Chapter 12 Cash Flows Blooms Taxonomy

CHAPTER 12

STATEMENT OF CASH FLOWS

SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY

Item SO BT Item SO BT Item SO BT Item SO BT Item SO BTTrue-False Statements

1. 1 K 10. 2 C 19. 2 C 28. 4 C *37. 6 C2. 1 K 11. 2 K 20. 3 K 29. 5 K *38. 6 C3. 1 K 12. 2 K 21. 3 K 30. 5 K *39. 6 C4. 1 K 13. 2 K 22. 4 C 31. 5 C 40. 6 K5. 1 K 14. 2 C 23. 4 C 32. 5 K *41. 6 K6. 2 K 15. 2 C 24. 4 K 33. 5 C7. 2 K 16. 2 C 25. 4 C *34. 6 C8. 2 C 17. 2 C 26. 4 C *35. 6 AP9. 2 K 18. 2 K 27. 4 C *36. 6 K

Multiple Choice Questions42. 1 K 68. 2 K 94. 4 K 120. 4 AP 146. 4 C43. 1 K 69. 2 C 95. 4 C 121. 4 AP 147. 5 K44. 1 K 70. 2 C 96. 4 AP 122. 4 AP 148. 5 AP45. 1 K 71. 2 C 97. 4 AP 123. 4 AP 149. 5 AP46. 1 K 72. 2 C 98. 4 AP 124. 4 AP 150. 5 K47. 1 K 73. 2 K 99. 4 C 125. 4 AP 151. 5 K48. 2 K 74. 2 K 100. 4 C 126. 4 K 152. 5 K49. 2 K 75. 2 K 101. 4 C 127. 4,6 AP *153. 6 AP50. 2 K 76. 2 K 102. 4 C 128. 4,6 AP *154. 6 AP51. 2 K 77. 2 K 103. 4 AP 129. 4,6 C *155. 6 AP52. 2 K 78. 2 AP 104. 4 AP 130. 4,6 K *156. 6 AP53. 2 K 79. 2 AP 105. 4 AP 131. 4,6 K *157. 6 AP54. 2 K 80. 2 AP 106. 4 AP 132. 4,6 K *158. 6 AP55. 2 C 81. 2 AP 107. 4 K 133. 4,6 K *159. 6 AP56. 2 C 82. 2 AP 108. 4 C 134. 4,6 K *160. 6 C57. 2 C 83. 2 K 109. 4 K 135. 4,6 K *161. 6 AP58. 2 C 84. 2 AP 110. 4 K 136. 4,6 AP *162. 6 K59. 2 C 85. 2 AP 111. 4 K 137. 4,6 AP *163. 6 AP60. 2 C 86. 2 AP 112. 4 K 138. 4,6 AP *164. 6 AP61. 2 C 87. 3 K 113. 4 K 139. 4,6 AP *165. 6 K62. 2 C 88. 3 K 114. 4 C 140. 4,6 AP *166. 6 K63. 2 C 89. 3 K 115. 4 C 141. 4 C *167. 6 AP64. 2 C 90. 3 K 116. 4 C 142. 4 C *168. 6 AP65. 2 C 91. 3 K 117. 4 C 143. 4 AP66. 2 C 92. 3 K 118. 4 C 144. 4 C67. 2 C 93. 3 K 119. 4 C 145. 4 C

Brief Exercises169. 2 AP 172. 4 AP 175. 4 AP *177. 6 AP *179. 6 AP170. 2 AP 173. 4 K *176. 6 AP *178. 6 AP *180. 6 AP171. 2 K 174. 4 K

Exercises181. 4 AP 183. 4 AP 185. 4,5 AP 187. 4 AP *189. 6 AP182. 4 AP 184. 4,5 AP 186. 4 AP *188. 5,6 AP *190. 6 AP

Completion Statements191. 1 K 194. 3 K 197. 4 K 200. 5 K *203. 6 K192. 2 K 195. 3 K 198. 4,6 K *201. 6 K *204. 6 K193. 3 K 196. 4 K 199. 5 K *202. 6 K

Test Bank for Financial Accounting: Tools for Business Decision Making, Fourth Edition

Matching205. 2 AP *206. 6 AP

Short Answer Essay207. 3,4 C 209. 4 C *211. 6 C 212. 4,6 E 213. 1 C208. 4,6 C 210. 4,6 C

*This topic is dealt with in an Appendix to the chapter.

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Statement of Cash Flows

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

S.O. 1 S.O. 2 S.O. 2 (cont.) S.O. 2 (cont.) S.O. 3 Item Type Item Type Item Type Item Type Item Type

1. TF 6. TF 54. MC 74. MC 20. TF2. TF 7. TF 55. MC 75. MC 21. TF3. TF 8. TF 56. MC 76. MC 87. MC4. TF 9. TF 57. MC 77. MC 88. MC

5. TF 10. TF 58 MC 78. MC 89. MC42. MC 11. TF 59. MC 79. MC 90. MC43. MC 12. TF 60. MC 80. MC 91. MC44. MC 13. TF 61. MC 81. MC 92. MC45. MC 14. TF 62. MC 82. MC 93. MC46. MC 15. TF 63. MC 83. MC47. MC 16. TF 64. MC 84. MC

191. C 17. TF 65. MC 85. MC18. TF 66. MC 86. MC19. TF 67. MC 169. Be48. MC 68. MC 170. Be49. MC 69. MC 171. Be50. MC 70. MC 192. C51. MC 71. MC52. MC 72. MC53. MC 73. MC

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S.O. 4 S.O. 4 (cont.) S .O. 5 S.O. 6* S.O. 6* (cont.) Item Type Item Type Item Type Item Type Item Type22. TF 126. MC 29. TF 34. TF 161. MC23. TF 127. MC 30. TF 35. TF 162. MC24. TF 128. MC 31. TF 36. TF 163. MC25. TF 129. MC 32. TF 37. TF 164. MC26. TF 130. MC 33. TF 38. TF 165. MC27. TF 131. MC 147. MC 39. TF 166. MC28. TF 132. MC 148. MC 40. TF 167. MC

94. MC 133. MC 149. MC 41. TF 168. MC 95. MC 134. MC 150. MC 127. MC 176. Be 96. MC 135. MC 151. MC 128. MC 177. Be 97. MC 136. MC 152. MC 129. MC 178. Be98. MC 137. MC 184. Ex 130. MC 179. Be99. MC 138. MC 185. Ex 131. MC 180. Be

100. MC 139. MC 188. Ex 132. MC 188. Ex101. MC 140. MC 199. C 133. MC 189. Ex102. MC 141. MC 200. C 134. MC 190. Ex103. MC 142. MC 135. MC 201. C104. MC 143. MC 136. MC 202. C105. MC 144. MC 137. MC 203. C106. MC 145. MC 138. MC 204. C107. MC 146. MC 139. MC108. MC 172 Be 140. MC109. MC 173. Be 153. MC110. MC 174. Be 154. MC111. MC 175. Be 155. MC112. MC 181. Ex 156. MC113. MC 182. Ex 157. MC114. MC 183. Ex 158. MC115. MC 184. Ex 159. MC116. MC 185. Ex 160. MC117. MC 186. Ex118. MC 187. Ex119. MC 196. C120. MC 197. C121. MC 198. C122. MC123. MC124. MC125. MC

Note: TF = True-False C = Completion Be = Brief ExerciseMC = Multiple Choice Ex = Exercise

The chapter also contains two sets of ten Matching questions each and seven Short-Answer Essay questions.

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CHAPTER STUDY OBJECTIVES

1. Indicate the usefulness of the statement of cash flows. The statement of cash flows provides information about the cash receipts, cash payments, and net change in cash resulting from the operating, investing, and financing activities of a company during the period.

2. Distinguish among operating, investing, and financing activities. Operating activities include the cash effects of transactions that enter into the determination of net income. Investing activities involve cash flows resulting from changes in investments and long-term asset items. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items.

3. Explain the impact of the product life cycle on a company’s cash flows. During the introductory stage, cash provided by operating activities and cash from investing are negative, and cash from financing is positive. During the growth stage, cash provided by operating activities becomes positive. During the maturity stage, cash provided by operating activities exceeds investing needs, so the company begins to retire debt. During the decline stage, cash provided by operating activities is reduced, cash from investing becomes positive, and cash from financing becomes more negative.

4. Prepare a statement of cash flows using the indirect method. The preparation of a statement of cash flows involves three major steps: (1) Determine net cash provided (used) by operating activities. (2) Determine net cash provided (used) by investing and financing activities. (3) Determine the net increase or decrease in cash. Under the indirect method, accrual-basis net income is adjusted to net cash provided by operating activities.

5. Use the statement of cash flows to evaluate a company. A number of measures can be derived by using information from the statement of cash flows as well as the other required financial statements. Free cash flow indicates the amount of cash a company generated during the current year that is available for the payment of dividends or for expansion. Liquidity can be measured with the current cash debt coverage ratio (cash provided by operating activities divided by average current liabilities). Solvency can be measured by the cash debt coverage ratio (cash provided by operating activities divided by average total liabilities).

