The financial statements for Nike, Inc., are provided in Appendix B at the end of the text.

b. How might a lender use free cash flow to determine whether or not to give Nike, Inc., a loan?

Sweeter Enterprises Inc. has cash flows from operating activities of $539,000. Cash flows used for investments in property, plant, and equipment totaled$210,000, of which 75% of this investment was used to replace existing capacity.

b. How might a lender use free cash flow to determine whether or not to give Sweeter Enterprises Inc. a loan?

Sweeter Enterprises Inc. has cash flows from operating activities of $539,000. Cash flows used for investments in property, plant, and equipment totaled$210,000, of which 75% of this investment was used to replace existing capacity.

a. Determine the free cash flow for Sweeter Enterprises Inc.

The income statement for Rhino Company for the current year ended June 30 and balances of selected accounts at the beginning and the end of the year are as follows:

$$\begin{array}{lrr} \text{Sales} && \$445,500\\ \text{Cost of merchandise sold} && \underline{154,000}\\ \text{Gross profit} && \$291,500\\ \text{Operating expenses:}\\ \text{$\quad$Depreciation expense} & \$\hspace{10pt} 38,500\\ \text{$\quad$Other operating expenses} & \underline{115,280}\\ \text{$\quad\quad$Total operating expenses} && \underline{153,780}\\ \text{Income before income tax } && \$137,720\\ \text{Income tax expense} && \underline{39,600}\\ \text{Net income} && \underline{\underline{\$\hspace{5pt} 98,120}}\\ \end{array}$$

$$\begin{array}{lrr} & \textbf{End} & \textbf{Beginning}\\ & \textbf{of Year} & \textbf{of Year}\\ \\ \text{Accounts receivable (net)} & \$36,300 & \$31,240\\ \text{Inventories} & 92,400 & 80,300\\ \text{Prepaid expenses} &14,520 & 15,840\\ \text{Accounts payable (merchandise creditors)} & 67,540 & 62,700\\ \text{Accrued expenses payable (operating expenses) } &19,140& 20,900\\ \text{Income tax payable } &4,400 & 4,400\\ \end{array}$$

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.

The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:

$$\begin{array}{lrr} \text{Sales} && \$511,000\\ \text{Cost of merchandise sold} && \underline{290,500}\\ \text{Gross profit} && \$220,500\\ \text{Operating expenses:}\\ \text{$\quad$Depreciation expense } & \$\hspace{5pt} 39,200\\ \text{$\quad$Other operating expenses} & \underline{105,000}\\ \text{Total operating expenses} && \underline{144,200}\\ \text{Income before income tax } && \$\hspace{5pt} 76,300\\ \text{Income tax expense } && \underline{21,700}\\ \text{Net income} && \underline{\underline{\$\hspace{5pt} 54,600}}\\ \end{array}$$

Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:

$$\begin{array}{lr} & \textbf{Increase}\\ & \textbf{(Decrease)}\\ \\ \text{Accounts receivable (net)} & \$(11,760)\\ \text{Inventories} &3,920\\ \text{Prepaid expenses} & (3,780)\\ \text{Accounts payable (merchandise creditors)} &(7,980)\\ \text{Accrued expenses payable (operating expenses)} &1,260\\ \text{Income tax payable} &(2,660)\\ \end{array}$$

What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?

The income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:

$$\begin{array}{lrr} \text{Sales} && \$511,000\\ \text{Cost of merchandise sold} && \underline{290,500}\\ \text{Gross profit} && \$220,500\\ \text{Operating expenses:}\\ \text{$\quad$Depreciation expense } & \$\hspace{5pt} 39,200\\ \text{$\quad$Other operating expenses} & \underline{105,000}\\ \text{Total operating expenses} && \underline{144,200}\\ \text{Income before income tax } && \$\hspace{5pt} 76,300\\ \text{Income tax expense } && \underline{21,700}\\ \text{Net income} && \underline{\underline{\$\hspace{5pt} 54,600}}\\ \end{array}$$

Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:

$$\begin{array}{lr} & \textbf{Increase}\\ & \textbf{(Decrease)}\\ \\ \text{Accounts receivable (net)} & \$(11,760)\\ \text{Inventories} &3,920\\ \text{Prepaid expenses} & (3,780)\\ \text{Accounts payable (merchandise creditors)} &(7,980)\\ \text{Accrued expenses payable (operating expenses)} &1,260\\ \text{Income tax payable} &(2,660)\\ \end{array}$$

Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the direct method.

