True/False Questions

 

1. Amounts held in cash equivalent investments must be reported separately from amounts held as cash on the statement of cash flows.

 

Answer: False      Learning Objective: 2       Level of Learning:

 

2. Generally speaking, cash flows from operating activities include the elements of net income reported on a cash basis.

 

Answer: True      Learning Objective: 4       Level of Learning: 2

 

3. In using a spreadsheet to prepare the statement of cash flows, the spreadsheet entries duplicate the actual journal entries used to record the transactions during the year.

 

Answer: True      Learning Objective: 8       Level of Learning: 2

 

4. Interest payments on debt are classified as cash outflows from financing activities.

 

Answer: False      Learning Objective: 6       Level of Learning: 2

 

5. Transactions that represent noncash investing and financing should be reported in the statement of cash flows.

 

Answer: True      Learning Objective: 7       Level of Learning: 2

 

6. If the direct method is used to report cash flows from operating activities in the body of the statement of cash flows, a reconciliation of net income to net cash flows from operating activities also is required.

 

Answer: True      Learning Objective: 4       Level of Learning: 1

 

7. Cash paid for taxes and interest must be disclosed on the face of the statement or in the disclosure notes under both the direct and indirect methods of reporting cash flows from operating activities.

 

Answer: True      Learning Objective: 4       Level of Learning: 1

 

8. The purchase of treasury stock is an investing cash outflow.

 

Answer: False      Learning Objective: 5       Level of Learning: 1

 

9. A decrease in cash dividends payable means that dividends declared were less than dividends paid.

 

Answer: True      Learning Objective: 4       Level of Learning: 2

 

10. When one enters a $50,000 credit entry to the Land account in a spreadsheet for the statement of cash flows, it represents a negative change in that account and probably is due to selling such assets.

 

Answer: True      Learning Objective: 8       Level of Learning: 2

 

 

Matching Pair Questions

 

Use the following to answer questions 11-15:

 

11-15.  Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

 

Terms:

1. Operating cash inflow
2. Operating cash outflow
3. Investing cash inflow
4. Investing cash outflow
5. Financing cash inflow
6. Financing cash outflow
7. Noncash financing and investing activity
8. Not reported on the statement of cash flows

Phrases:

11. ____ Gain from the sale of a cash equivalent.
12. ____ Cash purchase of inventory.
13. ____ Cash dividends received under the equity method.
14. ____ Principal payment on a note.
15. ____ Distribution of a stock dividend.

 

Answer: 11-A; 12-B; 13-C; 14-F; 15-H

 

Use the following to answer questions 16-20:

 

16-20.  Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

 

Terms:

1. Operating cash inflow
2. Operating cash outflow
3. Investing cash inflow
4. Investing cash outflow
5. Financing cash inflow
6. Financing cash outflow
7. Noncash financing and investing activity
8. Not reported on the statement of cash flows

Phrases:

16. ____ Cash collected on accounts receivable.
17. ____ Cash collection of a nontrade note receivable.
18. ____ Cash purchase of securities issued by another corporation.
19. ____ Issuance of a long-term note payable for cash.
20. ____ Payment of a property dividend.

 

Answer: 16-A; 17-C; 18-D; 19-E; 20-G

 

 

 

Use the following to answer questions 21-25:

 

21-25.  Listed below are reporting classifications for a statement of cash flows using the indirect method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

 

Terms:

1. Operating activity, no adjustment to net income
2. Operating activity, negative adjustment to net income
3. Operating activity, positive adjustment to net income
4. Investing cash inflow
5. Investing cash outflow
6. Financing cash inflow
7. Financing cash outflow
8. Noncash financing and investing activity

Phrases:

21. ____ Increase in inventory account.
22. ____ Payment of cash dividends.
23. ____ Cash sales.
24. ____ Prepayment of an insurance premium for six months.
25. ____ Cash proceeds from sale of equipment.

 

Answer: 21-B; 22-G; 23-A; 24-B; 25-D

 

Use the following to answer questions 26-30:

 

26-30.  Listed below are reporting classifications for a statement of cash flows using the indirect method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

 

Terms:

1. Operating activity, no adjustment to net income
2. Operating activity, negative adjustment to net income
3. Operating activity, positive adjustment to net income
4. Investing cash inflow
5. Investing cash outflow
6. Financing cash inflow
7. Financing cash outflow
8. Noncash financing and investing activity

Phrases:

26. ____ Payment of semi-annual interest on bonds payable.
27. ____ Acquisition of a building for cash.
28. ____ Depreciation expense.
29. ____ Issuance of bonds at a discount for cash.
30. ____ Decrease in account payable.

 

Answer: 26-A; 27-E; 28-C; 29-F; 30-B

 

 

 

Use the following to answer questions 31-35:

 

31-35.  Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

 

Terms:

1. Operating cash inflow
2. Operating cash outflow
3. Investing cash inflow
4. Investing cash outflow
5. Financing cash inflow
6. Financing cash outflow
7. Noncash financing and investing activity
8. Not reported on the statement of cash flows

Phrases:

31. ____ Acquisition of equipment by issuing bonds payable.
32. ____ Repayment of long-term debt by issuing preferred stock.
33. ____ Interest received on trading securities.
34. ____ Cash sale of a patent.
35. ____ Loan of cash to a supplier in exchange for a six-month note receivable.

 

Answer: 31-G; 32-G; 33-A; 34-C; 35-D

 

Use the following to answer questions 36-40:

 

36-40.  Listed below are the reporting classifications for a statement of cash flows using the direct method for reporting operating cash flows. Indicate the reporting classification that would apply to each of the five transactions described below by placing the letter of the reporting classification in the space provided by each transaction.

 

Terms:

1. Operating cash inflow
2. Operating cash outflow
3. Investing cash inflow
4. Investing cash outflow
5. Financing cash inflow
6. Financing cash outflow
7. Noncash financing and investing activity
8. Not reported on the statement of cash flows

Phrases:

36. ____ Payment of cash dividends.
37. ____ Purchase of treasury stock.
38. ____ Investment of excess cash in an interest-bearing security classified as a cash equivalent.
39. ____ Appropriation of retained earnings for expansion of the R&D program.
40. ____ Acquisition of equipment under a capital lease.

 

Answer: 36-F; 37-F; 38-H; 39-H; 40-G

 

 

 

Multiple Choice Questions

 

41. Which of the following financial statements is prepared as of a particular point in time rather than for a period of time?
42. A) Statement of cash flows.
43. B) Income statement.
44. C) Statement of shareholders’ equity.
45. D) Balance sheet.

 

Answer: D      Learning Objective: 1       Level of Learning: 1

 

42. Which one of the following financial statements does not report amounts primarily on an accrual basis?
43. A) Income statement.
44. B) Balance sheet.
45. C) Statement of cash flows.
46. D) Statement of shareholders’ equity.

 

Answer: C      Learning Objective: 1       Level of Learning: 1

 

43. Which of the following is not required by generally accepted accounting principles?
44. A) Cash flow per share.
45. B) Earnings per share.
46. C) Statement of cash flows.
47. D) Disclosure notes.

 

Answer: A      Learning Objective: 1       Level of Learning: 1

 

44. Which of the following is always reported as an outflow of cash?
45. A) The accrual of warranty expense.
46. B) The declaration of a cash dividend.
47. C) The purchase of equipment for cash.
48. D) Amortization expense.

 

Answer: C      Learning Objective: 5       Level of Learning: 1

 

45. Which of the following causes a change in cash?
46. A) Accrual of interest payable.
47. B) Recording of depreciation expense.
48. C) Write-off of an uncollectible account.
49. D) Payment of a cash dividend declared in the previous fiscal year.

 

Answer: D      Learning Objective: 6       Level of Learning: 1

 

46. Cash equivalents generally would not include short-term investments in:
47. A) Commercial paper.
48. B) Certificates of deposit.
49. C) Held-to-maturity securities.
50. D) Money market funds.

 

Answer: C      Learning Objective: 2       Level of Learning: 1

 

 

 

47. How is the amortization of patents reported in a statement of cash flows that is prepared using the indirect method?
48. A) A decrease in cash flows from investing activities.
49. B) An increase in cash flows from investing activities.
50. C) A deduction from net income.
51. D) An addition to net income in arriving at cash flows from operations.

 

Answer: D      Learning Objective: 4       Level of Learning: 2

 

48. How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method?
49. A) Not reported.
50. B) An increase in cash flows from operating activities.
51. C) A decrease in cash flows from operating activities.
52. D) A decrease in cash flows from investing activities.