*6. Prepare a statement of cash flows using the direct method. The preparation of the statement of cash flows involves three major steps: (1) Determine net cash provided (used) by operating activities. (2) Determine net cash provided (used) by investing and financing activities. (3) Determine the net increase or decrease in cash. The direct method reports cash receipts less cash payments to arrive at net cash provided by operating activities.

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TRUE-FALSE STATEMENTS

1. The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

2. For external reporting, a company must prepare either an income statement or a statement of cash flows, but not both.

3. A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

4. The primary purpose of the statement of cash flows is to provide information about a company’s cash receipts and cash payments during an accounting period.

5. A statement of cash flows indicates the sources and uses of cash during a period.

6. The statement of cash flows shows the effects on net income of a company’s operating, investing, and financing activities for an accounting period.

7. Operating activities include the cash effects of transactions that create revenues and expenses.

8. 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.

9. The statement of cash flows explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations.

10. In preparing a statement of cash flows, the issuance of debt should be reported separately from the retirement of debt.

11. Noncash investing and financing activities must be reported in the body of a statement of cash flows.

12. Noncash investing and financing transactions, such as the exchange of common stock to purchase assets, represent significant investing and financing activities and are reflected either in a schedule separate from the statement of cash flows or in a separate note to the financial statements.

13. The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.

14. The sale of land for cash would be classified as a cash inflow from an investing activity.

15. Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.

16. The receipt of dividends from long-term investments in stock is classified as a cash inflow from investing activities.

17. The payment of interest on bonds payable is classified as a cash outflow from operating activities.

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18. Any item that appears on the income statement would be considered as either a cash inflow or cash outflow from operating activities.

19. The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

20. The growth phase of the product life cycle occurs when the company is purchasing fixed assets and beginning to produce and sell.

21. During the maturity phase, cash from operations and net income are approximately the same.

22. A loss on sale of equipment is added to net income in determining cash provided by operations under the indirect method.

23. Under the indirect method, gains and losses from the sale of equipment used in operations would be included in the cash flows from operating activities section on the statement of cash flows.

24. Cash provided by operations is generally equal to operating income.

25. Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.

26. A major disadvantage of the indirect method of reporting cash flows from operating activities is that the difference between the net amount of cash flows from operating activities and net income is not emphasized.

27. Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.

28. In preparing a statement of cash flows, an increase in the Common Stock and Treasury Stock accounts during a period would be an investing activity.

29. Free cash flow is cash from operations less dividends.

30. The current cash debt coverage ratio is computed by dividing net cash provided by operations by average total liabilities.

31. The cash debt coverage ratio indicates a company’s ability to repay its liabilities from cash generated from operations.

32. The cash basis measure of liquidity is the cash debt coverage ratio.

33. The current cash debt coverage ratio is considered a better representative of liquidity than the current ratio because it involves the entire year rather than a balance at one point in time.

*34. During a period, cost of goods sold + an increase in inventory + an increase in accounts payable = cash paid to suppliers.

*35. During the year, Income Tax Expense amounted to $20,000 and Income Taxes Payable increased by $3,000; therefore, the cash paid for income taxes was $17,000.

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*36. In computing net cash flow from operating activities using the direct method, each item in the income statement is adjusted from the accrual basis to the cash basis.

*37. An increase in inventory would be added to cost of goods sold to determine net purchases for the period.

*38. As an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be added to operating expenses to determine cash payments for operating expenses.

*39. As an adjustment to operating expenses per the income statement, an increase in accrued liabilities would be deducted from operating expenses to determine cash payments for operating expenses.

*40. Free cash flow is measured in terms of a percentage.

*41. Using the direct method, major classes of investing and financing activities are listed in the operating activities section.

Answers to True-False Statements1. T 8. F 15. F 22. T 29. F *36. T2. F 9. T 16. F 23. T 30. F *37. T3. F 10. T 17. T 24. F 31. T *38. F4. T 11. F 18. F 25. T 32. F *39. T5. T 12. T 19. T 26. F 33. T *40. F6. F 13. F 20. F 27. F *34. F *41. F7. T 14. T 21. T 28. F *35. T

MULTIPLE CHOICE QUESTIONS

42. The statement of cash flowsa. must be prepared on a daily basis.b. summarizes the operating, financing, and investing activities of an entity.c. is another name for the income statement.d. is a special section of the income statement.

43. Which one of the following items is not generally used in preparing a statement of cash flows?a. Adjusted trial balanceb. Comparative balance sheetsc. Current income statementd. Additional information

44. The primary purpose of the statement of cash flows is toa. provide information about the investing and financing activities during a period.b. prove that revenues exceed expenses if there is a net income.c. provide information about the cash receipts and cash payments during a period.d. facilitate banking relationships.

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45. If a company reports a net loss, ita. may still have a net increase in cash.b. will not be able to pay cash dividends.c. will not be able to get a loan.d. will not be able to make capital expenditures.

46. In addition to the three basic financial statements, which of the following is also a required financial statement?a. The "Cash Budget"b. Statement of Cash Flowsc. Statement of Cash Inflows and Outflowsd. The "Cash Reconciliation"

47. The statement of cash flows will not report thea. amount of checks outstanding at the end of the period.b. sources of cash in the current period.c. uses of cash in the current period.d. change in the cash balance for the current period.

48. The acquisition of land by issuing common stock isa. a noncash transaction that is not reported in the body of a statement of cash flows.b. a cash transaction and would be reported in the body of a statement of cash flows.c. a noncash transaction and would be reported in the body of a statement of cash

flows.d. only reported if the statement of cash flows is prepared using the direct method.

49. The order of presentation of activities on the statement of cash flows isa. operating, investing, and financing.b. operating, financing, and investing.c. financing, operating, and investing.d. financing, investing, and operating.

50. Financing activities involvea. lending money.b. acquiring investments.c. issuing debt.d. acquiring long-lived assets.

51. Investing activities includea. collecting cash on loans made.b. obtaining cash from creditors.c. obtaining capital from owners.d. repaying money previously borrowed.

52. Generally, the most important category on the statement of cash flows is cash flows froma. operating activities.b. investing activities.c. financing activities.d. significant noncash activities.

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53. The category that is generally considered to be the best measure of a company's ability to continue as a going concern isa. cash flows from operating activities.b. cash flows from investing activities.c. cash flows from financing activities.d. usually different from year to year.

54. Cash receipts from interest and dividends are classified asa. financing activities.b. investing activities.c. operating activities.d. either financing or investing activities.

Use the following information for questions 55-66.

Garden Corporation engaged in the following transactions. For each transaction, indicate where, if at all, it would be classified on the statement of cash flows. Assume the indirect method is used.

55. Declared and issued a stock dividend.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

56. Collected accounts receivable.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

57. Purchased inventory with cash.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

58. Retired long-term debt with cash.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

59. Paid interest on note.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

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60. Issued stock for equipment.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

61. Received dividends on securities held.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

62. Paid income taxes.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

63. Issued common stock for cash.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

64. Purchased land for cash.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

65. Purchased land and building with a mortgage.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

66. Purchased treasury stock with cash.a. Operating activities sectionb. Investing activities sectionc. Financing activities sectiond. Does not represent a cash flow

67. If a company has both an inflow and outflow of cash related to property, plant, and equipment, the ______________ in the investing activities section.a. two cash effects must be netted and presented as one itemb. cash inflow and cash outflow must be reported separatelyc. cash outflow is only is presented.d. cash inflow and cash outflow can either be reported separately or presented as one

item.

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68. Of the items below, the one that appears first on the statement of cash flows isa. noncash investing and financing activities.b. net increase (decrease) in cash.c. cash at the end of the period.d. cash at the beginning of the period.

69. Which of the following transactions does not affect cash during a period?a. Write-off of an uncollectible accountb. Collection of an accounts receivablec. Sale of treasury stockd. Redeeming bonds before maturity

70. Significant noncash transactions would not includea. conversion of bonds into common stock.b. asset acquisition through bond issuance.c. treasury stock acquisition.d. exchange of plant assets.

71. Preferred stock issued in exchange for land would be reported in the statement of cash flows ina. the cash flows from financing activities section.b. the cash flows from investing activities section.c. a separate schedule or note to the financial statements.d. the cash flows from operating section.

72. In preparing a statement of cash flows, a conversion of bonds into common stock will be reported ina. the financing section.b. the "extraordinary" section.c. a separate schedule or note to the financial statements.d. the stockholders' equity section.

73. On the statement of cash flows, the cash flows from operating activities section would includea. receipts from the issuance of capital stock.b. receipts from the sale of investments.c. payments for the acquisition of investments.d. cash receipts from sales activities.

74. Cash flows from operating activities, as reported on the statement of cash flows under the indirect method, would includea. receipts from the sale of investments.b. net income.c. payments for dividends.d. receipts from the issuance of capital stock.

