chap013
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Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Statement of Cash FlowsStatement of Cash Flows
Chapter 13
13-2
Provides information about the cash receipts and cash payments of a business
entity during the accounting period.
Provides information about the cash receipts and cash payments of a business
entity during the accounting period.
Purpose of the StatementPurpose of the Statement
Helps investors with questions about the Helps investors with questions about the company’scompany’s
• Ability to generate positive cash flows.Ability to generate positive cash flows.
• Ability to meet its obligations and to pay dividends.Ability to meet its obligations and to pay dividends.
• Need for external financing.Need for external financing.
• Investing and financing transactions for the period. Investing and financing transactions for the period.
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The Statement of Cash Flows must include the following three sections:
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities
The Statement of Cash Flows must include the following three sections:
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities
Classification of Cash FlowsClassification of Cash Flows
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+
_
Inflows from:• Interest and dividends
received• Sales to customers
Inflows from:• Interest and dividends
received• Sales to customers Cash
Flows from Operating Activities
Cash Flows from Operating Activities
Operating ActivitiesOperating Activities
Outflows to:• Suppliers of merchandise and
services• Employees• Lenders for interest• Governments for taxes
Outflows to:• Suppliers of merchandise and
services• Employees• Lenders for interest• Governments for taxes
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Cash Flows from Investing Activities
Cash Flows from Investing Activities
+
_
Investing ActivitiesInvesting ActivitiesInflows from:
•Sale of investments and plant assets
•Collection of principal on loans
Outflows to:• Purchase investments and
plant assets• Purchase debt or equity
investments• Make loans
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+
_
Financing ActivitiesFinancing Activities
Inflows from:• Short-term and long-term
borrowing• Owners (for example, from
issuing stock)
Inflows from:• Short-term and long-term
borrowing• Owners (for example, from
issuing stock)
Outflows to:• Make payments on borrowed
funds• Owners for dividends• Purchase treasury stock
Outflows to:• Make payments on borrowed
funds• Owners for dividends• Purchase treasury stock
Cash Flows from Financing Activities
Cash Flows from Financing Activities
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Cash Equivalents
CashCash
Currency
• Short-term, highly liquid investments.
• Readily convertible into cash.
• So near maturity that market value is unaffected by interest rate changes.
• Short-term, highly liquid investments.
• Readily convertible into cash.
• So near maturity that market value is unaffected by interest rate changes.
Cash and Cash EquivalentsCash and Cash Equivalents
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The operating cash flows section
can be prepared using either the direct method or
the indirect method.
The operating cash flows section
can be prepared using either the direct method or
the indirect method.
Let’s look at the direct
method for preparing the Statement of Cash Flows.
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Direct Method: Cash Direct Method: Cash Received from CustomersReceived from Customers•Accrual basis revenue includes sales
that did not result in cash inflows.•Can be computed as:
Cash Received from
Customers
Cash Received from
Customers
Decrease in receivablesDecrease in receivables
Increase in receivablesIncrease in receivables
+
–
=
=
Net SalesNet Sales
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Direct Method: Cash Direct Method: Cash Received from CustomersReceived from Customers
The accounts receivable balance was $80,000 on 12/31/08 and $110,000 on 12/31/09. If accrual sales revenue for 2009 was $900,000, what was cash
basis revenue?
–
=
$30,000Increase in receivables
$30,000Increase in receivables
Net Sales
$900,000
Net Sales
$900,000$870,000
Cash Received from Customers
$870,000Cash Received
from Customers
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Direct Method: Interest and Direct Method: Interest and Dividends ReceivedDividends Received
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Direct Method: Cash Paid Direct Method: Cash Paid for Purchases of for Purchases of MerchandiseMerchandiseStep 1
Step 2
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After deducting depreciation and other noncash expenses, the cash paid for
expenses is affected by(1) whether the expense was prepaid, and(2) whether the expense was accrued.
After deducting depreciation and other noncash expenses, the cash paid for
expenses is affected by(1) whether the expense was prepaid, and(2) whether the expense was accrued.