Selected data taken from the accounting records of Ginis Inc. for the current year ended December 31 are as follows:

$$\begin{array}{lrr} & \begin{array}{c} \textbf { Balance, } \\ \textbf { December 31 } \end{array} & \begin{array}{c} \textbf { Balance, } \\ \textbf { January 1 } \end{array} \\ \hline \text { Accrued expenses payable (operating expenses) } & \$ 12,650 & \$ 14,030 \\ \text { Accounts payable (merchandise creditors) } & 96,140 & 105,800 \\ \text { Inventories } & 178,020 & 193,430 \\ \text { Prepaid expenses } & 7,360 & 8,970 \end{array}$$

During the current year, the cost of merchandise sold was $1,031,550, and the operating expenses other than depreciation were$179,400. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows.

Determine the amount reported on the statement of cash flows for cash payments for operating expenses.

Selected data taken from the accounting records of Ginis Inc. for the current year ended December 31 are as follows:

$$\begin{array}{lrr} & \begin{array}{c} \textbf { Balance, } \\ \textbf { December 31 } \end{array} & \begin{array}{c} \textbf { Balance, } \\ \textbf { January 1 } \end{array} \\ \hline \text { Accrued expenses payable (operating expenses) } & \$ 12,650 & \$ 14,030 \\ \text { Accounts payable (merchandise creditors) } & 96,140 & 105,800 \\ \text { Inventories } & 178,020 & 193,430 \\ \text { Prepaid expenses } & 7,360 & 8,970 \end{array}$$

During the current year, the cost of merchandise sold was $1,031,550, and the operating expenses other than depreciation were$179,400. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows.

Determine the amount reported on the statement of cash flows for cash payments for merchandise.

The cost of merchandise sold for Kohl’s Corporation for a recent year was $15,480 million. The balance sheet showed the following current account balances (in millions):

$$\begin{array}{lcc} & \begin{array}{c} \textbf { Balance, } \\ \textbf { End of Year } \end{array} & \begin{array}{c} \textbf { Balance, } \\ \textbf { Beginning of Year } \end{array} \\ \hline \text { Merchandise inventories } & \$ 4,050 & \$ 3,420 \\ \text { Accounts payable } & 1,494 & 1,260 \end{array}$$

Determine the amount of cash payments for merchandise.

Provide the major advantages of an indirect method of reporting cash flows from operating activities.

The comparative balance sheet of Lankau Enterprises Inc. at December 31, 2014 and 2013, is as follows:

$$\begin{array}{lrr} & \textbf{Dec. 31, 2014} & \textbf{Dec. 31, 2013}\\ \\ \textbf{Assets}\\ \text{Cash } & \$\hspace{10pt} 219,900 & \$\hspace{10pt} 269,700\\ \text{Accounts receivable (net)} &336,900 & 363,000\\ \text{Merchandise inventory} & 482,400 & 448,800\\ \text{Prepaid expenses} &20,100 & 14,400\\ \text{Equipment } & 982,500 & 805,500\\ \text{Accumulated depreciation—equipment} & \underline{(256,200)} & \underline{(198,300)}\\ & \underline{\underline{\$1,785,600}} & \underline{\underline{\$1,703,100}}\\ \\ \textbf{Liabilities and Stockholders’ Equity}\\ \text{Accounts payable (merchandise creditors)} & \$\hspace{10pt} 375,300 & \$\hspace{10pt} 356,400\\ \text{Mortgage note payable } & 0& 504,000\\ \text{Common stock, \$25 par} & 411,000 & 36,000\\ \text{Paid-in capital: Excess of issue price over par}\\ \text{$\quad$—common stock} &705,000 & 480,000\\ \text{Retained earnings} & \underline{294,300} & \underline{326,700}\\ & \underline{\underline{\$1,785,600}} & \underline{\underline{\$1,703,100}}\\ \end{array}$$