 

Answer: A      Learning Objective: 1       Level of Learning: 2

 

49. Which of the following is reported as an investing activity on the statement of cash flows?
50. A) Sale of a subsidiary.
51. B) Issuance of a long-term promissory note.
52. C) Sale of treasury stock.
53. D) Purchase of highly liquid, short-term investments with excess cash.

 

Answer: A      Learning Objective: 5       Level of Learning: 2

 

50. Which of the following is reported as an investing activity on the statement of cash flows?
51. A) The receipt of dividend revenue.
52. B) The payment of cash dividends.
53. C) The payment of interest on bonds.
54. D) The sale of machinery.

 

Answer: D      Learning Objective: 5       Level of Learning: 2

 

51. Which of the following is reported as an operating activity on the statement of cash flows?
52. A) The payment of dividends.
53. B) The sale of office equipment.
54. C) The payment of interest on long-term notes.
55. D) The issuance of a stock dividend.

 

Answer: C      Learning Objective: 3       Level of Learning: 2

 

52. Which of the following is reported as an operating activity on the statement of cash flows?
53. A) The purchase of operating assets.
54. B) The acquisition of treasury stock.
55. C) The retirement of bonds.
56. D) The payment of prepaid insurance.

 

Answer: D      Learning Objective: 3       Level of Learning: 2

 

 

 

53. Which of the following is reported as a financing activity on the statement of cash flows?
54. A) The sale of securities classified as available for sale.
55. B) The acquisition of stock for the purpose of retiring it.
56. C) The payment of interest on bonds payable.
57. D) The receipt of dividend revenue.

 

Answer: B      Learning Objective: 6       Level of Learning: 2

 

54. Which of the following is reported as a financing activity on the statement of cash flows?
55. A) The amortization of a patent.
56. B) The exchange of common stock for a building.
57. C) The acquisition of long-term investments.
58. D) The repayment of bonds issued at par.

 

Answer: D      Learning Objective: 6       Level of Learning: 2

 

55. When preparing the statement of cash flows using the indirect method for determining net cash flows from operating activities, depreciation is added to net income because:
56. A) It was deducted as an expense on the income statement, but does not require cash.
57. B) It was deducted as an expense on the income statement and affects the amount of cash.
58. C) It is a significant portion of the year’s expenses.
59. D) It represents a source or inflow of cash.

 

Answer: A      Learning Objective: 4       Level of Learning: 2

 

56. Which of the following is not classified as an operating activity?
57. A) Interest paid on long-term debt.
58. B) Dividends received on common stock.
59. C) Dividends paid on common stock.
60. D) Payments on accounts payable.

 

Answer: C      Learning Objective: 6       Level of Learning: 2

 

57. When a company purchases a security it considers a cash equivalent, the cash outflow is:
58. A) Reported as an operating activity.
59. B) Reported as an investing activity.
60. C) Reported as a financing activity.
61. D) Not reported on a statement of cash flows.

 

Answer: D      Learning Objective: 2       Level of Learning: 2

 

58. When treasury stock is sold at an amount less than its cost, the sale is classified as:
59. A) A financing activity.
60. B) An operating activity.
61. C) A financing activity and an operating activity.
62. D) An investing activity.

 

Answer: A      Learning Objective: 6       Level of Learning: 2

 

 

 

59. Using the direct method, cash received from customers is calculated as sales:
60. A) Plus an increase in allowance for uncollectible accounts.
61. B) Minus an increase in allowance for uncollectible accounts.
62. C) Plus an increase in accounts receivable.
63. D) Plus a decrease in accounts receivable.

 

Answer: D      Learning Objective: 3       Level of Learning: 3

 

60. Cash paid to suppliers under the direct method is computed as:
61. A) Cost of goods sold plus a decrease in inventory and minus an increase in accounts payable.
62. B) Cost of goods sold plus an increase in inventory and minus an increase in accounts payable.
63. C) Cost of goods sold minus a decrease in inventory and plus an increase in accounts payable.
64. D) Cost of goods sold minus an increase in inventory and plus an increase in accounts payable.

 

Answer: B      Learning Objective: 3       Level of Learning: 3

 

61. Which of the following never requires an outflow of cash?
62. A) Early extinguishment of debt.
63. B) Retirement of common stock.
64. C) Payment of dividends.
65. D) Amortization of patent.

 

Answer: D      Learning Objective: 1       Level of Learning: 1

 

62. Which of the following is not an inflow of cash?
63. A)
64. B) Cash borrowed on a short-term note.
65. C) Sale of a computer.
66. D) Cash borrowed on a long-term note.

 

Answer: A      Learning Objective: 1       Level of Learning: 1

 

63. The amortization of bond discount is included in the statement of cash flows (indirect method) as:
64. A) A financing cash inflow.
65. B) An investing activity.
66. C) An addition to net income.
67. D) A deduction from net income.

 

Answer: C      Learning Objective: 4       Level of Learning: 1

 

 

64. Which of the following is not reported as an adjustment to net income when using the indirect method of computing net cash flows from operating activities?
65. A) Cash dividends paid.
66. B) A change in accounts receivable.
67. C)
68. D) A change in a prepaid expense.

 

Answer: A      Learning Objective: 4       Level of Learning: 1

 

65. Which of the following is reported as a deduction from net income when using the indirect method to determine net cash flows from operating activities?
66. A) Depreciation expense.
67. B) A bad debt written off under the allowance method.
68. C) Amortization of premium on bonds payable.
69. D) Dividends declared.

 

Answer: C      Learning Objective: 4       Level of Learning: 2

 

66. All of the following may qualify as cash equivalents except:
67. A) Money market accounts.
68. B) Certificates of deposit.
69. C) S. Treasury bills.
70. D) Newly issued corporate bonds.

 

Answer: D      Learning Objective: 1       Level of Learning: 1

 

67. Cost of goods sold as reported on the income statement will be less than cash paid to suppliers if:
68. A) The increase in accounts payable is greater than the increase in inventory during the period.
69. B) The decrease in accounts payable is equal to the increase in inventory during the period.
70. C) The decrease in accounts payable is less than the decrease in inventory during the period.
71. D) The increase in accounts payable is equal to the decrease in inventory during the period.

 

Answer: B      Learning Objective: 3       Level of Learning: 3

 

68. The primary objective of the statement of cash flows is to provide information about a company’s:
69. A) Cash receipts and disbursements.
70. B) Noncash financing and investing activities.
71. C) Financial position.
72. D)

 

Answer: A      Learning Objective: 1       Level of Learning: 1

 

 

69. When a transfer is made between cash and cash equivalents with no gain or loss, how is the transaction treated on the statement of cash flows?
70. A) It is included as an operating activity.
71. B) It is included as a noncash financing activity.
72. C) It is included as an investing activity.
73. D) It is not reported.

 

Answer: D      Learning Objective: 1       Level of Learning: 2

 

70. Creditors and investors would generally find the statement of cash flows least useful for assessing the:
71. A) Ability to generate future cash flows.
72. B) Ability to pay dividends.
73. C) Financial position at a point in time.
74. D) Quality of earnings.

 

Answer: C      Learning Objective: 1       Level of Learning: 2

 

71. Of the following, which is not an investing activity?
72. A) Purchasing a new computer.
73. B) Buying treasury stock.
74. C) Selling a parcel of land.
75. D) Purchasing short-term investments.

 

Answer: B      Learning Objective: 6       Level of Learning: 2

 

72. A loss on the sale of machinery should be reported on the statement of cash flows as:
73. A) An adjustment to net income under the indirect method.
74. B) An operating activity under the direct method.
75. C) An investing activity cash outflow.
76. D) A noncash investing activity.

 

Answer: A      Learning Objective: 4       Level of Learning: 2

 

73. Which of the following would not be a cash inflow from financing activities?
74. A) Cash from issuing common stock.
75. B) Cash from issuing bonds.
76. C) Cash from issuing preferred stock.
77. D) Cash from the sale of stock of a supplier.

 

Answer: D      Learning Objective: 6       Level of Learning: 2

 

74. Which of the following would be reported as a cash outflow from investing activities?
75. A) Issuance of bonds.
76. B) Purchase of land.
77. C) Payment of dividends.
78. D) Retirement of common stock.

 

Answer: B      Learning Objective: 5       Level of Learning: 2

 

 

 

75. Payments to acquire bonds of other corporations should be classified on a statement of cash flows as:
76. A) A lending activity.
77. B) An operating activity.
78. C) A financing activity.
79. D) An investing activity.

