Chapter 14 Capital Investment Decisions b59c

Chapter 15 - Statement of Cash Flows 1. A statement of cash flows indicates the sources and uses of a firm's cash during a period. a. True b. False ANSWER: True 2. All SEC-ed firms must issue a statement of cash flows, in addition to the income statement and balance sheet. a. True b. False ANSWER: True 3. The amount for "net cash from operating activities" will be different depending on if the direct method or the indirect method is used to construct the statement of cash flows. a. True b. False ANSWER: False RATIONALE: The same amount for "net cash from operating activities" will be obtained regardless of whether the direct method or the indirect method is used to construct the statement of cash flows.

4. Transactions that involve the acquisition or sale of long-term assets are generally classified as investing activities on the statement of cash flows. a. True b. False ANSWER: True 5. Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are disclosed in a supplementary schedule that is attached to the statement of cash flows. a. True b. False ANSWER: True 6. Cash received on the sale of equipment would be considered a financing activity on a statement of cash flows. a. True b. False ANSWER: False RATIONALE: The purchase or sale of long-term assets, such as equipment, would be considered an investing activity on the statement of cash flows.

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Chapter 15 - Statement of Cash Flows 7. Companies can use two different methods to report the amount of cash flow from their operating activities on the statement of cash flows. a. True b. False ANSWER: True 8. The indirect method of reporting the cash flows from operating activities on the statement of cash flows is the method most widely used in practice. a. True b. False ANSWER: True 9. Investments in stock are reported as an investing activity on the statement of cash flows. a. True b. False ANSWER: True 10. On the statement of cash flows, the indirect method adjusts net income to determine the net cash flows from operating activities. a. True b. False ANSWER: True 11. For a statement of cash flows, firms are required to classify their cash activities into three categories: operating, investing, and borrowing. a. True b. False ANSWER: False RATIONALE: For a statement of cash flows, firms are required to classify their cash activities into three categories: operating, investing, and financing.

12. The sale of land for cash would be classified as a cash inflow from a financing activity. a. True b. False ANSWER: False RATIONALE: The sale of land for cash would be classified as a cash inflow from an investing activity.


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Chapter 15 - Statement of Cash Flows 13. Cash inflows that enter into the determination of net income are classified as financing activities on a statement of cash flows. a. True b. False ANSWER: False RATIONALE: Cash inflows that enter into the determination of net income are classified as operating activities on a statement of cash flows.

14. Cash flow activities that include the cash effect of transactions that create revenues and expenses and thus enter into the determination of net income are classified as operating activities on the statement of cash flows. a. True b. False ANSWER: True 15. The issuance of common stock in exchange for a building would appear both as a cash inflow in the financing activities section of the cash flow statement and also as a cash outflow in the investing activities section. a. True b. False ANSWER: False RATIONALE: The issuance of common stock in exchange for a building represents a noncash financing and investing activity and should be disclosed in a supplementary schedule attached to the statement of cash flows.

16. The activity from the balance sheet to be presented in the financing activities section of the statement of cash flows is based on an analysis of stockholders' equity only. a. True b. False ANSWER: False RATIONALE: The long-term liability section must also be analyzed to determine issuance or retirement of long-term debt. (Stockholders' equity only provides information with regard to issuance of stock, treasury stock purchases, and dividends.)

17. Under the indirect method of determining the net cash from operating activities on the statement of cash flows, increases in current assets such as s receivable are added to net income. a. True b. False ANSWER: False RATIONALE: Increases in current assets are deducted from net income. In this example, if s receivable increases, net income will be decreased because sales were recognized where cash was not collected.


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Chapter 15 - Statement of Cash Flows 18. Under the indirect method of determining the net cash from operating activities on the statement of cash flows, depreciation is subtracted from the net income for the period. a. True b. False ANSWER: False RATIONALE: Under the indirect method of determining the net cash from operating activities on the statement of cash flows, depreciation is added to the net income for the period.

19. A decrease in s payable is added to net income in the operating activities section of the statement of cash flows prepared under the indirect method. a. True b. False ANSWER: False RATIONALE: A decrease in s payable is deducted from net income in the operating activities section of the statement of cash flows prepared under the indirect method.

20. Determining the cash flows from operating activities generally requires analyzing each item on the income statement as well as the current asset and current liability s. a. True b. False ANSWER: True 21. A loss on the sale of equipment is subtracted from net income in determining net cash from operating activities under the indirect method. a. True b. False ANSWER: False RATIONALE: A loss on the sale of equipment is added to net income in determining net cash from operating activities under the indirect method.

22. Under the indirect method, the net cash flow from operating activities is computed by adjusting net income to remove the effect of all deferrals of past operating cash receipts and payments, and all accruals of future operating cash receipts or payments. a. True b. False ANSWER: True 23. If a firm uses the direct method for reporting operating activities on the statement of cash flows, it must present a separate schedule which reconciles net income to net cash from operating activities. a. True b. False ANSWER: True


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Chapter 15 - Statement of Cash Flows 24. The direct method of reporting cash flows from operating activities involves reporting major classes of cash receipts and cash payments. a. True b. False ANSWER: True 25. An advantage to using a worksheet to organize the information of preparation of the statement of cash flows is that it uses a spreadsheet format allowing the preparer to use a PC and spreadsheet software. a. True b. False ANSWER: True 26. All firms that are ed with the ______________________ must issue a statement of cash flows. ANSWER: Securities and Exchange Commission (SEC) SEC 27. Highly liquid investments such as Treasury bills, money market funds, and commercial paper are examples of ___________________. ANSWER: cash equivalents 28. Activities that increase cash are sources of cash and are referred to as ___________. ANSWER: cash inflows 29. Activities that decrease cash are uses of cash and are referred to as ___________. ANSWER: cash outflows 30. The format that should be followed in preparing the statement of cash flows is known as the ______________. ANSWER: activity format 31. The indirect method and the direct method differ only on how the cash flows from ________________ are calculated. ANSWER: operating activities 32. The ______________ computes operating cash flow by adjusting net income for items that do not affect cash flows. ANSWER: indirect method 33. The __________________ computes operating cash flows by adjusting each line on the income statement to reflect cash flows. ANSWER: direct method 34. The _____________________ provides information regarding the sources and uses of a firm’s cash. ANSWER: statement of cash flows Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows 35. ________________ are the ongoing, day-to-day, revenue-generating activities of an organization. ANSWER: Operating activities 36. Acquiring new equipment, selling long-term investments, and purchasing land are all examples of _______________. ANSWER: investing activities 37. Issuing shares of common stock, paying dividends and paying off debt are all examples of _______________. ANSWER: financing activities 38. When an investing or financing activity takes place without affecting cash it is referred to as _________________________. ANSWER: noncash investing and financing activities. 39. The two approaches to calculating operating cash flows are the _______________ and the _____________. ANSWER: indirect method; direct method direct method, indirect method 40. Income statements are prepared on a (n) ______________. ANSWER: accrual basis 41. Preparation of the statement of cash flows relies on the beginning and ending ____________. ANSWER: balance sheets 42. Using the ________________ of reporting cash flow, each line on the income statement is adjusted to produce a cash flow income statement. ANSWER: direct method 43. Some individuals prefer to show operating cash flows as the difference between ___________ and ____________. ANSWER: cash receipts; cash payments cash payments, cash receipts 44. As transactions increase in number and complexity, a ____________ becomes a useful aid in preparing the statement of cash flows. ANSWER: worksheet 45. Worksheets offer increased ____________ in form and the added convenience of spreadsheet software packages. ANSWER: efficiency


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Chapter 15 - Statement of Cash Flows 46. The primary purpose of the statement of cash flows is to a. provide information about the investing and financing activities during the period. b. prove that revenues exceed expenses if there is a net income. c. provide information about the sources and uses of cash during a period. d. facilitate banking relationships. ANSWER: c 47. The statement of cash flows does not report the a. sources of cash in the current period. b. uses of cash in the current period. c. amount of checks outstanding at the end of the period. d. change in the cash balance for the current period. ANSWER: c 48. The acquisition of land by issuing common stock is a. only reported if the statement of cash flows is prepared using the direct method. b. a cash transaction that is reported in the investing section in the body of the statement of cash flows. c. a noncash transaction that is reported in the operating section in the body of the statement of cash flows. d. a noncash transaction that is disclosed in a supplementary schedule attached to the statement of cash flows. ANSWER: d 49. The order of presentation of activities on the statement of cash flows is a. operating, investing, financing. b. operating, financing, investing. c. financing, operating, investing. d. financing, investing, operating. ANSWER: a 50. Financing activities involve a. purchasing patent. b. receipt of dividends. c. selling of investments. d. issuance of stock. ANSWER: d 51. Which of the following transactions does not affect cash during a period? a. increase in amortization expense b. payment of an s payable c. issuance of bonds d. purchase of a long-term investment ANSWER: a Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows 52. Cash flows from operating activities, as reported on the statement of cash flows, would include a. depreciation. b. gain on sale of equipment c. increase in s receivable. d. All of these. ANSWER: d 53. Which one of the following affects cash during a period? a. payment of an payable b. declaration of a cash dividend c. write-off of an uncollectible receivable d. recording depreciation expense ANSWER: a 54. In developing the cash flows from operating activities, most companies in the United States a. use the indirect method. b. use the direct method. c. present both the indirect and direct methods in their financial reports. d. prepare the operating activities section on the accrual basis. ANSWER: a 55. The indirect and direct methods of preparing the statement of cash flows are identical except for the a. financing activities section. b. investing activities section. c. operating activities section. d. significant noncash activities section. ANSWER: c 56. Cash flows from acquiring and selling equipment are classified as a. operating activities. b. investing activities. c. financing activities. d. distribution activities. ANSWER: b 57. Cash flows from acquiring and retiring long-term debt are classified as a. operating activities. b. investing activities. c. financing activities. d. purchasing activities. ANSWER: c Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows 58. Which balance sheet s are affected by financing activities? a. current assets and current liabilities. b. long-term assets. c. long-term liabilities. d. intangible assets. ANSWER: c 59. Which balance sheet s are affected by operating activities? a. current assets and current liabilities. b. current assets and long-term assets. c. long-term assets and current liabilities. d. long-term liabilities and stockholders' equity. ANSWER: a 60. Which of the following investing activities results in a cash inflow? a. selling treasury stock. b. retirement of bonds. c. disposal of a building. d. paying cash dividends. ANSWER: c 61. Which of the following financing activities results in a cash outflow? a. purchase of long-term investments. b. collecting s receivable. c. payment of dividends. d. issuance of bonds. ANSWER: c


