean Coutu enjoys far
better liquidity and solvency than Shoppers. While Shoppers demonstrates good ratios,
for debt to total assets and times interest earned, the corresponding ratios are far
superior with Jean Coutu.
(c) In order to conclude which company is more committed to growth, we would look at the
investing activities of the statement of cash flows. While Jean Coutu has a net cash
position in investing activities from selling Rite Aid, Shoppers incurred a large cash
outflow from purchasing investments in businesses and developing properties for new
store locations. Shoppers is, therefore, the company most committed to growth.
In order to conclude which company is more committed to paying down debt, we would
look at the financing activities the statement of cash flows. Shoppers’ financing activities
consisted primarily of cash payments to buy back common shares and pay dividends.
On the other hand, Jean Coutu appears to have used the proceeds from the sale of
Rite Aid to pay down its revolving credit facility. This explains in part why the debt to
total asset and times interest earned ratios are more favourable with Jean Coutu. Jean
Coutu is more committed to paying down debt.
Looking at the proportion of cash obtained from operating activities paid out in
dividends, Shoppers percentage payout is slightly lower than that of Jean Coutu.
Shoppers’ is 23.9% ($218,732 ÷ $916,816) while Jean Coutu’s is 27.1% ($60.8 ÷
$223.8).

BYP 13-3 COMPARING IFRS AND ASPE
(a) Companies following ASPE classify interest paid, interest revenue, and dividend
revenue, as part of operating activities because they are disclosed on the income
statement as part of profit. Dividend payments are classified as financing activities. This
is the most common practice for both publicly traded and private companies.
Companies following IFRS may classify interest and dividend revenue as either
investing activities or operating activities; and interest and dividend payments as either
financing activities or operating activities. In order to present the strongest (largest)
performance for cash obtained from operating activities, Discount Ltd.’s management
probably chose to classify interest and dividend revenue as operating activities as these
can only be positive cash flows and likely would have chosen to classify interest and
dividend payments under financing activities as these can only be negative cash flows.
(b) Increasing the cash flows from operating activities by using the classification choices
described in part (a) will cause Discount Ltd. to have a higher (better) cash debt
coverage and higher (better) cash total debt coverage since, in both ratios, the
numerator will be larger. The choice will also provide for a larger (better) free cash flow
ratio as the amount of cash flow from operating activities will be larger, leaving more
cash remaining after covering capital expenditures and dividend payments.

BYP 13-4 CRITICAL THINKING CASE
Note to instructors: All of the material supplementing this group activity, including a
suggested solution, can be found in the Collaborative Learning section of the Instructor
Resource site accompanying this textbook as well as in the Prepare and Present section of
WileyPLUS.
(a) During 2014, the purchase of property, plant, and equipment in the amount of $2 billion
dollars was financed differently by the three companies. While some of the financing
came from using cash generated from operations, A Limited chose to finance the
balance needed with a blend of debt and equity financing that was similar in amount. B
Limited chose to use only equity and C Limited financed with mostly debt. For 2015,
expansion continued at an even greater pace for A Limited, which spent $2,350 million
on property, plant, and equipment, while B and C acquired far less of these assets. A
Limited financed this higher level of expenditures by using net cash from operating
activities and by issuing more common shares.
Because the majority of the investments in 2014 made by C Limited were financed with
debt, even though C Limited was able to pay down some of this debt in 2015 and
reduce it to a lower amount than the debt held by A Limited, relative to its assets, of the
three companies, C Limited still has the greatest percentage of its assets financed with
debt as the other two companies have used equity more extensively than C Limited.
(b) Because A Limited financed expansion in 2015 using mostly equity, and it grew its
operations in that year through expansion, it generated the most cash from operations.
The cash total debt coverage is determined by taking cash from operating activities and
dividing it by average total liabilities. Even though A Limited has the highest cash flow
from operations, B Limited has very little debt and because of this, is likely the company
that would have the highest cash to total debt ratio.
(c) C Limited is the only company that had a decrease in the net cash from its operating
activities in 2015. This happened because too much cash was tied up in accounts
receivable and inventory. The increases in these current assets, particularly during
2015, caused a large reduction of cash that could have been used instead to reduce the
high levels of debt.
(d) C Limited likely did not have a choice to pay down its bank loans in 2015. It was forced
to do so by the bank. C Limited had poor performance in managing accounts receivable
and inventory that in turn caused a shortage of cash needed to satisfy the bank’s
concerns with regard to its liquidity and solvency. C Limited resorted to the desperate
measure of selling off some its non-current assets at a loss of $70 million to raise the
cash needed to pay down the bank loans.