Additional data obtained from the income statement and from an examination of the accounts in the ledger for 2014 are as follows:

a. Net income, $198,000.

b. Depreciation reported on the income statement,$125,100.

c. Equipment was purchased at a cost of $244,200, and fully depreciated equipment costing$67,200 was discarded, with no salvage realized.

d. The mortgage note payable was not due until 2016, but the terms permitted earlier payment without penalty.

e. 15,000 shares of common stock were issued at $40 for cash.

f. Cash dividends declared and paid,$230,400.

Instruction

Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.

The comparative balance sheet of Harris Industries Inc. at December 31, 2014 and 2013, is as follows:

$$\begin{array}{lrr} & \textbf{Dec. 31, 2014} & \textbf{Dec. 31, 2013}\\ \\ \textbf{Assets}\\ \text{Cash} & \$\hspace{10pt} 443,240 & \$\hspace{10pt} 360,920\\ \text{Accounts receivable (net)} & 665,280 & 592,200\\ \text{Inventories} & 887,880 & 1,022,560\\ \text{Prepaid expenses} & 31,640 & 25,200\\ \text{Land} & 302,400 & 302,400\\ \text{Buildings} & 1,713,600 & 1,134,000\\ \text{Accumulated depreciation—buildings} & (466,200) & (414,540)\\ \text{Machinery and equipment} & 781,200 & 781,200\\ \text{Accumulated depreciation}\\ \text{$\quad$—machinery and equipment} & (214,200) & (191,520)\\ \text{Patents} & \underline{106,960} & \underline{112,000}\\ & \underline{\underline{\$4,251,800}} & \underline{\underline{\$3,724,420}}\\ \\ \textbf{Liabilities and Stockholders’ Equity}\\ \text{Accounts payable (merchandise creditors)} & \$\hspace{10pt} 837,480 & \$\hspace{10pt} 927,080\\ \text{Dividends payable} & 32,760 & 25,200\\ \text{Salaries payable} & 78,960 & 87,080\\ \text{Mortgage note payable, due 2017} & 224,000 & 0\\ \text{Bonds payable} & 0 &390,000\\ \text{Common stock, \$5 par } & 200,400 &50,400\\ \text{Paid-in capital: Excess of issue price over par}\\ \text{$\quad$—common stock} & 366,000 & 126,000\\ \text{Retained earnings} & \underline{2,512,200} & \underline{2,118,660}\\ & \underline{\underline{\$4,251,800}} & \underline{\underline{\$3,724,420}}\\ \end{array}$$

An examination of the income statement and the accounting records revealed the following additional information applicable to 2014:

a. Net income, $524,580.

b. Depreciation expense reported on the income statement: buildings,$51,660; machinery and equipment, $22,680.

c. Patent amortization reported on the income statement,$5,040.

d. A building was constructed for $579,600.

e. A mortgage note for$224,000 was issued for cash.

f. 30,000 shares of common stock were issued at $13 in exchange for the bonds payable.

g. Cash dividends declared,$131,040.

Instruction

Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.

Identify whether each of the following would be reported as an operating, investing, or financing activity on the statement of cash flows.

a. Purchase of investments b. Disposal of equipment c. Payment for selling expenses d. Collection of accounts receivable e. Cash sales f. Issuance of bonds payable

Identify whether each of the following would be reported as an operating, investing, or financing activity on the statement of cash flows.

a. Payment of accounts payable b. Payment for administrative expenses c. Purchase of land d. Issuance of common stock e. Retirement of bonds payable f. Cash received from customers