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Chapter 15 - Statement of Cash Flows 62. Tracy Company reported the following information at the end of 20X0 and 20X1: 20X0 20X1 Land $ 35,000 $ 90,000 Common Stock 200,000 255,000 An analysis of the company's records indicated that there were no cash flow effects resulting from the changes in the two s presented above. How should Tracy report the changes in these s on a statement of cash flows? a. The company should report $55,000 for the acquisition of land as an investing activity and $55,000 for the issuance of stock as a financing activity. b. The company should report $55,000 as a noncash investing and financing activity for the acquisition of land by issuing common stock. c. The company should report the issuance of common stock to acquire land in the financing activity section with a net cash flow effect of zero. d. The company should report the acquisition of land by issuing common stock in the investing activity section with a net cash flow effect of zero. ANSWER: b 63. The decision whether to use the direct or indirect method on the statement of cash flows is relevant with respect to a. operating activities only. b. investing activities only. c. financial activities only. d. All activities. ANSWER: a 64. Which one of the following items is not necessary in preparing a statement of cash flows? a. Determine the change in cash. b. Determine the cash provided by operating activities. c. Determine cash from financing and investing activities. d. Determine the cash in all bank s. ANSWER: d 65. Which one of the following affects cash during a period? a. recording amortization expense b. declaration of a stock dividend c. write-off of an uncollectible receivable d. receipt of an s receivable ANSWER: d


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Chapter 15 - Statement of Cash Flows 66. If a company has both an inflow and an outflow of cash related to property, plant, and equipment, a. the two cash effects can be netted and presented as one item in the investing activities section of the statement of cash flows. b. the cash inflow and the cash outflow should be reported separately in the investing activities section of the statement of cash flows. c. the two cash effects can be netted and presented as one item in the financing activities section of the statement of cash flows. d. the cash inflow and the cash outflow should be reported in the financing activities section of the statement of cash flows. ANSWER: b 67. In calculating cash flows from operating activities using the indirect method, an increase in s payable is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows. ANSWER: a 68. In calculating cash flows from operating activities using the indirect method, an increase in inventories is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows. ANSWER: b 69. Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called the a. direct method. b. indirect method. c. cost-benefit method. d. working capital method. ANSWER: b 70. In calculating net cash from operating activities using the indirect method, depreciation expense is a. deducted from net income. b. added to net income. c. ignored because it does not affect income. d. ignored because it is included in the investing section. ANSWER: b


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Chapter 15 - Statement of Cash Flows 71. Using the indirect method, patent amortization expense for the period a. is deducted from net income. b. has no impact on cash flows. c. causes cash to decrease. d. is added to net income. ANSWER: d 72. Which of the following would be added to net income using the indirect method? a. loss on sale of equipment b. gain on sale of a long-term investment c. an increase in s receivable d. proceeds from the sale of a patent ANSWER: a 73. Which of the following would be subtracted from net income using the indirect method? a. an increase in inventories. b. loss on sale of investments. c. depreciation expense. d. a decrease in s payable. ANSWER: d 74. Which of the following would not be an adjustment to net income using the indirect method? a. depreciation expense b. an increase in prepaid expenses c. amortization expense d. an increase in land ANSWER: d 75. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment will appear as a(n) a. subtraction from net income. b. addition to net income. c. addition to cash flow from investing activities. d. subtraction from cash flow from investing activities. ANSWER: b


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Chapter 15 - Statement of Cash Flows 76. Using the indirect method, if equipment is sold at a gain, the a. sale proceeds received are deducted in the operating activities section. b. sale proceeds received are added in the operating activities section. c. amount of the gain is added in the operating activities section. d. amount of the gain is deducted in the operating activities section. ANSWER: d 77. In preparing the statement of cash flows, determining the net increase or decrease to cash requires the use of a. the adjusted trial balance. b. the current period's retained earnings statement. c. a comparative balance sheet. d. a comparative income statement. ANSWER: c 78. Which of the following would not be needed to determine net cash provided by operating activities? a. depreciation expense b. change in s receivable c. payment of cash dividends d. change in prepaid expenses ANSWER: c 79. Smith and Company reported net income for the current year. Which of the following business transactions would cause cash from operating activities to be higher than the amount of net income? a. Cash dividends were paid to stockholders during the year. b. Depreciation expense was recorded for the year. c. A bank loan was repaid during the year. d. Equipment was purchased for cash during the year. ANSWER: b 80. Which method of preparing the operating activities section of the statement of cash flows adjusts net income to remove the effects of deferrals and accruals for revenues and expenses? a. the direct method b. the indirect method c. both direct and indirect methods d. neither the direct method nor the indirect method ANSWER: b


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Chapter 15 - Statement of Cash Flows 81. The following items were reported on the balance sheets and income statement for Collin Inc.: s Receivable, December 31, 20X0 $ 85,000 s Receivable, December 31, 20X1 78,000 Sales, 20X1 750,000 How would the change in s receivable be reported in the operating activities section of the statement of cash flows using the indirect method? a. as an addition to sales b. as a deduction from sales c. as an addition to net income d. as a deduction from net income ANSWER: c 82. The following items were reported on the balance sheets and income statements of Marshall Company: s payable, December 31, 20X0 $ 42,000 s payable, December 31, 20X1 48,000 Operating expenses 286,000 How would the change in s payable be reported in the operating activities section of the statement of cash flows under the indirect method? a. as an addition to operating expenses b. as a deduction from operating expenses c. as an addition to net income d. as a deduction from net income ANSWER: c 83. The Star City reported net loss of $50,000. Cash from operating activities a. will be more than $50,000. b. will be less than $50,000. c. will be equal to $50,000. d. cannot be determined without more information. ANSWER: d 84. Upon review of Johnson's Statement of Cash Flows, the following was noted: Cash flows from operating activities $15,000 Cash flows from investing activities 80,000 Cash flows from financing activities (60,000) From this information, the most likely explanation is that Johnson is a. using cash from operations and selling long-term assets to pay back debt. b. using cash from operations and borrowing to purchase long-term assets. c. using its profits to expand growth. d. using cash from investors to provide for operations. ANSWER: a Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows 85. Upon review of Susan's Statement of Cash Flows, the following was noted: Cash flows from operating activities $ 75,000 Cash flows from investing activities (135,000) Cash flows from financing activities 125,000 From this information, the most likely explanation is that Susan is a. using cash from operations and selling long-term assets to pay back debt. b. using cash from operations and borrowing to purchase long-term assets. c. using its profits to expand growth. d. using cash from investors to provide for operations. ANSWER: b 86. Moore Company's net income last year was $56,000 and cash dividends declared and paid to the company stockholders was $31,000. Changes in selected balance sheet s for the year appear below: Increases (Decreases) Debit balances: s receivable Inventory Prepaid expenses

$ (8,000) (6,000) 12,000

Credit balances: Accumulated Depreciation 23,000 s payable (10,000) Accrued liabilities 7,000 Taxes payable 5,000 Bonds payable 40,000 Based solely on this information, the net cash flows from operating activities under the indirect method on the statement of cash flows would be a. $79,000. b. $102,000. c. $29,000. d. $83,000. ANSWER: RATIONALE:

d $ 8,000 $ 6,000 $(12,000) $23,000 $(10,000) $ 7,000 $ 5,000 $56,000 $83,000


s receivable Inventory Prepaid expenses Accumulated Depreciation s payable Accrued liabilities Taxes payable Income Net cash flows from operating activities

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Chapter 15 - Statement of Cash Flows 87. Nelson Company's net income last year was $18,000 and cash dividends declared and paid to the company stockholders was $12,000. Changes in selected balance sheet s for the year appear below: Increases (Decreases) Debit balances: s receivable Inventory Long-term investments

$(6,000) 5,000 20,000

Credit balances: Accumulated Depreciation 12,000 s payable 8,000 Accrued liabilities (7,000) Taxes payable (3,000) Based solely on this information, the net cash flows from operating activities under the indirect method on the statement of cash flows would be a. $7,000. b. $30,000. c. $17,000. d. $29,000. ANSWER: d RATIONALE: $6,000 − $5,000 + $12,000 + $8,000 − $7,000 − $3,000 + $18,000 = $29,000


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Chapter 15 - Statement of Cash Flows 88. Long Company's net income last year was $43,000 and cash dividends declared and paid to the company stockholders was $28,000. Changes in selected balance sheet s for the year appear below: Increases (Decreases) Debit balances: s receivable Inventory Long-term investments

$(6,000) 2,000 40,000

Credit balances: Accumulated Depreciation 19,000 s payable 18,000 Accrued liabilities (5,000) Taxes payable 4,000 Based solely on this information, the net cash flows from operating activities under the indirect method on the statement of cash flows would be a. $25,000. b. $62,000. c. $83,000. d. $3,000. ANSWER: c RATIONALE: $43,000 + $6,000 − $2,000 + $19,000 + $18,000 − $5,000 + $4,000 = $83,000


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Chapter 15 - Statement of Cash Flows 89. Stacy Company's net income last year was $27,000. Changes in selected balance sheet s for the year appear below: Increases (Decreases) Debit balances: s receivable Inventory Prepaid expenses

$(8,000) 5,000 (4,000)

Credit balances: Accumulated Depreciation 12,000 s payable 11,000 Accrued liabilities (7,000) Taxes payable 2,000 Based solely on this information, the net cash flows from operating activities under the indirect method on the statement of cash flows would be a. $38,000. b. $2,000. c. $39,000. d. $52,000. ANSWER: d RATIONALE: $27,000 + $8,000 − $5,000 + $4,000 + $12,000 + $11,000 − $7,000 + $2,000 = $52,000 90. The data given below are from the ing records of Kain Company: Net Income $40,000 Depreciation expense 8,000 Decrease in s payable 1,800 Decrease in merchandise inventory 2,500 Increase in long-term liabilities 10,000 Increase in common stock 25,000 Increase in s receivable 4,000 Based on this information, the net cash flows from operating activities on the statement of cash flows using the indirect method would be a. $51,300. b. $50,000. c. $42,100. d. $44,700. ANSWER: d RATIONALE: $40,000 + $8,000 − $1,800 + $2,500 − $4,000 = $44,700