75. The issuance of debt to purchase assets would be classified as a(n)a. operating activity. b. investing activity.c. financing activity.d. none of the above.

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76. The payment of a cash dividend would be classified as a(n)a. operating activity. b. investing activity.c. financing activity. d. significant noncash activity.

77. Which of the following activities would be classified as an investing activity?a. Cash received from interest revenue. b. Cash paid (loaned) to a borrower as a loan. c. Cash received from dividend revenue. d. Cash paid to reacquire capital stock.

Use the following information for questions 78-80.

Joy Elle’s Vegetable Market had the following transactions during 2007:

1. Issued $25,000 of par value common stock for cash.2. Recorded and paid wages expense of $10,000. 3. Acquired land by issuing common stock of par value $50,000.4. Declared and paid a cash dividend of $1,000. 5. Sold a long-term investment (cost $3,000) for cash of $3,000. 6. Recorded cash sales of $20,000. 7. Bought inventory for cash of $2,000.8. Acquired an investment in IBM stock for cash of $6,000.9. Converted bonds payable to common stock in the amount of $10,000.

10. Repaid a 6 year note payable in the amount of $11,000.

78. What is the net cash provided by operating activities?a. $20,000.b. $18,000.c. $10,000.d. $8,000.

79. What is the net cash provided by financing activities?a. $13,000.b. $25,000.c. $14,000.d. $9,000.

80. What is the net cash provided by investing activities?a. $6,000.b. $16,000c. ($3,000).d. $3,000.

81. Morris Company issued 10,000 shares of $1 par common stock for $25 per share during 2007. The company paid dividends of $24,000 and issued long-term notes payable of $220,000 during the year. What amount of cash flows from financing activities will be reported on the statement of cash flows?

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a. $6,000 net cash inflow.b. $226,000 net cash inflow.c. $470,000 net cash outflow.d. $446,000 net cash inflow.

82. Miller Company purchased treasury stock with a cost of $15,000 during 2007. During the year, the company paid dividends of $20,000 and issued bonds payable for proceeds of $816,000. Cash flows from financing activities for 2007 totala. $796,000 net cash inflow.b. $811,000 net cash inflow.c. $5,000 net cash outflow.d. $781,000 net cash inflow.

83. Which of the following is the first step in preparing the statement of cash flows?a. Determine the net cash provided by operating activities.b. Determine the net income.c. Determine net cash provided by investing and financing activities.d. Determine the net increase (decrease) in cash.

84. Cline Company issued common stock for proceeds of $186,000 during 2007. The company paid dividends of $33,000 and issued a long-term note payable for $45,000 in exchange for equipment during the year. The company also purchased treasury stock that had a cost of $7,000. The financing section of the statement of cash flows will report net cash inflows ofa. $146,000.b. $202,000.c. $153,000.d. $179,000.

85. During 2007, Dole Company sold equipment with a book value of $90,000 for proceeds of $104,000. The company purchased new equipment for $240,000 by signing a long-term note payable. No other transactions impacted long-term asset accounts during 2007. The investing section of the statement of cash flows will reporta. net cash outflows of $226,000.b. net cash outflows of $136,000.c. net cash inflows of $104,000.d. net cash inflows of $14,000.

86. In Gentry Company, land decreased $120,000 because of a cash sale for $120,000, the equipment account increased $40,000 as a result of a cash purchase, and Bonds Payable increased $130,000 from issuance for cash at face value. The net cash provided by investing activities isa. $120,000.b. $210,000.c. $80,000. d. $90,000.

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87. In order to determine net cash provided by operating activities, a company must convert net income from an accrual basis to a cash basis undera. the direct method only.b. the indirect method only.c. both the direct method and the indirect method.d. neither the direct nor the indirect method.

88. Cash from investing becomes positive and cash from financing becomes more negative during thea. introductory phase.b. growth phase.c. maturity phase.d. decline phase.

89. Cash generated from operations exceeds investing needs, and the company can begin retiring debt during thea. introductory phase.b. growth phase.c. maturity phase.d. decline phase.

90. Collections on accounts receivable will lag behind sales, and accrual sales during a period will exceed cash collections during the a. introductory phase.b. growth phase.c. maturity phase.d. decline phase.

91. A company would be expected to generate small amounts of cash from operations during thea. introductory phase.b. growth phase.c. maturity phase.d. decline phase.

92. The phase in the product life cycle when a company is purchasing fixed assets and beginning to produce and sell is thea. introductory phase.b. growth phase.c. maturity phase.d. decline phase.

93. Cash from operations and net income are approximately the same during thea. introductory phase.b. growth phase.c. maturity phase.d. decline phase.

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94. Which one of the following items is not necessary in preparing a statement of cash flows?a. Determine the change in cashb. Determine the cash provided by operationsc. Determine cash from financing and investing activitiesd. Determine the cash in each of the bank accounts

95. If accounts receivable have increased during the perioda. 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.

96. Accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at the beginning and end of the year, respectively. Income reported on the income statement for the year was $240,000. Exclusive of the effect of other adjustments, the cash flows from operating activities to be reported on the statement of cash flows isa. $240,000.b. $250,000.c. $310,000.d. $230,000.



99. If accounts payable have increased during a perioda. 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.

100. Which one of the following affects cash during a period?a. Recording depreciation expenseb. Declaration of a cash dividendc. Write-off of an uncollectible account receivabled. Payment of an accounts payable

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101. In calculating cash flows from operating activities using the indirect method, a gain on the sale of equipment isa. 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.

102. In calculating cash flows from operating activities using the indirect method, a loss on the sale of equipment isa. 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.

103. Bilton Company reported net income of $30,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year isa. $25,000.b. $45,000.c. $29,000.d. $30,000.

104. Wilton Company reported net income of $40,000 for the year. During the year, accounts receivable increased by $7,000, accounts payable decreased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year isa. $30,000.b. $45,000.c. $39,000.d. $35,000

105. Loster Company reported a net loss of $10,000 for the year ended December 31, 2007. During the year, accounts receivable decreased $5,000, merchandise inventory increased $8,000, accounts payable increased by $10,000, and depreciation expense of $5,000 was recorded. During 2007, operating activitiesa. used net cash of $2,000.b. used net cash of $8,000.c. provided net cash of $2,000.d. provided net cash of $8,000.

106. Buster Company reported a net loss of $3,000 for the year ended December 31, 2007. During the year, accounts receivable decreased $7,000, merchandise inventory increased $5,000, accounts payable increased by $10,000, and depreciation expense of $5,000 was recorded. During 2007, operating activitiesa. used net cash of $1,000.b. used net cash of $14,000.c. provided net cash of $14,000.d. provided net cash of $9,000.

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107. Starting with net income and adjusting it for items that affected reported net income but which did not affect cash is called thea. direct method.b. indirect method.c. working capital method.d. cost-benefit method.

108. In calculating net cash provided by operating activities using the indirect method, an increase in prepaid expenses during a period isa. deducted from net income.b. added to net income.c. ignored because it does not affect income.d. ignored because it does not affect expenses.

109. Using the indirect method, patent amortization expense for the perioda. is deducted from net income.b. causes cash to increase.c. causes cash to decrease.d. is added to net income.

110. In developing the cash flows from operating activities, most companies in the United Statesa. use the direct method.b. use the indirect method.c. present both the indirect and direct methods in their financial reports.d. prepare the operating activities section on the accrual basis.

111. Which of the following would be subtracted from net income using the indirect method?a. Depreciation expenseb. An increase in accounts receivablec. An increase in accounts payabled. A decrease in prepaid expenses

112. Which of the following would be added to net income using the indirect method?a. An increase in accounts receivableb. An increase in prepaid expensesc. Depreciation expensed. A decrease in accounts payable

113. Which of the following would not be an adjustment to net income using the indirect method?a. Depreciation Expenseb. An increase in Prepaid Insurancec. Amortization Expensed. An increase in Land

114. 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.

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d. subtraction from cash flow from investing activities.115. Using the indirect method, which of the following adjustments to convert net income to net

cash provided by operating activities is correct?

Add to Net Income Deduct from Net Incomea. Accounts Receivable increase decreaseb. Prepaid Expenses increase decreasec. Inventory decrease increased. Taxes Payable decrease increase

116. Using the indirect method, which of the following adjustments to convert net income to net cash provided by operating activities is incorrect?

Add to Net Income Deduct from Net Incomea. Accounts Receivable decrease increaseb. Prepaid Expenses increase decreasec. Inventory decrease increased. Accounts Payable increase decrease

117. Which of the following adjustments to convert net income to net cash provided by operating activities is not added to net income?a. Gain on Sale of Equipmentb. Depreciation Expensec. Patent Amortization Expensed. Depletion Expense

118. Using the indirect method, if equipment is sold at a gain, thea. 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.

119. On the statement of cash flows using the indirect method, patent amortization expense willa. be added to net income in the operating section.b. be deducted from net income in the operating section.c. appear as an inflow of cash in the investing section.d. appear as an outflow of cash in the investing section.

