Chapter 1

Financial Information and Cash Flows

learning OBJECTIVES
LO 1 Define and explain the conceptual bases of
LO 5 Calculate book value and cash received for selling

accounting long-term assets
LO 2 Explain and interpret different components of
LO 6 Analyze the statement of cash flows and discuss basic

financial statements cash management techniques
LO 3 Classify operating, investing and financing activities
LO 7 Discuss ethical issues related to cash flow

LO 4 Prepare a statement of cash flows using the indirect

method

Access the integrated resource library for tutorials,

practice exercises, the digital textbook and more.

Assessment Questions
AS-1 LO 1

What are Generally Accepted Accounting Principles (GAAP)? Explain.

GAAP refers to standards created by the accounting profession to provide guidance on how financial information
should be recorded and reported. They are necessary so that different users of the financial information are able
to compare the information to prior periods and different companies.

AS-2 LO 1

What are the two main sets of standards acceptable under Generally Accepted Accounting Principles (GAAP) in
Canada?
Accounting Standards for Private Enterprises (ASPE) and International Financial Reporting Standards (IFRS)

AS-3 LO 1

What is USALI? Is it required under GAAP?

Uniform System of Accounts for the Lodging Industry (USALI) is a set of guidelines for preparation and
presentation of financial statements with formats and account classifications standardized specifically for the
hospitality industry. USALI is voluntary under GAAP.

AS-4 LO 1

Explain the difference between cash and accrual accounting.

The cash basis of accounting recognizes transactions only when cash is exchanged. The accrual basis of
accounting recognizes transactions when they happen regardless of when cash is exchanged.

1
Chapter 1 Financial Information and Cash Flows

AS-5 LO 2

Explain the purpose of the balance sheet and what information it contains.
The balance sheet reports the assets, liabilities and equity of a company at a point in time. It is a record of what
the company owns and owes and of the profit accumulated in the company.

AS-6 LO 2

Explain the purpose of the income statement and what information it contains.
An income statement indicates the net income or profit, or net loss, for a company for a period of time. It
reports all revenues earned (also referred to as sales) and all expenses incurred for that period.

AS-7 LO 3

Is the statement of cash flows an optional statement? Explain.

The statement of cash flows is not optional. It is required by GAAP under both ASPE and IFRS.

AS-8 LO 3

Identify the three ways a business can generate and use cash.
A business can generate and use cash through operating, investing and financing activities.

AS-9 LO 3

What does cash flow from operating activities represent?

Cash flow from operating activities represents cash movement within a company based on day-to-day activities.

AS-10 LO 3

What does cash flow from investing activities represent?

Cash flow from investing activities represents cash changes based on the purchase or sale of long-term assets.

AS-11 LO 3

What does cash flow from financing activities represent?

Cash flow from financing activities represents cash received from investors and lenders to help run or finance the
business and cash paid back to the investors (dividends) and lenders (principal repayment).

AS-12 LO 4

Which financial statements are required to prepare a statement of cash flows?

The current year’s income statement and a comparative balance sheet with the current year and the previous
year’s balances are needed to prepare a statement of cash flows.

2
Financial Information and Cash Flows Chapter 1

AS-13 LO 4

Which items appear in the cash flow from operating activities section of the statement of cash flows using the
indirect method?
Net income, non-cash or non-operating items in the income statement (e.g. depreciation and gains or losses
on the disposal of equipment), and changes in current assets and current liabilities are all reported in the cash
flow from operating activities section.

AS-14 LO 4

Which items appear in the cash flow from investing activities section of the statement of cash flows?
Purchases and sales of property, equipment and other long-term assets are recorded in the cash flow from
investing activities section.

AS-15 LO 4

Which items appear in the cash flow from financing activities section of the statement of cash flows?
Changes in financing debt, changes in preferred and common shares, and dividends are reported in the cash
flow from financing activities section.

AS-16 LO 5

What does a gain on the sale of equipment indicate?

A gain on the sale of equipment indicates that equipment was sold for more than the book value.

AS-17 LO 5

How is a gain on sale of equipment shown on the statement of cash flows using the indirect method?
A gain on sale of equipment is subtracted from net income in the cash flow from operating activities section.
The proceeds from the sale of equipment (including the gain) is reported in the investing activities section.

AS-18 LO 6

Define free cash flow.

Free cash flow is the amount of cash remaining after a company has covered its operating activities and capital
expenditures.

AS-19 LO 6

Why would an investor or creditor want to see a company show a positive free cash flow amount?
A positive free cash flow indicates that the company has cash available to pay for financing. This can be either
to pay back debt or to pay dividends to shareholders.

AS-20 LO 7

What are some actions a company may be tempted to take to unethically and artificially improve its statement
of cash flows presentation?
In an attempt to artificially improve its statement of cash flows presentation, a company may delay paying its
accounts payable, finance its payables or shorten its collection period on receivables.

3
Chapter 1 Financial Information and Cash Flows

Application Questions Group A

AP-1A LO 3

For each item listed, indicate how the item will impact cash flow (increase, decrease or no change) using the
indirect method.

Item Effect on Cash

Net income Increase
Increase in accounts payable Increase
Decrease in accounts receivable Increase
Purchase of long-term assets Decrease
Payment of notes payable Decrease
Increase in food inventory Decrease
Payment of dividends Decrease
Increase in loan payable Increase
Increase in prepaid insurance Decrease

AP-2A LO 3

Indicate the section of the statement of cash flows where each item would be located (operating, investing or
financing activities) using the indirect method.

Item Section
Change in accounts payable Operating
Change in beverage inventory Operating
Change in long-term assets Investing
Change in long-term portion of notes payable Financing
Change in current portion of notes payable Financing
Change in prepaid rent Operating
Change in accounts receivable Operating
Change in common shares Financing
Gain on sale of property and equipment Operating

AP-3A LO 4

DC Hotels’ net income for the year ended December 31, 2020, was $120,000. Additional data for the year is
provided below.

Purchase of property and equipment $280,000

Depreciation of property and equipment 14,000
Dividends declared 50,000
Decrease in accounts receivable 29,000
Loss on sale of equipment 13,000
Issue of common shares 10,000

4
Financial Information and Cash Flows Chapter 1

Calculate the net cash provided (used) by operating activities using the indirect method.
Net income $120,000
Add: Depreciation expense 14,000
Add: Decrease in accounts receivable 29,000
Add: Loss on sale of equipment 13,000
Net cash provided (used) by operating activities $176,000

AP-4A LO 4

Ash Café Inc. reported the following data for 2020.

Income Statement
Net Income $30,000
Depreciation Expense 4,000
Balance Sheet
Increase in Accounts Receivable $9,000
Decrease in Accounts Payable 7,000

Calculate the net cash provided (used) by operating activities using the indirect method.
Net income $30,000
Add: Depreciation expense 4,000
Less: Increase in accounts receivable (9,000)
Less: Decrease in accounts payable (7,000)
Net cash provided (used) by operating activities $18,000

AP-5A LO 4

Wonderstruck Corporation’s net income for the year ended August 31, 2020, was $147,000. Additional data for the
year is provided below.

Purchase of property and equipment $257,000

Depreciation of equipment 11,000
Dividends paid 42,000
Net increase in accounts receivable 22,000
Loss on sale of property 17,000
Gain on retirement of debt 10,000

Calculate the net cash provided (used) by operating activities using the indirect method.