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Chapter 15 - Statement of Cash Flows 91. The following events occurred last year at Taylor Company: Purchase of plant & equipment $33,000 Sale of long-term investment 12,000 Stock dividend paid 6,000 Paid off bonds payable 15,000 Depreciation expense 7,000 Based on the above information, the net cash flows from investing activities for the year on the statement of cash flows would be a. ($15,000). b. ($21,000). c. ($7,000). d. ($37,000). ANSWER: b RATIONALE: $(33,000) + $12,000 92. The following events occurred last year for the Cronin Company: Purchase of treasury stock $30,000 Issuance of common stock 50,000 Payment of dividends to common stockholders 15,000 Sale of equipment 10,000 Considering just the above transactions, the net cash flows from financing activities on the statement of cash flows was a. $20,000. b. $5,000. c. $15,000. d. $25,000. ANSWER: b RATIONALE: $50,000 – $30,000 – $15,000 93. Last year Kinslow Company's cash increased by $16,000. Net cash flows from investing activities were $(39,000). Net cash flows from financing activities were $17,000. On the statement of cash flows, the net cash flows from operating activities were a. $(22,000). b. $38,000. c. $(6,000). d. $16,000. ANSWER: b RATIONALE: X + $(39,000) + $17,000 = $16,000


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Chapter 15 - Statement of Cash Flows 94. Last year Frye Company's cash increased by $17,000. Net cash flows from investing activities were $(40,000). Net cash flows from financing activities were $2,000. On the statement of cash flows, the net cash flows from operating activities were a. $17,000. b. $(21,000). c. $55,000. d. $(38,000). ANSWER: c RATIONALE: X + $(40,000) + $2,000 = $17,000 95. Last year Sheeder Company's cash decreased by $10,000. Net cash flows from investing activities were $19,000. Net cash flows from financing activities were $(17,000). On the statement of cash flows, the net cash flows from operating activities were a. $(12,000). b. $(3,000). c. $(10,000). d. $7,000. ANSWER: a RATIONALE: X + $19,000 – $17,000 = $(10,000) 96. Stillwater Inc. reported the following information for 20X0 and 20X1: 20X0 $51,000 42,000 43,000

20X1 s receivable $57,000 Inventories 39,000 s payable 48,000 Net income 49,000 Depreciation Expense 8,000 If Stillwater Inc. uses the indirect method to prepare the operating activities section of the statement of cash flows, what amount will be reported as net cash flows from operating activities for 20X1? a. $49,000 b. $55,000 c. $57,000 d. $59,000 ANSWER:

d

RATIONALE: s receivable Inventories s payable Net income Depreciation Expense Net Cash Change


$51,000 − 57,000 42,000 − 39,000 48,000 − 43,000 49,000 8,000

Cash Change $(6,000) 3,000 5,000 49,000 8,000 $59,000

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Chapter 15 - Statement of Cash Flows 97. Advance Systems Inc. reported the following information for 20X0 and 20X1: 20X0 20X1 s receivable $101,000 $93,000 Prepaid expenses 5,000 6,000 s payable 71,000 76,000 Salaries payable 5,000 4,000 Net income 67,000 Loss on sale of equipment 5,000 Depreciation expense 11,000 If Advance Systems uses the indirect method to prepare the operating activities section of the statement of cash flows, what amount will be reported as net cash flows from operating activities for 20X1? a. $72,000 b. $78,000 c. $94,000 d. $98,000 ANSWER: c 98. Jamestown Inc. reported the following information for 20X0 and 20X1: 20X0 20X1 Cash $ 42,000 $ 49,000 Noncash current assets 162,000 175,000 Cash flows from financing activities 313,000 Cash flows from operating activities 72,000 What was the amount of net cash flows from investing activities for 20X1? a. Cash inflow of $378,000. b. Cash outflow of $391,000 c. Cash inflow of 7,000. d. Cash outflow of $378,000. ANSWER: d RATIONALE: $7,000 = X + $313,000 + $72,000 99. s receivable arising from sales to customers amounted to $62,000 and $40,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $215,000. Exclusive of the effect of other adjustments, the cash inflows from operating activities to be reported on the statement of cash flows are a. $213,000. b. $215,000. c. $193,000. d. $237,000. ANSWER: d RATIONALE: $215,000 + $22,000


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Chapter 15 - Statement of Cash Flows 100. Dance Unlimited Company reported net income of $80,000 for the year. During the year, s receivable decreased by $3,000, s payable increased by $4,500 and depreciation expense of $9,000 was recorded and there was a gain on the sale of long-term investments of $2,000. Using the indirect method, net cash flows from operating activities for the year are a. $94,500. b. $88,500. c. $79,500. d. $89,500. ANSWER: a RATIONALE: $80,000 + $3,000 + $4,500 + $9,000 – $2,000 101. A company had net income of $230,000. Depreciation expense is $26,000. During the year s receivable and inventory increased $15,000 and $40,000, respectively. Prepaid expenses and s payable decreased $2,000 and $4,000, respectively. There was also a loss on the sale of equipment of $3,000. Using the indirect method, what is the amount of net cash flows from operating activities on the statement of cash flows? a. $196,000 b. $202,000 c. $276,000 d. $288,000 ANSWER: b RATIONALE: $230,000 + $26,000 – $15,000 – $40,000 + $2,000 – $4,000 + $3,000 102. The net income reported on the income statement for the current year was $200,000. Depreciation recorded on plant assets was $38,000. s receivable and inventories increased by $2,000 and $8,000, respectively. Prepaid expenses and s payable decreased by $1,000 and $11,000, respectively. Using the indirect method, how much would be reported for net cash flows from operating activities in the statement of cash flows? a. $180,000 b. $200,000 c. $218,000 d. $238,000 ANSWER: c RATIONALE: $200,000 + $38,000 – $2,000 – $8,000 + $1,000 – $11,000 103. The net income reported on the income statement for the current year was $100,000. Depreciation recorded on plant assets was $25,000. s receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and s payable increased by $500 and $4,000, respectively. Using the indirect method, how much would be reported for net cash flows from operating activities in the statement of cash flows? a. $130,500 b. $148,500 c. $141,500 d. $98,500 ANSWER: b RATIONALE: $100,000 + $25,000 + $5,000 + 15,000 – $500 + $4,000 Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows 104. If a gain of $25,000 is incurred in selling (for cash) office equipment having a book value of $100,000, the total amount reported in the cash flows from the investing activities section of the statement of cash flows is a. $75,000. b. $100,000. c. $125,000. d. $25,000. ANSWER: c 105. If a loss of $12,500 is incurred in selling (for cash) office equipment having a book value of $50,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $37,500. b. $50,000. c. $62,500. d. $12,500. ANSWER: a 106. Land costing $78,000 was sold for $93,000 cash. The gain on the sale was reported on the income statement as other income. On the statement of cash flows, what amount should be reported as an investing activity from the sale of land? a. $78,000 b. $108,000 c. $93,000 d. $15,000 ANSWER: c 107. The following transactions occurred last year at Jackson Inc. Issuance of common stock $ 80,000 Dividends paid to the company's stockholders 1,000 Depreciation expense 4,000 Repayment of principal on bonds 60,000 Proceeds from sale of the company's used equipment 22,000 Purchase of land 140,000 Based solely on the above information, the net cash flows from financing activities for the year on the statement of cash flows would be a. $19,000. b. $(120,000). c. $(6,000). d. $332,000. ANSWER: a RATIONALE: $80,000 – $1,000 – $60,000


Page 23

Chapter 15 - Statement of Cash Flows 108. The following transactions occurred last year at Jackson Inc. Issuance of common stock $140,000 Dividends paid to the common stockholders 7,000 Depreciation expense 4,000 Repayment of principal on the company's own bonds 90,000 Sale of equipment 16,000 Purchase of a building 110,000 Based solely on the above information, the net cash flows from financing activities for the year on the statement of cash flows would be a. $31,000. b. $(59,000). c. $43,000. d. $379,000. ANSWER: c RATIONALE: $140,000 – $7,000 – $90,000 109. The following transactions occurred last year at Dempsey Inc. Issuance of common stock $ 50,000 Dividends paid to common stockholders 3,000 Depreciation expense 6,000 Repayment of principal on the company's own bonds 40,000 Sale of equipment 17,000 Purchase of land 120,000 Based solely on the above information, the net cash flows from financing activities for the year on the statement of cash flows would be a. $249,000. b. $7,000. c. $(103,000). d. $(6,000). ANSWER: b RATIONALE: $50,000 – $3,000 – $40,000


Page 24

Chapter 15 - Statement of Cash Flows 110. The Laurel Company reported the following data for last year: Decrease in the Cash $25,000 Net cash provided by operating activities 20,000 Net cash provided by investing activities 15,000 Based solely on this information, the net cash flows from financing activities on the statement of cash flows would be a. $2,000. b. $(30,000). c. $(60,000). d. $(8,000). ANSWER: c RATIONALE: $(25,000) = X + $20,000 + $15,000 Figure 15-1. Master Company's net income last year was $88,000 and cash dividends declared and paid to the company stockholders was $60,000. Changes in selected balance sheet s for the year appear below: Increases (Decreases) Debit balances: Cash s receivable Inventory Prepaid expenses Long-term investments Plant and equipment

$ (4,000) (11,000) 6,000 0 50,000 35,000

Credit balances: Accumulated depreciation 62,000 s payable 1,000 Accrued liabilities (5,000) Taxes payable 10,000 Bonds payable (60,000) Common stock 40,000 Retained earnings 28,000 111. Refer to Figure 15-1. The net cash flows from operating activities last year was a. $181,000. b. $150,000. c. $88,000. d. $161,000. ANSWER: d RATIONALE: $88,000 + $11,000 – $6,000 + $62,000 + $1,000 – $5,000 + $10,000