120. A company had net income of $705,000. Depreciation expense is $78,000. During the year, accounts receivable and inventory increased $45,000 and $120,000, respectively. Prepaid expenses and accounts payable decreased $6,000 and $12,000, respectively. There was also a loss on the sale of equipment of $9,000. How much cash was provided by operating activities?a. $603,000.b. $621,000.c. $843,000.d. $879,000.

121. A company had net income of $242,000. Depreciation expense is $26,000. During the year, accounts receivable and inventory increased $15,000 and $40,000, respectively. Prepaid expenses and accounts payable decreased $2,000 and $4,000, respectively.

12-19


There was also a loss on the sale of equipment of $3,000. How much cash was provided by operating activities?

12-20


a. $214,000.b. $207,000.c. $274,000.d. $295,000.

122. The net income reported on the income statement for the current year was $840,000. Depreciation recorded on plant assets was $38,000. Accounts receivable and inventories increased by $8,000 and $32,000, respectively. Prepaid expenses and accounts payable decreased by $4,000 and $44,000, respectively. How much cash was provided by operating activities?a. $760,000b. $840,000c. $798,000d. $984,000

123. The net income reported on the income statement for the current year was $205,000. Depreciation recorded on plant assets was $38,000. Accounts receivable and inventories increased by $2,000 and $8,000, respectively. Prepaid expenses and accounts payable decreased by $1,000 and $11,000, respectively. How much cash was provided by operating activities?a. $185,000b. $223,000c. $205,000d. $239,000

124. The net income reported on the income statement for the current year was $220,000. Depreciation was $50,000. Accounts receivable and inventories decreased by $10,000 and $30,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $1,000 and $8,000. How much cash was provided by operating activities?a. $281,000b. $317,000c. $301,000d. $239,000

125. The net income reported on the income statement for the current year was $210,000. Depreciation was $25,000. Accounts receivable and inventories decreased by $5,000 and $15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $500 and $4,000. How much cash was provided by operating activities?a. $240,500b. $250,500c. $258,500d. $219,500

126. The indirect and direct methods of preparing the statement of cash flows are identical except for thea. significant noncash activity section.b. operating activities section.c. investing activities section.d. financing activities section.

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127. If $180,000 of bonds are issued during the year but $300,000 of old bonds are retired during the year, the statement of cash flows will show a(n)a. net increase in cash of $120,000.b. net decrease in cash of $120,000.c. increase in cash of $180,000 and a decrease in cash of $300,000.d. net loss on retirement of bonds of $120,000.

128. If $120,000 of bonds are issued during the year but $200,000 of old bonds are retired during the year, the statement of cash flows will show a(n)a. net increase in cash of $80,000.b. net decrease in cash of $80,000.c. increase in cash of $120,000 and a decrease in cash of $200,000.d. net loss on retirement of bonds of $80,000.

129. Which of the following changes in retained earnings during a period will be reported in the financing activities section of the statement of cash flows?

1. Declaration and payment of a cash dividend during the period2. Net income for the period

a. 1b. 2c. Neither 1 nor 2d. Both 1 and 2

130. The statement of cash flowsa. is prepared instead of an income statement under generally accepted accounting

principles.b. is used to assess an entity's ability to pay dividends and meet obligations.c. is prepared from comparative income statements.d. reflects earnings per share figures on a cash basis and on an accrual basis in the

body of the statement.

131. In preparing the statement of cash flows, determining the net increase or decrease in cash requires the use ofa. the adjusted trial balance.b. the current period's retained earnings statement.c. a comparative balance sheet.d. a comparative income statement.

132. To determine the net cash provided (used) by operating activities, it is necessary to analyzea. the current year's income statement.b. a comparative balance sheet.c. additional information.d. all of the above.

133. Which of the following would not be needed to determine net cash provided by operating activities?a. Depreciation expenseb. Change in accounts receivablec. Payment of cash dividends

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d. Change in prepaid expenses

134. When equipment is sold for cash, the amount received is reflected as a casha. inflow in the operating section.b. inflow in the financing section.c. inflow in the investing section.d. outflow in the operating section.

135. The statement of cash flows will not provide insight intoa. why dividends were not increased.b. whether cash flow is greater than net income.c. the exact proceeds of a future bond issue.d. how the retirement of debt was accomplished.

136. If a gain of $18,000 is incurred in selling (for cash) office equipment having a book value of $120,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows isa. $102,000.b. $120,000.c. $138,000.d. $18,000.

137. If a loss of $31,000 is incurred in selling (for cash) office equipment having a book value of $100,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows isa. $69,000.b. $100,000.c. $131,000.d. $31,000.

138. If a gain of $10,000 is incurred in selling (for cash) office equipment having a book value of $100,000, the total amount reported in the cash flows from investing activities section of the statement of cash flows isa. $90,000.b. $110,000.c. $100,000.d. $10,000.

139. 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 isa. $37,500.b. $50,000.c. $62,500.d. $12,500.

140. Land costing $125,000 was sold for $155,000 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. $125,000b. $155,000

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c. $185,000d. $30,000

141. When using the indirect method to compute cash provided by operating activitiesa. income taxes paid may be ignored.b. amortization expense is added to net income.c. decreases in inventory are subtracted from net income.d. increases in accounts receivable are added to net income.

142. A transaction involving a gain on the sale of equipment affects cash provided (used) bya. financing and investing activities.b. operating and financing activities.c. operating and investing activities.d. operating, financing, and investing activities.

143. Harbor Company reported net income of $60,000 for the year ended December 31, 2007. During the year, inventories decreased by $12,000, accounts 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 2007 using the indirect method wasa. $119,000.b. $65,000.c. $77,000.d. $55.000.

144. All of the following adjustments are added to net income in computing net cash provided by operating activities excepta. amortization expense.b. a decrease in accounts receivable.c. an increase in accounts payable.d. an increase in prepaid expenses.

145. All of the following adjustments would be deducted in determining net cash provided by operating activities except a(n)a. increase in inventories.b. depreciation expense.c. gain on sale of plant assets.d. decrease in accrued expenses payable.

146. Each of the following is an adjustment to convert net income to net cash provided by operating activities excepta. adding back noncash expenses.b. adding gains and deducting losses.c. analyzing changes to noncash current asset and current liability accounts.d. All of the above are adjustments.

147. The current cash debt coverage ratio is computed by dividinga. average current liabilities by cash provided by operating activities.b. cash provided by operating activities by average current liabilities.c. ending current liabilities by cash provided by operating activities.d. cash provided by operating activities by ending current liabilities.

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Statement of Cash Flows 12-25


Use the following information for questions 148-149

DV’s Pest Control Products has the following information available:

Net Income $15,000Average Total Liabilities 40,000Average Current Liabilities 18,000Cash Provided by Operations 21,000Cash Sales 65,000Capital Expenditures 11,000Dividends Paid 3,000

148. What is the current cash debt coverage ratio?a. 1.167 timesb. .525 times c. .833 times d. .333 times

149. What is the cash debt coverage ratio?a. .375 timesb. 1.17 timesc. .525 timesd. 1.625 times

150. The current cash debt coverage ratio is used to evaluatea. solvency.b. profitability.c. liquidity.d. earning power.

151. The cash debt coverage ratio is computed by dividing net cash provided by operating activities bya. average current liabilities.b. net sales.c. average long-term liabilities.d. average total liabilities.

152. Free cash flow provides an indication of a company’s ability toa. generate cash to invest in new capital expenditures.b. generate net income.c. generate cash to pay dividends.d. both (a) and (c).

*153. Cent Company reports a $24,000 increase in inventory and a $6,000 increase in accounts payable during the year. Cost of goods sold for the year was $180,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers werea. $180,000.b. $198,000.c. $150,000.d. $162,000.

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*154. The cost of goods sold during the year was $165,000. Merchandise inventory decreased by $6,000 during the year and accounts payable decreased by $3,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise totala. $168,000.b. $162,000.c. $156,000.d. $174,000.

*155. Bent Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts payable during the year. Cost of Goods Sold for the year was $150,000. Using the direct method of reporting cash flows from operating activities, cash payments made to suppliers werea. $150,000.b. $165,000.c. $175,000.d. $135,000.

*156. The cost of goods sold during the year was $220,000. Merchandise inventory increased by $8,000 during the year and accounts payable decreased by $4,000 during the year. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise totala. $224,000.b. $216,000.c. $208,000.d. $232,000.