Net income $147,000

Add: Depreciation expense 11,000
Add: Loss on sale of property 17,000
Less: Increase in accounts receivable (22,000)
Less: Gain on retirement of debt (10,000)
Net cash provided (used) by operating activities $143,000

5
Chapter 1 Financial Information and Cash Flows

AP-6A LO 4

The following information pertains to Bush Brew Pub for the fiscal year 2020.

Purchase of equipment $33,000

Sale of long-term investments 12,000
Increase in accounts payable 6,000
Repayment of loan payable 15,000
Depreciation of equipment 7,000

Calculate the net cash provided (used) by investing activities.

Purchase of equipment ($33,000)

Sale of long-term investments 12,000
Net cash provided (used) by investing activities ($21,000)

AP-7A LO 4

In 2020, Nature Tree Cafés purchased equipment for $35,000, saw an increase in accounts receivable of
$7,100, purchased $19,000 of long-term investments, repaid $12,000 of long-term debt and recorded $10,000
depreciation on equipment. Calculate the net cash provided (used) by investing activities.
Purchase of equipment ($35,000)
Purchase of long-term investments (19,000)
Net cash provided (used) by investing activities ($54,000)

AP-8A LO 4

The Markham Hotel’s cash account decreased by $20,000. Net cash provided by operating activities was $17,000.
Net cash used by investing activities was $22,000. Calculate the net cash provided (used) by financing activities.

Decrease in cash ($20,000)

Increase in cash from operating activities (17,000)
Decrease in cash from investing activities 22,000
Decrease in cash from financing activities ($15,000)
Once the decrease in cash from financing activities has been calculated to be $15,000, the cash flow statement
can be presented in the following format:
Net cash provided (used) by operating activities $17,000
Net cash provided (used) by investing activities (22,000)
Net cash provided (used) by financing activities (15,000)
Net increase (decrease) in cash ($20,000)

6
Financial Information and Cash Flows Chapter 1

AP-9A LO 4

George’s Restaurant’s cash account decreased by $14,000. Net cash provided by operating activities was $21,000.
Net cash used by investing activities was $22,000. Based on this information, calculate the net cash provided
(used) by financing activities.

The net cash used by financing activities is equal to $13,000, as shown in the calculation below.
Decrease in cash ($14,000)
Increase in cash from operating activities (21,000)
Decrease in cash from investing activities 22,000
Decrease in cash from financing activities ($13,000)
Once the decrease in cash from financing activities has been calculated to be $13,000, the cash flow statement
can be presented in the following format:
Net cash provided (used) by operating activities $21,000
Net cash provided (used) by investing activities (22,000)
Net cash provided (used) by financing activities (13,000)
Net increase (decrease) in cash ($14,000)

AP-10A LO 4

The year 2020 has been a great one for Excel Nightclub, which managed to earn $56,000 in net income.
Therefore, the board decided to declare and pay dividends by year end.

Based on the following information, answer the following questions.

Accounts 2020 2019

Retained Earnings $91,000 $67,000
Common Shares $120,000 $110,000

a) How much was paid in dividends in 2020? $32,000

b) Which section of the statement of cash flows is affected? Financing
c) Assuming only the information given impacted the section of the statement of cash ($22,000)
flows indicated in b), what is the net change in cash for this section?

7
Chapter 1 Financial Information and Cash Flows

AP-11A LO 4

Balance sheet accounts for Planet Café Inc. contain the following amounts at the end of 2019 and 2020.

Planet Café Inc.

Balance Sheet
As at December 31

2020 2019
Assets
Current Assets
Cash $7,500 $5,000
Accounts Receivable 21,000 15,000
Prepaid Expenses 2,500 2,000
Food & Beverage Inventory 37,000 28,000
Total Current Assets 68,000 50,000
Long-Term Assets
Equipment(1) 196,000 175,000
Accumulated Depreciation (41,000) (32,000)
Total Long-Term Assets 155,000 143,000
Total Assets $223,000 $193,000

Liabilities
Current Liabilities(2) $33,000 $33,000
Long-Term Liabilities (3)
30,000 35,000
Total Liabilities 63,000 68,000

Shareholders’ Equity
Common Shares 75,000 60,000
Retained Earnings 85,000 65,000
Total Shareholders’ Equity 160,000 125,000

Total Liabilities and Shareholders’ Equity $223,000 $193,000

Additional Information
(1)
The company did not sell any equipment throughout the year.
(2)
Current liabilities include only items from operations (e.g. accounts payable, taxes payable).
(3)
Long-term liabilities include items from financing (e.g. bonds and other long-term liabilities). The
company did not borrow any additional long-term liabilities throughout the year.

8
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for 2020 using the indirect method. Assume no dividends were declared or
paid in 2020.

Planet Café Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $20,000
Adjustments for Non-Cash Items
Depreciation Expense 9,000
Changes in Current Assets and Current Liabilities
Increase in Accounts Receivable (6,000)
Increase in Prepaid Expenses (500)
Increase in Food & Beverage Inventory (9,000)
Net Cash Provided (Used) by Operating Activities $13,500

Cash Flow from Investing Activities

Purchase of Equipment (21,000)
Net Cash Provided (Used) by Investing Activities (21,000)

Cash Flow from Financing Activities

Proceeds from Issue of Common Shares 15,000
Repayment of Long-Term Liabilities (5,000)
Net Cash Provided (Used) by Financing Activities 10,000

Net Increase (Decrease) in Cash 2,500

Cash at the Beginning of the Year 5,000
Cash at the End of the Year $7,500

9
Chapter 1 Financial Information and Cash Flows

AP-12A LO 4

Villa Foods International provides food and beverage services to institutional facilities like schools and hospitals.
At the end of 2020, the income statement and comparative balance sheet were prepared as shown below.
Villa Foods International Ltd.
Balance Sheet
As at December 31
  2020 2019  
  Assets  
  Current Assets  
  Cash $239,820 $135,640  
  Accounts Receivable 242,100 265,300  
  Prepaid Expenses 26,500 26,500  
  Food & Beverage Inventory 503,200 465,300  
  Total Current Assets 1,011,620 892,740  
Long-Term Assets(1)
  Land 0 16,000  
Equipment 840,400 840,400
  Accumulated Depreciation (102,300) (95,600)  
Total Long-Term Assets 738,100 760,800
  Total Assets $1,749,720 $1,653,540  
   
  Liabilities  
  Current Liabilities  
  Accounts Payable $305,600 $324,500  
  Notes Payable, Current Portion(2) 32,000 23,000  
  Total Current Liabilities 337,600 347,500  
  Notes Payable, Long-Term Portion(2) 205,000 185,000  
  Total Liabilities 542,600 532,500  
   
  Shareholders’ Equity  
  Common Shares 290,000 260,000  
  Retained Earnings 917,120 861,040  
  Total Shareholders’ Equity 1,207,120 1,121,040  
  Total Liabilities and Shareholders’ Equity $1,749,720 $1,653,540  
             

Additional Information
(1)
During 2020, land was sold for a loss of $5,000. There was no purchase of equipment
throughout the year.
(2)
The company did not pay off any amount of the notes payable.

Villa Foods International Ltd.

Income Statement
For the Year Ended December 31, 2020
 
  Revenue $2,650,000  
  Cost of Sales 1,722,500  
  Gross Profit 927,500  
  Operating Expenses  
  Depreciation Expense 6,700  
  Other Operating Expenses 752,600  
  Total Operating Expenses 759,300  
  Income from Operations 168,200  
  Other Income and Expenses  
  Loss on Sale of Land (5,000)  
  Income before Income Tax Expense 163,200  
  Income Tax Expense 57,120  
  Net Income (Loss) $106,080  
         

10
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows using the indirect method.

