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Student Centre Fundamental Accounting Principles
10th Canadian Edition
Larson / Jensen / Carroll

Student Centre

Chapter 19: Reporting and Analyzing Cash Flows

| Learning Objectives | True/False Quiz | Multiple Choice Quiz | Fill-In-The-Blanks | Internet Exercises | Beyond the Numbers | Glossary Match | Key Terms and Glossary | Excel Template | Animated Solutions | PowerPoint Chapter Review |

    Beyond the Numbers

    See your instructor for suggested solutions to these exercises, available to faculty in this Online Learning Centre's instructor area.

    Reporting in Action
    Refer to the financial statements and related information for Alliance in Appendix I. Answer the following questions by analyzing the information in the report:

    1. Alliance's annual report contains a consolidated statement of changes in financial position that reports cash flow information. Was this statement of cash flows prepared according to the direct method or the indirect method?
    2. During each of the fiscal years 1997 and 1996 was cash provided by operating activities more or less than net income?
    3. How much was Alliance's gain on sale of investments? How does it affect the reporting of cash flows?
    4. What was the net amount spent on investing activities? How were these investments financed?
    5. Obtain access to Alliance's annual report for fiscal years ending after March 31, 1997. This access may be through a securities investment firm or you may gain access to annual report information at the following Web site: http://www.sedar.com. Since March 31, 1997, what have been Alliance's largest cash outflows and inflows in the investing and financing sections of the cash flow statement?

    Ethics Challenge
    Wendy Geiger is working late on a Friday night in preparation for a meeting with her banker early Monday morning. Her business is just finishing its fourth quarter. In the first year the business experienced negative cash flows from operations. In the second and third years, cash flows from operations turned positive. Unfortunately, her inventory costs rose significantly in year four and her net income will probably be down about 25% after this year's adjusting entries. Wendy is hoping to secure a line of credit from her banker which will be a nice financing buffer. From prior experience with her banker she knows a focus of the meeting on Monday will be cash flows from operations. The banker will scrutinize the cash flow numbers for years one through four and will want a projected number for year five. Wendy knows that a steady upward progression of cash flows in years one through four will really help her case for securing the line of credit. Wendy decides to use her discretion as owner of the business and proposes several adjusting entries and business actions which will help turn her cash flow number in year four from negative to positive.


    1. Identify three possible entries or business actions Wendy might use to improve the cash flow from operations number on the statement of cash flows for year four.
    2. Comment on the ethics and possible consequences of Wendy's decision to propose the adjustments/actions for year four.

    Communicating in Practice
    Your friend, Maddy Massola, recently completed his second year in his own business. Maddy just received annual financial statements from his accountant. Maddy says he finds the income statement and balance sheet quite informative but he does not understand the statement of cash flows. He says the first section is particularly confusing and he cannot get much beyond it. He says it contains a lot of additions and subtractions that do not make sense to him. Maddy added "I'm not concerned. It's probably just one of those extra forms accountants are required to fill out. The Income Statement tells me the business was more profitable than last year and that is what's most important. If I want to know about cash or cash changes, I can look at the Balance Sheets from this year and last."

    Write a memo to your friend to explain the purpose of the statement of cash flows. Comment on why he found the first section so confusing and suggest what he might do to rectify this problem.

    Taking it to the Net
    Use the Sedar database at http://www.sedar.com to access the December 31, 1997, annual report for Canadian Pacific Corporation. Locate this company's consolidated statement of changes in financial position for the years ended December 31, 1997, 1996, and 1995. (Note that under the current accounting recommendations this statement would be called a statement of cash flows.) Answer the following questions.
    1. Which method, direct or indirect, does Canadian Pacific use to prepare a statement of cash flow?
    2. What is the largest adjustment needed to reconcile cash flow from operations to net income in each of the two years?
    3. What is the largest investment requiring cash in each of the three years presented?
    4. For the fiscal year ended December 31, 1997, did Canadian Pacific issue a long-term debt? Was any long-term debt repaid during 1997?

    Teamwork in Action
    The aim of this activity is to provide team support for "putting it all together" with the statement of cash flows. After completing each of the three sections below, members should report to the team. Team members are to confirm or correct teammate's responses.
    1. Each member of the team is to prepare notes to present a response to one of the following questions about the statement of cash flows:
      1. What is this statement's reporting objectives?
      2. What methods or formats can be used to prepare it? Describe each by identifying their similarities and differences.
      3. What steps are followed to prepare it?
      4. What kinds of analysis are often made from its information?
    2. Each member of the team is to prepare notes to identify and explain the formula for computing cash flows from operating activities using the direct method for one of the following items:
      1. Cash receipts from customers
      2. Cash paid for merchandise
      3. Cash paid for wages and operating expenses
      4. Cash paid for interest and taxes
    3. Each member of the team is to prepare notes to identify and explain the adjustment from net income to cash flows from operating activities using the indirect method for one of the following items:
      1. Noncash operating revenues and expenses
      2. Gains and Losses
      3. Increases and decreases in current assets
      4. Increases and decreases in current liabilities

    Hitting the Road
    Visit the Motley Fool Investment Web site at http://www.fool.com. Click on the sidebar link entitled "School." Select the link "Valuation: Principles and Practice." How does the Fool's school define cash flow? Per the school's instruction why do analysts focus on earnings before interest and taxes (EBIT)? Visit other links at the Web site that may interest you such as "A Journey Through the Balance Sheet" or find out what the "Fool's Ratio" is.

    Business Break
    Read the article, "Are profits shakier than they look?" in the August 5, 1996, issue of Business Week.


    1. How is the free cash flow number derived from cash flow from operations?
    2. How does Allied's explanation of their cash concerns differ from the analyst Jeff Fotta's interpretation?
    3. How does Fotta conduct the dual cash flow analysis?


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