Page 25

Chapter 15 - Statement of Cash Flows 112. Refer to Figure 15-1. The net cash flows from investing activities last year was a. $45,000. b. $(45,000). c. $85,000. d. $(85,000). ANSWER: d RATIONALE: $(50,000) + $(35,000) 113. Refer to Figure 15-1. The net cash flows from financing activities last year was a. $80,000. b. $(80,000). c. $20,000. d. $(20,000). ANSWER: b RATIONALE: $(60,000) + $40,000 + $(60,000)


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Chapter 15 - Statement of Cash Flows Figure 15-2. Chandler Company's net income last year was $98,000 and cash dividends declared and paid to the company stockholders was $13,000. Changes in selected balance sheet s for the year appear below: Increases (Decreases) Debit balances: Cash s receivable Inventory Prepaid expenses Long-term investments Plant and equipment

$ (3,000) 1,000 (1,000) 13,000 70,000 45,000

Credit balances: Accumulated depreciation 61,000 s payable (11,000) Accrued liabilities (9,000) Taxes payable 9,000 Bonds payable (50,000) Common stock 40,000 Retained earnings 85,000 114. Refer to Figure 15-2. The net cash flows from operating activities to be reported in a statement of cash flows is a. $135,000. b. $98,000. c. $159,000. d. $74,000. ANSWER: a RATIONALE: $98,000 – $1,000 + $1,000 – $13,000 + $61,000 – $11,000 – $9,000 + $9,000 115. Refer to Figure 15-2. The net cash flows from investing activities to be reported in a statement of cash flows is a. $(75,000). b. $75,000. c. $(115,000). d. $115,000. ANSWER: c RATIONALE: $70,000 + $45,000


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Chapter 15 - Statement of Cash Flows 116. Refer to Figure 15-2. The net cash flows from financing activities to be reported in a statement of cash flows is a. $10,000. b. $(10,000). c. $23,000. d. $(23,000). ANSWER: d RATIONALE: $(50,000) + $40,000 – $13,000 117. The net income reported on the income statement for the current year was $635,000. Depreciation recorded on plant assets was $29,000. s receivable and inventories increased by $1,200 and $3,600, respectively. Prepaid expenses and s payable decreased by $800 and $16,000 respectively. How much cash was provided by operating activities? a. $642,400 b. $644,000 c. $652,000 d. $685,600 ANSWER: b RATIONALE: $635,000 + $29,000 – $1,200 – $3,600 + $800 – $16,000 118. The net income reported on the income statement for the current year was $79,000. Depreciation was $6,000. receivable and inventories decreased by $1,100 and $2,700, respectively. Prepaid expenses and s payable increased, respectively, by $950 and $3,000. How much cash was provided by operating activities? a. $86,750 b. $90,850 c. $85,150 d. $83,250 ANSWER: b RATIONALE: $79,000 + $6,000 + $1,100 + $2,700 – $950 + $3,000 119. If a gain of $30,000 is incurred in selling (for cash) long-term investments having a book value of $180,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $30,000. b. $210,000. c. $180,000. d. $150,000. ANSWER: b


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Chapter 15 - Statement of Cash Flows 120. If a loss of $9,200 is incurred in selling (for cash) a patent having a book value of $80,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows is a. $70,800. b. $89,200. c. $9,200. d. $80,000. ANSWER: a 121. Harbor Company reported net income of $60,000 for the year ended December 31, 20X1. During the year, inventories decreased by $12,000, s payable decreased by $18,000, depreciation expense was $20,000 and a gain on disposal of equipment of $9,000 was recorded. Net cash provided by operating activities in 20X1 using the indirect method was a. $119,000. b. $65,000. c. $77,000. d. $55,000. ANSWER: b RATIONALE: $60,000 + $12,000 – $18,000 + $20,000 – $9,000 122. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment is a. added to net income. b. deducted from net income. c. ignored because it does not affect cash. d. not reported on a statement of cash flows. ANSWER: b 123. Last year Snyder Company reported sales of $125,000 on its income statement. During the year, s receivable increased by $30,000 and s payable increased by $10,000. The company uses the direct method to determine the net cash flows from operating activities on the statement of cash flows. The sales revenue adjusted to a cash basis would be a. $105,000. b. $115,000. c. $95,000. d. $145,000. ANSWER: c RATIONALE: $125,000 – $30,000


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Chapter 15 - Statement of Cash Flows 124. Which of the following statement concerning the statement of cash flows is true? a. The statement of cash flows is usually more accurate when using the indirect method. b. If the direct method is used, a supplementary schedule reconciling the net income to net cash from operating activities must still be provided. c. The statement of cash flows reflects both earnings per share and cash per share. d. The statement of cash flows is an optional financial statement for an SEC ed firm. ANSWER: b 125. Last year Simpson Company reported cost of goods sold of $105,000. Inventories decreased by $10,000 during the year, and s payable increased by $25,000. The company uses the direct method to determine the net cash flows from operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be a. $140,000. b. $95,000. c. $70,000. d. $80,000. ANSWER: c RATIONALE: $105,000 – $25,000 – $10,000 126. Last year Emmons Company reported cost of goods sold of $115,000. Inventories decreased by $20,000 during the year, and s payable decreased by $15,000. The company uses the direct method to determine the net cash flows from operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be a. $120,000. b. $110,000. c. $95,000. d. $130,000. ANSWER: b RATIONALE: $115,000 – $20,000 + $15,000 127. Last year Maine Company reported cost of goods sold of $110,000. Inventories increased by $30,000 during the year, and s payable decreased by $15,000. The company uses the direct method to determine the net cash flows from operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be a. $140,000. b. $65,000. c. $155,000. d. $125,000. ANSWER: c RATIONALE: $110,000 + $30,000 + $15,000


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Chapter 15 - Statement of Cash Flows 128. Last year Lawson Company reported sales of $150,000 on its income statement. During the year, s receivable decreased by $15,000 and s payable decreased by $35,000. The company uses the direct method to determine the net cash flows from operating activities on the statement of cash flows. The sales revenue adjusted to a cash basis would be a. $165,000. b. $185,000. c. $170,000. d. $130,000. ANSWER: a RATIONALE: $150,000 + $15,000 129. Total operating expenses on Tucker Company's income statement for last year totaled $215,000. During the year the s payable stayed the same, the accrued liabilities stayed the same, and prepaid expenses stayed the same. Depreciation expense for the year was $11,000. Based on this information, operating expenses adjusted to cash basis under the direct method on the statement of cash flows would be a. $215,000. b. $204,000. c. $226,000. d. none of these. ANSWER: b RATIONALE: Expenses = $215,000 − $11,000 = $204,000 130. Total operating expenses on Legg Company's income statement for last year totaled $260,000. During the year the accrued liabilities decreased by $12,000, and prepaid expenses increased by $18,000. Depreciation expense for the year was $25,000. Based on this information, operating expenses adjusted to cash basis under the direct method on the statement of cash flows would be a. $255,000. b. $315,000. c. $205,000. d. $265,000. ANSWER: d RATIONALE: Expenses = 260,000 + 12,000 + 18,000 − 25,000 = 265,000 131. If s payable have increased during a period, a. revenues on an accrual basis are less than revenues on a cash basis. b. expenses on an accrual basis are less than expenses on a cash basis. c. expenses on an accrual basis are greater than expenses on a cash basis. d. expenses on an accrual basis are the same as expenses on a cash basis. ANSWER: c


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Chapter 15 - Statement of Cash Flows 132. If s receivable have increased during the period, a. revenues on an accrual basis are less than revenues on a cash basis. b. revenues on an accrual basis are greater than revenues on a cash basis. c. revenues on an accrual basis are the same as revenues on a cash basis. d. expenses on an accrual basis are greater than expenses on a cash basis. ANSWER: b 133. Total operating expenses on Harmon Company's income statement for last year totaled $370,000. During the year accrued liabilities increased by $18,000, and prepaid expenses increased by $25,000. Depreciation expense for the year was $45,000. Based on this information, operating expenses adjusted to cash basis under the direct method on the statement of cash flows would be a. $318,000. b. $332,000. c. $422,000. d. $408,000. ANSWER: b RATIONALE: Expenses = 370,000 − 18,000 + 25,000 − 45,000 = 332,000 134. The Prince Company reported net income of $260,000 for the current year. Depreciation recorded on buildings and equipment amounted to $90,000 for the year. Balances of the current asset and current liability s for 20X0 and 20X1 are as follows: 20X1 20X0 Cash $20,000 $15,000 s receivable 19,000 32,000 Inventories 50,000 65,000 Prepaid expenses 7,500 5,000 s payable 12,000 18,000 Income taxes payable 1,600 1,200 Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method. ANSWER:

Operating net income Add (deduct) adjusting items: Depreciation expense Decrease in s receivable Decrease in inventories Increase in income taxes payable Increase in prepaid expenses Decrease in s payable Net cash from operating activities:

$260,000 90,000 13,000 15,000 400 (2,500) (6,000) $369,900

135. The balance sheets of Dolan Company, for December 31, 20X1 and 20X0, are as follows: Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows

Cash s receivable (net) Inventories Investments Equipment Accumulated depreciation—equipment

s payable Bonds payable, due 20X1 Common stock, $20 par on common stock Retained earnings

20X1 $ 68,000 61,000 121,000 — 515,000 (153,000) $612,000

20X0 $ 42,500 70,200 105,000 100,000 425,000 (175,000) $567,700

$ 59,750 — 375,000 50,000 127,250 $612,000

$ 47,250 75,000 325,000 25,000 95,450 $567,700

Additional information: (a) (b) (c) (d) (e) (f) (g)

Net income, $71,800. Depreciation reported on income statement, $38,000. Fully depreciated equipment costing $60,000 was scrapped, no salvage, and equipment was purchased for $150,000. Bonds payable for $75,000 were retired by payment at their face amount. 2,500 shares of common stock were issued at $30 for cash. Cash dividends declared and paid, $40,000. Investments of $100,000 were sold for $125,000.

