| Course | ACC 423 Intermediate Financial Accounting III (ACC/423) |
|---|---|
| Week | 5 |
| Paper type | Statement of cash flows paper |
| Length | about 1,013 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 423 Week 5
Profit of $5.2 Million, Cash Up $1.1 Million: Building an Indirect-Method Cash Flow Statement for a Composite Pet Food Manufacturer
[Student Name]
University of Phoenix
ACC/423: Intermediate Financial Accounting III
Week 5 Assignment
[Instructor Name]
[Date]
The company and all figures are composites written for a model paper; accounting rules and research findings come from the sources listed.
A composite company makes dry and wet pet food for store brands sold by regional grocery chains and farm supply stores. Sales grew 14% this year, and net income was $5.2 million. Yet the company's cash balance rose only from $2.3 million to $3.4 million, and the owners asked where the rest of the profit went. Net income measures what the company earned; the statement of cash flows shows where the money actually went. This paper prepares the statement, starting from net income, and explains it.
Operating Activities
The operating section opens with the year's $5.2 million profit. Two kinds of correction follow: one for income statement items that involved no cash, and one for the working capital accounts whose balances moved during the year. Together they convert an accrual figure into the cash the business actually collected and spent in running the plant.
Depreciation of $2.1 million reduced income without using cash, so it is added back. The company sold an old packaging line with a book value of $500,000 for $350,000, recording a $150,000 loss. The loss reduced income but is not a cash outflow; the cash effect of the sale belongs in investing, so the loss is added back.
Accounts receivable rose $900,000 as sales to two new grocery chains on 45-day terms grew; that portion of sales was recorded but not collected, so it is subtracted. Inventory rose $1.3 million because the company built stock of a new grain-free line; cash was spent on ingredients and packaging that have not yet been sold, so it is subtracted. Prepaid expenses fell $100,000 as a prepaid insurance policy was used up, which is added. Accounts payable rose $600,000, meaning some purchases were recorded but not yet paid, which is added. Accrued liabilities fell $200,000 as year-end bonuses from last year were paid, which is subtracted. Deferred revenue rose $400,000 because a retailer prepaid for a large private-label order, cash received before revenue, which is added.
Net cash provided by operating activities is $5.2 million plus $2.1 million plus $150,000, less $900,000, less $1.3 million, plus $100,000, plus $600,000, less $200,000, plus $400,000, or $6.15 million.
Investing Activities
The company bought a new twin-screw extruder and related equipment for $4.8 million in cash. It received $350,000 for the old packaging line. The full proceeds are shown here, not the loss. It also acquired a $800,000 bagging machine by signing a note payable to the seller; because no cash changed hands, this is disclosed as a noncash investing and financing activity rather than included in the statement (Financial Accounting Standards Board, 1987). Net cash used in investing activities is $4.45 million.
Financing Activities
The company borrowed $2.0 million on a term loan to help pay for the extruder and repaid $1.2 million of an older loan. It paid dividends of $900,000 and repurchased shares from a retiring founder for $500,000. Net cash used in financing activities is $600,000.
Reconciling to the Change in Cash
Operating activities provided $6.15 million, investing used $4.45 million and financing used $600,000, for a net increase of $1.1 million. Cash rose from $2.3 million to $3.4 million, which matches.
Supplemental Disclosures
The company paid $450,000 of interest and $1.6 million of income taxes during the year, disclosed at the bottom of the statement or in the notes. Interest paid is classified as operating under US GAAP. The noncash acquisition of the bagging machine for an $800,000 note is disclosed separately.
Interpreting the Statement
Operating cash flow of $6.15 million exceeded net income of $5.2 million, mainly because depreciation is large for a capital-intensive manufacturer. But working capital absorbed $1.3 million of cash, as growth tied money up in receivables and inventory. Barth et al. (2001) showed that separating earnings into cash flow and accrual components improves predictions of future cash flows, and here the accruals signal growth rather than trouble, since the receivables are from creditworthy chains and the inventory is for a line with confirmed orders.
Subtracting the $4.8 million of equipment spending from operating cash leaves free cash flow of or $1.35 million. That covered the dividends and buyback of $1.4 million almost exactly, with new borrowing filling the small gap and adding to cash. Dechow (1994) argued that accruals make earnings the better short-horizon performance measure, a view this year supports: net income shows a profitable year, while cash flow shows how much of that profit was reinvested.