Villa Foods International Ltd.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $106,080  
Adjustments for Non-Cash Items
Depreciation Expense 6,700  
Loss on Sale of Land 5,000  
Changes in Current Assets and Current Liabilities    
Decrease in Accounts Receivable 23,200  
Increase in Food & Beverage Inventory (37,900)  
Decrease in Accounts Payable (18,900)  
Net Cash Provided (Used) by Operating Activities   $84,180
     
Cash Flow from Investing Activities    
Sale of Land 11,000  
Net Cash Provided (Used) by Investing Activities   11,000
     
Cash Flow from Financing Activities    
Proceeds from Issue of Common Shares 30,000  
Proceeds from Notes Payable 29,000  
Payment of Cash Dividend (50,000)  
Net Cash Provided (Used) by Financing Activities   9,000
     
Net Increase (Decrease) in Cash   104,180
Cash at the Beginning of the Year   135,640
Cash at the End of the Year   $239,820

11
Chapter 1 Financial Information and Cash Flows

AP-13A LO 4 5

The balance sheet and income statement for Zoodles Italian Restaurant are presented below.
Zoodles Italian Restaurant
Balance Sheet
As at December 31
2020 2019
Assets
Current Assets
Cash $37,580 $15,000
Accounts Receivable 17,000 16,000
Food & Beverage Inventory 21,000 27,000
Total Current Assets 75,580 58,000
Long-Term Assets(1)
Land 110,000 80,000
Equipment 130,000 160,000
Accumulated Depreciation (26,500) (30,000)
Total Long-Term Assets 213,500 210,000
Total Assets $289,080 $268,000

Liabilities
Current Liabilities
Accounts Payable $29,000 $35,000
Taxes Payable 18,000 18,000
Total Current Liabilities 47,000 53,000
Loan Payable(2) 80,000 65,000
Total Liabilities 127,000 118,000

Shareholders’ Equity
Common Shares 75,000 70,000
Retained Earnings(3) 87,080 80,000
Total Shareholders’ Equity 162,080 150,000

Total Liabilities and Shareholders’ Equity $289,080 $268,000

Additional Information
(1)
There was no sale of land or purchase of equipment during Zoodles Italian Restaurant
the year. Income Statement
(2)
The company did not repay any loan principal during the For the Year Ended December 31, 2020
year. Revenue $142,000
(3)
The company declared and paid dividends during the year.
Cost of Sales 92,000
Gross Profit 50,000
Operating Expenses
Depreciation Expense 4,500
Other Operating Expenses 13,550
Total Operating Expenses 18,050
Income from Operations 31,950
Other Income and Expenses
Interest Expense (4,350)
Loss on Sale of Equipment (3,200)
Income before Income Tax Expense 24,400
Income Tax Expense 7,320
Net Income (Loss) $17,080

12
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for December 31, 2020, using the indirect method.

Zoodles Italian Restaurant

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $17,080
Adjustments for Non-Cash Items
Depreciation Expense 4,500
Loss on Sale of Equipment 3,200
Changes in Current Assets and Current Liabilities
Increase in Accounts Receivable (1,000)
Decrease in Food & Beverage Inventory 6,000
Decrease in Accounts Payable (6,000)
Net Cash Provided (Used) by Operating Activities $23,780

Cash Flow from Investing Activities

Sale of Equipment 18,800
Purchase of Land (30,000)
Net Cash Provided (Used) by Investing Activities (11,200)

Cash Flow from Financing Activities

Proceeds from Issue of Common Shares 5,000
Proceeds from Loan Payable 15,000
Payment of Cash Dividends (10,000)
Net Cash Provided (Used) by Financing Activities 10,000

Net Increase (Decrease) in Cash 22,580

Cash at the Beginning of the Year 15,000
Cash at the End of the Year $37,580

13
Chapter 1 Financial Information and Cash Flows

AP-14A LO 4 5

The balance sheet and income statement for Demi’s Catering Inc. are presented below.

Demi’s Catering Inc.

Balance Sheet
As at December 31
2020 2019
Assets
Current Assets
Cash $20,140 $21,000
Accounts Receivable 17,000 19,000
Food & Beverage Inventory 21,000 15,000
Total Current Assets 58,140 55,000
Long-Term Assets
Land(1) 110,000 60,000
Equipment(2) 100,000 140,000
Accumulated Depreciation (40,500) (60,000)
Total Long-Term Assets 169,500 140,000
Total Assets $227,640 $195,000

Liabilities
Current Liabilities
Accounts Payable $29,000 $25,000
Taxes Payable 22,000 22,000
Total Current Liabilities 51,000 47,000
Loan Payable(3) 70,000 65,000
Total Liabilities 121,000 112,000

Shareholders’ Equity
Common Shares 85,000 70,000
Retained Earnings(4) 21,640 13,000
Total Shareholders’ Equity 106,640 83,000

Total Liabilities and Shareholders’ Equity $227,640 $195,000

Additional Information
(1)
There was no sale of land. Demi’s Catering Inc.
(2)
Equipment was purchased for an amount of $80,000. Income Statement
(3)
The company did not repay any loan principal during the year. For the Year Ended December 31, 2020
(4)
The company declared and paid dividends during the year. Revenue $130,000
Cost of Sales 72,000
Gross Profit 58,000
Operating Expenses
Depreciation Expense 20,500
Other Operating Expenses 9,950
Total Operating Expenses 30,450
Income from Operations 27,550
Other Income and Expenses
Interest Expense (4,050)
Gain on Sale of Equipment 1,700
Income before Income Tax Expense 25,200
Income Tax Expense 7,560
Net Income (Loss) $17,640

14
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for December 31, 2020, using the indirect method.

Demi’s Catering Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $17,640
Adjustments for Non-Cash Items
Depreciation Expense 20,500
Gain on Sale of Equipment (1,700)
Changes in Current Assets and Current Liabilities
Decrease in Accounts Receivable 2,000
Increase in Food & Beverage Inventory (6,000)
Increase in Accounts Payable 4,000
Net Cash Provided (Used) by Operating Activities $36,440

Cash Flow from Investing Activities

Sale of Equipment 81,700
Purchase of Equipment (80,000)
Purchase of Land (50,000)
Net Cash Provided (Used) by Investing Activities (48,300)

Cash Flow from Financing Activities

Proceeds from Issue of Common Shares 15,000
Proceeds from Loan Payable 5,000
Payment of Cash Dividends (9,000)
Net Cash Provided (Used) by Financing Activities 11,000

Net Increase (Decrease) in Cash (860)

Cash at the Beginning of the Year 21,000
Cash at the End of the Year $20,140

15
Chapter 1 Financial Information and Cash Flows

AP-15A LO 4 5

The balance sheet and income statement for Victoria Hotels Corporation are presented below.
Victoria Hotels Corporation
Balance Sheet
As at December 31
  2020 2019
Assets    
Current Assets
Cash $133,400 $75,000
Accounts Receivable 47,000 26,000
Inventory 72,000 42,000
Total Current Assets 252,400 143,000
Long-Term Assets
Land(1) 90,000 100,000
Equipment(2) 90,000 130,000
Accumulated Depreciation (45,000) (60,000)
Total Long-Term Assets 135,000 170,000
Total Assets $387,400 $313,000
     
Liabilities    
Current Liabilities
Accounts Payable $35,000 $65,000
Taxes Payable 40,000 40,000
Total Current Liabilities 75,000 105,000
Notes Payable(3) 140,000 95,000
Total Liabilities 215,000 200,000
     
Shareholders’ Equity    
Common Shares 85,000 75,000
Retained Earnings(4) 87,400 38,000
Total Shareholders’ Equity 172,400 113,000
     
Total Liabilities and Shareholders’ Equity $387,400 $313,000
Additional Information
(1)
The company did not purchase any land during 2020. Victoria Hotels Corporation
(2)
The company did not purchase any equipment during 2020. Income Statement
(3)
The company did not make a notes payable payment during For the Year Ended December 31, 2020
2020. Revenue $380,000
(4)
The company paid cash dividends during 2020. Cost of Sales 247,000
Gross Profit 133,000
Operating Expenses  
Depreciation Expense 5,000
Other Operating Expenses 22,550
Total Operating Expenses 27,550
Income from Operations 105,450
Other Income and Expenses  
Interest Expense (7,050)
Loss on Sale of Equipment (5,400)
Gain on Sale of Land 5,000
Income before Income Tax Expense 98,000
Income Tax Expense 29,400
Net Income (Loss) $68,600

16
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for December 31, 2020, using the indirect method.