 

Answer: D      Learning Objective: 5       Level of Learning: 2

 

76. Which of the following would be added to net income when determining cash flows from operating activities under the indirect method?
77. A) A gain on the sale of land.
78. B) An increase in prepaid expenses.
79. C) A decrease in accounts payable.
80. D) A decrease in accounts receivable.

 

Answer: D      Learning Objective: 4       Level of Learning: 3

 

77. Which of the following would be an example of an investing activity on a statement of cash flows?
78. A) Sale of equipment.
79. B) Issuance of long-term bonds.
80. C) Receipt of investment revenue.
81. D) Conversion of a cash equivalent into cash.

 

Answer: A      Learning Objective: 5       Level of Learning: 2

 

78. Interest payments to creditors are reported on a statement of cash flows as:
79. A) An investing activity.
80. B) A borrowing activity.
81. C) A financing activity.
82. D) An operating activity.

 

Answer: D      Learning Objective: 4       Level of Learning: 1

 

79. Accrual of payroll expense is:
80. A) Reported as an operating activity in the statement of cash flows.
81. B) Reported as an investing activity in the statement of cash flows.
82. C) Reported as a financing activity in the statement of cash flows.
83. D) None of the above is correct.

 

Answer: D      Learning Objective: 2       Level of Learning: 2

Rationale: Accruing expenses does not affect cash flows.

 

80. Purchase of equipment for cash is:
81. A) Reported as an operating activity in the statement of cash flows.
82. B) Reported as an investing activity in the statement of cash flows.
83. C) Reported as a financing activity in the statement of cash flows.
84. D) None of the above is correct.

 

Answer: B      Learning Objective: 5       Level of Learning: 2

 

 

81. Acquiring land with a long-term note is:
82. A) Reported as an investing activity in the statement of cash flows.
83. B) Reported as a financing activity in the statement of cash flows.
84. C) Reported as a noncash investing and financing activity in the statement of cash flows.
85. D) None of the above is correct.

 

Answer: C      Learning Objective: 7       Level of Learning: 2

 

82. Proceeds from the sale of a plant site are:
83. A) Reported as an operating activity in the statement of cash flows.
84. B) Reported as an investing activity in the statement of cash flows.
85. C) Reported as a financing activity in the statement of cash flows.
86. D) None of the above is correct.

 

Answer: B      Learning Objective: 5       Level of Learning: 2

 

83. Purchase of treasury stock is:
84. A) Reported as a financing activity in the statement of cash flows.
85. B) Reported as an investing activity in the statement of cash flows.
86. C) Reported as an operating activity in the statement of cash flows.
87. D) None of the above is correct.

 

Answer: A      Learning Objective: 6       Level of Learning: 2

 

Use the following to answer questions 84-88:

 

Each year, White Mountain Enterprises (WME) prepares a reconciliation schedule that compares its income statement with its statement of cash flows on both the direct and indirect method bases.

 

84. In its 2006 income statement, WME reported a $60,000 loss on the sale of equipment.  In its reconciliation schedule, WME should:
85. A) Report a $40,000 cash outflow for the direct method.
86. B) Show a $40,000 positive adjustment to net income under the indirect method.
87. C) Show a $40,000 negative adjustment to net income under the indirect method.
88. D) None of the above is correct.

 

Answer: B      Learning Objective: 4       Level of Learning: 3

Rationale: This loss reduces net income, but has no effect on cash flow.

 

 

85. In its 2006 income statement, WME reported $11,000 of interest expense on its outstanding bonds.  During the year, WME paid its regular installments of $9,000 of interest in cash. In its reconciliation schedule, WME should:
86. A) Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond premium.
87. B) Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond premium.
88. C) Show a $2,000 positive adjustment to net income under the indirect method for the decrease in bond discount.
89. D) Show a $2,000 negative adjustment to net income under the indirect method for the decrease in bond discount.

 

Answer: C      Learning Objective: 4       Level of Learning: 3

Rationale: When interest expense exceeds the cash paid, the effective interest rate exceeds the stated interest rate; therefore, the bond was sold at a discount.

 

86. In its 2006 income statement, WME reported $440,000 for the cost of goods sold.  WME paid inventory suppliers $380,000 in 2006, and its inventory balance decreased by $41,000 during the year.  In its reconciliation schedule, WME should:
87. A) Show a $19,000 positive adjustment to net income under the indirect method for the increase in accounts payable.
88. B) Show a $19,000 positive adjustment to net income under the indirect method for the decrease in accounts payable.
89. C) Show a $19,000 negative adjustment to net income under the indirect method for the increase in accounts payable.
90. D) Show a $19,000 negative adjustment to net income under the indirect method for the decrease in accounts payable.

 

Answer: A      Learning Objective: 4       Level of Learning: 3

Rationale: Decrease in inventory balance by $41,000 indicates that purchases were less than cost of goods sold by $41,000, totaling $399,000.  If cash paid to suppliers was $380,000, accounts payable increased by $19,000.

 

87. In its 2006 income statement, WME reported $58,000 for insurance expense.  WME paid $72,000 in insurance premiums during 2006.  In its reconciliation schedule, WME should:
88. A) Show a $14,000 positive adjustment to net income under the indirect method for the increase in prepaid insurance.
89. B) Show a $14,000 negative adjustment to net income under the indirect method for the decrease in prepaid insurance.
90. C) Show a $14,000 negative adjustment to net income under the indirect method for the increase in prepaid insurance.
91. D) Show a $14,000 positive adjustment to net income under the indirect method for the decrease in prepaid insurance.

 

Answer: C      Learning Objective: 4       Level of Learning: 3

Rationale: Prepaid insurance, an asset account, increased by the cash payment of $72,000 and decreased by the $58,000 portion that was expensed.  Thus, prepaid insurance increased by $14,000.

 

 

88. In its 2006 income statement, WME reported $695,000 for service revenue earned from membership fees.  WME received $681,000 cash in advance from members during 2006.  In its reconciliation schedule, WME should:
89. A) Show a $14,000 negative adjustment to net income under the indirect method for the increase in unearned revenue.
90. B) Show a $14,000 negative adjustment to net income under the indirect method for the decrease in unearned revenue.
91. C) Show a $14,000 positive adjustment to net income under the indirect method for the increase in unearned revenue.
92. D) Show a $14,000 positive adjustment to net income under the indirect method for the decrease in unearned revenue.

 

Answer: B      Learning Objective: 4       Level of Learning: 3

Rationale: Unearned revenue, a liability account, increased by the cash received for $681,000 and decreased by the $695,000 revenue recognized.  Thus, unearned revenue decreased by $14,000.

 

89. Rampart Inc. recorded the following transaction:

 

Land	15 million
Notes Payable		12 million
Cash		3 million

 

In the statement of cash flows, this would be reported as:

1. A) $3 million outflow from investing activities.
2. B) $15 million outflow from investing activities.
3. C) $3 million outflow from investing activities and $12 million noncash investing and financing activity.
4. D) None of the above

 

Answer: C      Learning Objective: 7       Level of Learning: 3

 

90. On December 31, 2006, Wellstone Company reported net income of $70,000 and sales of $210,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Wellstone will report cash collected from customers in its 2006 statement of cash flows (direct method) in the amount of:
91. A) $215,000.
92. B) $285,000.
93. C) $135,000.
94. D) $205,000.

 

Answer: D      Learning Objective: 3       Level of Learning: 3

Rationale:

Cash	205,000
Accounts receivable	5,000
Sales revenue		210,000

 

 

 

91. On December 31, 2006, Tiras Company reported net income of $50,000 and sales of $200,000. The company also reported beginning and ending accounts receivable at $20,000 and $25,000, respectively. Tiras will report cash collected from customers in its 2006 statement of cash flows (indirect method) in the amount of:
92. A) $0.
93. B) $245,000.
94. C) $205,000.
95. D) $195,000.

 

Answer: A      Learning Objective: 4       Level of Learning: 3

Rationale: When using the indirect method to determine cash flows from operating activities, cash collected from customers is not calculated or reported.

 

92. Hemmer Company reported net income for 2006 in the amount of $40,000.  The company’s financial statements also included the following:

 

Decrease in accounts receivable	$6,000
Increase in inventory	1,000
Depreciation expense	3,000

 

What is net cash provided by operating activities?