A Warning Sign to Watch
Not every pattern in the statement is reassuring. Receivables grew 18% while sales grew 14%, so customers are taking slightly longer to pay. If the two new grocery chains stretch their terms further, the company's operating cash flow will lag its profit more each year, and the gap will have to be filled with borrowing. The controller will track days sales outstanding monthly and review the chains' payment history before extending credit limits. Inventory deserves the same attention: the grain-free line is new, and if it sells more slowly than the confirmed orders suggest, the $1.3 million build could turn into markdowns. A cash flow statement cannot say which way these will go, but it shows where to look.
Direct Method Comparison
Under the direct method, operating activities would list cash received from customers and cash paid to suppliers, employees, for interest and for taxes. The total would be the same $6.15 million. Standards encourage the direct method but require a reconciliation of net income to operating cash flow either way, which is why most companies present the indirect method.
Conclusion
The pet food manufacturer earned $5.2 million and generated $6.15 million from operations, but spent heavily on equipment and built working capital to support growth. After borrowing, repaying debt and returning $1.4 million to owners, cash rose $1.1 million. Weygandt et al. (2021) describe the statement of cash flows as the bridge between the balance sheets of two years, and this one answers the owners' question about where their profit went.
References
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(1), 27-58. https://doi.org/10.2308/accr.2001.76.1.27
Dechow, P. M. (1994). Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals. Journal of Accounting and Economics, 18(1), 3-42. https://doi.org/10.1016/0165-4101(94)90016-7
Financial Accounting Standards Board. (1987). Statement of cash flows (Statement of Financial Accounting Standards No. 95).
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
What the ACC 423 Week 5 instructions ask
ACC 423 Week 5 usually asks students to prepare and analyze a statement of cash flows. Common requirements include classifying cash flows as operating, investing or financing, computing operating cash flow by the indirect method, and sometimes the direct method, from comparative balance sheets and an income statement, reporting significant noncash investing and financing activities and providing supplemental disclosures of interest and taxes paid. Many prompts end with interpretation, such as comparing operating cash flow with net income or computing free cash flow. The paper should show each adjustment and its source in the balance sheet or income statement and cite the textbook and the cash flow standard in APA style.
How this ACC 423 Week 5 example is built
A pet food manufacturer suits the week because it is growing: receivables and inventory are rising, it is buying new extrusion equipment, it borrows and repays debt and it pays dividends. Each of those shows up in a different section of the statement. The paper takes the adjustments one at a time, stating the balance sheet change and why it adds to or subtracts from net income. The equipment sale is traced through the accounts to separate the cash proceeds from the loss. Financing is built from the debt and equity accounts. The statement is then summarized and checked against the change in cash, and a final section interprets the results using free cash flow.
ACC 423 Week 5 grading rubric: where the points go
The rubric for cash flows usually rewards correct classification, correct adjustments and a statement that reconciles to the change in cash. Faculty check that noncash expenses and losses are added back, gains subtracted, increases in current operating assets subtracted and increases in current operating liabilities added. Purchases and sales of long-term assets belong in investing, with the full proceeds shown, and borrowing, repayments, dividends and share repurchases in financing. Noncash transactions must be disclosed, not included. The net change must equal the change in the cash balance. Interpretation of operating cash flow and free cash flow earns additional credit, while tidy figures and APA form take the remaining points.
ACC 423 Week 5 help: mistakes to avoid
A common ACC 423 Week 5 error is reversing the signs of working capital changes. An increase in receivables means sales were recorded but not collected, so it is subtracted; an increase in payables means expenses were recorded but not paid, so it is added. Another mistake is showing only the gain or loss on an equipment sale rather than the full cash proceeds in investing. Students also list a purchase financed with a note as an investing outflow; it belongs in the noncash disclosure. Interest paid is operating under US GAAP, and dividends paid are financing. Always check that the three sections sum to the change in cash. Finally, explain what the result means for the company.
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ACC 423 Week 5 questions, answered
What does ACC/423 Week 5 usually cover?
It usually covers the statement of cash flows: classifying operating, investing and financing activities, the indirect and direct methods, noncash transactions and interpretation.
Where can I find a free ACC 423 Week 5 sample paper?
The pet food manufacturer statement on this page is built line by line with margin notes explaining each adjustment, and it is open to read. Give us the balance sheets from your own assignment and a first custom draft will be written free.
Why is depreciation added back in the indirect method?
Depreciation reduced net income but used no cash in the period, so it is added back to convert net income to cash from operations.
Where do interest and dividends go on the statement of cash flows?
Under US GAAP, interest paid and interest and dividends received are operating activities, while dividends paid are financing activities.
What is free cash flow?
It is commonly cash from operating activities minus capital expenditures, the cash left for debt repayment, dividends, buybacks or growth.
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