Victoria Hotels Corporation

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $68,600  
Adjustments for Non-Cash Items
Depreciation Expense 5,000  
Loss on Sale of Equipment 5,400  
Gain on Sale of Land (5,000)  
Changes in Current Assets and Current Liabilities    
Increase in Accounts Receivable (21,000)  
Increase in Inventory (30,000)  
Decrease in Accounts Payable (30,000)  
Net Cash Provided (Used) by Operating Activities   ($7,000)
     
Cash Flow from Investing Activities    
Sale of Equipment 14,600  
Sale of Land 15,000  
Net Cash Provided (Used) by Investing Activities   29,600
     
Cash Flow from Financing Activities    
Proceeds from Issue of Common Shares 10,000  
Proceeds from Notes Payable 45,000  
Payment of Cash Dividends (19,200)  
Net Cash Provided (Used) by Financing Activities   35,800
     
Net Increase (Decrease) in Cash   58,400
Cash at the Beginning of the Year   75,000
Cash at the End of the Year   $133,400

Analysis
a) Are there any concerns based on the statement of cash flows?
Although cash increased a little, cash flow from operations showed a decrease. This means that day-to-day
operations are not generating enough cash to remain self-sufficient. The company is selling assets and using
notes payables to fund daily operations, which is not a sign of a healthy business.

b) Are there any concerns in the cash flow from operating activities section?
Accounts receivable and inventory both increased dramatically. This can indicate problems with collecting
from customers and a possible buildup of inventory. Accounts payable decreased dramatically. The company
may have trouble getting credit from suppliers or may not be taking advantage of longer payment terms.

17
Chapter 1 Financial Information and Cash Flows

AP-16A LO 5

Allen Woods has just started working as an accountant for Genie’s Lamp Moroccan Restaurant. Unfortunately, the
company had no proper accounting system in place and Allen has to start everything from scratch. He has been
provided with some items from the company’s balance sheet and income statement for the end of 2020.

Accounts 2020
Property and Equipment $10,000
Accumulated Depreciation 3,600
Accounts Payable 4,000
Notes Payable, Current Portion 15,000
Retained Earnings 5,400
Depreciation Expense 1,200
Loss on Sale of Equipment 300

Going through the company’s purchase receipts and some other financial documents, Allen realizes that
Genie’s Lamp purchased $2,500 worth of equipment in 2020. At the end of 2019, the balance of property and
equipment was $11,000 and the balance of accumulated depreciation was $2,900. Accounts payable balance was
not affected by any investment activities during 2020.

Based on the information provided, help Allen fill the missing information in the table below.

Which section of the statement of cash flows is affected? Investing

How much property and equipment (book value before deducting $3,500
accumulated depreciation) was sold in 2020?
What was the accumulated depreciation for the property and equipment sold? $500
What was the net book value of the property and equipment sold? $3,000
How much cash was received from the sale? $2,700
How much cash was paid out for the purchase? $2,500
What was the net change in cash resulting from property and equipment? $200 (Increase)

18
Financial Information and Cash Flows Chapter 1

AP-17A LO 3 6

Gordy’s Steakhouse is a small chain of steak restaurants. At the end of 2020, the statement of cash flows below
was prepared.

Gordy’s Steakhouse Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $83,800
Adjustments for Non-Cash Items
Depreciation Expense 4,760
Gain on Sale of Equipment (7,200)
Change in Operating Assets and Liabilities
Decrease in Accounts Receivable 2,210
Increase in Food & Beverage Inventory (46,800)
Increase in Accounts Payable 6,000
Net Cash Provided (Used) by Operating Activities $42,770

Cash Flow from Investing Activities

Sale of Equipment 20,300
Net Cash Provided (Used) by Investing Activities 20,300

Cash Flow from Financing Activities

Payment of Notes Payable (19,100)
Payment of Cash Dividend (23,700)
Net Cash Provided (Used) by Financing Activities (42,800)

Net Increase (Decrease) in Cash 20,270

Cash at the Beginning of the Year 68,300
Cash at the End of the Year $88,570

Required
a) How much of the company’s cash is from day-to-day operations?
The company generated $42,770 from operating activities.

b) Why does the company have positive cash flow from investing activities? Would such positive cash flow from
investing activities be sustainable?
The company sold equipment to generate positive cash flow from investing activities. The decision to
sell the equipment might have been made to cover the cash shortfall due to the large cash outflow from
financing activities. The increase in cash of $42,770 from operating activities was not enough to cover the
decrease in cash of $42,800 due to financing activities. The $20,300 proceeds from the sale of equipment
helps to cover the cash deficit. However, selling assets to generate cash would not be sustainable.

19
Chapter 1 Financial Information and Cash Flows

c) Calculate Gordy’s free cash flow in 2020.

Free Cash Flow = Net Cash Provided by Operating Activities – Net Cash Used by Investing Activities
= $42,770 + $20,300 = $63,070

Analysis
What could Gordy’s do if selling the equipment was not an action the company could take, yet it still wanted to
have a positive net cash flow at the end of the year?
If selling the equipment was not an action the company could take, then Gordy’s should consider reducing the
amount of cash dividends or not paying them out at all. It could also look into why there was such a large
increase in inventory and if it was really required.

20
Financial Information and Cash Flows Chapter 1

Application Questions Group B

AP-1B LO 3

Indicate the section of the statement of cash flows where each item would be located (operating, investing or
financing activities) using the indirect method. Also indicate whether the item would increase or decrease cash
using the indirect method.

Item Section Effect on Cash

Loss on sale of equipment Operating Increase
Decrease in accounts payable Operating Decrease
Increase in food inventory Operating Decrease
Depreciation expense Operating Increase
Gain on sale of investments Operating Decrease
Dividends paid Financing Decrease
Issuance of shares in the company Financing Increase
Net income Operating Increase
Decrease in notes payable Financing Decrease
Sale of equipment Investing Increase
Decrease in accounts receivable Operating Increase

AP-2B LO 4

Bonus Company had the following amounts in its statement of cash flows for the year ended December 31, 2020.

Net decrease in cash from operating activities $100,000

Net decrease in cash from investing activities 400,000
Net increase in cash from financing activities 350,000
Cash balance, January 1, 2020 600,000

Calculate the cash balance at December 31, 2020.

Cash balance, January 1, 2020 $600,000

Less: Net decrease in cash from operating activities (100,000)
Less: Net decrease in cash from investing activities (400,000)
Add: Net increase in cash from financing activities 350,000
Cash balance, December 31, 2020 $450,000

AP-3B LO 4

Kersley Diner’s net income for the year ended December 31, 2020, was $73,000. Additional information is shown
below.