*157. Simon Company had credit sales of $1,050,000. The beginning accounts receivable balance was $60,000 and the ending accounts receivable balance was $210,000. Using the direct method of reporting cash flows from operating activities, what were the cash collections from customers during the period?a. $1,200,000b. $1,050,000c. $900,000d. $1,110,000

*158. During 2007, Unruh Company had $160,000 in cash sales and $1,400,000 in credit sales. The accounts receivable balances were $180,000 and $212,000 at December 31, 2006 and 2007, respectively. Using the direct method of reporting cash flows from operating activities, what was the total cash collected from all customers during 2007?a. $1,368,000b. $1,592,000c. $1,560,000d. $1,528,000

*159. The following information relates to Klugman Company:

Prepaid Insurance, December 31, 2006 $161,000Prepaid Insurance, December 31, 2007 140,000Insurance expense for 2007 700,000

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Test Bank for Financial Accounting: Tools for Business Decision Making, Fourth Edition12-28


Using the direct method of reporting cash flows from operating activities, what was the amount of cash paid for insurance premiums by Klugman during 2007?a. $679,000b. $721,000c. $840,000d. $861,000

*160. Cash receipts from customers are greater than sales revenues when there is a(n)a. increase in accounts receivable.b. decrease in accounts receivable.c. increase in cost of goods sold.d. decrease in cost of goods sold.

*161. Wynn Company had an increase in inventory of $80,000. The cost of goods sold was $180,000. There was a $20,000 decrease in accounts payable from the prior period. Using the direct method of reporting cash flows from operating activities, what were Wynn's cash payments to suppliers?a. $280,000b. $120,000c. $240,000d. $200,000

*162. Which of the following items does not appear in the statement of cash flows under the direct method?a. Cash payments to suppliersb. Cash collections from customersc. Depreciation Expensed. Cash from the sale of equipment

*163. Logan Company has other operating expenses of $260,000. There has been a decrease in prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 larger than in the prior period. Using the direct method of reporting cash flows from operating activities, what were Logan's cash payments for operating expenses?a. $248,000b. $252,000c. $220,000d. $300,000

*164. Miley Corporation shows income tax expense of $210,000. There has been a $15,000 decrease in federal income taxes payable and a $21,000 increase in state income taxes payable during the year. Using the direct method of reporting cash flows from operating activities, what was Miley's cash payment for income taxes?a. $210,000b. $204,000c. $174,000d. $246,000

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*165. Which of the following would not appear in the operating activities section of a statement of cash flows prepared under the direct method?a. Cash receipts from customersb. Cash paid for income taxesc. Gain on sale of equipmentd. Cash paid to employees

*166. Which of the following statements 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 external reporting

purposes.

*167. Cronen Company reports the following:

End of Year Beginning of YearInventory $25,000 $40,000Accounts Payable 30,000 10,000

If cost of goods sold for the year is $180,000, the amount of cash paid to suppliers using the direct method isa. $175,000.b. $185,000.c. $145,000.d. $215,000.

*168. During the year, Salaries Payable decreased by $6,000. Using the direct method of reporting cash flows from operating activities, if Salary Expense amounted to $190,000 for the year, the cash paid to employees (including deductions from gross pay) isa. $196,000.b. $190,000.c. $184,000.d. $202,000.

12-30


Answers to Multiple Choice Questions42. b 61. a 80. c 99. c 118. d 137. a *156. d43. a 62. a 81. d 100. d 119. a 138. b *157. c44. c 63. c 82. d 101. b 120. b 139. a *158. d45. a 64. b 83. a 102. a 121. a 140. b *159. a46. b 65. d 84. a 103. a 122. c 141. b *160. b47. a 66. c 85. c 104. d 123. b 142. c *161. a48. a 67. b 86. c 105. c 124. b 143. b *162. c49. a 68. b 87. c 106. c 125. c 144. d *163. c50. c 69. a 88. d 107. b 126. b 145. b *164. b51. a 70. c 89. c 108. a 127. c 146. b *165. c52. a 71. c 90. b 109. d 128. c 147. b *166. b53. a 72. c 91. b 110. b 129. a 148. a *167. c.54. c 73. d 92. a 111. b 130. b 149. c *168. a55. d 74. b 93. c 112. c 131. c 150. c56. a 75. d 94. d 113. d 132. d 151. d57. a 76. c 95. b 114. b 133. c 152. d58. c 77. b 96. b 115. c 134. c *153. b59. a 78. d 97. d 116. b 135. c *154. b60. d 79. a 98. c 117. a 136. c *155. c

BRIEF EXERCISES

Be. 169

Selected transactions of the Davis Company are listed below.

1. Common stock is sold for cash above par value.2. Bonds payable are issued for cash at a discount.3. Interest on a short-term note receivable is collected.4. Merchandise is sold to customers for cash.5. Cash is paid to purchase inventory.6. Equipment is purchased by signing a 3-year, 10% note payable.7. Cash dividends on common stock are declared and paid.8. One hundred shares of XYZ common stock are purchased for cash.9. Land is sold for cash at book value.

10. Bonds payable are converted into common stock.

InstructionsClassify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.

Solution 169 (8-11 min.)

1. (c) Financing activity2. (c) Financing activity3. (a) Operating activity4. (a) Operating activity5. (a) Operating activity

6. (d) Noncash activity7. (c) Financing activity8. (b) Investing activity9. (b) Investing activity

10. (d) Noncash activity

12-31


Be. 170

Selected transactions for the Eldon Company are listed below.

1. Collected accounts receivable.2. Declared and paid dividends on common stock.3. Sold long-term investments for cash.4. Issued stock for equipment.5. Repaid five year note payable.6. Paid employee wages.7. Converted bonds payable to common stock.8. Acquired long-term investment with cash.9. Sold buildings and equipment for cash.

10. Sold merchandise to customers.

InstructionsClassify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing activity, or (d) a noncash investing and financing activity.


1. (a) Operating activity2. (c) Financing activity3. (b) Investing activity4. (d) Noncash activity5. (c) Financing activity

6. (a) Operating activity7. (d) Noncash activity8. (b) Investing activity9. (b) Investing activity

10. (a) Operating activity

Be. 171

(a) Identify several alternatives for presenting significant noncash activities in financial state-ments.

(b) Give three examples of significant noncash activities.


(a) Significant noncash activities may appear at the bottom of the statement of cash flows as a separate schedule under the heading "Noncash investing and financing activities." They may also be presented in a separate note or supplementary schedule to the financial statements.

(b) 1. Direct issuance of common stock to purchase assets2. Conversion of bonds into common stock3. Direct issuance of debt to purchase assets4. Exchanges of plant assets

12-32

Be. 172

Menschken Company reported net income of $150,000 for the current year. Depreciation recorded on buildings and equipment amounted to $65,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year Beginning of YearCash $20,000 $15,000Accounts receivable 19,000 32,000Inventories 50,000 65,000Accounts payable 12,000 18,000

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


Net income ......................................................................................................... $150,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense ................................................................................ 65,000Decrease in accounts receivable ............................................................... 13,000Decrease in inventories ............................................................................. 15,000Decrease in accounts payable .................................................................. (6,000)Net cash provided by operating activities .................................................. $237,000

Be. 173

Assume the indirect method is used to compute cash flows from operations. For each item listed below, indicate the effect on net income in arriving at cash flows from operations by choosing one of the following code letters.

CodeCash Flows From Operating Activities

Add to Net Income ADeduct from Net Income D

1. Increase in accounts receivable2. Increase in inventory3. Decrease in prepaid expenses4. Decrease in accounts payable5. Increase in accrued liabilities6. Increase in income taxes payable7. Depreciation expense8. Loss on sale of investment9. Gain on disposal of equipment

10. Amortization expense


Solution 173 (10 min.)

1. D 6. A2. D 7. A3. A 8. A4. D 9. D5. A 10. A

Be. 174

Assuming a statement of cash flows is prepared using the indirect method, 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.

CodeCash Flows From Operating Activities

Add to Net Income ADeduct from Net Income D

Cash Flows From Investing Activities IACash Flows From Financing Activities FA

Category

1. Common stock is issued for cash at an amount above par value. ______

2. Merchandise inventory increased during the period. ______

3. Depreciation expense recorded for the period. ______

4. Building was purchased for cash. ______

5. Bonds payable were acquired and retired at their carrying value. ______

6. Accounts payable decreased during the period. ______

7. Prepaid expenses decreased during the period. ______

8. Treasury stock was acquired for cash. ______

9. Land is sold for cash at an amount equal to book value. ______

10. Patent amortization expense recorded for a period. ______


Category

1. Common stock is issued for cash at an amount above par value. FA

2. Merchandise inventory increased during the period. D

3. Depreciation expense recorded for the period. A

4. Building was purchased for cash. IA

5. Bonds payable were acquired and retired at their carrying value. FA

6. Accounts payable decreased during the period. D

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Solution 174 (cont.)

7. Prepaid expenses decreased during the period. A

8. Treasury stock was acquired for cash. FA

9. Land is sold for cash at an amount equal to book value. IA

10. Patent amortization expense recorded for a period. A

Be. 175

Dutton Company prepared the tabulation below at December 31, 2007.

Net Income ............................................................................................................ $275,000

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

Depreciation expense, $35,000 .................................................................... ________

Increase in accounts receivable, $55,000 .................................................... ________

Decrease in inventory, $12,000 .................................................................... ________

Increase in accounts payable, $6,600 .......................................................... ________

Increase in prepaid expenses, $4,000 ......................................................... ________

Decrease in income taxes payable, $1,500 .................................................. ________

Gain on sale of land, $5,000 ........................................................................ ________

Net cash provided (used) by operating activities .......................................... ________

InstructionsShow how each item should be reported in the statement of cash flows. Use parentheses for deductions.