1. A) $38,000.
2. B) $43,000.
3. C) $35,000.
4. D) $48,000.

 

Answer: D      Learning Objective: 4       Level of Learning: 3

Rationale:

Net income	$40,000
Decrease in accounts receivable	6,000
Increase in inventory	(1,000	)
Depreciation expense	3,000
Net cash flows from operating activities	$48,000

 

 

 

93. Creble Company reported net income for 2006 in the amount of $40,000. The company’s financial statements also included the following:

 

Increase in accounts receivable	$4,000
Decrease in inventory	2,000
Depreciation expense	3,000
Gain on sale of equipment	5,000

 

On the statement of cash flows what is net cash provided by operating activities under the indirect method?

1. A) $36,000.
2. B) $41,000.
3. C) $40,000.
4. D) $38,000.

 

Answer: A      Learning Objective: 4       Level of Learning: 3

Rationale:

Net income	$40,000
Increase in accounts receivable	(4,000	)
Decrease in inventory	2,000
Depreciation expense	3,000
Gain on sale of equipment	(5,000	)
Net cash flows from operating activities	$36,000

 

94. Lite Travel Company’s accounting records include the following information:

 

Payments to suppliers	$50,000
Collections on accounts receivable	79,000
Cash sales	44,000

 

What is the amount of net cash provided by operating activities indicated by the numbers provided?

1. A) $  50,000.
2. B) $  73,000.
3. C) $  94,000.
4. D) $129,000.

 

Answer: B      Learning Objective: 3       Level of Learning: 3

Rationale:

Cash	73,000
Accounts payable	50,000
Accounts receivable		79,000
Sales revenue		44,000

 

 

 

95. Freeman Company’s accounting records include the following information:

 

Payments to suppliers	$50,000
Collections on accounts receivable	90,000
Cash sales	20,000
Income taxes paid	5,000
Equipment purchased	15,000

 

What is the amount of net cash provided by operating activities indicated by these transactions?

1. A) $40,000.
2. B) $45,000.
3. C) $55,000.
4. D) $60,000.

 

Answer: C      Learning Objective: 5       Level of Learning: 3

Rationale:

Cash	55,000
Accounts payable	50,000
Income taxes payable	5,000
Accounts receivable		90,000
Sales revenue		20,000

 

The purchase of equipment is an investing activity.

 

96. Ludwig Company’s prepaid rent was $9,000 at December 31, 2005, and $13,000 at December 31, 2006. Ludwig reported rent expense of $19,000 on the 2006 income statement. What amount would be reported on the statement of cash flows as rent paid using the direct method?
97. A) $15,000.
98. B) $19,000.
99. C) $23,000.
100. D) None of the above is correct.

 

Answer: D      Learning Objective: 3       Level of Learning: 3

Rationale:

Rent expense	19,000
Prepaid rent	4,000
Cash		23,000

 

97. Pickering Company’s prepaid insurance was $8,000 at December 31, 2005, and $10,000 at December 31, 2006. Pickering reported insurance expense of $15,000 on the 2006 income statement. What amount would be reported on the statement of cash flows as insurance paid using the direct method?
98. A) $13,000.
99. B) $17,000.
100. C) $15,000.
101. D) $23,000.

 

Answer: B      Learning Objective: 3       Level of Learning: 3

Rationale:

Insurance expense	15,000
Prepaid insurance	2,000
Cash		17,000

 

 

98. Alpha Company had the following account balances for 2006:

 

	Dec. 31	Jan. 1
Accounts receivable	$44,000	$35,000
Accounts payable	58,000	60,000

 

Alpha reported net income of $210,000 for 2006. Assuming no other changes in current account balances, what is the amount of net cash provided by operating activities for 2006 reported on the statement of cash flows?

1. A) $224,000.
2. B) $206,000.
3. C) $214,000.
4. D) $196,000.

 

Answer: D      Learning Objective: 4       Level of Learning: 3

Rationale:

Net income	$210,000
Increase in accounts receivable	(9,000	)
Decrease in accounts payable	(5,000	)
	$196,000

 

99. Hogan Company had the following account balances for 2006:

 

	Dec. 31	Jan. 1
Accounts receivable	$44,000	$35,000
Accounts payable	60,000	55,000
Prepaid insurance	15,000	10,000

 

Hogan reported net income of $300,000 for 2006. Assuming no other changes in current account balances, what is the amount of net cash provided by operating activities for 2006 reported on the statement of cash flows?

1. A) $291,000.
2. B) $290,000.
3. C) $281,000.
4. D) $301,000.

 

Answer: A      Learning Objective: 4       Level of Learning: 3

Rationale:

Net income	$300,000
Increase in accounts receivable	(9,000	)
Increase in accounts payable	5,000
Increase in prepaid insurance	(5,000	)
	$291,000

 

 

 

100. Hanson Company had the following account balances for 2006:

 

	Dec. 31	Jan. 1
Inventory	$40,000	$35,000
Accounts payable	40,000	55,000

 

Hanson reported net income of $90,000 for 2006. Assuming no other changes in current account balances, what is the amount of net cash provided by operating activities for 2006 reported on the statement of cash flows?

1. A) $  70,000.
2. B) $  80,000.
3. C) $100,000.
4. D) $110,000.

 

Answer: A      Learning Objective: 4       Level of Learning: 3

Rationale:

Net income	$90,000
Increase in inventory	(5,000	)
Decrease in accounts payable	(15,000	)
	$70,000

 

101. A company reported interest expense of $540,000 for the year. Interest payable was $35,000 and $75,000 at the beginning and the end of the year, respectively. What was the amount of interest paid?
102. A) $580,000.
103. B) $615,000.
104. C) $500,000.
105. D) $575,000.

 

Answer: C      Learning Objective: 4       Level of Learning: 3

Rationale:

Interest expense	540,000
Interest payable		40,000
Cash		500,000

 

102. A firm reported (in millions of dollars) net cash inflows (outflows) as follows: operating $75, investing ($200), and financing $350. The beginning cash balance was $250. What was the ending cash balance?
103. A) $875.
104. B) $ 25.
105. C) $475.
106. D) $125.

 

Answer: C      Learning Objective: 1       Level of Learning: 3

Rationale: $75 — $200 + $350 + $250 = $475

 

 

103. During the year, cash increased by $300 million. Investing and financing activities created positive cash flow totaling $500 million. What were net cash flows from operating activities on the statement of cash flows?
104. A) Inflow of $300 million.
105. B) Outflow of $200 million.
106. C) Outflow of $300 million.
107. D) Inflow of $600 million.

 

Answer: B      Learning Objective: 3       Level of Learning: 3

Rationale: $300 $500 = ($200)

 

104. Bowers Corporation reported the following (in thousands of dollars) for the year:

 

	Balance
	Beginning	Ending
Accounts receivable	$600	$850
Allowance for bad debts	40	35

 

Sales on account were $1,900 and bad debt expense was $18 for the year. How much cash was collected from customers on account?

627. A) $1,627.
628. B) $1,642.
629. C) $1,638.
630. D) $2,142.

 

Answer: A      Learning Objective: 3       Level of Learning: 3

Rationale:

Cash	1,627
Accounts receivable	250
Allowance for bad debts	5
Bad debt expense	18
Sales revenue		1,900

 

105. Sneed Corporation reported balances in the following accounts for the current year:

 

	Beginning	Ending
Income tax payable	$50	$30
Deferred tax liability	80	140

 

Income tax expense was $230 for the year. What was the amount paid for taxes?

280. A) $280.
281. B) $220.
282. C) $210.
283. D) $190.

 

Answer: D      Learning Objective: 3       Level of Learning: 3

Rationale:

Income tax expense	230
Income tax payable	20
Deferred tax liability		60
Cash		190

 

 

 

106. Dooling Corporation reported balances in the following accounts for the current year:

 

	Beginning	Ending
Inventories	$600	$300
Accounts payable	300	500

 

Cost of goods sold was $7,500. What was the amount of cash paid to suppliers?

1. A) $7,000.
2. B) $7,200.
3. C) $7,300.
4. D) $7,500.

 

Answer: A      Learning Objective: 3       Level of Learning: 3

Rationale:

Cost of goods sold	7,500
Inventory		300
Accounts payable		200
Cash		7,000

 

107. A firm reported salary expense of $239,000 for the current year. The beginning and ending balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of cash paid for salaries?
108. A) $214,000.
109. B) $289,000.
110. C) $264,000.
111. D) $239,000.

 

Answer: C      Learning Objective: 3       Level of Learning: 3

Rationale:

Salary expense	239,000
Salaries payable	25,000
Cash		264,000

 

108. Goodfellow Corporation reported pension expense of $477 for the current year. The beginning and ending balances in the prepaid pension expense account were $50 and $30, respectively. What was the amount of cash paid into the pension fund?
109. A) $477.
110. B) $457.
111. C) $497.
112. D) None of the above is correct.