Interest expense on borrowing $8,000

Increase in accounts receivable 10,000
Decrease in prepaid expense 3,000
Decrease in accounts payable 4,000
Dividends paid to common shareholders 14,000

21
Chapter 1 Financial Information and Cash Flows

Calculate the net cash provided (used) by operating activities using the indirect method.
Net income $73,000
Less: Increase in accounts receivable (10,000)
Add: Decrease in prepaid expense 3,000
Less: Decrease in accounts payable (4,000)
Net cash provided (used) by operating activities $62,000

AP-4B LO 4

Use the following information to prepare the operating activities section of a statement of cash flows for Max’s
Catering Company for 2020 using the indirect method.

Net income $140,000

Increase in food and beverage inventory 30,000
Increase in accounts payable 20,000
Depreciation expense 55,000
Increase in accounts receivable 18,000
Gain on sale of land 25,000
Net income $140,000
Less: Increase in food and beverage inventory (30,000)
Add: Increase in accounts payable 20,000
Add: Depreciation expense 55,000
Less: Increase in accounts receivable (18,000)
Less: Gain on sale of land (25,000)
Net cash provided (used) by operating activities $142,000

AP-5B LO 4

Danes Hotel had net income for 2020 of $120,000. Included in net income was depreciation of $3,000, a gain on
sale of land of $5,000, loss on sale of equipment of $10,000 and income taxes of $30,000. Using the information
given, calculate the net cash provided (used) by operating activities using the indirect method. Assume that the
balances of current assets (except cash) and current liabilities remain the same as last year.
Net income $120,000
Add: Depreciation expense 3,000
Add: Loss on sale of equipment 10,000
Less: Gain on sale of land (5,000)
Net cash provided (used) by operating activities $128,000

Analysis
Why are some items from the income statement added back to net income on the statement of cash flows?
We start with the assumption that net income will become cash. However, some items, such as depreciation
and gains or losses on sale of long-term assets, are not cash items or are not operating activities. Thus, net
income must be adjusted by these values to convert the accrual-based net income to the net cash provided
(used) by operating activities in the statement of cash flows.

22
Financial Information and Cash Flows Chapter 1

AP-6B LO 4

Cosmos Hotels had a net income for 2020 of $320,000. Included on the income statement was a loss on sale of equipment
of $5,000, depreciation of $8,000 and interest of $3,000. Calculate the net cash provided (used) by operating activities
using the indirect method. Assume that the balances of current assets (except cash) and current liabilities remain the
same as last year.
Net income $320,000
Add: Depreciation expense 8,000
Add: Loss on sale of equipment 5,000
Increase in cash $333,000

Analysis
Does net income, after being adjusted by the non-cash items on the income statement, represent the actual
amount of cash received through operating activities by the company during the year?
No. The actual amount of cash received through operations will be different from net income due to changes in
current assets and current liabilities. The company will pay for operating supplies, pay bills and receive cash
from customers who bought on credit.

AP-7B LO 4

The following events took place during 2020 at Hotel Bernard. Based on the information given, calculate net
cash provided (used) by investing activities.

Gain on sale of investments $4,000

Sale of investments (including gain) 50,000
Issuance of company shares 60,000
Notes payable paid off 30,000
Purchase of equipment 70,000

Sale of investments (including gain) $50,000

Purchase of equipment (70,000)
Net cash provided (used) by investing activities ($20,000)

AP-8B LO 4

The following events took place during 2020 at Tony’s Trail Inn. Based on the information given, calculate net
cash provided (used) by financing activities.

Loss on sale of land $10,000

Sale of land (including loss) 110,000
Issuance of company shares 120,000
Notes payable paid off 50,000
Payment of dividends 30,000
Depreciation expense 6,000

Issuance of company shares $120,000

Notes payable paid off (50,000)
Payment of dividends (30,000)
Net cash provided (used) by financing activities $40,000
23
Chapter 1 Financial Information and Cash Flows

Analysis
If Tony’s Trail Inn’s net income during 2020 was $25,000, identify a potential concern from the cash flows from
financing activities section.
Tony’s paid out more dividends in 2020 than it earned in net income. This means the company is not retaining
any profits for future growth and may run into financial difficulties if this practice continues.

AP-9B LO 4

The following events took place during 2020 at Robinson Hotels. Based on the information given, calculate the
net cash provided (used) by investing activities and financing activities.

Gain on sale of equipment $2,000

Sale of equipment (including gain) 90,000
Purchase of equipment 65,000
Issuance of company shares 60,000
Issuance of notes payable 40,000
Payment of dividends 20,000
Increase in wine inventory 24,000

Investing activities include:

Sale of equipment (including gain) $90,000
Purchase of equipment (65,000)
Net cash provided (used) by investing activities $25,000
Financing activities include:
Issuance of company shares $60,000
Issuance of notes payable 40,000
Payment of dividends (20,000)
Net cash provided (used) by financing activities $80,000

Analysis
Suppose Robinson Hotels had a net increase in cash of $50,000. Explain why the company may be in trouble
despite having a large increase in cash during the year.
Net Increase in Cash $50,000
Net Cash Provided (Used) by Investing Activities $25,000
Net Cash Provided (Used) by Financing Activities $80,000
Net Cash Provided (Used) by Operating Activities ($55,000)
Robinson Hotels’ day-to-day operating activities are using up a very large amount of cash that must be covered
by selling equipment and increasing financing. A healthy business will generate positive cash flows from
operations that can then be used to purchase assets and pay off notes payable.

24
Financial Information and Cash Flows Chapter 1

AP-10B LO 3 6

Carlin’s Pub Inc. has prepared the following statement of cash flows for the year end.

Carlin’s Pub Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $56,200
Adjustments for Non-Cash Items
Depreciation Expense 3,100
Changes in Opening Assets and Liabilities
Increase in Accounts Receivable (31,000)
Increase in Food & Beverage Inventory (33,000)
Decrease in Accounts Payable (26,000)
Net Cash Provided (Used) by Operating Activities ($30,700)

Cash Flow from Investing Activities

Purchase of Equipment (95,000)
Sale of Land 120,000
Net Cash Provided (Used) by Investing Activities 25,000

Cash Flow from Financing Activities

Proceeds from Issue of Common Shares 10,000
Proceeds from Notes Payable 45,000
Payment of Cash Dividends (40,000)
Net Cash Provided (Used) by Financing Activities 15,000

Net Increase (Decrease) in Cash 9,300

Cash at the Beginning of the Year 12,000
Cash at the End of the Year $21,300

Required
a) The company had a net income during the year; however, it had a negative cash flow from operations. Identify the
problems that led to a negative cash flow from operations.
Accounts receivable increased. This can indicate that customers are buying on credit and not paying on
time. Inventory also increased. This can indicate that too much inventory has been purchased and is being
stockpiled. Accounts payable has decreased. This can indicate that the company is not taking advantage of
payment terms from its suppliers.

b) Even though cash flow from operations was negative, total cash increased by $9,300. How did cash increase?
Cash increased due to the sale of land, issuance of common shares and issuance of notes payable. These were
enough to cover the negative cash flow from operations, plus other cash outflows such as purchasing
equipment and paying dividends.

c) Are there any other concerns regarding the statement of cash flows that have not been covered in parts a) and b)?
Net income was just over $56,000; however, the company paid dividends of $40,000. It does not seem like
the company can afford to pay dividends with a relatively small net income and apparent cash flow problems.