Net Income ............................................................................................................ $275,000

Adjustments to reconcile net income to net cash provided by operating activities:Depreciation expense ................................................................................... 35,000Increase in accounts receivable ................................................................... (55,000)Decrease in inventory ................................................................................... 12,000Increase in accounts payable ....................................................................... 6,600Increase in prepaid expenses ....................................................................... (4,000)Decrease in income taxes payable ............................................................... (1,500)Gain on sale of land ..................................................................................... (5,000)

Net cash provided (used) by operating activities ................................. $263,100

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*Be. 176

Hiller Company had total operating expenses of $135,000 in 2007, which included Depreciation Expense of $25,000. Also during 2007, prepaid expenses increased by $9,000 and accrued expenses decreased by $5,500.

InstructionsCalculate the amount of cash payments for operating expenses in 2007 using the direct method.

*Solution 176 (5-8 min.)

Operating expenses ........................................................... $135,000Less: Noncash depreciation expense ................................ (25,000)Add: Increase in prepaid expenses .................................... 9,000Add: Decrease in accrued liabilities .................................... 5,500Cash payments for operating expenses ............................. $124,500

*Be. 177

a. Sales = $650,500; Accounts receivable increased by $37,500. Calculate cash receipts from sales.

b. Cost of goods sold = $430,000; inventory decreased by $75,000; accounts payable decreased by $23,500. Calculate cash payments for purchases.

c. The Income statement shows $12,500 in income taxes. The balance sheet shows an increase in taxes payable of $1,500. Calculate the cash paid for income taxes.

d. Operating expenses total $75,750; Depreciation expense = $37,200; Prepaid expenses increased by $15,400; Accrued wages decreased by $5,600. Calculate cash payments for operating expenses.

*Solution 177 (10 min.)

a. $613,000; $650,500 – $37,500

b. $378,500; $430,000 – $75,000 + $23,500

c. $11,000; $12,500 – $1,500

d. $59,550; $75,750 – $37,200 + $15,400 + $5,600

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*Be. 178

a. Sales = $850,000; Accounts receivable decreased by $30,000. Calculate cash receipts from sales.

b. Cost of goods sold = $650,000; inventory increased by $22,000; accounts payable increased by $18,000. Calculate cash payments for purchases.

c. Income statement shows $25,500 in income taxes. The balance sheet shows an increase in taxes payable of $3,500. Calculate the cash paid for income taxes.

d. Operating expenses total $103,000; Depreciation expense = $9,000; Prepaid expenses decreased by $13,000; Accrued liabilities increased by $6,000. Calculate cash payments for operating expenses.

*Solution 178 (10 min.)

a. $880,000; $850,000 + $30,000

b. $654,000; $650,000 + $22,000 – $18,000

c. $22,000; $25,500 – $3,500

d. $75,000; $103,000 – $9,000 – $13,000 - $6,000

*Be. 179

The general ledger of the Starter Company provides the following information:

End of Year Beginning of YearAccounts Receivable $ 69,000 $ 84,000Inventory 240,000 205,000Accounts Payable 42,000 67,000

The company's net sales for the year was $2,000,000 and cost of goods sold amounted to $1,700,000.

InstructionsCompute the following:

(a) Cash receipts from customers

(b) Cash payments to suppliers


(a) Cash receipts from customersSales + Decrease in Accounts Receivable$2,000,000 + $15,000 = $2,015,000

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*Solution 179 (cont.)

(b) Cash payments to suppliersFirst calculate the amount of purchases:Beginning inventory $ 205,000Add: Purchases ?

?Less: Ending Inventory 240,000Cost of goods sold $1,700,000

Purchases = Cost of goods sold + increase in inventory= $1,700,000 + $35,000= $1,735,000

Amount of cash payments to suppliers:Purchases + Decrease in accounts payable$1,735,000 + $25,000 = $1,760,000

*Be. 180

The income statement of Jetty Inc. for the year ended December 31, 2007, reported the following condensed information:

Revenue from fees $600,000Operating expenses 360,000Income from operations 240,000Income tax expense 60,000Net income $180,000

Jetty's balance sheet contained the following comparative data at December 31:

2007 2006 Accounts receivable $50,000 $65,000Accounts payable 37,000 41,000Income taxes payable 6,000 3,000

Jetty has no depreciable assets. Accounts payable pertains to operating expenses.

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


JETTY INC.Statement of Cash Flows

For the Year Ending December 31, 2007

Cash flows from operating activitiesCash receipts from customers ($600,000 + $15,000) $615,000Cash payments:

For operating expenses ($360,000 + $4,000) $364,000For income taxes ($60,000 - $3,000) 57,000 421,000

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Net cash provided by operating activities $194,000

EXERCISES

Ex. 181

Bentley Company reported net income of $320,000 for the current year. Depreciation recorded on buildings and equipment amounted to $75,000 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

End of Year Beginning of YearCash $22,000 $15,000Accounts receivable 17,000 32,000Inventories 55,000 65,000Prepaid expenses 7,500 5,000Accounts payable 14,000 18,000Income taxes payable 600 1,200

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


Net income ......................................................................................................... $320,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense ................................................................................ 75,000Decrease in accounts receivable ............................................................... 15,000Decrease in inventories ............................................................................. 10,000Increase in prepaid expenses .................................................................... (2,500)Decrease in accounts payable .................................................................. (4,000)Decrease in income taxes payable ............................................................ (600)Net cash provided by operating activities .................................................. $412,900

Ex. 182

Using the indirect method, calculate the amount of cash flows from operating activities from the following data:

Net income $230,000Beginning accounts receivable 22,000Ending accounts receivable 26,000Beginning prepaid expenses 5,000Ending prepaid expenses 2,000Beginning accounts payable 15,000Ending accounts payable 14,000Depreciation expense 55,000Amortization of intangible asset 3,000Dividends declared and paid 11,000

12-39


Solution 182 (15 min.)

Net income $230,000– Increase accounts receivable (4,000)+ Decrease in prepaid expenses 3,000– Decrease in accounts payable (1,000)+ Depreciation 55,000+ Amortization 3,000Cash flows from Operating Activities $286,000

Ex. 183

Use the following information to perform the calculations below (using the indirect method). Clearly label the amount of each answer as positive or negative and show all your calculations.

Net income $369,000 Beginning accounts payable $119,000Depreciation expense 97,000 Ending accounts payable 146,000Beginning accounts receivable 420,000 Purchase of long-term assets 612,000Ending accounts receivable 439,000 Issuance of long-term debt 200,000Beginning inventory 516,000 Issuance of stock for cash 160,000 Ending inventory 560,000 Issuance of stock for long-term assets 110,000Beginning prepaid expenses 42,000 Purchase of treasury stock 64,000Ending prepaid expenses 48,000 Sale of long-term investment at cost 39,000

a. Calculate the amount of cash flows from operating activities. _____________

b. Calculate the amount of cash flows from investing activities. _____________

c. Calculate the amount of cash flows from financing activities. _____________

d. Calculate the net change in cash. _____________

12-40


Solution 183 (20 –25 minutes)

a. Cash flows form operating activitiesNet income $369,000Depreciation expense 97,000Increase in accounts receivable (19,000)Increase in inventory (44,000)Increase in prepaid expense (6,000)Increase in accounts payable 27,000Cash flows from operating activities $424,000

b. Cash flows used in investing activitiesPurchase of long-term assets $(612,000)Sale of long-term investments 39,000Cash flows used in investing activities $(573,000)

c. Cash flows from financing activitiesIssue of long-term debt $200,000Issue of stock for cash 160,000Purchase of treasury stock (64,000)Cash flows from financing activities $296,000

d. Net change in cashIncrease from operating activities $424,000Decrease from investing activities (573,000)Increase from financing activities 296,000Net increase in cash $147,000

Ex. 184

The comparative balance sheets for Kexler Company appear below:

KEXLER COMPANYComparative Balance Sheet

Dec. 31, 2007 Dec. 31, 2006Assets

Cash $ 28,000 $13,000Accounts receivable 18,000 14,000Prepaid expenses 7,000 9,000Inventory 25,000 15,000Long-term investments -0- 18,000Equipment 60,000 30,000Accumulated depreciation—equipment (18,000) (14,000)

Total assets $120,000 $85,000

Liabilities and Stockholders' Equity

Accounts payable $ 25,000 $ 7,000Bonds payable 37,000 45,000Common stock 40,000 23,000

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Retained earnings 18,000 10,000Total liabilities and stockholders' equity $120,000 $85,000

Ex. 184 (cont.)

Additional information:1. Net income for the year ending December 31, 2007, was $25,000.2. Cash dividends of $17,000 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 2007 are $120,000.

Instructions1. Prepare a statement of cash flows for the year ended December 31, 2007, using the indirect

method.