Required: Prepare a statement of cash flows using the indirect method. ANSWER: Dolan Company Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities: Net income Add (deduct) adjusting items: Depreciation Decrease in s receivable Increase in s payable Increase in inventories Gain on sale of investments Net operating cash Cash flows from investing activities: Sale of investments Purchase of equipment Net cash from investing activities

$ 71,800 38,000 9,200 12,500 (16,000) (25,000) $90,500

$125,000 (150,000) (25,000)

Cash flows from financing activities: Cengage Learning Testing, Powered by Cognero

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Chapter 15 - Statement of Cash Flows Sale of common stock Retired bonds payable Payment of dividends Net cash from financing activities

$ 75,000 (75,000) (40,000) (40,000)

Increase in cash Cash at the beginning of the year Cash at the end of the year

$25,500 42,500 $68,000

136. The balance sheets for Jenson Company, for the years ended December 31, 20X1 and 20X0, are as follows:

Cash s receivable (net) Inventories Investments Equipment Accumulated depreciation—equipment

s payable Bonds payable, due 20X1 Common stock, $10 par Paid-in capital in excess of par—common stock Retained earnings

20X1 $ 53,000 37,000 108,500 — 573,200 (142,000) $629,700

20X0 $ 50,000 48,000 100,000 70,000 450,000 (176,000) $542,000

$ 62,500 — 325,000 80,000 162,200 $629,700

$ 43,800 100,000 285,000 55,000 58,200 $542,000

The income statement for the current year is as follows: Sales Cost of merchandise sold Gross profit Operating expenses: Depreciation expense Other operating expenses Income from operations Other income: Gain on sale of investment Other expense: Interest expense Income before income tax Income tax Net income

$625,700 340,000 $285,700 $26,000 68,000

94,000 $191,700

$ 4,000 6,000

(2,000) $189,700 60,700 $129,000

Additional information: (a)

Fully depreciated equipment costing $60,000 was scrapped, no salvage, and equipment was purchased for $183,200.


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Chapter 15 - Statement of Cash Flows (b) (c) (d)

Bonds payable for $100,000 were retired by payment at their face amount. 5,000 shares of common stock were issued at $13 for cash. Cash dividends declared and paid, $25,000.

Required: Prepare a statement of cash flows, using the indirect method. ANSWER: Jenson Company Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities: Net income $129,000 Add (deduct) adjusting items: Depreciation 26,000 Decrease in s receivable 11,000 Increase in s payable 18,700 Increase in inventories (8,500) Gain on sale of investments (4,000) Net operating cash Cash flows from investing activities: Sale of investments $ 74,000 Purchase of equipment (183,200) Net cash from investing activities Cash flows from financing activities: Sale of common stock $ 65,000 Retired bonds payable (100,000) Payment of dividends (25,000) Net cash from financing activities Increase in cash Cash at the beginning of the year Cash at the end of the year


$172,200

(109,200)

(60,000) $ 3,000 50,000 $ 53,000

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Chapter 15 - Statement of Cash Flows 137. Using the indirect method, calculate the amount of net cash flows from operating activities from the following data: 20X1 $250,000 22,000 3,000 14,000 51,000 4,000 11,000

Net Income s receivable Prepaid expenses s payable Depreciation expense Amortization expense (Patent) Dividends declared and paid

20X0 $25,000 5,000 15,000

ANSWER:

+ + + + −

Net Income Decrease in s receivable Decrease in prepaid expenses Depreciation expense Amortization expense Decrease in s payable Net Operating Cash

$250,000 3,000 2,000 51,000 4,000 (1,000) $309,000

138. Use the following information to perform the calculations below, using the indirect method. Show and clearly label your calculations:

Net Income s receivable Inventory Prepaid expenses s payable Depreciation expense Purchase of long-term assets Issuance of long-term debt Issuance of stock for cash Issuance of stock for long-term assets Purchase of treasury stock Sale of long-term investments at cost A. B. C. D.

Current Year $365,000 439,000 560,000 42,000 146,000 107,000 616,000 200,000 160,000 110,000 64,000 49,000

Prior Year $420,000 516,000 48,000 119,000

Calculate the amount of the net cash flows from operating activities. Calculate the amount of the net cash flows from investing activities. Calculate the amount of the net cash flows from financing activities. Calculate the net change in cash.

ANSWER: A.

Cash flows from operating activities: Net Income Depreciation Expense Decrease in prepaid expenses


$365,000 107,000 6,000 Page 36


B.

C.

D.

Increase in s payable Increase in s receivable Increase in inventory Net cash flows from operating activities

27,000 (19,000) (44,000) $442,000

Cash flows from investing activities: Sale of long-term investments Purchase of long-term assets Net cash flows from investing activities

$ 49,000 (616,000) $(567,000)

Cash flows from financing activities: Issuance of long-term debt Issuance of stock for cash Purchase of treasury stock Net cash flows from financing activities

$200,000 160,000 (64,000) $296,000

Net change in cash: Increase in operating activities Decrease in investing activities Increase in financing activities Net Change in Cash

$ 442,000 (567,000) 296,000 $ 171,000

139. Use the following selected data and additional information to answer the questions that follow: Balance Sheet Data s receivable Inventories s payable Salaries payable Equipment Accumulated depreciation Bonds payable Common stock Retained earnings

Current Year $ 36,000 28,000 31,000 2,000 60,000 12,000 50,000 150,000 38,000

Prior Year $ 42,000 25,000 35,000 1,000 40,000 16,000 100,000 100,000 20,000

Income Statement Data Current Year Net sales $420,000 Cost of goods sold 300,000 Operating expenses (excluding depreciation expense) 84,000 Net income 30,000 Gain on sale of equipment (included in net income above) 2,000 Additional information: Equipment with a cost of $15,000 and a book value of $3,000 was sold for $5,000 during the 1. current year. 2. Common stock was issued to retire bonds payable during the current year. 3. Dividends declared and paid during the current year were $12,000. A.

Prepare the operating activities section of a statement of cash flows for the current year using the indirect method.


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Chapter 15 - Statement of Cash Flows B. C.

Prepare the investing activities section of a statement of cash flows for the current year. Prepare the financing activities section of a statement of cash flows for the current year.

ANSWER: A.

Operating activities: Net income Add (deduct) adjusting items: Depreciation Decrease in s receivable Increase in salaries payable Gain on sale equipment Increase in inventories Decrease in s payable Net cash provided from operating activities

$ 30,000 8,000 6,000 1,000 (2,000) (3,000) (4,000) $ 36,000

Calculations: Decrease in s receivable ($42,000 − $36,000) Increase in salaries payable ($2,000 − $1,000) Gain on sale of equipment ($5,000 − $3,000) Increase in inventories ($28,000 − $25,000) Decrease in s payable ($35,000 − $31,000) Depreciation ($16,000 − $12,000 + $X = $12,000) B.

C.

$ 6,000 $ 1,000 $ 2,000 $ 3,000 $ 4,000 $ 8,000

Investing activities: Proceeds from selling equipment Purchase of equipment (40,000 – 15,000 + 35,000) Net cash used by for investing activities

$ 5,000 (35,000) $(30,000)

Financing activities: Payment of dividends Net cash used by for financing activities

$(12,000) $(12,000)

140. Bradley Company's net income last year was $77,000. Changes in the company's balance sheet s for the year appear below: Increases (Decreases) Debit balances: Cash s receivable Inventory Prepaid expenses Long-term investments Plant and equipment Credit balances: Accumulated depreciation s payable Cengage Learning Testing, Powered by Cognero

$12,000 (16,000) 18,000 7,000 20,000 70,000

32,000 26,000 Page 38

Chapter 15 - Statement of Cash Flows Accrued liabilities Taxes payable Bonds payable Common stock Retained earnings The company declared and paid cash dividends of $37,000 last year.

(4,000) 7,000 (20,000) 30,000 40,000

Required: Prepare the operating activities section of the company's statement of cash flows for the A. year. (Use the indirect method.) Prepare the investing activities section of the company's statement of cash flows for the B. year. Prepare the financing activities section of the company's statement of cash flows for the C. year. ANSWER: A.

B.

C.

Operating activities: Net income Add (deduct) adjusting items: Depreciation expense Decrease in s receivable Increase in inventory Increase in prepaid expenses Increase in s payable Decrease in accrued liabilities Increase in taxes payable Net cash flows from operating activities

32,000 16,000 (18,000) (7,000) 26,000 (4,000) 7,000 $129,000

Investing activities: Increase in long-term investments Increase in plant & equipment Net cash flows from investing activities

$ (20,000) (70,000) $ (90,000)

Financing activities: Decrease in bonds payable Increase in common stock Cash dividends Net cash flows from financing activities

$ (20,000) 30,000 (37,000) $ (27,000)

$ 77,000

141. Baskin Company's net income last year was $98,000. Changes in the company's balance sheet s for the year appear below: Increases (Decreases) Debit balances: Cash s receivable Inventory Cengage Learning Testing, Powered by Cognero

$24,000 15,000 (18,000) Page 39

Chapter 15 - Statement of Cash Flows Prepaid expenses Long-term investments Plant and equipment Credit balances: Accumulated depreciation s payable Accrued liabilities Taxes payable Bonds payable Common stock Retained earnings The company declared and paid cash dividends of $36,000 last year.

(6,000) 10,000 40,000

32,000 (14,000) 11,000 4,000 (40,000) 10,000 62,000


B.

C.

Operating activities: Net income Add (deduct) adjusting items: Depreciation expense Increase in s receivable Decrease in inventory Decrease in prepaid expenses Decrease in s payable Increase in accrued liabilities Increase in taxes payable Net cash flows from operating activities

32,000 (15,000) 18,000 6,000 (14,000) 11,000 4,000 $140,000


$ (10,000) (40,000) $ (50,000)


$ (40,000) 10,000 (36,000) $ (66,000)

$ 98,000

142. Black Company's net income last year was $84,000. Changes in the company's balance sheet s for the year appear below: Cengage Learning Testing, Powered by Cognero

Page 40


Increases (Decreases) Debit balances: Cash s receivable Inventory Prepaid expenses Long-term investments Plant and equipment Credit balances: Accumulated depreciation s payable Accrued liabilities Taxes payable Bonds payable Common stock Retained earnings The company declared and paid cash dividends of $59,000 last year.