BYP 13-4 (Continued)
(e) As a shareholder interested in dividends and not in growth in the value of my

investment, I would consider investing in B Limited. The amount of dividends paid by B
Limited in 2015 was $120 million, which is 10% of the total value of shares issued. This
percentage is lower for the other two companies so shareholders in B Limited are
receiving the largest dividend relative to the amount invested.
(f) A Limited is the company most committed to growth as demonstrated by the large
investment in property, plant and equipment that continued into 2015. So long as
shareholders feel that the cash spent provides for growth in the market value of the
common shares issued, the pace of expansion is not excessive since it was financed
with equity, which will not cause a reduction in cash flow due to interest payments.
(g) C Limited has the highest free cash flow.
A Limited B Limited C Limited

Net cash provided by operating activities $1,030 $980 $820
Purchases of property, plant, and equipment (2,350) (830) (430)
Dividends paid (100) (120) (5 )
Free cash flow $(1,420) $30 $385
(h) If I was interested in owning the shares of one of these companies, I would likely not
invest in C Limited due to the build up of inventory and accounts receivable shown in
the operating activities section of the statement of cash flows. I would also be
concerned about a management team that raised funds in 2014 to buy non-current
assets, and then sold some of them in 2015 at a loss. As an investor I would like the
fact that A Limited is growing, but I would like to know at what point the expansion
occurred in 2015. If it occurred early in the year, one would expect, given the larger
asset base of this company, that profit would be higher. On the other hand if the
expansion occurred very late in 2015, the extra asset base could trigger much higher
amounts of profit next year compared to 2015. On the other hand B Limited seems to
be conservatively financed with little debt, so it has the potential to expand very easily in
the future. So before making a decision, I would need more information about the
success of A Limited’s 2015 expansion before buying their shares. On the other hand,
B Limited is probably the safest company to lend money to, given its low level of debt
and its reasonably high operating cash flows.

BYP 13-5 ETHICS CASE
(a) A company’s dividend policy should be based on several factors other than the
requirement to pay the “usual” dividend. Some of these factors include:
• Legal requirements such as the Business Corporations Acts for the jurisdiction in
which the company is incorporated. For example, the Canada Business
Corporations Act specifies certain requirements that must be met in order for
companies to be able to pay dividends; these requirements include solvency and
a positive (credit) balance in Retained Earnings.
• Creditor or other contractual requirements: some creditor loan agreements can
specify financial ratios that must be maintained or limit the amounts of dividends
that can be paid out to shareholders.
• The company’s short-term and long-term budgets and goals. The payment of
dividends uses the company’s cash, and management has to ensure that
sufficient cash remains to operate the business and meet its short-term and long-
term goals, such as property, plant, and equipment purchases, expansion, debt
repayment, etc.
(b) The stakeholders in this situation are:

Phil Monat, president and CEO of Onwards and Upwards Corporation
Leland Yee, controller
The board of directors
The shareholders of Onwards and Upwards Corporation
(c) The president’s statement, “We must get that amount above $1 million,” puts undue
pressure on the controller. This statement along with his statement, “I know you won’t
let me down Leland,” encourages Leland to do something unethical.
Controller Leland Yee’s reclassification (intentional misclassification) of cash payments

from interest as an operating activity to a financing activity is inappropriate and
unethical. Although companies reporting under IFRS have the choice to show interest
payments under either operating or financing activities, the presentation must be
consistent from year to year.
(d) Yes. Under IFRS, it is permissible to show interest paid as a financing rather than an
operating cash payment but just like the dividend payment discussed above, such a
change should be consistent from year to year. Companies reporting under ASPE must
classify interest paid as part of operating activities and do not have the choice to show
these payments as part of financing activities.