 

Answer: B      Learning Objective: 5       Level of Learning: 3

Rationale:

Pension expense	477
Prepaid pension expense		20
Cash		457

 

 

 

109. Melanie Corporation declared cash dividends of $13,500 during the current year. The beginning and ending balances in dividends payable were $450 and $750, respectively. What was the amount of cash paid for dividends?
110. A) $12,750.
111. B) $13,800.
112. C) $12,900.
113. D) $13,200.

 

Answer: D      Learning Objective: 6       Level of Learning: 3

Rationale:

Retained earnings	13,500
Dividends payable		300
Cash		13,200

 

 

Problems

 

110. Determine the amount of cash received from customers for each of the four independent situations below.

 

	Sales	Accounts	Bad debt	Allowance for
Situation	revenue	receivable	expense	uncollectible
		inc (dec)		accounts	Cash received
				inc (dec)	from customers
1	$300,000	$ 10,000	$     0	$     0	$
2	300,000	(10,000)	0	0	$
3	400,000	(10,000)	2,000	1,000	$
4	400,000	10,000	2,000	(1,000)	$

 

Answer:

• $300,000 — $10,000 = $290,000
• $300,000 + $10,000 = $310,000
• $400,000 + $10,000 + $1,000 — $2,000 = $409,000
• $400,000 — $10,000  — $1,000 — $2,000 = $387,000

 

Learning Objective: 3       Level of Learning: 3

 

 

111. Determine the amount of cash paid to suppliers for each of the four independent situations below.

 

	Cost of	Inventory	Accounts	Cash paid to suppliers
Situation	goods sold		payable
		inc (dec)	inc (dec)
1	$300,000	$6,000	$       0	$
2	300,000	0	7,000	$
3	400,000	6,000	7,000	$
4	400,000	(6,000)	(7,000)	$

 

Answer:

• $300,000 +  $6,000  =  $306,000
• $300,000 —  $7,000  =  $293,000
• $400,000 +  $6,000  —  $7,000  =  $399,000
• $400,000 +  $7,000  —  $6,000  =  $401,000

 

Learning Objective: 3       Level of Learning: 3

 

112. The accounting records of Eastlake Industries provided the data below.

 

Net income	$300,000
Depreciation expense	15,000
Increase in inventory	2,000
Increase in accounts receivable	1,400
Decrease in interest payable	1,600
Amortization of bond premium	3,000
Increase in accounts payable	7,000
Cash dividends paid	20,000

 

Required:

            Prepare a reconciliation of net income to net cash flows from operating activities.

 

Answer:

Net income	$300,000
Adjustments for noncash effects:
Depreciation expense	15,000
Increase in inventory	(2,000	)
Decrease in interest payable	(1,600	)
Increase in accounts receivable	( 1,400	)
Decrease in bond premium	(3,000	)
Increase in accounts payable	7,000
Net cash flows from operating activities	$314,000

 

Learning Objective: 4       Level of Learning: 3

 

 

113. The accounting records of Westlake Industries provided the data below.

 

Net income	$200,000
Depreciation expense	15,000
Decrease in inventory	12,000
Increase in accounts receivable	1,400
Increase in interest payable	1,600
Amortization of bond discount	3,000
Increase in accounts payable	7,000
Cash dividends paid	20,000

 

Required:

            Prepare a reconciliation of net income to net cash flows from operating activities.

 

Answer:

Net income	$200,000
Adjustments for noncash effects:
Depreciation expense	15,000
Decrease in inventory	12,000
Increase in interest payable	1,600
Increase in accounts receivable	(1,400	)
Decrease in bond discount	3,000
Increase in accounts payable	7,000
Net cash flows from operating activities	$237,200

 

Learning Objective: 4       Level of Learning: 3

 

114. Prepare the spreadsheet entries necessary to determine the amount of cash received from customers for each of the four independent situations below.

 

	Sales	Accounts	Bad debt	Allowance for	Cash received
Situation	revenue	receivable	expense	uncollectible	from customers
иииисс		inc (dec)	inc (dec)	accounts
1	200,000	10,000	0	0
2	200,000	(10,000)	0	0
3	200,000	(10,000)	2,000	1,000
4	200,000	10,000	2,000	(1,000)

 

Answer:

(1.)	Cash	190,000
	Accounts receivable	10,000
	Sales revenue		200,000
(2.)	Cash	210,000
	Accounts receivable		10,000
	Sales revenue		200,000

 

 

(3.)	Cash	209,000
	Bad debt expense	2,000
	Allowance for uncollectible accounts		1,000
	Accounts receivable		10,000
	Sales revenue		200,000
(4.)	Cash	187,000
	Bad debt expense	2,000
	Allowance for uncollectible accounts	1,000
	Accounts receivable	10,000
	Sales revenue		200,000

 

Learning Objective: 3       Level of Learning: 3

 

115. Prepare the spreadsheet entries necessary to determine the amount of cash paid to suppliers for each of the four independent situations below.

 

	Cost of	Inventory	Account	Cash paid
Situation	goods sold	inc (dec)	payable	to suppliers
			inc (dec)
1	400,000	6,000	0
2	400,000	0	7,000
3	100,000	6,000	7,000
4	100,000	(6,000)	(7,000)

 

Answer:

(1.)	Cost of goods sold	400,000
	Inventory	6,000
	Cash		406,000
(2.)	Cost of goods sold	400,000
	Accounts payable		7,000
	Cash		393,000
(3.)	Cost of goods sold	100,000
	Inventory	6,000
	Accounts payable		7,000
	Cash		99,000
(4.)	Cost of goods sold	100,000
	Accounts payable	7,000
	Inventory		6,000
	Cash		101,000

 

Learning Objective: 3       Level of Learning: 3

 

 

116. Following are the income statement and some additional information for Carolina Consulting Company.

 

Carolina Consulting Company Income Statement For the Year Ended December 31, 2006
Net sales		$10,000
Cost of goods sold		(1,500	)
Gross margin		8,500
Operating expenses	$2,000
Depreciation expense	900	(2,900	)
Income before taxes		5,600
Income taxes		(1,600	)
Net income		$4,000

 

All sales were on credit and accounts receivable decreased by $900 this year compared to last year. Merchandise purchases were on credit with a decrease in accounts payable of $700 during the year. Ending inventory was $500 larger than beginning inventory. Income taxes payable increased $300 during the year. All operating expenses were paid for in cash.

 

Required:

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

 

Answer:

Cash flows from operating activities:
Cash received from customers ($10,000 + $900)	$10,900
Cash paid to suppliers ($1,500 + $500 + $700)	(2,700	)
Cash paid for operating expenses	(2,000	)
Cash paid for taxes ($1,600 — $300)	(1,300	)
Net cash flows from operating activities	$4,900

 

Learning Objective: 3       Level of Learning: 3

 

 

117. Following are the income statement and some additional information for Parson Corporation for 2006.

 

Parson Corporation Income Statement
For the Year Ended December 31, 2006
Net sales		$10,000
Cost of goods sold		(1,500	)
Gross margin		8,500
Operating expenses	$2,000
Depreciation expense	900	(2,900	)
Income before taxes		5,600
Income taxes		(1,600	)
Net income		$4,000

 

All sales were on credit and accounts receivable increased by $600 this year compared to last year. Merchandise purchases were on credit with a increase in accounts payable of $400 during the year. Ending inventory was $500 larger than beginning inventory. Income taxes payable increased $300 during the year. All operating expenses were paid for in cash.

 

Required:

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

 

Answer:

Cash flows from operating activities:
Net income	$4,000
Adjustment for noncash effects:
Depreciation expense	900
Increase in accounts receivable	(600	)
Increase in inventory	(500	)
Increase in accounts payable	400
Increase in taxes payable	300
Net cash flows from operating activities	$4,500

 

Learning Objective: 4       Level of Learning: 3

 

 

118. Partial balance sheets and additional information are listed below for Sowell Company.

 

Sowell Company Partial Balance Sheets as of December 31
Assets	2006	2005
Cash	$40,000	$20,000
Accounts receivable	70,000	85,000
Inventory	40,000	35,000
Liabilities
Accounts payable	$54,000	$62,000

 

Additional information for 2006:

Net income was $88,000.

Depreciation expense was $19,000.

 

Required:

            Prepare the operating activities section of the statement of cash flows for 2006 using the indirect method.