25
Chapter 1 Financial Information and Cash Flows

AP-11B LO 4

Flax Breakfast Restaurant’s balance sheet accounts as at December 31, 2020 and 2019, are presented below.

Flax Breakfast Restaurant Inc.

Balance Sheet
As at December 31

2020 2019
Assets
Current Assets
Cash $4,600 $3,000
Accounts Receivable 10,200 10,200
Prepaid Expenses 6,000 -
Food & Beverage Inventory 13,600 12,000
Total Current Assets 34,400 25,200
Long-Term Assets
Long-Term Investments 4,000 8,000
Equipment (1)
31,000 25,000
Accumulated Depreciation (9,000) (6,000)
Total Long-Term Assets 26,000 27,000
Total Assets $60,400 $52,200

Liabilities
Current Liabilities(2) $23,000 $20,000
Long-Term Liabilities (3)
8,000 7,000
Total Liabilities 31,000 27,000

Shareholders’ Equity
Common Shares 18,000 16,800
Retained Earnings 11,400 8,400
Total Shareholders’ Equity 29,400 25,200

Total Liabilities and Shareholders’ Equity $60,400 $52,200

Additional Information
(1)
There was no sale of equipment throughout the year.
(2)
Current liabilities include only items from operations (e.g. accounts payable, taxes payable).
(3)
Long-term liabilities include items from financing (e.g. bonds and other long-term liabilities).

26
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for 2020 using the indirect method. Assume the net income for 2020 was
$3,000.

Flax Breakfast Restaurant Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $3,000
Adjustments for Non-Cash Items
Depreciation Expense 3,000
Changes in Current Assets and Current Liabilities
Increase in Prepaid Expenses (6,000)
Increase in Food & Beverage Inventory (1,600)
Increase in Current Liabilities 3,000
Net Cash Provided (Used) by Operating Activities $1,400

Cash Flow from Investing Activities

Purchase of Equipment (6,000)
Sale of Long-Term Investments 4,000
Net Cash Provided (Used) by Investing Activities (2,000)

Cash Flow from Financing Activities

Proceeds from Issue of Common Shares 1,200
Proceeds from Long-Term Liabilities 1,000
Net Cash Provided (Used) by Financing Activities 2,200

Net Increase (Decrease) in Cash 1,600

Cash at the Beginning of the Year 3,000
Cash at the End of the Year $4,600

27
Chapter 1 Financial Information and Cash Flows

AP-12B LO 4

Breakwater Hotels has completed its financial statements for 2020. The income statement and comparative
balance sheet were prepared as shown below.

Breakwater Hotels Limited

Balance Sheet
As at December 31
  2020 2019  
  Assets  
  Current Assets  
  Cash $73,870 $62,500  
  Accounts Receivable 94,800 87,500  
  Prepaid Expenses 14,500 14,500  
  Inventory 327,000 245,700  
  Total Current Assets 510,170 410,200  
Long-Term Assets (1)

Land 0 44,000
Equipment 340,000 340,000
  Accumulated Depreciation (26,200) (24,500)  
Total Long-Term Assets 313,800 359,500
  Total Assets $823,970 $769,700  
   
  Liabilities  
  Current Liabilities  
  Accounts Payable $52,600 $45,700  
  Notes Payable, Current Portion 8,500 8,500  
  Total Current Liabilities 61,100 54,200  
  Notes Payable, Long-Term Portion 50,100 58,600  
  Total Liabilities 111,200 112,800  
   
  Shareholders’ Equity  
  Common Shares 150,000 150,000  
  Retained Earnings 562,770 506,900  
  Total Shareholders’ Equity 712,770 656,900  
  Total Liabilities and Shareholders’ Equity $823,970 $769,700  
             

Additional Information
(1)
uring 2020, land was sold for a gain of $6,000. There was no purchase of equipment
D
throughout the year.

28
Financial Information and Cash Flows Chapter 1

Breakwater Hotels Limited

Income Statement
For the Year Ended December 31, 2020
  Revenue $562,000  
  Cost of Sales 365,300  
  Gross Profit 196,700  
  Operating Expenses  
  Depreciation Expense 1,700  
  Other Operating Expenses 61,200  
  Total Operating Expenses 62,900  
  Income from Operations 133,800  
  Other Income and Expenses  
  Gain on Sale of Land 6,000  
  Income before Income Tax Expense 139,800  
  Income Tax Expense 48,930  
  Net Income $90,870  
         

Prepare the statement of cash flows using the indirect method.

Breakwater Hotels Limited
Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $90,870  
Adjustments for Non-Cash Items
Depreciation Expense 1,700  
Gain on Sale of Land (6,000)  
Changes in Current Assets and Current Liabilities    
Increase in Accounts Receivable (7,300)  
Increase in Inventory (81,300)  
Increase in Accounts Payable 6,900  
Net Cash Provided (Used) by Operating Activities   $4,870
     
Cash Flow from Investing Activities    
Sale of Land 50,000  
Net Cash Provided (Used) by Investing Activities   50,000
     
Cash Flow from Financing Activities    
Payment of Notes Payable (8,500)  
Payment of Cash Dividend (35,000)  
Net Cash Provided (Used) by Financing Activities   (43,500)
     
Net Increase (Decrease) in Cash   11,370
Cash at the Beginning of the Year   62,500
Cash at the End of the Year   $73,870
     

Analysis
Explain the main activities that caused Breakwater Hotels’ net cash flow to increase or decrease.
Cash flow from operations explains less than half of the increase. Some land was sold, which was enough to
repay a portion of the notes payable and pay a rather large dividend.

29
Chapter 1 Financial Information and Cash Flows

AP-13B LO 4 5

The balance sheet and income statement for Venus Hotels are presented below.

Venus Hotels Limited

Balance Sheet
As at December 31
2020 2019
Assets
Current Assets
Cash $191,410 $94,000
Accounts Receivable 30,000 34,000
Inventory 42,000 50,000
Total Current Assets 263,410 178,000
Long-Term Assets(1)
Land 90,000 100,000
Equipment 125,000 130,000
Accumulated Depreciation (62,000) (60,000)
Total Long-Term Assets 153,000 170,000
Total Assets $416,410 $348,000

Liabilities
Current Liabilities
Accounts Payable $76,000 $65,000
Notes Payable, Current Portion(2) 45,000 40,000
Total Current Liabilities 121,000 105,000
Notes Payable, Long-Term Portion(2) 120,000 95,000
Total Liabilities 241,000 200,000

Shareholders’ Equity
Common Shares 85,000 75,000
Retained Earnings(3) 90,410 73,000
Total Shareholders’ Equity 175,410 148,000

Total Liabilities and Shareholders’ Equity $416,410 $348,000

Additional Information
(1)
Equipment and land were purchased for $115,000, and $200,000 respectively.
(2)
The company did not pay off any amount of the notes payable.
(3)
The company declared and paid dividends during the year.

Venus Hotels Limited

Income Statement
For the Year Ended December 31, 2020
Revenue $380,000
Cost of Sales 255,000
Gross Profit 125,000
Operating Expenses
Depreciation Expense 42,000
Other Operating Expenses 28,500
Total Operating Expenses 70,500
Income from Operations 54,500
Other Income and Expenses
Loss on Sale of Equipment (5,400)
Gain on Sale of Land 3,200
Income before Income Tax Expense 52,300
Income Tax Expense 15,690
Net Income (Loss) $36,610

30
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for December 31, 2020, using the indirect method.