Direct Method: Cash Direct Method: Cash Payments for ExpensesPayments for Expenses
Cash Paid for Expenses
= Expenses
+ Increase in prepaid expenses - Decrease in prepaid expenses
+ Decrease in accrued liabilities - Increase in accrued liabilities
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Martin Co.Comparative Balance Sheets - Assets
December 31, 2008 2009
Cash 60,000$ 70,370$ Accounts Receivable, net 27,000 35,000 Inventory 230,000 200,000 Trading Securities - 25,000 Equipment, net 500,000 425,000 Investments 100,000 130,000
Total Assets 917,000$ 885,370$
Direct MethodDirect Method
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Martin Co.Comparative Balance Sheets - Assets
December 31, 2008 2009
Cash 60,000$ 70,370$ Accounts Receivable, net 27,000 35,000 Inventory 230,000 200,000 Trading Securities - 25,000 Equipment, net 500,000 425,000 Investments 100,000 130,000
Total Assets 917,000$ 885,370$
Direct MethodDirect MethodMartin Co.
Comparative Balance Sheets - Liabilities and Equity
December 31, 2008 2009
Accounts Payable 15,000$ 12,000$ Salaries Payable 7,000 5,000 Interest Payable 11,950 7,350 Income Tax Payable 20,000 17,000 Notes Payable, 1st Bank 70,000 60,000 Bonds Payable 250,000 150,000 Premium on Bonds Payable 5,000 4,000
Common Stock 450,000 500,000 Retained Earnings 88,050 130,020
Total Liabilities and Equity 917,000$ 885,370$
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Martin Co.Income Statement Amounts
For the Year Ending December 31, 2009
Sales Revenues 800,000$ Cost of Goods Sold 560,000 Depreciation Expense 5,000 Interest Expense 28,050 Income Tax Expense 27,980 Salary Expense 80,000 Other Expenses 71,000 Amortization of Bond Premium 1,000 Gain on Sale of Equipment 3,000 Extraordinary Loss 30,000 Equity in Investee Income 40,000
Net Income 41,970$
Direct MethodDirect Method
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Direct MethodDirect MethodAdditional Information
• Trading Securities were purchased during 2009 at a cost of $25,000.
• Equipment with a book value of $40,000 was sold during the year for $43,000.
• Equipment with a book value of $30,000 was destroyed during a freak flood in 2009. There was no insurance.
• Martin owns 25% of the common stock of another company and uses the equity method to account for this investment.
•Martin’s tax rate is 40%.•The Notes Payable to the bank carry a 12% rate. The
payments are due on the first day of each month.•The Bonds Payable carry a 9% rate. Interest is payable
semiannually on July 1 & Jan. 1.•Sold stock during 2009 for $50,000. •Received $10,000 dividends from its equity investment.
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Salary Expense 80,000$ 2000Add: Decrease in Salary Payable 2,000
Cash Paid to Employees 82,000$
Salary Expense 80,000$ 2000Add: Decrease in Salary Payable 2,000
Cash Paid to Employees 82,000$
Sales Revenues 800,000$
Less: Increase in A/R (8,000)
Cash Received from Customers 792,000$
Sales Revenues 800,000$
Less: Increase in A/R (8,000)
Cash Received from Customers 792,000$
Direct MethodDirect Method
Cash Received from Customers
Cash Paid to Employees
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Interest Expense 28,050$ 2000Add: Decrease in Interest Payable 4,600
Cash Paid for Interest 32,650$
Interest Expense 28,050$ 2000Add: Decrease in Interest Payable 4,600
Cash Paid for Interest 32,650$
Cost of Goods Sold 560,000$
Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000)
Cash Paid for Inventory 533,000$
Cost of Goods Sold 560,000$
Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000)
Cash Paid for Inventory 533,000$
Direct MethodDirect MethodCash Paid for Inventory
Cash Paid for Interest
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Income Tax Expense 27,980$ 2000Add: Decrease in Taxes Payable 3,000
Cash Paid for Taxes 30,980$
Income Tax Expense 27,980$ 2000Add: Decrease in Taxes Payable 3,000
Cash Paid for Taxes 30,980$
Direct MethodDirect MethodCash Paid for Taxes
Other Operating Cash Flows
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Direct MethodDirect Method
Cash Flows From Operating Activities
Cash Received from Customers 792,000$
Cash Paid to Employees (82,000)
Cash Paid for Inventory (533,000)
Cash Paid for Interest (32,650)
Cash Paid for Taxes (30,980)
Cash Paid to Other Sources (86,000)
Cash From Operating Activities 27,370$
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Martin Co.Statement of Cash Flows
For the Period Ending December 31, 2009
Operating Cash Flows 27,370$
Investing Cash Flows
Proceeds from sale of Equipment 43,000
Financing Cash Flows
Proceeds from sale of Stock 50,000$ Principal paid on Bonds (100,000) Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period 10,370$
Add: Beginning Cash Balance 60,000
Ending Cash Balance 70,370$
Equipment with a book value of $40,000 was sold for $43,000.