 

Answer:

Cash flows from operating activities:
Net income	$88,000
Adjustment for noncash effects:
Depreciation expense	19,000
Decrease in accounts receivable	15,000
Increase in inventory	(5,000	)
Decrease in accounts payable	(8,000	)
Net cash flows from operating activities	$109,000

 

Learning Objective: 4       Level of Learning: 3

 

119. Partial balance sheets and additional information are listed below for Rickey Company.

 

Rickey Company Partial Balance Sheets as of December 31
Assets	2006	2005
Cash	$20,000	$40,000
Accounts receivable	85,000	70,000
Inventory	35,000	40,000
Liabilities
Accounts payable	$62,000	$80,000

 

Additional information for 2006:

Net income was $160,000.

Depreciation expense was $20,000.

 

Required:

            Prepare the operating activities section of the statement of cash flows for 2006 using the indirect method.

 

 

Answer:

Cash flows from operating activities:
Net income	$160,000
Adjustment for noncash effects:
Depreciation expense	20,000
Increase in accounts receivable	(15,000	)
Decrease in inventory	5,000
Decrease in accounts payable	(18,000	)
Net cash flows from operating activities	$152,000

 

Learning Objective: 4       Level of Learning: 3

 

120. Partial balance sheets and additional information are listed below for Monaco Company.

 

Monaco Company Partial Balance Sheets as of December 31
Assets	2006	2005
Cash	$40,000	$20,000
Accounts receivable	60,000	90,000
Inventory	25,000	40,000
Liabilities
Accounts payable	$60,000	$72,000

 

Additional information for 2006:

Net income was $270,000.

Depreciation expense was $30,000.

Sales totaled $800,000.

Cost of goods sold totaled $305,000.

 

Required:

            Calculate the amount of cash paid to merchandise suppliers during 2006.

 

Answer:

Cost of goods sold	305,000
Accounts payable	12,000
Inventory		15,000
Cash (paid to suppliers)		302,000

 

Learning Objective: 3       Level of Learning: 3

 

 

121. Partial balance sheets and additional information are listed below for Ensign Company.

 

Ensign Company Partial Balance Sheets as of December 31
Assets	2006	2005
Cash	$20,000	$40,000
Accounts receivable	90,000	60,000
Inventory	20,000	25,000
Liabilities
Accounts payable	$72,000	$58,000

 

Additional information for 2006:

Net income was $170,000.

Depreciation expense was $30,000.

Sales totaled $400,000.

Cost of goods sold totaled $145,000.

 

Required:

            Calculate the amount of cash paid to merchandise suppliers during 2006.

 

Answer:

Cost of goods sold	145,000
Inventory		5,000
Accounts payable		14,000
Cash (paid to suppliers)		126,000

 

Learning Objective: 3       Level of Learning: 3

 

122. Partial balance sheets and additional information are listed below for Funk Company.

 

Funk Company Partial Balance Sheets as of December 31
Assets	2006	2005
Cash	$40,000	$20,000
Accounts receivable	94,000	90,000
Inventory	25,000	40,000
Liabilities
Accounts payable	$58,000	$72,000

 

Additional information for 2006:

Net income was $170,000.

Depreciation expense was $30,000.

Sales totaled $800,000.

Cost of goods sold totaled $325,000.

 

Required:

            Calculate the amount of cash received from customers during 2006.

 

 

Answer:

Cash (received from customers)	796,000
Accounts receivable	4,000
Sales revenue		800,000

 

Learning Objective: 3       Level of Learning: 3

 

123. Partial balance sheets and additional information are listed below for Julius Company.

 

Julius Company Partial Balance Sheets as of December 31
Assets	2006	2005
Cash	$20,000	$40,000
Accounts receivable	90,000	60,000
Inventory	40,000	25,000
Liabilities
Accounts payable	$72,000	$58,000

 

Additional information for 2006:

Net income was $70,000.

Depreciation expense was $30,000.

Sales totaled $600,000.

Cost of goods sold totaled $325,000.

 

Required:

            Calculate the amount of cash received from customers during 2006.

 

Answer:

Cash (received from customers)	570,000
Accounts receivable	30,000
Sales revenue		600,000

 

Learning Objective: 3       Level of Learning: 3

 

 

124. Partial balance sheets for Yarborough Company and additional information are found below.

 

Yarborough Company Partial Balance Sheets as of December 31
Assets	2006		2005
Equipment	$100,000		$75,000
Accumulated depreciation	(25,000	)	(20,000	)
Shareholders’ equity
Common stock, $5 par	$150,000		$100,000
Paid-in capital — excess of par	20,000		0
Retained earnings	40,000		30,000

 

Additional information for 2006:

July 1:        Issued 10,000 shares of common stock for cash.

July 1:        Purchased new equipment for cash.

Dec. 31      Paid cash dividends of $30,000.

 

Required:

            Prepare the investing activities section of the statement of cash flows for 2006.

 

Answer:

Cash flows from investing activities:
Purchase of equipment	$(25,000)
Net cash flows from investing activities	$(25,000)

 

Learning Objective: 5       Level of Learning: 3

 

125. Partial balance sheets for ABC Company and additional information are provided below.

 

ABC Company Partial Balance Sheets as of December 31
Assets	2006		2005
Equipment	$100,000		$75,000
Accumulated depreciation	(25,000	)	(20,000	)
Shareholders’ equity
Common stock, $10 par	180,000		$100,000
Paid-in capital – excess of par	20,000		0
Retained earnings	40,000		30,000

 

Additional information for 2006:

July 1:              Issued 8,000 shares of common stock for cash.

July 1:              Purchased new equipment for cash.

December 31:  Paid cash dividends of $20,000.

 

Required:

            Prepare the financing activities section of the statement of cash flows for 2006.

 

 

Answer:

Cash flows from financing activities:
Issuance of common stock	$100,000
Payment of cash dividends	(20,000	)
Net cash flows from financing activities	$80,000

 

Learning Objective: 6       Level of Learning: 3

 

126. The accounting records of Harrison Company provided the data below.

 

Net loss	$10,000
Depreciation expense	12,000
Increase in salaries payable	1,000
Decrease in accounts receivable	4,000
Increase in inventory	4,800
Amortization of patent	700
Decrease in discount on bonds	500

 

Required:

            Prepare a reconciliation of net income to net cash flows from operating activities.

 

Answer:

Net loss	$(10,000	)
Adjustments for noncash effects:
Depreciation expense	12,000
Increase in salaries payable	1,000
Decrease in accounts receivable	4,000
Increase in inventory	(4,800	)
Amortization of patent	700
Reduction in discount on bonds	500
Net cash flows from operating activities	$ 3,400

 

Learning Objective: 4       Level of Learning: 3

 

127. The accounting records of Unlucky Company provided the data below

 

Net loss	$40,000
Depreciation expense	12,000
Increase in salaries payable	11,000
Increase in accounts receivable	4,000
Decrease in inventory	4,800
Amortization of patent	700
Decrease in premium on bonds	500

 

Required:

            Prepare a reconciliation of net income to net cash flows from operating activities.

 

 

Answer:

Net loss	$(40,000	)
Adjustments for noncash effects:
Depreciation expense	12,000
Increase in salaries payable	11,000
Increase in accounts receivable	(4,000	)
Decrease in inventory	4,800
Amortization expense	700
Reduction in premium on bonds	(500	)
Net cash flows from operating activities	$ (16,000	)

 

Learning Objective: 4       Level of Learning: 3

 

128. The Murdock Corporation reported the following balance sheet data for 2006 and 2005.

 

	2006		2005
Cash	$    77,375		$   (22,955	)
Available-for-sale securities
(not cash equivalents)	15,500		85,000
Accounts receivable	80,000		68,250
Inventory	165,000		145,000
Prepaid insurance	1,500		2,000
Land, buildings, and equipment	1,250,000		1,125,000
Accumulated depreciation	(610,000	)	(572,000	)
Total assets	$  979,375		$  830,295
Accounts payable	$    76,340		$  102,760
Salaries payable	20,000		24,500
Notes payable (current)	25,000		75,000
Bonds payable	200,000		0
Common stock	300,000		300,000
Retained earnings	358,035		328,035
Total liabilities and shareholders’ equity	$   979,375		$  830,295

ог

Additional information for 2006:

• Sold available-for-sale securities costing $69,500 for $74,000.
• Equipment costing $20,000 with a book value of $5,000 was sold for $6,000.
• Issued 6% bonds payable at par, $200,000.
• Purchased new equipment for cash $145,000.
• Paid cash dividends of $20,000.
• Net income was $50,000.
• Proceeds of the notes payable were used for operating purposes.