BYP 13-6 “ALL ABOUT YOU” ACTIVITY
(a) Statement of Cash Flows—Direct Method

Year Ended (date)
Cash receipts from salary ..................................... $45,000
Cash payments
For rent and utilities ..................................... $(16,600)
For interest .................................................. (1,400)
For car expenses ......................................... (4,800)
For food, entertainment and recreation ....... (6,000) (28,800 )
Net cash provided by operating activities ...................... 16,200
Purchase of car .................................................... $(20,000 )
Purchase of investments ...................................... (5,500)
Purchase of computer .......................................... (1,500)
Disposal of computer ............................................ 100
Disposal of motorcycle ......................................... 1,000
Net cash used in investing activities .............................. (25,900)
Increase in credit card debt ($2,500 – $1,000) ....... $ 1,500
Decrease in line of credit ($2,500 – $1,200) ......... (1,300)
Car loan obtained ................................................... 15,000
Repayment of student loan ($15,000 – $10,000) ... (5,000)
Net cash provided by financing activities ......................... 10,200
Net increase in cash ........................................................ 500

Cash, beginning of year................................................... 500
Cash, end of year ............................................................ $ 1,000
(b) Depending on the level of security for the large investment made during the year, your
friend should likely consider the benefits of eliminating some interest expenses by
reducing debt that carries a higher interest rate than the yield obtained from the
investment.

BYP 13-7 SERIAL CASE

(a)
Biscuits Coffee Beans

Koebel’s Family Bakery ($ in thousands) ($ in thousands)
$235,279 $6,821 $1,594
Cash current debt
coverage ratio $31,121 $16,233 $3,759
= 7.6 times = 0.4 times = 0.4 times
$235,279 $6,821 $1,594

Cash total debt
coverage ratio $81,551 $27,758.5 $8,879
= 2.9 times = 0.2 times = 0.2 times
$235,279 – $144,000 – $6,821 – $3,414 – $1,594 – $1,448 –

Free cash flow $120,000 $580 $0
= $(28,721) = $2,827 = $146
(b) Koebel is able to generate a significant amount of cash from its operating activities—in
excess of its profit. It uses cash for both its investing activities and financing activities.
The use of cash in investing activities indicates that Koebel is investing in its plant and
equipment, which is a good sign for future growth. Its use of cash in financing activities
indicates that they are either repaying more debt than they are raising (through debt or
equity) or are using cash for dividends. From the additional information, we can
determine that a $120,000 dividend was paid, which exceeded the amount that Daniel
contributed in equity ($107,500). See Chapter 11.
Biscuits is also generating a significant amount of cash from its operating activities—far
in excess of its profit. It is also using cash in both its investing and financing activities.
From this, it appears to be at the maturity stage of its corporate life cycle.
Coffee Beans’ cash flows tell a bit of a different story. Although it is also generating a
significant amount of cash from its operating activities in excess of its profit, it is
insufficient to cover the investing and financing activities. It does not pay a dividend so
most of its cash used for financing activities is likely repaying debt on its capital
expenditures. All of this has resulted in a net decrease in cash during the year, leaving
the company with a low ending cash balance.

BYP 13-7 (Continued)

(c) As we saw above, Koebel is generating positive cash from its operating activities. While
its free cash flow is negative (because of its investment in capital expenditures and
relatively large dividend), it has little debt and is able to pay a generous dividend from its
operating activities. Its cash current debt coverage and cash total debt coverage ratios
indicate that the cash provided from its operating activities is more than sufficient to pay
the current and total liabilities. Overall, the company appears to report strong profit and
cash flow, which are likely two of the financial reasons Biscuits and Coffee Beans are
interested in acquiring Koebel, in addition to strategic reasons discussed in the past.
(d) The Koebels will likely favour Biscuits over Coffee Beans. Biscuits appears to have a
stronger financial position than Coffee Beans. It has more cash available to pay for its
investment in Koebel’s Family Bakery. Coffee Beans, on the other hand, does not pay a
dividend and has decreased its overall cash position during 2016. Even though its cash
current debt coverage and cash total debt coverage ratios are similar to those of
Biscuits, its free cash flow is significantly less.
Other issues the Koebels should consider before finalizing their decision could include:
• Determining what percentage of ownership Natalie and Daniel will have going
forward.
• How will Natalie and Daniel feel about the change in control?
• Will they be paid in cash for the purchase of their shares or will they be asked to take
back a note or preferred shares in partial payment?
• What are the income tax consequences of this sale?