Equipment with a book value of $40,000 was sold for $43,000.
Notes Payable decreased from $70,000 to $60,000 during 2009.Notes Payable decreased from $70,000 to $60,000 during 2009.
Bonds Payable decreased from $250,000 to $150,000 during 2009.Bonds Payable decreased from
$250,000 to $150,000 during 2009.
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Martin Co.Statement of Cash Flows
For the Period Ending December 31, 2009
Operating Cash Flows 27,370$
Investing Cash Flows
Proceeds from sale of Equipment 43,000
Financing Cash Flows
Proceeds from sale of Stock 50,000$ Principal paid on Bonds (100,000) Principal paid on Notes (10,000) (60,000)
Net Cash Flows for the Period 10,370$
Add: Beginning Cash Balance 60,000
Ending Cash Balance 70,370$
Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the
12/31/09 Cash balance on the Balance Sheet.
Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the
12/31/09 Cash balance on the Balance Sheet.
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Reconciling Net Income Reconciling Net Income withwithNet Cash FlowsNet Cash Flows
There are two major categories of reconciling items. They include adjusting for:
1. Noncash Expenses.2. Timing Differences.
There are two major categories of reconciling items. They include adjusting for:
1. Noncash Expenses.2. Timing Differences.
Accounts receivableAccounts receivableDepreciation ExpenseDepreciation Expense
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Net Income
Net Income
Cash Flows from Operating Activities
Cash Flows from Operating Activities
Reporting Operating Cash Reporting Operating Cash Flows by the Indirect MethodFlows by the Indirect Method
Changes in current assets and current liabilities as shown on the following table
Changes in current assets and current liabilities as shown on the following table
+ Losses and - Gains
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization
+ Noncash expenses such as depreciation and
amortization
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Use this table when adjusting Net Income to Operating Cash Flows.
Reconciling Net Income with Reconciling Net Income with Net Cash FlowsNet Cash Flows
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The Indirect Method: A The Indirect Method: A SummarySummary
Net IncomeAdd: Depreciation expense
Decrease in accounts receivableDecrease in inventoriesDecrease in prepaid expensesIncrease in accounts payableIncrease in accrued expenses payableNonoperating losses deducted in computing net income
Deduct: Increase in accounts receivableIncrease in inventoriesIncrease in prepaid expensesDecrease in accounts payableDecrease in accrued expenses payableDecrease in deferred income taxes payableNonoperating gains added in computing net income
Net Cash Provided by (used in) operating activities
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Cash Budgets are used by management to plan and forecast future cash flows.
Cash Budgets are used by management to plan and forecast future cash flows.
Force m anagem ent to coordinate activities.
Provide managers w ith advance notice of available resources.
Provide targets useful in evaluating performance.
Provide advance w arnings of potentia l cash shortages.
A C ash Bu d get can b e u sed to:
Managing Cash FlowsManaging Cash Flows
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Managing Cash FlowsManaging Cash Flows
Increase collection of accounts receivables.
Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash.
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A Worksheet for Preparing A Worksheet for Preparing a Statement of Cash Flowsa Statement of Cash Flows
2008 2009AssetsCash 50,000$ 45,000$ Marketable securities 40,000 25,000 Accounts receivable 320,000 330,000 Inventory 240,000 235,000 Plant and equipment (net of depreciation) 600,000 640,000 Totals 1,250,000$ 1,275,000$ Liabilities & Stockholders' EquityAccounting payable 150,000$ 160,000$ Accured expenses payable 60,000 45,000 Mortage note payable (long-term) - 70,000 Bonds payable (due in 2020) 500,000 350,000 Capital stock (no par) 160,000 160,000 Retained earnings 380,000 490,000 Totals 1,250,000$ 1,275,000$
AUTO SUPPLY COMPANYComparative Balance Sheets
December 31
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A Worksheet for Preparing A Worksheet for Preparing a Statement of Cash Flowsa Statement of Cash Flows
Additional Information1.Net income for the year amounted to $250,000. cash dividends of $140,000 were declared and paid.2.Auto’s only noncash expense was depreciation, which totaled $60,000.3.Marketable securities costing $15,000 were sold for $35,000 cash, resulting in a $20,000 nonoperating gain.4.The company purchased plant assets for $100,000, making a $30,000 cash down payment and issuing a $70,000 mortgage not payable for the balance of the purchase price.