 

Required:

            Prepare a statement of cash flows for 2006 in good form using the indirect method for cash flows from operating activities.

 

 

Answer:

Note:  This can be solved in spreadsheet form if the instructor wishes.

 

Murdock Company Statement of Cash Flows For the Year Ended December 31, 2006
Cash flows from operating activities:
Net income	$  50,000
Adjustments for noncash effects:
Depreciation expense	53,000
Gain on sale of available for sale securities	(4,500	)
Gain on sale of equipment	(1,000	)
Increase in accounts receivable	(11,750	)
Increase in inventory	(20,000	)
Decrease in prepaid insurance	500
Decrease in accounts payable	(26,420	)
Decrease in salaries payable	(4,500	)
Decrease in notes payable	(50,000	)
Net cash flows from operating activities			$(14,670	)
Cash flows from investing activities:
Sale of available-for-sale securities	74,000
Sale of equipment	6,000
Purchase of equipment	(145,000	)
Net cash flows from investing activities			(65,000	)
Cash flows from financing activities:
Sale of bonds payable	200,000
Payment of cash dividends	(20,000	)
Net cash flows from financing activities			180,000
Net increase in cash			100,330
Cash balance, January 1			(22,955	)
Cash balance, December 31			$ 77,375

 

Learning Objective: 8       Level of Learning: 3

 

 

129. The following are comparative balance sheets and on income statement for Wentworth Company.

 

Wentworth Company Balance Sheets as of December 31
Assets	2006	2005
Cash	$  21,500	$120,000
Accounts receivable	195,000	105,000
Inventory	180,000	225,000
Long-term investments	0	60,000
Totals	$396,500	$510,000
Liabilities and shareholders’ equity
Accounts payable	$  75,000	$120,000
Operating expenses payable	24,000	15,000
Bonds payable	70,000	100,000
Common stock	125,000	125,000
Retained earnings	102,500	150,000
Totals	$396,500	$510,000

 

Wentworth Company Income Statement For the Year Ended December 31, 2006
Sales		$560,000
Cost of goods sold:
Beginning inventory	$225,000
Purchases	330,000
Goods available for sale	555,000
Less: ending inventory	180,000
Cost of goods sold		375,000
Gross profit		185,000
Operating expenses		180,000
Income from operations		5,000
Other expenses:
Loss on sale of long-term investment		(7,500	)
Net loss		$   (2,500	)

 

Cash dividends of $45,000 were paid in 2006.

Required: Prepare a statement of cash flows for 2006 using the direct method.

 

 

Answer:

Note:  This can be solved in spreadsheet form if the instructor wishes.

 

Wentworth Company Statement of Cash Flows For the Year Ended December 31, 2006
Cash flows from operating activities:
Cash inflows:
From customers	$470,000
Cash outflows:
To suppliers of goods	(375,000	)
For operating expenses	(171,000	)
Net cash flows from operating activities			$(76,000	)
Cash flows from investing activities:
Sale of long-term investments	52,500
Net cash flows from investing activities			52,500
Cash flows from financing activities:
Payment of bonds	(30,000	)
Payment of cash dividends	(45,000	)
Net cash flows from financing activities			(75,000	)
Net decrease in cash			(98,500	)
Cash balance, January 1			120,000
Cash balance, December 31			$ 21,500

 

Learning Objective: 8       Level of Learning: 3

 

Use the following to answer questions 130-135:

 

In its 2005 Annual Report to Shareholders, Henchman & Co. provided the following Statement of Cash Flows:

 

Years ended December 31, $ in millions	2005		2004
Operating Activities
Sources of Cash
Cash received from customers
Progress payments	$3,102		$ 1,438
Other collections	11,148		7,003
Proceeds from litigation settlement	220
Interest received	17		17
Income tax refunds received	23		15
Other cash receipts	24		10
Cash provided by operating activities	14,534		8,483
Uses of Cash
Cash paid to suppliers and employees	13,251		7,250
Interest paid	333		165
Income taxes paid	126		57
Other cash payments	7		1
Cash used in operating activities	13,717		7,473
Net cash provided by operating activities	817		1,010

 

 

Investing Activities
Payment for businesses purchased, net of	(3,061	)	(510	)
cash acquired
Additions to property, plant and equipment	(393	)	(274	)
Collection of note receivable	148
Proceeds from sale of property, plant and	86		44
equipment
Proceeds from sale of businesses	18		668
Other investing activities	(2	)	(6	)
Net cash used in investing activities	(3,204	)	(78	)
Financing Activities
Proceeds from issuance of long-term debt	1,491
Proceeds from equity security units	690
Borrowings under lines of credit	1,173
Repayment of borrowings under lines of	(1,306	)	(175	)
credit
Principal payments of long-term debt/	(119	)	(485	)
capital leases
Proceeds from issuance of stock	825		19
Dividends paid	(158	)	(114	)
Other financing activities	(64	)	_____
Net cash provided by (used in) financing	2,532		(755	)
activities
Increase in cash and cash equivalents	145		177
Cash and cash equivalents at beginning of year	319		142
Cash and cash equivalents at end of year	$   464		$   319

 

130. What method (direct or indirect) does Henchman & Co. use to present its Statement of Cash Flows?  Explain how you can tell.

 

Answer: Henchman & Co. uses the direct method, one of very few companies that do.  One can tell this by the fact that they simply list sources and uses of cash in the operating activities section, rather than starting with net income and making the series of adjustments necessary to work back to operating cash flows.

 

Learning Objective: 1       Level of Learning: 3

 

131. What was the net change in cash and cash equivalents experienced by Henchman & Co. during 2005? Was it positive or negative?

 

Answer: $145 million positive change (increase).

 

Learning Objective: 2       Level of Learning: 3

 

 

132. Which type of activity (operating, investing, financing) was most responsible for the net change in cash and cash equivalents experienced by Henchman & Co. during 2005?

 

Answer: Financing activities were most responsible.

 

Learning Objective: 3       Level of Learning: 3

 

133. (a.) What is the most significant change in operating cash outflow activity in 2005 relative to

2004?

(b.) What balance sheet accounts would likely have changed during 2005 in relation to the

cash flow change that you identify in (a)?

 

Answer:

• Cash payments to suppliers and employees increased from $7,250 million to $13,251 million.
• Accounts Payable and Wages/Salaries Payable probably are the accounts that would have changed.

 

Learning Objective: 3       Level of Learning: 3

 

134. What was most responsible for the negative cash flow from financing activities during 2004?  What amount was paid?

 

Answer: Principal payments on long-term debt and capital leases were $485 million.

 

Learning Objective: 6       Level of Learning: 3

 

135. What was most responsible for the positive cash flow from financing activities during 2005?  What amount was received?

 

Answer: Proceeds from issuance of long-term debt were $1,491 million.

 

Learning Objective: 6       Level of Learning: 3

 

 

Use the following to answer questions 136-139:

 

In its 2005 Annual Report to Shareholders, Kinney Inc. reported the following Consolidated Statement of Cash Flows:

For the years ended December 31,

 

	2005	2004
Cash flow from operations:
Cash received from customers	$197,942,040	$211,773,952
Cash paid to suppliers and employees	-191,276,791	-200,474,336
Interest paid, net	-1,563,990	-2,098,523
Income taxes paid	-406,650	-542,250
Cash provided by operations	4,694,609	8,658,843
Cash flow from investing activities:
Capital expenditures and acquisitions	-3,003,579	-1,667,382
Expenditures for other assets	-43,560	137,420
Cash used in investing activities	-3,047,139	-1,804,802
Cash flow from financing activities:
Principal payments of long-term debt and capitalized leases	-2,062,485	-6,370,175
Addition to long-term debt and capitalized leases	5,817,348	1,434,847
Changes in restricted unexpended IRB cash	-2,748,970	—
Purchase of common stock and other capital transactions	-1,605,906	-908,231
Payment of dividends	-855,558	-1,021,968
Cash provided by (used in) financing activities	-1,455,571	-6,865,527
Net increase (decrease) in cash	191,899	-11,486
Cash at beginning of year	192,615	204,101
Cash at end of year	$   384,514	$   192,615

 

	2005	2004
Reconciliation of net income to net cash provided by operations:
Net income	$1,747,833	$2,382,027
Depreciation and amortization	3,505,504	3,525,087
Deferred income taxes	205,000	344,766
Changes in assets and liabilities, net of acquisitions:
Decrease (increase) in receivables	-2,897,353	4,120,668
Decrease (increase) in inventories	-355,508	6,041,490
Increase (decrease) in prepaid expenses	361,648	-94,350
Increase (decrease) in controlled disbursements	373,394	83,718
Increase (decrease) in accounts payable	1,768,676	-8,164,148
Increase (decrease) in accrued expenses	-14,585	417,616
Other, net		1,969
Cash provided by operations	$4,694,609	$8,658,843

 

 

 

136. Assuming the decrease in accrued expenses during fiscal year 2005 included a $20,000 reduction due to taxes, compute the income tax expense for Kinney in that year.