$(12,000) 13,000 (15,000) (9,000) 20,000 60,000

26,000 (15,000) (8,000) 19,000 (30,000) 40,000 25,000


B.

C.

Operating activities Net income Add (deduct) adjusting items: Depreciation expense Increase in s receivable Decrease in inventory Decrease in prepaid expenses Decrease in s payable Decrease in accrued liabilities Increase in taxes payable Net cash flows from operating activities

26,000 (13,000) 15,000 9,000 (15,000) (8,000) 19,000 $117,000


$ (20,000) (60,000) $ (80,000)

Financing activities: Decrease in bonds payable

$ (30,000)


$ 84,000

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Chapter 15 - Statement of Cash Flows Increase in common stock Cash dividends Net cash flows from financing activities

40,000 (59,000) $ (49,000)

143. Daniels Company's comparative balance sheet and income statement for last year appear below: Balance Sheet

Cash s receivable Inventory Prepaid expenses Long-term investments Plant and equipment Accumulated depreciation Total assets

Ending Balance $ 62,000 85,000 31,000 0 260,000 450,000 (255,000) $633,000

Beginning Balance $ 38,000 66,000 44,000 4,000 210,000 450,000 (219,000) $593,000

s payable Accrued liabilities Taxes payable Deferred taxes payable Bonds payable Common stock Retained earnings Total liabilities and stockholders' equity

$ 33,000 36,000 17,000 41,000 150,000 130,000 226,000 $633,000

$ 45,000 18,000 24,000 24,000 190,000 100,000 192,000 $593,000

Income Statement Sales Less cost of goods sold Gross margin Less operating expenses Net operating income Less income taxes Net income The company declared and paid $36,000 in cash dividends during the year.

$610,000 330,000 280,000 180,000 100,000 30,000 $ 70,000

Required: Using the indirect method, prepare each of the following activities sections of the company's statement of cash flows for the year: A. Operating activities section. B. Investing activities section. C. Financing activities section. ANSWER: A.

Operating activities − INDIRECT METHOD Net income Add (deduct) Adjusting Items: Depreciation expense


$ 70,000 36,000 Page 42


B.

C.

Increase in s receivable Decrease in inventory Decrease in prepaid expenses Decrease in s payable Increase in accrued liabilities Decrease in taxes payable Increase in deferred taxes Net cash flows from operating activities

(19,000) 13,000 4,000 (12,000) 18,000 (7,000) 17,000 $120,000

Investing activities: Increase in long-term investments Net cash flows from investing activities

$ (50,000) $ (50,000)

Financing activities: Decrease in bonds payable Increase in common stock Cash dividends paid Net cash flows from financing activities

$ (40,000) 30,000 (36,000) $ (46,000)

144. Trueblood Company's comparative balance sheet and income statement for last year appear below: Balance Sheet


Ending Balance $ 60,000 48,000 56,000 13,000 300,000 470,000 (222,000) $725,000



$ 59,000 42,000 7,000 38,000 80,000 110,000 389,000 $725,000

$ 36,000 24,000 14,000 23,000 140,000 70,000 338,000 $645,000

Income Statement Sales Less cost of goods sold Gross margin Less operating expenses Net operating income Less income taxes Cengage Learning Testing, Powered by Cognero

$540,000 300,000 $240,000 150,000 90,000 27,000 Page 43

Chapter 15 - Statement of Cash Flows Net income The company declared and paid $12,000 in cash dividends during the year.

$ 63,000

Required: Using the indirect method, prepare each of the following activities sections of the company's statement of cash flows for the year: A. Operating activities section. B. Investing activities section. C. Financing activities section. ANSWER: A.

B.

C.

Operating activities − INDIRECT METHOD Net income Add (deduct) adjusting items: Depreciation expense Decrease in s receivable Increase in inventory Decrease in prepaid expenses Increase in s payable Increase in accrued liabilities Decrease in taxes payable Increase in deferred taxes payable Net cash flows from operating activities

$ 63,000 34,000 13,000 (8,000) 6,000 23,000 18,000 (7,000) 15,000 $157,000


$ (90,000) $ (90,000)


$ (60,000) 40,000 (12,000) $ (32,000)

145. The comparative balance sheets for Bessler Company appear below: Bessler Company Comparative Balance Sheet Assets Cash s receivable Prepaid expenses Inventory Long-term investments Equipment Accumulated depreciation—equipment Total assets Cengage Learning Testing, Powered by Cognero

20X1

20X0

$ 23,000 18,000 6,000 27,000 -060,000 (18,000) $116,000

$15,000 14,000 9,000 15,000 18,000 30,000 (14,000) $87,000 Page 44

Chapter 15 - Statement of Cash Flows Liabilities and Stockholders' Equity s payable $ 21,000 $ 9,000 Bonds payable 37,000 45,000 Common stock 40,000 23,000 Retained earnings 18,000 10,000 Total liabilities and stockholders' equity $116,000 $87,000 Additional information: 1. Net income for the year ending December 31, 20X1, was $20,000. 2. Cash dividends of $12,000 were declared and paid during the year. 3. Long-term investments that had a book value of $18,000 were sold for $16,000. 4. Sales for 20X1 are $120,000. Required: Prepare a statement of cash flows for the year ended December 31, 20X1, using the indirect method. ANSWER: BESSLER COMPANY Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities Net income Add (deduct) adjusting items: Depreciation expense Increase in s receivable Decrease in prepaid expenses Loss on sale of long-term investment in bonds Increase in inventories Increase in s payable Net cash flows from operating activities

$20,000 4,000 (4,000) 3,000 2,000 (12,000) 12,000 $ 25,000

Cash flows from investing activities Sale of long-term investments Purchase of equipment Net cash flows from investing activities

$ 16,000 (30,000) $(14,000)

Cash flows from financing activities Issuance of common stock Retirement of bonds payable Payment of cash dividend Net cash flows from financing activities

$17,000 (8,000) (12,000) $(3,000)

Net increase in cash Cash at beginning of period Cash at end of period

$8,000 15,000 $23,000

146. A comparative balance sheet for the Bright Corporation is presented below: BRIGHT CORPORATION Comparative Balance Sheet 20X1 Cengage Learning Testing, Powered by Cognero

20X0 Page 45

Chapter 15 - Statement of Cash Flows Assets Cash s receivable (net) Prepaid insurance Land Equipment Accumulated depreciation Total assets

$ 39,000 80,000 22,000 18,000 70,000 (20,000) $209,000

$ 31,000 60,000 17,000 40,000 60,000 (13,000) $195,000

Liabilities and Stockholders' Equity s payable $ 11,000 $ 6,000 Bonds payable 27,000 19,000 Common stock 140,000 115,000 Retained earnings 31,000 55,000 Total liabilities &stockholders' equity $209,000 $195,000 Additional information: 1. Net loss for 20X1 is $20,000. Net sales for 20X1 are $250,000. 2. Cash dividends of $4,000 were declared and paid in 20X1. Land was sold for cash at a loss of $10,000. This was the only land transaction during the 3. year. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for 4. $5,000 cash. 5. $12,000 of bonds were retired during the year at carrying (book) value. Equipment was acquired for common stock. The fair market value of the stock at the time of 6. the exchange was $25,000. Required: Prepare a statement of cash flows for the year ended 20X1 using the indirect method. ANSWER: BRIGHT CORPORATION Statement of Cash Flows For the Year Ended December 31, 20X1 Net loss Add (deduct) adjusting items: Depreciation Loss on sale of land Increase in s payable Increase in s receivable Increase in prepaid insurance Net cash flows from operating activities Cash flows from investing activities: Proceeds from the sale of land Proceeds from the sale of equipment Net cash flows from investing activities Cash flows from financing activities: Retirement of bonds payable Issuance of bonds payable Payment of dividends Cengage Learning Testing, Powered by Cognero

$(20,000) 17,000 10,000 5,000 (20,000) (5,000) $(13,000)

$12,000 5,000 17,000

$(12,000) 20,000 (4,000) Page 46

Chapter 15 - Statement of Cash Flows Net cash flows from financing activities

4,000

Increase in cash Cash at beginning of period (12−31−20X0) Cash at end of period (12−31−20X1)

$ 8,000 31,000 $ 39,000

Noncash investing and financing activities: Purchase of equipment through issuance of common stock

$ 25,000

Issuance of Bonds Payable = $19,000 opening balance less 12,000 retired less $27,000 ending balance is an increase of $20,000. 147. The following information is available for the Benning Corporation for the year ended Dec. 31, 20X1: Collection of principal on long-term loan to a supplier $35,000 Acquisition of equipment for cash 10,000 Proceeds from sale of long-term investment at book value 27,000 Issuance of common stock for cash 20,000 Depreciation expense 25,000 Redemption of bonds payable at carrying (book) value 24,000 Payment of cash dividends 9,000 Net income 35,000 Purchase of land by issuing bonds payable 40,000 In addition, the following information is available from the comparative balance sheet for Benning at the end of 20X1 and 20X0:

Cash s receivable (net) Prepaid insurance Total current assets

20X1 $107,000 20,000 17,000 $144,000

20X0 $14,000 15,000 13,000 $42,000

s payable $ 25,000 $19,000 Salaries payable 4,000 7,000 Total current liabilities $ 29,000 $26,000 Required: Prepare Benning's statement of cash flows for the year ended Dec. 31, 20X1, using the indirect method. ANSWER:

BENNING CORPORATION Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation Increase in s receivable Cengage Learning Testing, Powered by Cognero

$35,000

25,000 (5,000) Page 47

Chapter 15 - Statement of Cash Flows Increase in prepaid insurance Increase in s payable Decrease in salaries payable Net cash provided by operating activities

(4,000) 6,000 (3,000) $54,000

Cash flows from investing activities: Collection of long-term loan Proceeds from the sale of investments Purchase of equipment Net cash provided by investing activities

$35,000 27,000 (10,000)

Cash flows from financing activities: Issuance of common stock Redemption of bonds Payment of dividends Net cash used by financing activities

$20,000 (24,000) (9,000)

52,000

(13,000)

Increase in Cash Cash at beginning of period Cash at end of period

$ 93,000 14,000 $107,000

Noncash investing and financing activities Purchase of land by issuing bonds

$ 40,000


Page 48

Chapter 15 - Statement of Cash Flows 148. Assuming a statement of cash flows is prepared, indicate the reporting of the transactions and events listed below by major categories on the statement. Use the following code letters to indicate the appropriate category under which the item would appear on the statement of cash flows. Code Cash Flows From Operating Activities Add to Net Income Deduct from Net Income Cash Flows From Investing Activities Cash Flows From Financing Activities

A D IA FA

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Category _____ _____ _____ _____ _____ _____ _____ _____ _____ _____

Common stock is issued for cash at an amount above par value. Merchandise inventory increased during the period. Depreciation expense recorded for the period. Building was purchased for cash. Bonds payable were acquired and retired at their carrying value. s payable decreased during the period. Prepaid expenses decreased during the period. Treasury stock was acquired for cash. Land is sold for cash at an amount equal to book value. Patent amortization expense recorded for a period.