Venus Hotels Limited

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $36,610
Adjustments for Non-Cash Items
Depreciation Expense 42,000
Loss on Sale of Equipment 5,400
Gain on Sale of Land (3,200)
Changes in Current Assets and Current Liabilities
Decrease in Accounts Receivable 4,000
Decrease in Inventory 8,000
Increase in Accounts Payable 11,000
Net Cash Provided (Used) by Operating Activities $103,810

Cash Flow from Investing Activities

Sale of Equipment 74,600
Purchase of Equipment (115,000)
Sale of Land 213,200
Purchase of Land (200,000)
Net Cash Provided (Used) by Investing Activities (27,200)

Cash Flow from Financing Activities

Proceeds from Issue of Common Shares 10,000
Proceeds from Notes Payable 30,000
Payment of Cash Dividends (19,200)
Net Cash Provided (Used) by Financing Activities 20,800

Net Increase (Decrease) in Cash 97,410

Cash at the Beginning of the Year 94,000
Cash at the End of the Year $191,410

31
Chapter 1 Financial Information and Cash Flows

AP-14B LO 4 5

The balance sheet and income statement for Lucky Gold Restaurants Inc. are presented below.
Lucky Gold Restaurants Inc.
Balance Sheet
As at December 31
2020 2019
Assets
Current Assets
Cash $62,927 $56,000
Accounts Receivable 27,000 23,000
Food & Beverage Inventory 24,500 18,000
Total Current Assets 114,427 97,000
Long-Term Assets
Long-Term Investment(1) 42,000 45,000
Land(2) 119,000 100,000
Equipment(3) 89,000 76,000
Accumulated Depreciation (28,200) (24,000)
Total Long-Term Assets 221,800 197,000
Total Assets $336,227 $294,000

Liabilities
Current Liabilities
Accounts Payable $29,000 $25,000
Notes Payable, Current Portion(4) 22,000 22,000
Total Current Liabilities 51,000 47,000
Notes Payable, Long-Term Portion(4) 79,000 65,000
Total Liabilities 130,000 112,000

Shareholders’ Equity
Common Shares 85,000 85,000
Retained Earnings(5) 121,227 97,000
Total Shareholders’ Equity 206,227 182,000

Total Liabilities and Shareholders’ Equity $336,227 $294,000

Additional Information
(1)
A long-term investment was purchased for $10,500. The Lucky Gold Restaurant Inc.
long-term investment is held at cost. Income Statement
(2)
There was no sale of land. For the Year Ended December 31, 2020
(3)
Equipment was purchased for $30,000. Revenue $140,000
(4)
The company paid off $22,000 of the notes payable in Cost of Sales 76,000
2020. Gross Profit 64,000
(5)
The company declared and paid dividends during the year. Operating Expenses
Depreciation Expense 8,200
Other Operating Expenses 14,790
Total Operating Expenses 22,990
Income from Operations 41,010
Other Income and Expenses
Gain on Sale of Investment 1,100
Gain on Sale of Equipment 2,500
Income before Income Tax Expense 44,610
Income Tax Expense 13,383
Net Income (Loss) $31,227

32
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for December 31, 2020, using the indirect method.

Lucky Gold Restaurant Inc.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities
Net Income $31,227
Adjustments for Non-Cash Items
Depreciation Expense 8,200
Gain on Sale of Long-Term Investment (1,100)
Gain on Sale of Equipment (2,500)
Changes in Current Assets and Current Liabilities
Increase in Accounts Receivable (4,000)
Increase in Food & Beverage Inventory (6,500)
Increase in Accounts Payable 4,000
Net Cash Provided (Used) by Operating Activities $29,327

Cash Flow from Investing Activities

Sale of Equipment 15,500
Sale of Long-Term Investment 14,600
Purchase of Equipment (30,000)
Purchase of Long-Term Investment (10,500)
Purchase of Land (19,000)
Net Cash Provided (Used) by Investing Activities (29,400)

Cash Flow from Financing Activities

Payment of Notes Payable (22,000)
Proceeds from Notes Payable 36,000
Payment of Cash Dividends (7,000)
Net Cash Provided (Used) by Financing Activities 7,000

Net Increase (Decrease) in Cash 6,927

Cash at the Beginning of the Year 56,000
Cash at the End of the Year $62,927

33
Chapter 1 Financial Information and Cash Flows

AP-15B LO 4 5

The balance sheet and income statement for Joe’s Fish Hut are presented below.

Joe's Fish Hut

Balance Sheet
As at December 31, 2020
  2020 2019
Assets    
Current Assets
Cash $2,100 $23,000
Accounts Receivable 21,000 12,000
Food & Beverage Inventory 21,000 25,000
Total Current Assets 44,100 60,000
Long-Term Assets
Land 100,000 100,000
Equipment(1) 170,000 150,000
Accumulated Depreciation (28,600) (25,000)
Total Long-Term Assets 241,400 225,000
Total Assets $285,500 $285,000
     
Liabilities    
Current Liabilities
Accounts Payable $23,000 $33,000
Notes Payable, Current Portion(2) 12,000 12,000
Total Current Liabilities 35,000 45,000
Notes Payable, Long-Term Portion(2) 48,000 60,000
Total Liabilities 83,000 105,000
     
Shareholders’ Equity    
Common Shares 20,000 15,000
Retained Earnings 182,500 165,000
Total Shareholders’ Equity 202,500 180,000
     
Total Liabilities and Shareholders’ Equity $285,500 $285,000

Additional Information
(1)
The company did not sell any equipment during the year.
(2)
The company did not sign any additional notes payable in 2020.

Joe's Fish Hut

Income Statement
For the Year Ended December 31, 2020
Revenue $161,000
Cost of Sales 112,700
Gross Profit 48,300
Operating Expenses  
Depreciation Expense 3,600
Other Operating Expenses 19,700
Total Operating Expenses 23,300
Income before Income Tax Expense 25,000
Income Tax Expense 7,500
Net Income (Loss) $17,500

34
Financial Information and Cash Flows Chapter 1

Prepare the statement of cash flows for December 31, 2020, using the indirect method.

Joe’s Fish Hut

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $17,500  
Adjustments for Non-Cash Items  
Depreciation Expense 3,600  
Changes in Current Assets and Current Liabilities    
Increase in Accounts Receivable (9,000)  
Decrease in Food & Beverage Inventory 4,000  
Decrease in Accounts Payable (10,000)  
Net Cash Provided (Used) by Operating Activities   $6,100
     
Cash Flow from Investing Activities    
Purchase of Equipment (20,000)  
Net Cash Provided (Used) by Investing Activities   (20,000)
     
Cash Flow from Financing Activities    
Proceeds from Issue of Common Shares 5,000  
Payment of Notes Payable (12,000)  
Net Cash Provided (Used) by Financing Activities   (7,000)
     
Net Increase (Decrease) in Cash   (20,900)
Cash at the Beginning of the Year   23,000
Cash at the End of the Year   $2,100

Analysis
a) Are there any concerns based on the statement of cash flows?
Although cash flow from operations is positive, overall cash decreased significantly. The company could run
into cash flow problems unless cash is collected quickly (another notes payable payment of $12,000 is due
this year). Hopefully the newly acquired fixed assets will help generate more operating cash flows this year.

b) Are there any concerns in the cash flow from the operating activities section?
Accounts receivable increased, which can indicate problems with collecting cash from customers who owe
money. This could lead to further bad debts. Accounts payable decreased, which can indicate the company
may have trouble getting credit from suppliers, or it may not be taking advantage of longer payment terms.

35
Chapter 1 Financial Information and Cash Flows

AP-16B LO 5

Fast Café Inc. is planning to make the best use out of its cash on hand by purchasing some additional kitchen
equipment in January 2020. The company also sold some of its equipment in November 2020. December 31 is
its year end.