 

Answer:

The reduction in accrued taxes is actually a reduction in taxes payable, a liability.  Therefore, beg. taxes payable + income tax expense – income tax deferred – income taxes paid = end. taxes payable

 

Therefore, income tax expense = (end. taxes payable — beg. taxes payable) + income taxes deferred + income taxes paid   = $(20,000) + $205,000 + $406,650

= $591,650

 

Learning Objective: 3       Level of Learning: 3

 

137. Assuming the decrease in accrued expenses during fiscal year 2005 included a $14,000 reduction due to interest on debt, compute the interest expense (net) for Kinney in that year.

 

Answer:

The reduction in accrued expenses is actually a reduction in interest payable, a liability.  Therefore,

beg. interest payable + interest expense (net) – interest paid = end. interest payable

 

Therefore, interest expense =

(end. interest payable – beg. interest payable) + interest paid

= $(14,000) + 1,563,990

= $1,549,990

 

Learning Objective: 3       Level of Learning: 3

 

138. Kinney reported cost of goods sold of $168,114,150 in its fiscal 2005 income statement.  Compute its net inventory purchases during the year.

 

Answer:

Assuming that there were no inventory impairments, the computation is as follows:

CGS = beg. inventory + net purchases – end. inventory.  Therefore,

net purchases = CGS + (end. inventory – beg. inventory)

= $168,114,150 + 355,508

= $168,469,658

 

Learning Objective: 3       Level of Learning: 3

 

 

139. Kinney reported cost of goods sold of $168,114,150 in its fiscal 2005 income statement.  Assuming that Kinney uses accounts payable strictly for inventory purchases and that all such purchases are on credit, how much cash did Kinney pay during the year for inventories:

• to inventory suppliers?
• to employees?

 

Answer:

• Assuming that there were no inventory impairments, the computation is as follows:

CGS = beg. inventory + net purchases – end. inventory.  Therefore,

net purchases = CGS + (end. inventory – beg. inventory)

= $168,114,150 + 355,508

= $168,469,658

 

end. acct. payable = beg. acct. payable + net inventory purchases – cash paid to suppliers

Therefore,

(end. acct. payable — beg. acct. payable) + cash paid to suppliers = net inventory purchases $1,768,676 + cash paid to suppliers = $168,469,658

Cash paid to suppliers = $168,469,658 — $1,768,676

= $166,700,982

 

• Cash paid to suppliers and employees is $191,276,791. Therefore,

Cash paid to employees

= $191,276,791 — $166,700,982

= $24,575,809

 

Learning Objective: 3       Level of Learning: 3

 

 

Essay

 

Instructions:

 

The following answers point out the key phrases that should appear in students’ answers.  They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be.

 

140. Since the statement of cash flows has been required only since 1988, is the reporting of cash flows a new concept? Explain.

 

Answer: No. Financial reporting on a cash basis was common several decades ago. The requirement for a cash flow statement represents a renewed emphasis on cash flow reporting. Prior to the mid-1930s, preparing financial statements on the cash basis, rather than the accrual basis, was a common practice.

 

Learning Objective: 1       Level of Learning: 1

 

 

141. Is depreciation a source of cash? Explain.

 

Answer: No. Depreciation is simply the systematic and rational allocation of an asset’s cost. The expenditure to acquire the item being depreciated was a use of cash. When the indirect method is used to determine cash flows from operating activities, depreciation is added back to net income on the statement of cash flows because it was deducted on the accrual basis income statement but it did not require the use of cash.

 

Learning Objective: 4       Level of Learning: 1

 

142. Why is the statement of cash flows required as part of the set of external financial statements?

 

Answer: The FASB in statement No. 95 requires the statement of cash flows in direct response to FASB Concept Statement No. 1, which states as the primary objective of financial reporting to «provide information to help investors and creditors, and others assess the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise.»

 

Learning Objective: 1       Level of Learning: 2

 

143. Why are «cash equivalents» included as part of cash on the statement of cash flows?

 

Answer: Skilled managers will invest temporarily idle cash in short-term investments to earn a return on those funds, rather than maintaining an unnecessarily large checking account. The FASB views short-term, highly liquid investments that can be easily converted into cash, with little risk of loss, to be the equivalent of cash.

 

Learning Objective: 2       Level of Learning: 2

 

144. What are the general guidelines for an investment to be considered a cash equivalent?

 

Answer: To be classified as a cash equivalent, an investment must have a maturity date not longer than three months from the date of purchase. The investment must be easily convertible into cash, with little risk of loss on the conversion. However, flexibility is permitted in designating cash equivalents. Each company must establish a policy regarding which short-term, highly liquid investments it classifies as cash equivalents. The policy should be consistent with the company’s customary motivation for acquiring various investments and should be disclosed in the notes accompanying the financial statements.

 

Learning Objective: 2       Level of Learning: 1

 

145. What activities are included on the statement of cash flows under the section  entitled «Cash flows from investing activities»?

 

Answer: Cash flows from investing activities include the sale or purchase of operating assets, the sale or purchase of nontrading investments, and the collection or making of loans to others.

 

Learning Objective: 5       Level of Learning: 1

 

 

146. What activities are included on the statement of cash flows under the section  entitled «Cash flows from financing activities»?

 

Answer: Cash flows from financing activities include the issuance and repurchase of stock, the issuance and repayment of bonds and notes, and the payment of cash dividends.

 

Learning Objective: 6       Level of Learning: 1

 

147. Do «cash flows from operating activities» report all the elements of the income statement on a cash basis? Explain.

 

Answer: Although the cash flows from operating activities section of a statement of cash flows reports income statement elements on a cash basis, not all the elements from the income statement are necessarily reported on a cash basis. No cash effects are reported for depreciation and amortization. Further, no cash effect is reported for gains or losses from the sale of operational assets. When these operational assets are bought and sold, the effect is reported under «cash flows from investing activities.»

 

Learning Objective: 1       Level of Learning: 2

 

148. Does the statement of cash flows report only transactions that cause an increase or decrease in cash? Explain.

 

Answer:

A statement of cash flows reports transactions that cause an increase or decrease in cash. However, some transactions that do not increase or decrease cash, but which result in significant investing and financing activities, must be reported in related disclosure notes. Examples of noncash transactions that are important or significant enough to be reported include:

• Acquiring an asset by incurring debt or issuing stock,
• Acquiring an asset by entering into a capital lease,
• Converting debt into common stock,
• Exchanging noncash assets or liabilities for other noncash assets or liabilities.

 

Learning Objective: 1       Level of Learning: 2

 

 

Use the following to answer questions 149-150:

 

In its 2005 Annual; Report to Shareholders, Netherlands Corporation included the following information on cash flows from operations:

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	2005		2004
Operating activities:
Net income	$ 10,680		$30,100
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization	25,734		20,051
Deferred income taxes	5,156		9,885
Equity income	(486	)	(864	)
Changes in operating assets and liabilities:
Receivables	17,888		(33,018	)
Inventories	39,331		(10,173	)
Accounts payable and accrued expenses	(23,737	)	13,515
Prepaids and other-net	(10,913	)	5,893
Net Cash Provided By Operating Activities	63,653		35,389

 

149. Explain why Netherlands Corporation subtracts equity income from its net income in its measurement of operating cash flows.

 

Answer: Under the equity method, income accrues to the investor company when it is earned by the investee company, not when dividends are distributed.  In effect, Netherlands Corporation has earned investment revenue that has been included in its income statement.  However, this amount does not involve cash until PVH receives dividends (that will be reported as investment inflows).  Therefore, Netherlands Corporation makes an adjustment to eliminate this non-cash equity income from the company’s operating cash flows.

 

Learning Objective: 4       Level of Learning: 3

 

150. Did accounts receivable increase or decrease during 2005?

 

Answer: The accounts receivable balance decreased during 2005.  This is apparent because adjustments for current assets are inversely related to the direction of the change in balance.  Because the adjustment for accounts receivable was positive, its balance must have decreased.

 

Learning Objective: 4       Level of Learning: 3