2. Compute the following cash based ratios:a. Current cash debt coverage ratiob. Cash debt coverage ratio


1. KEXLER COMPANYStatement of Cash Flows

For the Year Ended December 31, 2007

Cash flows from operating activitiesNet income .................................................................................. $25,000Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense ......................................................... $ 4,000Loss on sale of long-term investment in bonds................... 2,000Increase in accounts receivable ......................................... (4,000)Decrease in prepaid expenses ........................................... 2,000Increase in inventories ....................................................... (10,000)Increase in accounts payable ............................................. 18,000 12,000Net cash provided by operating activities ........................... 37,000

Cash flows from investing activitiesSale of long-term investments ..................................................... 16,000Purchase of equipment ............................................................... (30,000)

Net cash used by investing activities .................................. (14,000)Cash flows from financing activities

Issuance of common stock .......................................................... 17,000Retirement of bonds payable ...................................................... (8,000)Payment of cash dividends ......................................................... (17,000)

Net cash used by financing activities ................................. (8,000)Net increase in cash ............................................................................ 15,000Cash at beginning of period ................................................................. 13,000Cash at end of period .......................................................................... $28,000

Net cash provided by operating activities2. a. Current cash debt coverage ratio = ——————————————————

Average current liabilities

$37,000

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= —————————— = 2.31 times($7,000 + $25,000) ÷ 2


Net cash provided by operating activitiesb. Cash debt coverage ratio = ——————————————————

Average total liabilities

$37,000= ——————————— = .65 times

($52,000 + $62,000) ÷ 2

Ex. 185

A comparative balance sheet for the Bison Corporation is presented below:

BISON CORPORATIONComparative Balance Sheet

2007 2006 Assets

Cash $ 40,000 $ 31,000Accounts receivable (net) 80,000 60,000Prepaid insurance 22,000 17,000Land 18,000 40,000Equipment 70,000 60,000Accumulated depreciation (20,000) (13,000)

Total Assets $210,000 $195,000

Liabilities and Stockholders' EquityAccounts payable $ 12,000 $ 6,000Bonds payable 27,000 19,000Common stock 140,000 115,000Retained earnings 31,000 55,000

Total liabilities and stockholders' equity $210,000 $195,000

Additional information:

1. Net loss for 2007 is $18,000. Net sales for 2007 are $250,000.

2. Cash dividends of $6,000 were declared and paid in 2007.

3. Land was sold for cash at a loss of $10,000. This was the only land transaction during the year.

4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for $5,000 cash.

5. $12,000 of bonds were retired during the year at carrying (book) value.

6. Equipment was acquired for common stock. The fair market value of the stock at the time of the exchange was $25,000.

Instructions1. Prepare a statement of cash flows for the year ended 2007 using the indirect method.

2. Compute the following cash based ratios:

12-43


a. Current cash debt coverage ratiob. Cash debt coverage ratio


1. BISON CORPORATIONStatement of Cash Flows

For the Year Ended December 31, 2007___________________________________________________________________________

Cash flows from operating activitiesNet loss .................................................................................... $(18,000)Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation (a)................................................................... $17,000Loss on sale of land............................................................ 10,000Increase in accounts receivable ......................................... (20,000)Increase in prepaid insurance ............................................ (5,000)Increase in accounts payable ............................................. 6,000 8,000Net cash used by operating activities ................................. (10,000)

Cash flows from investing activities Proceeds from the sale of land (b)............................................... 12,000Proceeds from the sale of equipment ......................................... 5,000

Net cash provided by investing activities............................. 17,000Cash flows from financing activities

Retirement of bonds payable ...................................................... (12,000)Issuance of bonds payable (c)..................................................... 20,000Payment of dividends .................................................................. (6,000)

Net cash provided by financing activities ............................ 2,000Increase in cash ................................................................................... 9,000Cash at beginning of period ................................................................. 31,000Cash at end of period .......................................................................... $40,000

Noncash investing and financing activitiesPurchase of equipment through issuance of common stock ....... $25,000

(a) Accumulated Depreciation 12/31/06 $13,000Accumulated Depreciation 12/31/07 20,000Difference 7,000Add: Accumulated depreciation on equipment sold 10,000Depreciation expense 17,000

(b) Cost of land sold 22,000Less: Loss on sale of land (10,000)Proceeds from sale of land $12,000

(c) Bonds Payable 12/31/06 $19,000Retirement of bonds (12,000)Difference 7,000Add: Bonds issued 20,000Bonds Payable 12/31/07 27,000

12-44

Statement of Cash Flows 12-45



2. a. Current cash debt coverage ratio =

= ($10,000) = (1.1) times($6,000 + $12,000) ÷ 2

b. Cash debt coverage ratio =

= ($10,000) ____ = (.31) times($25,000 + $39,000) ÷ 2

Ex. 186

The following information is available for Gunning Corporation for the year ended December 31, 2007:

Collection of principal on long-term loan to a supplier $35,000Acquisition of equipment for cash 10,000Proceeds from the sale of long-term investment at book value 27,000Issuance of common stock for cash 20,000Depreciation expense 25,000Redemption of bonds payable at carrying (book) value 24,000Payment of cash dividends 14,000Net income 35,000Purchase of land by issuing bonds payable 40,000

In addition, the following information is available from the comparative balance sheet for Gunning at the end of 2007 and 2006:

2007 2006 Cash $102,000 $14,000Accounts receivable (net) 25,000 15,000Prepaid insurance 19,000 13,000Total current assets $146,000 $42,000

Accounts payable $ 30,000 $19,000Salaries payable 6,000 7,000Total current liabilities $ 36,000 $26,000

InstructionsPrepare Gunning's statement of cash flows for the year ended December 31, 2007, using the indirect method.

12-46



GUNNING CORPORATIONStatement of Cash Flows


Cash flows from operating activitiesNet income ................................................................................. $35,000Adjustments to reconcile net income to net cash provided by operating activities

Depreciation ....................................................................... $25,000Increase in accounts receivable ......................................... (10,000)Increase in prepaid insurance ............................................ (6,000)Increase in accounts payable ............................................. 11,000Decrease in salaries payable ............................................. (1,000) 19,000Net cash provided by operating activities ........................... 54,000

Cash flows from investing activitiesCollection of long-term loan ........................................................ 35,000Proceeds from the sale of investments ....................................... 27,000Purchase of equipment ............................................................... (10,000)

Net cash provided by investing activities ............................ 52,000Cash flows from financing activities

Issuance of common stock .......................................................... 20,000Redemption of bonds .................................................................. (24,000)Payment of dividends .................................................................. (14,000)

Net cash used by financing activities ................................. (18,000)Increase in cash ................................................................................. 88,000Cash at beginning of period ................................................................. 14,000Cash at end of period .......................................................................... $102,000

Noncash investing and financing activitiesPurchase of land by issuing bonds ............................................. $40,000

12-47


Ex. 187

Lupton Company prepared the tabulation below at December 31, 2007.

Net Income ............................................................................................................ $350,000

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

Depreciation expense, $29,000 .................................................................... ________

Increase in accounts receivable, $75,000 .................................................... ________

Decrease in inventory, $18,000 .................................................................... ________

Amortization of patent, $4,000 ..................................................................... ________

Increase in accounts payable, $7,500 .......................................................... ________

Decrease in interest receivable, $4,000 ....................................................... ________

Increase in prepaid expenses, $7,000 ......................................................... ________

Decrease in income taxes payable, $2,500 .................................................. ________

Gain on sale of land, $5,000 ........................................................................ ________

Net cash provided (used) by operating activities .......................................... ________

InstructionsShow how each item should be reported in the statement of cash flows. Use parentheses for deductions.


Net Income ............................................................................................................ $350,000

Adjustments to reconcile net income to net cash provided by operating activities:Depreciation expense ................................................................................... 29,000Increase in accounts receivable ................................................................... (75,000)Decrease in inventory ................................................................................... 18,000Amortization of patent ................................................................................... 4,000Increase in accounts payable ....................................................................... 7,500Decrease in interest receivable .................................................................... 4,000Increase in prepaid expenses ....................................................................... (7,000)Decrease in income taxes payable ............................................................... (2,500)Gain on sale of land ..................................................................................... (5,000)

Net cash provided (used) by operating activities ................................. $323,000

12-48


*Ex. 188

Condensed financial data of Mannon Company appear below:

MANNON COMPANYComparative Balance Sheet

December 31 2007 2006

AssetsCash $ 70,000 $ 35,000Accounts receivable 82,000 53,000Inventories 120,000 132,000Prepaid expenses 19,000 25,000Investments 80,000 65,000Plant assets 310,000 250,000Accumulated depreciation (65,000) (60,000)

Total $616,000 $500,000

Liabilities and Stockholders' EquityAccounts payable $ 95,000 $ 75,000Accrued expenses payable 22,000 24,000Bonds payable 120,000 150,000Common stock 245,000 170,000Retained earnings 134,000 81,000

Total $616,000 $500,000

MANNON COMPANYIncome Statement


Sales $480,000Less:

Cost of goods sold $290,000Operating expenses (excluding depreciation) 60,000Depreciation expense 17,000Income taxes 15,000Interest expense 13,000Loss on sale of plant assets 3,000 398,000

Net income $ 82,000

Additional information:1. New plant assets costing $85,000 were purchased for cash in 2007.2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000.3. Bonds with a face value of $30,000 were converted into $30,000 of common stock.4. A cash dividend of $29,000 was declared and paid during the year.5. Accounts payable pertain to merchandise purchases.

