1. Statement of Cash Flows16
Statement of Cash Flows

2. After studying this chapter, you should be able to:
Summarize the types of cash flow activities reported in the statement of cash flows.
Prepare a statement of cash flows, using the indirect method.
Prepare a statement of cash flows, using the direct method.

3. 16-1
Objective 1
Summarize the types of cash flow activities reported in the statement of cash flows.

4. 16-1
The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet its financial obligations, and pay dividends.

5. Reporting Cash Flows
16-1
The statement of cash flows reports cash flows from three types of activities:
1. Cash flows from operating activities are cash flows from transactions that affect net income.
2. Cash flows from investing activities are cash flows from transactions that affect the investments in noncurrent assets.
3. Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the business.

6. Statement of Cash Flows—NetSolutions
16-1 6

7. Sources (increases) of Cash Uses (decreases) of Cash
Exhibit 2 Cash Flows
16-1
Sources (increases) of Cash
Uses (decreases) of Cash
(receipts from revenues)
Operating
(payments for expenses)
Operating
(receipts from sales of noncurrent assets)
Investing
(payments for acquiring noncurrent assets)
Investing
(receipts from issuing equity and debt securities)
Financing
(payments for treasury stock, dividends, and redemption of debt securities)
Financing 7

8. Cash Flows from Operating Activities
16-1
The direct method reports the sources of operating cash and the uses of operating cash. 8

9. 16-1
The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash. 9

10. 16-1
Cash inflows from operating activities normally arise when cash is received from customers.
Cash outflows from operating activities normally arise when cash is paid to suppliers for merchandise, supplies, services and to employees for salaries and wages.

11. 16-1
A primary advantage of the direct method is that it reports the sources and uses of operating cash flows in the statement of cash flow.
A primary disadvantage of the direct method is that the necessary data may not be readily available and may be costly to gather.

12. 16-1
A primary advantage of the indirect method is that it focuses on the differences between net income and cash flows from operations.
Because the data are readily available, another advantage of the indirect method is that it is normally less costly to use than the direct method.

13. Cash Flows from Operations: Direct and Indirect Methods— NetSolutions 3
16-1
same amount 13

14. Cash Flows from Investing Activities
16-1
Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets.
Cash outflows from investing activities normally include payments to acquire fixed assets, investments, and intangible assets.

15. Cash Flows from Financing Activities
16-1
Cash inflows from financing activities normally arise from issuing debt or equity securities.
Cash outflows from financing activities normally include paying cash dividends, repaying debt, and acquiring treasury stock.

16. Noncash Investing and Financing Activities
16-1
Noncash investing and financing activities are transactions that do not involve cash. The effect of such transactions is recorded in a separate schedule that appears at the bottom of the statement of cash flows.

17. 16-1
I M P O R T A N T
The financial statements, including the statement of cash flows, should not report cash flow per share.

18. Purchase treasury stock Depreciation expense
16-1
Example Exercise 16-1
For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on the statement of cash flows under the indirect method.
Purchase patent
Pay cash dividend
Disposal of equipment
Net income
Purchase treasury stock
Depreciation expense 18

19. Investing Financing Operating Financing Follow My Example 16-1
16-1
Follow My Example 16-1
Investing
Financing
Operating
Financing
For Practice: PE 16-1A, PE 16-1B 19

20. Prepare a statement of cash flows, using the indirect method.
16-2
Objective 2
Prepare a statement of cash flows, using the indirect method.

21. 16-2
An efficient approach to preparing the statement of cash flows is to analyze the changes in the noncash balance sheet accounts. The logic of this approach is that a change in any balance sheet account (including Cash) can be analyzed in terms of changes in the other balance sheet accounts.

22. 16-2
The analysis of Retained Earnings provides a good starting point for determining the cash flows from operating activities, which is the first section of the statement of cash flows.

23. Comparative Balance Sheet
16-2
Comparative Balance Sheet 23
(Continued)

24. Comparative Balance Sheet
16-2
Comparative Balance Sheet 24
(Concluded)

25. Retained Earnings
16-2
The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year.
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance ,300.00
Dec. 31 Net income 108, ,300.00
31 Cash dividends 28, ,300.00 25

26. 16-2
The net income of $108,000 is entered on the statement (or working papers).
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance ,300.00
Dec. 31 Net income 108, ,300.00
31 Cash dividends 28, ,300.00
To statement 26

27. Cash flows from operating activities: Net income $108,000
Operating Activities— Rundell Inc.
16-2
Cash flows from operating activities:
Net income $108,000
Adjustments to reconcile net income to net cash flow from operating activities:
This phrase is added to indicate that accrual basis net income is being adjusted to arrive at cash flows from operations. 27 18

28. Depreciation
16-2
Next, we need to determine depreciation expense for the year. If it isn’t given in the income statement, sometimes it can be found by analyzing the various accumulated depreciation accounts.