Below are the data of Fast Café.

Accounts 2020 2019

Equipment $120,000 $110,000
Purchase of Equipment $40,000
Gain on Sale of Equipment $5,000

Calculate the net cash provided (used) by investing activities resulting from the equipment.

Cash Flow from Investing Activities

Sale of equipment (including gain) $35,000
Purchase of equipment ($40,000)
Net cash provided (used) by investing activities ($5,000)

Analysis
Fast Café’s bookkeeper believes that the net change in cash from the investing activities must be a positive
number (a cash inflow) as a result of a big gain on the sale of equipment. Do you agree with this comment?
Explain.
The comments made by the bookkeeper are not accurate. Although a gain is a cash inflow, it does not
necessarily result in a positive cash flow in Fast Café’s investing section. The net change in cash resulting from
equipment is affected by both purchases (cash outflow) and sales (cash inflow). If cash inflow is
greater than cash outflow, the net change is positive; if cash inflow is less than cash outflow, the net change is
negative. Also note that a positive or negative net change in cash resulting from equipment is not a good or
bad sign on its own; in fact, it needs to be analyzed by looking at a big picture.

36
Financial Information and Cash Flows Chapter 1

AP-17B LO 3 6

Dawson Catering has prepared the following statement of cash flows for the year end.

Dawson Catering Ltd.

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $68,000  
Adjustments for Non-Cash Items
Depreciation Expense 3,700  
Gain on Sale of Equipment (8,000)  
Changes in Current Assets and Current Liabilities    
Decrease in Accounts Receivable 15,000  
Increase in Food & Beverage Inventory (60,000)  
Decrease in Accounts Payable (5,000)  
Net Cash Provided (Used) by Operating Activities   $13,700
     
Cash Flow from Investing Activities    
Sale of Equipment 84,000  
Purchase of Building (240,000)  
Net Cash Provided (Used) by Investing Activities   (156,000)
     
Cash Flow from Financing Activities    
Proceeds from Issue of Common Shares 30,000  
Proceeds from Notes Payable 120,000  
Payment of Cash Dividends (10,000)  
Net Cash Provided (Used) by Financing Activities   140,000
     
Net Increase (Decrease) in Cash   (2,300)
Cash at the Beginning of the Year   12,000
Cash at the End of the Year   $9,700

Required
a) The company had a total decrease in cash during the year of $2,300. What is the primary cause of this decrease in
cash?
The company purchased a building. It partially covered the cost of the building by taking a loan and selling
equipment. The cash inflow from operating activities and share issuance was not enough to cover the
shortfall, so overall cash decreased.

b) Are there any concerns with operating activities?

The primary concern is the increase in inventory. This increase can indicate a stockpile of inventory. If this
inventory is not sold, the company will not recover the cash used to purchase it.

c) Calculate Dawson Catering’s free cash flow.

Free Cash Flow = Net Cash Provided by Operating Activities – Net Cash Used by Investing Activities
= $13,700 – $156,000 = ($142,300)

37
Chapter 1 Financial Information and Cash Flows

Analysis
In a cash flow budgeting meeting, the company’s owner argued, “We could have taken a larger loan to finance our
building purchase in 2020. In fact, instead of borrowing only $120,000, we should have asked for $240,000. That would
have put us into a better cash flow situation.” Evaluate this comment from the owner. How would a larger loan affect the
cash flow of Dawson Catering?

A loan of $240,000 might have prevented the sale of the equipment, which was most likely done to partially
finance the building purchase. Assuming the equipment is a revenue-generating asset, selling it could negatively
impact future cash flow from operating activities. The owner’s comment could also be valid if the revenue
generated from the purchased building would be large enough to cover the increase in interest expense from a
larger loan.
However, a loan of $240,000 would not benefit Dawson Catering if the increase in interest expenses would
be more than the increase in revenue from the purchased building. In that scenario, the future cash flow would
be negatively affected. Also, the company should consider whether it will have enough cash flow generated in
the future to pay back the larger loan principal when it becomes due. Note that if the equipment happened to
be an idle asset, then selling the equipment would be considered a sound economic decision.

38
Financial Information and Cash Flows Chapter 1

Case Study
CS-1 LO 4

Capital Hotels and Restaurants Incorporated recently hired a new accounting clerk. She has compiled the
following information to prepare the statement of cash flows for the year ended December 31, 2020.
• Net income for the year was $114,140.
• Depreciation expense was $15,300.
• Equipment was sold for a gain of $16,000. Cash proceeds from the sale were $36,000.
• Equipment was purchased for $250,000.
• Dividends of $50,000 were paid.
• Accounts receivable increased by $31,400.
• Inventory decreased by $38,700.
• Accounts payable increased by $41,100.
• Notes payable increased by $55,000.
• Shares were sold for $50,000.
• Cash balance on January 1, 2020, was $114,800.
• Cash balance on December 31, 2020, was $117,640.

The statement of cash flows the accounting clerk prepared is shown below.

Capital Hotels and Restaurants Incorporated

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $114,140  
Adjustments for Non-Cash Items
Depreciation Expense 15,300  
Changes in Current Assets and Current Liabilities    
Increase in Accounts Receivable 31,400  
Decrease in Inventory (38,700)  
Increase in Accounts Payable 41,100  
Sale of Equipment 36,000  
Purchase of Equipment (250,000)  
Net Cash Provided (Used) by Operating Activities   ($50,760)
     
Cash Flow from Investing Activities    
Proceeds from Notes Payable 55,000  
Net Cash Provided (Used) by Investing Activities   55,000
     
Cash Flow from Financing Activities    
Proceeds from Issue of Common Shares 50,000  
Payment of Cash Dividend (50,000)  
Net Cash Provided (Used) by Financing Activities   0
     
Net Increase (Decrease) in Cash   4,240
Cash at the Beginning of the Year   114,800
Cash at the End of the Year   $119,040
     

39
Chapter 1 Financial Information and Cash Flows

Required
a) Identify the problems with the statement of cash flows that the accounting clerk prepared.

• The gain on the sale of the equipment is not deducted from the net income.
• The increase in accounts receivable should be a decrease in cash flow.
• The decrease in inventory should be an increase in cash flow.
• The sale and purchase of equipment should be recorded in the investing activities section.
• The notes payable should be recorded in the financing activities section.
• The cash at the end of the year does not match the ending cash balance.

b) Prepare a corrected statement of cash flows.

Capital Hotels and Restaurants Incorporated

Statement of Cash Flows
For the Year Ended December 31, 2020
Cash Flow from Operating Activities    
Net Income $114,140  
Adjustments for Non-Cash Items
Depreciation Expense 15,300  
Gain on Sale of Equipment (16,000)  
Changes in Current Assets and Current Liabilities    
Increase in Accounts Receivable (31,400)  
Decrease in Inventory 38,700  
Increase in Accounts Payable 41,100  
Net Cash Provided (Used) by Operating Activities   $161,840
     
Cash Flow from Investing Activities    
Sale of Equipment 36,000  
Purchase of Equipment (250,000)  
Net Cash Provided (Used) by Investing Activities   (214,000)
   
Cash Flow from Financing Activities    
Proceeds from Notes Payable 55,000  
Proceeds from Issue of Common Shares 50,000  
Payment of Cash Dividend (50,000)  
Net Cash Provided (Used) by Financing Activities   55,000
     
Net Increase (Decrease) in Cash   2,840
Cash at the Beginning of the Year   114,800
Cash at the End of the Year   $117,640
     

40