Additional Information1.Net income for the year amounted to $250,000. cash dividends of $140,000 were declared and paid.2.Auto’s only noncash expense was depreciation, which totaled $60,000.3.Marketable securities costing $15,000 were sold for $35,000 cash, resulting in a $20,000 nonoperating gain.4.The company purchased plant assets for $100,000, making a $30,000 cash down payment and issuing a $70,000 mortgage not payable for the balance of the purchase price.
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The WorksheetThe Worksheet
Balance sheet effects:Beginning Balance
Debit Changes
Credit Changes
Ending Balance
AssetsCash 50,000 45,000 Marketable securities 40,000 25,000 Accounts receivable 320,000 330,000 Inventory 240,000 235,000 Plant and equipment (net of depreciation) 600,000 640,000 Totals 1,250,000 1,275,000 Liabilities & Stockholders' EquityAccounting payable 150,000 160,000 Accured expenses payable 60,000 45,000 Mortage note payable (long-term) - 70,000 Bonds payable (due in 2020) 500,000 350,000 Capital stock (no par) 160,000 160,000 Retained earnings 380,000 (1) 250,000 490,000 Totals 1,250,000 1,275,000
AUTO SUPPLY COMPANY
For the Year Ended December 31, 2009Effects of Transactions
Worksheet for Statement of Cash Flows
Cash effects:Sources of
CashUses of
CashOperating activities:Net income (1) 250,000
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The WorksheetThe Worksheet
Balance sheet effects:Beginning Balance
Debit Changes
Credit Changes
Ending Balance
AssetsCash 50,000 45,000 Marketable securities 40,000 25,000 Accounts receivable 320,000 330,000 Inventory 240,000 235,000 Plant and equipment (net of depreciation) 600,000 (3) 60,000 640,000 Totals 1,250,000 1,275,000 Liabilities & Stockholders' EquityAccounting payable 150,000 160,000 Accured expenses payable 60,000 45,000 Mortage note payable (long-term) - 70,000 Bonds payable (due in 2020) 500,000 350,000 Capital stock (no par) 160,000 160,000 Retained earnings 380,000 (2) 140,000 (1) 250,000 490,000 Totals 1,250,000 1,275,000
AUTO SUPPLY COMPANY
For the Year Ended December 31, 2009Effects of Transactions
Worksheet for Statement of Cash FlowsCash effects:
Sources of Cash
Uses of Cash
Operating activities:Net income (1) 250,000Depreciation expense (3) 60,000
Investing activities:
Financing activities:Dividends paid (2) 140,000
Net change in cash
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The WorksheetThe Worksheet
Balance sheet effects:Beginning
BalanceDebit
ChangesCredit
ChangesEnding Balance
AssetsCash 50,000 45,000 Marketable securities 40,000 25,000 Accounts receivable 320,000 (4) 10,000 330,000 Inventory 240,000 (5) 5,000 235,000 Plant and equipment (net of depreciation) 600,000 (3) 60,000 640,000 Totals 1,250,000 1,275,000 Liabilities & Stockholders' EquityAccounting payable 150,000 (6) 10,000 160,000 Accured expenses payable 60,000 (7) 15,000 45,000 Mortage note payable (long-term) - 70,000 Bonds payable (due in 2020) 500,000 350,000 Capital stock (no par) 160,000 160,000 Retained earnings 380,000 (2) 140,000 (1) 250,000 490,000 Totals 1,250,000 1,275,000
AUTO SUPPLY COMPANY
For the Year Ended December 31, 2009Effects of Transactions
Worksheet for Statement of Cash FlowsCash effects:Sources of
CashUses of
CashOperating activities:Net income (1) 250,000Depreciation expense (3) 60,000Increase in accounts receivable (4) 10,000Decrease in inventory (5) 5,000Increase in accounts payable (6) 10,000Decreases in accrued expenses (7) 15,000
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The WorksheetThe Worksheet
Balance sheet effects:Beginning
BalanceDebit
ChangesCredit