29. 16-2
The comparative balance sheet (Exhibit 4: Slides 23 and 24) indicates that Accumulated Depreciation—Building increased by $7,000. By analyzing the account we can see that the increase is the result of the year-end adjusting entry.
ACCOUNT Accumulated Depreciation—Building ACCT. NO.
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance 58,300.00
Dec. 31 Depr. for year 7, ,300.00
to statement 29

30. 16-2
The offsetting $7,000 debit is to an expense for depreciation. The effect on the income statement was to reduced net income; however, this expense did not require an outflow of cash. Therefore, the $7,000 is added back to net income in determining cash flows from operating activities.

31. Amortization is treated in the same manner as depreciation.
Operating Activities—Rundell Inc.
16-2
Cash flows from operating activities:
Net income $108,000
Adjustments to reconcile net income
to net cash flow from operating activities:
Depreciation 7,000
Amortization is treated in the same manner as depreciation. 31

32. Gain on Sale of Land
16-2
The ledger or income statement of Rundell Inc. indicates that the sale of land resulted in a gain of $12,000. This gain increased net income by $12,000, yet cash flows was provided by an investing activity (selling land) rather than an operating activity, so the gain is deducted from net income on the statement of cash flows.

33. Cash flows from operating activities: Net income $108,000
Operating Activities—Rundell Inc.
16-2
Cash flows from operating activities:
Net income $108,000
Adjustments to reconcile net income
to net cash flow from operating activities:
Depreciation 7,000
Gain on sale of land (12,000) 33

34. 16-2
Example Exercise 16-2
Omni Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $3,400 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,100 from sale of land. Reconcile a net income of $50,000 to net cash flow from operating activities. 34

35. Adjustments to reconcile net income from operating activities:
16-2
Follow My Example 16-2
Net income $50,000
Adjustments to reconcile net income from operating activities:
Depreciation 12,000
Amortization 3,400
Gain on sale of land (4,100)
Net cash flow from operating activities $61,300
For Practice: PE 16-2A, PE 16-2B 35

36. Changes in Current Operating Assets and Liabilities
16-2
Next, select current assets and current liabilities that impact cash flows and determine their increases and decreases. Exhibit 5 in the next slide my prove to be helpful in determining how to treat increases and decreases in noncash current operating assets and current operating liabilities.

37. Adjustments to Net Income (Loss) Using the Indirect Method 16-2
Adjustments to Net Income (Loss) Using the Indirect Method
16-2 37

38. Changes in Current Accounts
16-2
Changes in Current Accounts
December 31
Increase
Accounts
2008
2007
Decrease*
Accounts receivable (net) $ 74,000 $ 65,000
Inventories 172, ,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000*
3,200*
2,200
500*
Note that Cash and Dividends Payable are not included in this analysis. 38

39. Cash flows from operating activities: Net income $108,000
Operating Activities—Indirect Method
16-2
Cash flows from operating activities:
Net income $108,000
Adjustments to reconcile net income
to net cash flow from operating activities:
Depreciation 7,000
Gain on sale of land (12,000)
Changes in current operating assets
and liabilities:
Increase in accounts receivable (9,000)
Decrease in inventory 8,000
Decrease in accounts payable (3,200)
Increase in accrued expenses 2,200
Decrease in income taxes payable (500) 39
You will notice that increases actually decrease cash flows from operating activities, and decreases do just the opposite.

40. Same information as Slide 39, only in final form.
16-2
16-2
Statement of Cash Flows—Indirect Method for Rundell Inc. (Operating Activities Section) 40
Same information as Slide 39, only in final form.

41. 16-2
Example Exercise 16-3
Victor Corporation’s comparative balance sheet for current assets and current liabilities was as follows:
Dec. 31, 2009
Dec. 31, 2008
Accounts receivable $ 6,500 $ 4,900
Inventory 12,300 15,000
Accounts payable 4,800 5,200
Dividends payable 5,000 4,000
Adjust net income of $70,000 for changes in operating assets and liabilities. 41

42. Increase in accounts receivable (1,600) Decrease in inventory 2,700
16-2
Follow My Example 16-3
Net income $70,000
Adjustments to reconcile net income to net cash from from operating activities:
Increase in accounts receivable (1,600)
Decrease in inventory 2,700
Decrease in accounts payable (400)
Net cash flow from operating activities $70,700
For Practice: PE 16-3A, PE 16-3B 42

43. Omicron, Inc. reported the following data:
16-2
Example Exercise 16-4
Omicron, Inc. reported the following data:
Net income $120,000
Depreciation expense 12,000
Loss on disposal of equipment 15,000
Increase in Accounts receivable 5,000
Decrease in Accounts payable (2,000)
Prepare the cash flow for operating activities section of the statement of cash flows using the indirect method. 43

