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Chapter 23: Q1FRP (page 1393)

Question: The Procter & Gamble Company (P&G)

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) Which method of computing net cash provided by operating activities does P&G use? What were the amounts of net cash provided by operating activities for the years 2012, 2013, and 2014? Which two items were most responsible for the decrease in net cash provided by operating activities in 2014?

(b) What was the most significant item in the cash flows used for investing activities section in 2014?

What was the most significant item in the cash flows used for financing activities section in 2014?

(c) Where is “deferred income taxes” reported in P&G’s statement of cash flows? Why does it appear in that section of the statement of cash flows?

(d) Where is depreciation reported in P&G’s statement of cash flows? Why is depreciation added to net income in the statement of cash flows?

Short Answer

Expert verified

Answer

  1. P&G has usedan indirect method for preparing the cash flow statement.
  2. Capital expenditure and dividend paymentare significant items in the investing and financing section.
  3. Theoperating section of the cash flow statement reports the deferred income tax.
  4. Depreciation isadded to the net income in the operating section of the cash flow statement.

Step by step solution

01

Definition of Statement of Cash Flow

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

02

Method used for calculation of net cash flow

The P & G Company has used an indirect method to prepare the cash flow statement.

Year

Net cash provided by operating activities

2012

$13,284

2013

$14,873

2014

$13,958

The two items responsible for the decrease in the net cash provided by the operating activities are changes in operating assets and liabilities and the change in the accounts payable.

03

Significant items

Cash flow used for investing activity: Capital expenditure of $3,848.

Cash flow used for financing activity: Dividend paid to shareholders $6,911.

04

Reporting of deferred income tax

Deferred income taxes are reported in the operating activity section of the cash flow statement. These are deducted in the reconciliation of the net income because these are non-cash benefits.

05

Reporting of depreciation

The operating activity section of the cash flow statement reports the depreciation expenses. It is added to the net income reconciliation because it is a non-cash expense reported in the income statement

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Most popular questions from this chapter

Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance. From what sources does the information to prepare this statement come, and what information does each source provide?

What are the major sources of cash (inflows) in a statement of cash flows? What are the major uses (outflows) of cash?

Data for Krauss Company are presented in E23-5.

Instructions

Prepare the operating activities section of the statement of cash flows using the indirect method.

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year

Prior Year

Cash flows from operating activities:

Net income

\( 17,523

\) 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes

(69,524)

(146,590)

Depreciation and amortization

316,416

181,348

Changes in assets and liabilities:

Accounts receivable, trade

(38,267)

(25,947)

Inventories

(1,599,014)

(1,289,293)

Prepaid and other current assets

(444,794)

(113,205)

Deposits and other assets

(24,240)

(83,044)

Accounts payable

2,017,059

(284,567)

Accrued expenses

61,321

170,755

Accrued interest payable, debentures

-

(58,219)

Other

-

(8,960)

Income taxes payable

-

117,810

Net cash provided by (used for) operating activities

236,480

(700,957)

Net cash used for investing activities

(2,102,892)

(4,422,953)

Net cash (used for) provided by financing activities

(315,353)

9,685,435

Net change in cash and cash equivalents

(2,181,765)

4,561,525

Other information:

Current liabilities

\( 4,055,465

\) 1,995,600

Total liabilities

4,620,085

2,184,386

Net sales

20,560,566

17,025,856

Instructions

  1. Note that net income in the current year was only \(17,523 compared to prior-year income of \)838,955, but net cash flow from operating activities was \(236,480 in the current year and a negative \)700,957 in the prior year. Explain the causes of this apparent paradox.
  2. Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-based ratios.

Novak Corporation is preparing its 2017 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novak’s 2017 statement of cash flows.

Code Letter Effect

A Added to net income in the operating section

D Deducted from net income in the operating section

R-I Cash receipt in investing section

P-I Cash payment in investing section

R-F Cash receipt in financing section

P-F Cash payment in financing section

N Noncash investing and financing activity

(a)Purchase of land and building

(b)Decrease in accounts receivable

(c)Issuance of stock.

(d)Depreciation expense.

(e)Sale of land at book value.

(f)Sale of land at a gain.

(g)Payment of dividends.

(h)Increase in accounts receivable.

(i)Purchase of available-for-sale debt investment

(j)Increase in accounts payable.

(k)Decrease in accounts payable.

(l)Loan from bank by signing note

(m)Purchase of equipment using a note

(n)Increase in inventory

(o)Issuance of bonds.

(p)Redemption of bonds payable.

(q)Sale of equipment at a loss.

(r)Purchase of treasury stock.
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