ANSWER: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Common stock is issued for cash at an amount above par value. Merchandise inventory increased during the period. Depreciation expense recorded for the period. Building was purchased for cash. Bonds payable were acquired and retired at their carrying value. s payable decreased during the period. Prepaid expenses decreased during the period. Treasury stock was acquired for cash. Land is sold for cash at an amount equal to book value. Patent amortization expense recorded for a period.


Category FA D A IA FA D A FA IA A

Page 49

Chapter 15 - Statement of Cash Flows 149. Playtown Company's income statement for last year appears below: Playtown Company Income Statement Sales Less: Cost of goods sold Gross margin Less: Operating expenses Income before income taxes Less: Income taxes Net income

$100,000 60,000 $ 40,000 25,000 $ 15,000 6,000 $ 9,000

The beginning and ending balances for last year are available for the following selected s:

s receivable Inventory Prepaid expenses Accumulated depreciation s payable Accrued liabilities Income taxes payable

Ending balance $15,000 29,000 6,000 (35,000) 27,000 3,000 4,000

Beginning balance $10,000 25,000 9,000 (30,000) 20,000 5,000 1,000

Required: Using the direct method, prepare the operating activities section of the statement of cash flows. ANSWER: Sales revenue Adjustments to a cash basis: Increase in s receivable

$100,000

Cost of goods sold Adjustments to a cash basis: Increase in inventory Increase in s payable

$ 60,000

Operating expenses Adjustments to a cash basis: Decrease in prepaid expenses Decrease in accrued liabilities Depreciation expense

$ 25,000

Income tax expense Adjustments to a cash basis: Increase in income taxes payable Net cash flows from operating activities


− 5,000

+ 4,000 − 7,000

$95,000

(57,000)

− 3,000 + 2,000 − 5,000

(19,000)

$ 6,000 − 3,000

(3,000) $16,000

Page 50

Chapter 15 - Statement of Cash Flows 150. Freeport Company's income statement for last year appears below: Income Statement Sales Less: Cost of goods sold Gross margin Less: Operating expenses Income before income taxes Less: Income taxes Net income The beginning and ending balances for last year are available for the following s:

$300,000 200,000 100,000 60,000 40,000 16,000 $ 24,000

Ending Beginning balance balance s receivable $32,000 $40,000 Inventory 60,000 50,000 Prepaid expenses 12,000 8,000 Accumulated depreciation (40,000) (30,000) s payable 30,000 45,000 Accrued liabilities 16,000 10,000 Income taxes payable 2,000 5,000 Required: Using the direct method, prepare the operating activities section of the statement of cash flows. ANSWER: Sales revenue Adjustments to a cash basis: Decrease in s receivable Cost of goods sold Adjustments to a cash basis: Increase in inventory Decrease in s payable Operating expenses Adjustments to a cash basis: Increase in prepaid expenses Increase in accrued liabilities Depreciation charges

$300,000 + 8,000

$308,000

200,000 + 10,000 + 15,000

(225,000)

60,000 + 4,000 − 6,000 − 10,000

Income tax expense Adjustments to a cash basis: Decrease in income taxes payable

(48,000)

16,000 + 3,000

Net cash flows from operating activities

(19,000) $ 16,000

151. Gingerich Company's comparative balance sheet and income statement for last year appear below: Balance Sheet Cengage Learning Testing, Powered by Cognero

Page 51



Ending Balance $ 45,000 39,000 30,000 14,000 280,000 600,000 (322,000) $686,000



$ 19,000 37,000 32,000 28,000 100,000 100,000 370,000 $686,000

$ 34,000 25,000 14,000 22,000 150,000 70,000 314,000 $629,000

Income Statement Sales Less: Cost of goods sold Gross margin Less: Operating expenses Net operating income Less: Income taxes Net income

$800,000 430,000 370,000 230,000 140,000 42,000 $ 98,000

The company declared and paid $42,000 in cash dividends during the year. Required: Using the direct method, prepare each of the following activities sections of the company's statement of cash flows for the year: A. Operating activities section. B. Investing activities section. C. Financing activities section. ANSWER: A.

Operating activities − DIRECT METHOD Sales Adjustments to a cash basis: Increase in s receivable Cost of goods sold Adjustments to a cash basis: Decrease in inventory Decrease in s payable Operating expenses


$800,000 − 9,000

$791,000

430,000 − 14,000 + 15,000

(431,000)

230,000 Page 52

Chapter 15 - Statement of Cash Flows Adjustments to a cash basis: Decrease in prepaid expenses Increase in accrued liabilities Depreciation charges Income tax expense Adjustments to a cash basis: Increase in taxes payable Increase in deferred taxes payable Net cash flows from operating activities B.

C.

− 5,000 − 12,000 − 31,000

(182,000)

42,000 − 18,000 − 6,000

(18,000) $160,000


$(80,000) $(80,000)


$(50,000) 30,000 (42,000) $(62,000)

152. The following information is available for Snider Company: Receipts from customers $180,000 Dividends from stock investments 3,000 Proceeds from sale of equipment 18,000 Proceeds from issuance of stock 90,000 Payments for goods 100,000 Payments for operating expenses 70,000 Interest paid 5,000 Taxes paid 4,000 Dividends paid 20,000 Required: Based on the preceding information, compute the net cash provided by operating activities. ANSWER: Receipts from customers Dividends from stock investments Payments for goods Payments for operating expenses Interest paid Taxes paid Net cash provided by operating activities


$180,000 3,000 183,000 $100,000 70,000 5,000 4,000

(179,000) $ 4,000

Page 53

Chapter 15 - Statement of Cash Flows 153. Dolan Company's income statement showed revenues of $250,000 and operating expenses of $160,000. s receivable decreased by $60,000 and s payable increased by $40,000 during the year. Required: Compute (A) cash receipts from customers and (B) cash payments for operating expenses using the direct method. ANSWER: A.

Cash receipts from customers = $310,000 ($250,000 + $60,000)

B.

Cash payments for operating expenses = $120,000 ($160,000 − $40,000)


Page 54

Chapter 15 - Statement of Cash Flows 154. The general ledger of Lopez Company provides the following information: Beginning End of Year of Year s Receivable $ 55,000 $ 94,000 Inventory 350,000 210,000 s Payable 40,000 65,000 Net sales for the year were $2,100,000 and cost of goods sold were $1,500,000. Required: Compute the following: A. Cash receipts from customers. B. Cash payments to suppliers. ANSWER: A.

Cash receipts from customers Sales + Decrease in s Receivable $2,100,000 + $39,000 = $2,139,000

B.

Cash payments to suppliers First calculate the amount of purchases: Beginning inventory Add: Purchases Goods Available for sale Less: Ending inventory Cost of goods sold

$ 210,000 ? ? 350,000 $1,500,000

COGS + Ending Inventory = Goods Available for Sale ($1,500,00 + $350,000 = $1,850,000) Goods Available for sale – Beginning Inventory = Purchases ($1,850,000 – $210,000 = $1,640,000) Amount of cash payments to = suppliers =

Purchases + Decrease in s payable $1,640,000 + $25,000 = $1,665,000

155. The income statement of Stuart Company is shown below: STUART COMPANY Income Statement For the Year Ended December 31, 20X0 Sales Cost of goods sold Gross profit Operating expenses Selling expenses Cengage Learning Testing, Powered by Cognero

$8,200,000 5,400,000 $2,800,000 $500,000 Page 55

Chapter 15 - Statement of Cash Flows istrative expense 700,000 Depreciation expense 90,000 Amortization expense 30,000 1,320,000 Net income $1,480,000 Additional information: 1. s receivable increased $400,000 during the year. 2. Inventory increased $250,000 during the year. 3. Prepaid expenses increased $200,000 during the year. 4. s payable to merchandise suppliers increased $100,000 during the year. 5. Accrued expenses payable increased $180,000 during the year. Required: Prepare the operating activities section of the statement of cash flows for the year ended December 31, 20X0, for Stuart Company, using the direct method. ANSWER: STUART COMPANY Statement of Cash Flows For the Year Ended December 31, 20X0 Cash flows from operating activities Adjustments to Cash Basis: Sales Cost of Goods Sold Operating expenses Net cash provided by operations

$ 7,800,000 (5,550,000) (1,220,000) $ 1,030,000

(1)

Sales Deduct: Increase in s receivable

$ 8,200,000 (400,000) $ 7,800,000

(2)

Cost of goods sold Add: Increase in inventory Deduct: Increase in s payable

$ 5,400,000 250,000 (100,000) $ 5,550,000

(3)

Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable

$ 1,200,000 200,000 (180,000) $ 1,220,000


Page 56

Chapter 15 - Statement of Cash Flows 156. The income statement of Bingham Inc. for the year ended December 31, 20X1, reported the following condensed information: Service revenue Operating expenses Income from operations Income tax expense Net income

$600,000 360,000 $240,000 60,000 $180,000

Bingham's balance sheet contained the following comparative data at December 31: 20X1 $50,000 35,000 6,000

s receivable s payable Income taxes payable

20X0 $40,000 50,000 3,000

Bingham has no depreciable assets. s payable pertains to operating expenses. Require: Prepare the operating activities section of the statement of cash flows using the direct method. ANSWER: BINGHAM INC. Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities Cash receipts from customers ($600,000 − $10,000) Cash payments: For operating expenses ($360,000 + $15,000) For income taxes ($60,000 − $3,000) Net cash provided by operating activities