Legal Notice
Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights
reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval
system, modified, made available on a network, used to create derivative works, or
transmitted in any form or by any means, electronic, mechanical, photocopying, recording,
scanning, or otherwise without the prior written permission of John Wiley & Sons Canada,
Ltd.
(MMXIII xi FI)


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ASSIGNMENT CLASSIFICATION TABLE

1. Describe the purpose 1, 2, 3, 4, 1, 2, 3 1, 2 1A 1B 1, 3, 5

2. Prepare the operating 6, 7, 8, 14, 3, 13 11A 11B 1, 7

(a) the indirect method or 9, 10, 11 3, 4, 5 4, 5, 8, 9, 2A, 3A, 2B, 3B,

5. Complete the statement 18 8, 9, 12 6A, 7A, 6B, 7B, 1, 6, 7

Solutions Manual 13-1 Chapter 13

ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

1A Classify activities. Simple 20-30

2A Prepare operating activities section—indirect and Moderate 30-40

3A Prepare operating activities section—indirect and Moderate 30-40

5A Calculate and classify cash flows for shareholders’ Moderate 20-30

6A Prepare statement of cash flows—indirect and direct Moderate 30-40

7A Prepare statement of cash flows—indirect and direct Moderate 50-60

8A Prepare statement of cash flows (indirect method) Complex 40-50

9A Calculate and evaluate liquidity and solvency. Moderate 20-30

10A Evaluate liquidity and solvency. Moderate 20-30

11A Compare cash flows for three companies. Moderate 20-30

1B Classify activities. Simple 20-30

2B Prepare operating activities section—indirect and Moderate 40-50

3B Prepare operating activities section—indirect and Moderate 50-60

5B Calculate and classify cash flows for shareholders’ Moderate 30-40

Solutions Manual 13-2 Chapter 13

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

6B Prepare statement of cash flows—indirect and direct Moderate 30-40

7B Prepare statement of cash flows—indirect and direct Moderate 50-60

8B Prepare statement of cash flows (indirect method) Complex 40-50

9B Calculate and evaluate liquidity and solvency. Moderate 20-30

10B Evaluate liquidity and solvency. Moderate 20-30

11B Compare cash flows for three companies. Moderate 20-30

Solutions Manual 13-3 Chapter 13

5. Examples of noncash transactions include the issue of shares or a mortgage to

Solutions Manual 13-4 Chapter 13

Answers to Questions (Continued)

(2) A comparative statement of financial position is required to obtain the changes in

(4) The statement of comprehensive income is needed to reconcile certain fair-valued

Solutions Manual 13-5 Chapter 13

Answers to Questions (Continued)

Example: Profit before depreciation $5,000

Solutions Manual 13-6 Chapter 13

Answers to Questions (Continued)

Solutions Manual 13-7 Chapter 13

Answers to Questions (Continued)

Solutions Manual 13-8 Chapter 13

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 13-1

BRIEF EXERCISE 13-2

BRIEF EXERCISE 13-3

Solutions Manual 13-9 Chapter 13

BRIEF EXERCISE 13-4

BRIEF EXERCISE 13-5

Solutions Manual 13-10 Chapter 13

BRIEF EXERCISE 13-6

+ Decrease in accounts receivable

BRIEF EXERCISE 13-7

+ Increase in inventory + Decrease in accounts payable

BRIEF EXERCISE 13-8

Operating + Increase in prepaid expenses

Solutions Manual 13-11 Chapter 13

BRIEF EXERCISE 13-9

Income tax expense $90,000

Income tax expense $90,000