44. Cash flows from operating activities:
16-2
Follow My Example 16-4
Cash flows from operating activities:
Net income $120, Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation 12,000
Loss from disposal of equipment 15,000
Changes in current operating assets and liabilities:
Increase in accounts receivable (5,000)
Decrease in accounts payable (2,000)
Net cash flow from operating activities $140,000 44
For Practice: PE 16-4A, PE 16-4B

45. Cash Flows Used for Payment of Dividends
16-2
ACCOUNT Dividends Payable ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance 10,000
10 Cash paid 10,000 —
June 20 Dividends declared 14, ,000
July 10 Cash paid 14,000 —
Dec. 20 Dividends declared 14, ,000
Note that while $28,000 in dividends were declared, only $24,000 were paid during the year. 45

46. 16-2
Because paying of dividends affects equity and is an outflow of cash, it is a negative $24,000 cash flows from financing activities transaction.

47. Common Stock increased by $8,000.
Common Stock
16-2
Common Stock increased by $8,000.
ACCOUNT Common Stock ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance 16,000
Nov ,000 shares issued/cash 8, ,000 47

48. 16-2
Analyzing the two accounts together, we can determine that the 4,000 shares were sold for $48,000.
ACCOUNT Paid-in Capital in Excess of Par—Common Stock
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance 80,000
Nov ,000 shares issued/cash 40, ,000 48

49. 16-2
Issuing common stock affects equity; therefore, we have a positive $48,000 cash flows from financing activities item.

50. Bonds Payable decreased by $50,000.
Bonds Payable
16-2
Bonds Payable decreased by $50,000.
ACCOUNT Bonds Payable ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance ,000
June 30 Retired by payment of
cash at face amount 50, ,000 50

51. 16-2
Retiring bonds is a cash outflow reported as a negative item under cash flows from financing activities.

52. Building
16-2
By examining the Building account, we can determine that Rundell Inc. bought a building for $60,000 cash.
ACCOUNT Building ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance 200,000
Dec. 27 Purchased for cash 60, ,000 52

53. 16-2
Purchasing a building involves a noncurrent asset, so this is a negative cash flows from investing activity.

54. Land
16-2
The $45,000 decline in the Land account resulted from two separate transactions: a sale and a purchase.
ACCOUNT Land ACCOUNT NO.
Balance
Date Item Debit Credit Debit Credit
2008
Jan. 1 Balance 125,000
June 8 Sold for $72,000 cash 60,000 65,000
Oct. 12 Purchased for $15, cash 15, ,000

55. 16-2
The first transaction, the sale of land, is classified as a positive cash flows from investing activity because land is a noncash asset.

56. 16-2
The $12,000 gain was recorded earlier on Slide 34 as an operating activity. The purchase of land also is an investing activity.
Click the button to view Slide 34. To return to this slide, type “56” and press the “Enter” key.

57. 16-2
The second transaction is the purchase of land for cash of $15,000. This transaction is reported as an outflow of cash in the cash flows from investing activities section.

58. 16-2
Statement of Cash Flows—Indirect Method for Rundell Inc. (Partial Statement) 58

59. The ending balance in the Cash account should match this amount.
16-2
Statement of Cash Flows—Indirect Method for Rundell Inc. (Partial Statement)
The ending balance in the Cash account should match this amount. 59

60. 16-2
Example Exercise 16-5
Alpha Corporation purchased land for $125,000. Later in the year the company sold land with a book value of $165,000 for $200,000. How are the effects of these transactions are reported on the statement of cash flows? 60

61. The gain on sale of land is deducted from net income as shown below:
16-2
Follow My Example 16-5
The gain on sale of land is deducted from net income as shown below:
Gain on sale of land $(35,000)
Cash received for sale of land $200,000
Cash paid for purchase of land (125,000)
The purchase and sale of land is reported as part of cash inflow form investing activities as shown below: 61
For Practice: PE 16-5A, PE 16-5B

62. Prepare a statement of cash flows, using the direct method.
16-3
Objective 3
Prepare a statement of cash flows, using the direct method.

63. The Direct Method
16-3
The final amount for cash flows from operating activities will be the same whether the direct or indirect approach is used. The methods differ in how the data are obtained, analyzed, and reported.

64. Schedule of Changes in Current Accounts
Exhibit 8 Data for Direct Method
16-3
Rundell Inc.
Schedule of Changes in Current Accounts
December 31
Increase
Accounts Decrease*
Cash $ 97,500 $ 26,000 $71,500
Accounts receivable (net) 74,000 65,000 9,000
Inventories 172, ,000 8,000*
Accounts payable (merchandise
creditors) 43,500 46,700 3,200*
Accrued expenses payable (operating
expenses) 26,500 24,300 2,200
Income taxes payable 7,900 8, *
Dividends payable 14,000 10,000 4,000 64
(Continued)

65. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
16-3
(Concluded) 65

66. Cash Received from Customers
16-3
The $1,180,000 of sales for Rundell Inc. is reported using the accrual method. An adjustment is necessary to convert the sales reported on the income statement to the cash method.

67. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash Received from Customers
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash received
from customers
Changes
Sales $1,180,000
Increase in accounts rec (9,000)
Cash received from customers $1,171,000 67

68. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash Received from Customers
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
Cash received
from customers
Changes
Sales $1,180,000
Increase in accounts rec (9,000)
Cash received from customers $1,171,000 68

69. Add decrease in accounts receivable 8,000
16-3
Example Exercise 16-6
Sales reported on the income statement were $350,000. The accounts receivable balance declined $8,000 over the year. Determine the amount of cash received from customers.
Follow My Example 16-6
Sales $350,000
Add decrease in accounts receivable ,000
Cash received from customer $358,000 69
For Practice: PE 16-6A, PE 16-6B

70. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash Payments for Merchandise
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
Cash payments for
merchandise
Changes
Cost of merchandise sold
$790,000 70

71. Rundell Inc. Income Statement For the Year Ended December 31, 2008
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
Cash payments for
merchandise
Changes
Cost of merchandise sold
$790,000
Decrease in inventories (8,000)
Decrease in accounts payable ,200
Cash payments for merchandise $785,200 71

72. Rundell Inc. Income Statement For the Year Ended December 31, 2008
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200)
Cost of merchandise sold
Changes
Cash payments for
merchandise
Decrease in inventories (8,000)
Decrease in accounts payable ,200
Cash payments for merchandise $785,200
$790,000 72

73. Cost of merchandise sold $145,000 Add increase in inventories 9,000
16-3
Example Exercise 16-7
Cost of merchandise sold reported on the income statement was $145,000. The accounts payable balance increased $4,000, and the inventory balance increased by $9,000 over the year. Determine the amount of cash paid for merchandise.
Follow My Example 16-7
Cost of merchandise sold $145,000
Add increase in inventories 9,000
Deduct increase in accounts payable (4,000)
Cash payments for merchandise $150,000 73
For Practice: PE 16-7A, PE 16-7B

74. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash Payments for Operating Expenses
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200) 74

75. Rundell Inc. Income Statement For the Year Ended December 31, 2008
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200)
There is no cash flow for depreciation expense. 75

76. Rundell Inc. Income Statement For the Year Ended December 31, 2008
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200)
(193,800)
Cash payments for
operating expenses
Changes
Changes
Operating expenses (other than depreciation)
$196,000
Increase in accrued expenses (2,200)
Cash payments for operating expenses $193,800 76

77. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Gain on Sale of Land
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
The gain on sale of land of $12,000 is included in the proceeds from the sale of land, which is reported as part of cash flows from investing activities.
(785,200)
(193,800)
To avoid confusion, page numbers for the remaining slides are centered on the slides. 77

78. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Gain on Sale of Land
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200)
Cash paid for
interest expense
Changes
Interest expense
8,000
(193,800)
+/- decrease/increase in payable
Cash payments for interest $8,000
(8,000) 78

79. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash Payments for Income Taxes
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200)
Cash payments
for income taxes
Changes
Income tax expense
(193,800)
$83,000
Add decrease in income taxes payable
Cash payments for income tax $83,500
(8,000)
(83,500) 79

80. Rundell Inc. Income Statement For the Year Ended December 31, 2008
Cash Payments for Income Taxes
16-3
Sales $1,180,000
Cost of merchandise sold ,000
Gross profit $ 390,000
Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000
Total operating expenses ,000
Income from operations $ 187,000
Other income:
Gain on sale of land $ 12,000
Other expense:
Interest expense 8, ,000
Income before income tax $ 191,000
Income tax 83,000
Net income $ 108,000
Rundell Inc. Income Statement For the Year Ended December 31, 2008
CASH BASIS
$1,171,000
(785,200)
(193,800)
(8,000)
(83,500) 80
$ 100,500

81. 16-3
Statement of Cash Flows—Direct Method (Operating Activities Section) 81

82. A reconciliation is required when the direct method is used.
Statement of Cash Flows—Direct Method (Reconciliation)
16-3
A reconciliation is required when the direct method is used. 82

83. Financial Analysis and Interpretation
16-3
Free cash flow is a measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.

84. Cash flow from operations Less: Investments in fixed assets to
Free Cash Flow
16-3
Cash flow from operations
Less: Investments in fixed assets to
maintain current production
Free cash flow
Positive free cash flow is considered favorable. A company that has free cash flow is able to fund internal growth, retire debt, pay dividends, and enjoy financial flexibility.