$590,000 $375,000 57,000

(432,000) $158,000

157. The income statement of Grimes Company is shown below: GRIMES COMPANY Income Statement For the Year Ended December 31, 20X1 Sales Cost of goods sold Gross profit Operating expenses Selling expenses istrative expense Depreciation expense Amortization expense Net income Additional information: 1. s receivable increased $500,000 during the year. 2. Inventory increased $250,000 during the year. Cengage Learning Testing, Powered by Cognero

$ 8,000,000 5,400,000 $ 2,600,000 $500,000 700,000 90,000 30,000

(1,320,000) $ 1,280,000

Page 57

Chapter 15 - Statement of Cash Flows 3. Prepaid expenses increased $200,000 during the year. 4. s payable to merchandise suppliers increased $150,000 during the year. 5. Accrued expenses payable increased $180,000 during the year. Required: Prepare the operating activities section of the statement of cash flows for the year ended December 31, 20X1, for Grimes Company, using the direct method. ANSWER: GRIMES COMPANY Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities Cash receipts from customers $7,500,000 Cash payments: To suppliers $(5,500,000) (2) For operating expenses (1,220,000) (3) (6,720,000) Net cash provided by operations $ 780,000

(1)

(1)

Sales Deduct: Increase in s receivable Cash receipts from customers

$8,000,000 (500,000) $7,500,000

(2)

Cost of goods sold Add: Increase in inventory Purchases Deduct: Increase in s payable Cash payments to suppliers

$5,400,000 250,000 5,650,000 (150,000) $5,500,000

(3)

Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses

$1,200,000 200,000 (180,000) $1,220,000

158. Clover Company had the following information for the years 20X1 and 20X0: Clover Company Income Statement For the Year Ended December 31, 20X1 Sales Cost of goods sold Gross profit Operating expense: Selling expense istrative expense Depreciation expense Net income Cengage Learning Testing, Powered by Cognero

$4,200,000 2,150,000 $2,050,000 $580,000 440,000 40,000

1,060,000 $ 990,000 Page 58

Chapter 15 - Statement of Cash Flows Clover Company Balance Sheet December 31, 20X1 20X1

20X0

Assets Cash s receivable Inventory Property, plant and equipment Accumulated depreciation Total assets

$ 16,000 325,000 127,000 300,000 120,000 $888,000

$ 22,000 412,000 205,000 300,000 100,000 $1,039,000

Liabilities s payable Accrued expenses Stockholders' equity Total liabilities and equity

$ 46,000 65,000 777,000 $888,000

$ 59,000 42,000 938,000 $1,039,000

Required: Prepare the operating activities section of the statement of cash flows using the direct method. ANSWER: Clover Company Statement of Cash Flows For the Year Ended December 31, 20X1 Cash flows from operating activities Cash receipts from customers Cash payments: To suppliers $(2,085,000) For operating expenses (997,000) Net cash provided by operations

$ 4,287,000

(3,082,000) $ 1,205,000

Cash flows from operating activities:

Revenues Cost of goods sold Selling expense istrative expense Net Operating cash

Income Statement 4,200,000 (2,150,000) (580,000) (440,000)

Adjustments 87,000 78,000 (13,000) 23,000

(a) (b) (c) (d)

Cash Flows 4,287,000 (2,085,000) (997,000) 1,205,000

a. Decrease in s receivable b. Decrease in inventory c. Decrease in s payable d. Increase in accrued expenses 159. Best Wishes Company had the following information for the year ended December 31, 20X0: Cengage Learning Testing, Powered by Cognero

Page 59

Chapter 15 - Statement of Cash Flows Best Wishes Company Income Statement For the Year Ended December 31, 20X0 Sales Cost of goods sold Gross profit Operating expenses Selling expense istrative expense Amortization expense Net income

$470,000 254,000 $216,000 $110,000 73,000 14,000

197,000 $ 19,000

Additional information: a. s receivable increased by $12,000. b. Inventories increased by $28,000. c. Prepaid expenses increased by $1,200. d. s payable to merchandise suppliers increased by $19,000. e. Accrued expenses payable increased by $9,000. Required: Prepare the operating activities section of the statement of cash flows for the year ended December 31, 20X0, for Best Wishes Company, using the direct method. ANSWER: Best Wishes Company Statement of Cash Flows For the Year Ended December 31, 20X0 Cash flows from operating activities: Cash receipts from customers Cash payments: To suppliers For operating expenses Net operating cash flows

$458,000 $263,000 175,200

438,200 $ 19,800

(1) (2) (3)

1

Sales Deduct: Increase in s receivable Cash receipts from customers

470,000 12,000 458,000

2

Cost of goods sold Add: Increase in inventory Deduct: Increase in s payable Cash payments to suppliers

254,000 28,000 282,000 (19,000) 263,000

Operating expenses exclusive of depreciation and amortization Add: Increase in prepaid expenses Deduct: Increase in accrued expenses payable Cash payments for operating expenses

183,000 1,200 (9,000) 175,200

3


Page 60


160. The statement of cash flow classifies the cash flows into three categories. Describe each of these categories. ANSWER: Operating activities are the ongoing, day-to-day, revenue-generating activities of an organization. Typically, operating cash flows involve increases or decreases in either current assets or current liabilities. Investing activities are those activities that involve the acquisition or sale of long-term assets. Longterm assets may be productive assets or long-term activities. Financing activities are those activities that raise cash from creditors and owners. 161. When preparing a statement of cash flows using the indirect method, why is depreciation added back to net income within the operating activities section? ANSWER: The indirect method begins with net income based on accrual ing. This includes a legitimate deduction for depreciation expense. However, depreciation expense does not represent a cash outflow and thus must be added back to net income to cancel the deduction. As a result depreciation is excluded from the net cash flows from operating activities. 162. How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash flow from operating activities? ANSWER: A net loss means that accrual-based expenses exceeded accrual-based revenues for the period. However, if you eliminate the effect of (add back) such noncash expenses as depreciation and amortization, it is possible to have produced a positive net cash flow from operations. Increasing payables (not paying all expenses incurred this period) and decreasing receivables (collecting more receivables than sales) this period would also cause cash flow to be higher than related net income or loss. 163. If an asset is sold at a gain, why is the gain deducted from net income when computing the net cash flows from operating activities under the indirect method? ANSWER: The gain is deducted from net income to avoid double counting, since the entire proceeds from the sale will appear as a cash inflow from investing activities. You decide 164. There are five basic steps that are followed in preparing a statement of cash flows. List the five steps and briefly describe what takes place in each step. ANSWER: 1. Compute the change in cash for the period. This figure is the difference between the ending and beginning cash balances shown on the balance sheets. It must equal the net cash inflow or outflow shown on the statement of cash flows. 2. Compute the cash flows from operating activities. Use the period’s beginning and ending balance sheets and information about other events and transactions to adjust the period’s income statement to an operating cash flow basis. 3. Identify the cash flows from investing activities. Use the period’s beginning and ending balance sheets and information about other events and transactions to identify the cash flows associated with the sale and purchase of long-term assets. 4. Identify the cash flows from financing activities. Use the period’s beginning and ending balance sheets to identify the cash flows associated with long-term debt and capital stock. 5. Prepare the statement of cash flows based on the previous four steps.


Page 61

Chapter 15 - Statement of Cash Flows 165. Cash flows from operating activities can be calculated using the indirect or direct method. Briefly describe how the two methods differ yet arrive at the same information about the net cash flows from operating activities. ANSWER: The indirect method starts with net income and converts it to the net cash flows from operating activities. There are two types of adjustments: (1) changes in current assets and current liabilities and (2) noncash charges and credits. For example, an increase in s receivable is deducted from net income and an increase in s payable is added to net income. Similarly, a noncash charge for depreciation expense is added to net income. The adjustments are the difference between net income and the net cash provided by operating activities. Under the direct method, net cash provided by operating activities is computed by adjusting each item in the income statement from the accrual to the cash basis. Within the operating activities section, only major classes of operating cash receipts and cash payments are reported. The classes include cash receipts from customers and cash payments to suppliers. The difference between these major classes is the net cash provided by operating activities. The same adjustments are used in both methods, regardless of whether net income is adjusted or individual revenues and expenses are adjusted. Therefore, both methods arrive at the same result.


Page 62

Chapter 15 - Statement of Cash Flows Use the following major cash flow activities to classify the activities listed below: a. Operating Activity, Source of Cash b. Operating Activity, Use of Cash c. Investing Activity, Source of Cash d. Investing Activity, Use of Cash e. Financing Activity, Source of Cash f. Financing Activity, Use of Cash g. Non-cash Investing & Financing Activity 166. Land is exchanged for common stock ANSWER: g 167. Reported profitable operations (Net Income) ANSWER: a 168. Issued long-term debt ANSWER: e 169. Payment of cash dividends ANSWER: f 170. Sold equipment used in the business for cash ANSWER: c 171. Payment of Operating Expenses ANSWER: b 172. Collection of Sales Revenue ANSWER: a 173. Purchased land for cash ANSWER: d 174. Issued Common Stock for cash ANSWER: e 175. Paid off long-term debt ANSWER: f


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Chapter 15 - Statement of Cash Flows For each of the following items, indicate by using the appropriate code letter, how the item should be reported in the statement of cash flows, using the indirect method. a. Added to net income b. Deducted from net income c. Cash outflow--investing activity d. Cash inflow--investing activity e. Cash outflow--financing activity f. Cash inflow--financing activity g. significant noncash investing and financing activity 176. Decrease in s payable during a period. ANSWER: b 177. Declaration and payment of a cash dividend. ANSWER: e 178. Loss on sale of land. ANSWER: a 179. Decrease in s receivable during a period. ANSWER: a 180. Redemption of bonds for cash. ANSWER: e 181. Proceeds from sale of equipment at book value. ANSWER: d 182. Issuance of common stock for cash. ANSWER: f 183. Purchase of a building for cash. ANSWER: c 184. Acquisition of land in exchange for common stock. ANSWER: g 185. Increase in merchandise inventory during a period. ANSWER: b


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