Changes Ending BalanceAssetsCash 50,000 45,000 Marketable securities 40,000 (8) 15,000 25,000 Accounts receivable 320,000 (4) 10,000 330,000 Inventory 240,000 (5) 5,000 235,000 Plant and equipment (net of depreciation) 600,000 (9) 100,000 (3) 60,000 640,000 Totals 1,250,000 1,275,000 Liabilities & Stockholders' EquityAccounting payable 150,000 (6) 10,000 160,000 Accured expenses payable 60,000 (7) 15,000 45,000 Mortage note payable (long-term) - (9) 70,000 70,000 Bonds payable (due in 2020) 500,000 (10) 150,000 350,000 Capital stock (no par) 160,000 160,000 Retained earnings 380,000 (2) 140,000 (1) 250,000 490,000 Totals 1,250,000 415,000 410,000 1,275,000
AUTO SUPPLY COMPANY
For the Year Ended December 31, 2009Effects of Transactions
Worksheet for Statement of Cash FlowsCash effects: Sources of Cash Uses of CashOperating activities:Net income (1) 250,000Depreciation expense (3) 60,000Increase in accounts receivable (4) 10,000Decrease in inventory (5) 5,000Increase in accounts payable (6) 10,000Decreases in accrued expenses (7) 15,000Gain on sale of securities (8) 20,000Investing activities:Preceeds for sale of securities (8) 35,000Plant acquired for cash (9) 30,000Financing activities:Dividends paid (2) 140,000Retirement of bonds payable (10) 150,000Net decrease in cash 5,000
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The WorksheetThe Worksheet
Balance sheet effects:Beginning
BalanceDebit
ChangesCredit
Changes Ending BalanceAssetsCash 50,000 (x) 5,000 45,000 Marketable securities 40,000 (8) 15,000 25,000 Accounts receivable 320,000 (4) 10,000 330,000 Inventory 240,000 (5) 5,000 235,000 Plant and equipment (net of depreciation) 600,000 (9) 100,000 (3) 60,000 640,000 Totals 1,250,000 1,275,000 Liabilities & Stockholders' EquityAccounting payable 150,000 (6) 10,000 160,000 Accured expenses payable 60,000 (7) 15,000 45,000 Mortage note payable (long-term) - (9) 70,000 70,000 Bonds payable (due in 2020) 500,000 (10) 150,000 350,000 Capital stock (no par) 160,000 160,000 Retained earnings 380,000 (2) 140,000 (1) 250,000 490,000 Totals 1,250,000 415,000 415,000 1,275,000
AUTO SUPPLY COMPANY
For the Year Ended December 31, 2009Effects of Transactions
Worksheet for Statement of Cash FlowsCash effects: Sources of Cash Uses of CashOperating activities:Net income (1) 250,000Depreciation expense (3) 60,000Increase in accounts receivable (4) 10,000Decrease in inventory (5) 5,000Increase in accounts payable (6) 10,000Decreases in accrued expenses (7) 15,000Gain on sale of securities (8) 20,000Investing activities:Preceeds for sale of securities (8) 35,000Plant acquired for cash (9) 30,000Financing activities:Dividends paid (2) 140,000Retirement of bonds payable (10) 150,000Net decrease in cash (x) 5,000 5,000
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Statement of Cash FlowsStatement of Cash Flows
Cash flows from operating activities:Net income 250,000$ Add: Depreciation expense 60,000 Decrease in inventory 5,000 Increase in accounts payable 10,000 Less: Increase in accounts receivable (10,000) Decrease in accrued expenses (15,000) Gain on sale of securities (20,000) Net cash provided by operating activities 280,000 Cash flows from investing activities: Proceeds from sale of securities 35,000$ Cash paid for plant assets (30,000) Net cash provided by investing activities 5,000 Cash flows from financing activities: Dividends paid (140,000) Retirement of bonds payable (150,000) Net cash used for financing activities (290,000) Net decrease in cash (5,000) Cash and cash equivalents, January 1, 2009 50,000 Cash and cash equivalents, December 31, 2009 45,000$
AUTO SUPPLY COMPANYStatement of Cash Flows
For the Year Ended December 31, 2009
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Supplemental InformationSupplemental Information
Purchases of plant assets 100,000$ Less: Portion financed by issuance of long-term debt 70,000 Cash paid to acquire plant assets 30,000$
AUTO SUPPLY COMPANYSupplementary Schedule: Noncash Investing and Financing Activities
We are required to disclose information concerning major investing and financing activities that do not
involve cash.
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End of Chapter 13End of Chapter 13