Instructions1. Prepare a statement of cash flows for the year using the direct method.2. Compute the following cash basis ratios:

a. Current cash debt coverage ratiob. Cash debt coverage ratio

12-49

Test Bank for Financial Accounting: Tools for Business Decision Making, Fourth Edition12-50



1. MANNON COMPANYStatement of Cash Flows


Cash flows from operating activitiesCash receipts from customers ($480,000 - $29,000) $451,000

Cash payments:To suppliers $258,000 (a)For operating expenses 56,000 (b)For income taxes 15,000For interest 13,000 342,000Net cash provided by operating activities 109,000

Cash flows from investing activitiesPurchase of investments (15,000)Purchase of plant assets (85,000)Sale of plant assets 10,000

Net cash used by investing activities (90,000)Cash flows from financing activities

Issuance of common stock 45,000Payment of cash dividends (29,000)

Net cash provided by financing activities 16,000Net increase in cash 35,000Cash at beginning of period 35,000Cash at end of period $ 70,000

Noncash investing and financing activitiesConversion of bonds payable into common stock $ 30,000

(a) Cost of goods sold $290,000Deduct: Decrease in inventory (12,000)Purchases 278,000Deduct: Increase in accounts payable (20,000)Cash payments to suppliers $258,000

(b) Operating expenses $60,000Deduct: Decrease in prepaid expenses (6,000)Add: Decrease in accrued expenses payable 2,000Cash payments for operating expenses $56,000

2. Cash basis ratios:$109,000

a. Current cash debt coverage ratio = ——————————— = 1.01 times($99,000 + $117,000) ÷ 2

$109,000b. Cash debt coverage ratio = ———————————— = .45 times

($237,000 + $249,000) ÷ 2

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*Ex. 189

The income statement of Rosen Company is shown below:

ROSEN COMPANYIncome Statement


Sales $8,500,000Cost of goods sold 5,300,000Gross profit 3,200,000Operating expenses

Selling and administrative expenses $1,210,000Depreciation expense 70,000Amortization expense 30,000 1,310,000

Net income $1,890,000

Additional information:1. Accounts receivable increased $500,000 during the year.2. Inventory increased $250,000 during the year.3. Prepaid expenses increased $200,000 during the year.4. Accounts payable to merchandise suppliers increased $125,000 during the year.5. Accrued expenses payable increased $180,000 during the year.

InstructionsPrepare the operating activities section of the statement of cash flows for the year ended December 31, 2007, for Rosen Company, using the direct method.


ROSEN COMPANYStatement of Cash Flows


Cash flows from operating activitiesCash receipts from customers (1) $8,000,000Cash payments:

To suppliers (2) $5,425,000For operating expenses (3) 1,230,000 6,655,000Net cash provided by operations $1,345,000

(1) Sales $8,500,000Deduct: Increase in accounts receivable 500,000Cash receipts from customers $8,000,000

(2) Cost of goods sold $5,300,000Add: Increase in inventory 250,000Purchases 5,550,000Deduct: Increase in accounts payable 125,000Cash payments to suppliers $5,425,000

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(3) Operating expenses exclusive of depreciation and amortization $1,210,000Add: Increase in prepaid expenses 200,000Deduct: Increase in accrued expenses payable (180,000)Cash payments for operating expenses $1,230,000

*Ex. 190

The financial statements of Juniper Company appear below:

JUNIPER COMPANYComparative Balance Sheet

December 31 2007 2006

AssetsCash $ 42,000 $ 25,000Accounts receivable 26,000 34,000Merchandise inventory 22,000 15,000Property, plant, and equipment 50,000 78,000Accumulated depreciation (20,000) (24,000)

Total $120,000 $128,000

Liabilities and Stockholders' Equity

Accounts payable $ 12,000 $ 23,000Income taxes payable 13,000 10,000Bonds payable 10,000 33,000Common stock 41,000 24,000Retained earnings 44,000 38,000

Total $120,000 $128,000

JUNIPER COMPANYIncome Statement


Sales $350,000Cost of goods sold 280,000Gross profit 70,000Selling expenses $20,000Administrative expenses 16,000 36,000Income from operations 34,000Interest expense 4,000Income before income taxes 30,000Income tax expense 8,000Net income $ 22,000

12-53


*Ex. 190 (cont.)

The following additional data were provided:1. Dividends declared and paid were $16,000.2. During the year equipment was sold for $12,000 cash. This equipment cost $28,000

originally and had a book value of $12,000 at the time of sale.3. All depreciation expense is in the selling expense category.4. All sales and purchases are on account.5. Accounts payable pertain to merchandise suppliers.6. All operating expenses except for depreciation were paid in cash.

InstructionsPrepare a statement of cash flows for Juniper Company using the direct method.


JUNIPER COMPANYStatement of Cash Flows


Cash flows from operating activitiesCash receipts from customers ($350,000 + $8,000) $358,000Cash payments:

To suppliers $298,000 (a)For operating expenses 24,000 (b)For interest expense 4,000For income taxes ($8,000 – $3,000) 5,000 331,000Net cash provided by operating activities 27,000

Cash flows from investing activitiesSale of equipment 12,000

Cash flows from investing activitiesRedemption of bonds payable (23,000)Issuance of common stock 17,000Payment of cash dividend (16,000)

Net cash used by financing activities (22,000)Net increase in cash 17,000Cash at beginning of period 25,000Cash at end of period $ 42,000

(a) Cost of goods sold $280,000Add: Increase in inventory 7,000Purchases 287,000Add: Decrease in accounts payable 11,000Cash payments to suppliers $298,000

(b) Operating expenses $36,000Less: Depreciation expense (12,000)*Cash payments for operating expenses $24,000

*$24,000 - $16,000 = $8,000 balance in accumulated depreciation after sale.Ending balance, $20,000 - $8,000 = $12,000 depreciation expense.

12-54


COMPLETION STATEMENTS191. A statement of cash flows summarizes the operating, ____________, and ___________

activities of an entity.

192. The cash effects of selling goods and services appears in the ______________ activities section of a statement of cash flows.

193. Net cash provided/used by operating activities can be determined using the ____________ method or the ______________ method.

194. During the _______________, cash from operations and net income are approximately the same.

195. During the growth phase, a company will start to generate small amounts of cash _______________.

196. Using the indirect approach, noncash charges in the income statement are ___________ to net income and noncash credits are ______________ to compute cash provided by operations.

197. If accounts receivable increase during a period, revenues on an accrual basis are ______________ than revenues on a cash basis.

198. The sale of equipment at less than its book value is a(an) ______________ of cash that is reported in the ______________ activities section.

199. The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by _________________ liabilities.

200. The cash ______________ is a measure of solvency that uses cash figures.

*201. Cost of goods sold for the year amounted to $100,000, and during the year, inventory ______________ by $7,000 and accounts payable ______________ by $3,000 resulting in cash paid to suppliers of $90,000.

*202. In computing cash payments for operating expenses, a decrease in prepaid expenses is ______________ and an increase in accrued expenses payable is ______________ to (from) operating expenses, exclusive of depreciation.

*203. In computing cash payments for income taxes, a decrease in income taxes payable is ______________ to (from) income tax expense.

*204. Under the direct method, the two largest classes of items in the operating activities section for a merchandising company are cash ________________________ and cash _________________________.

Answers to Completion Statements

191. investing, financing (or vice versa) 199. average current192. operating 200. debt coverage ratio193. indirect, direct (or vice versa) *201. decreased, increased194. maturity phase *202. deducted, deducted195. from operations *203. added196. added, deducted *204. receipts from customers, payments to suppliers197. higher (greater) (or vice versa

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198. inflow, investingMATCHING

Set 1 — Indirect Method

205. 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 incomeB. Deducted from net incomeC. Cash outflow—investing activityD. Cash inflow—investing activityE. Cash outflow—financing activityF. Cash inflow—financing activityG. Significant noncash investing and financing activity

____ 1. Decrease in accounts payable during a period

____ 2. Declaration and payment of a cash dividend.

____ 3. Loss on sale of land.

____ 4. Decrease in accounts receivable during a period.

____ 5. Redemption of bonds for cash.

____ 6. Proceeds from sale of equipment at book value.

____ 7. Issuance of common stock for cash.

____ 8. Purchase of a building for cash.

____ 9. Acquisition of land in exchange for common stock.

____ 10. Increase in merchandise inventory during a period.

Answers to Matching

1. B 6. D2. E 7. F3. A 8. C4. A 9. G5. E 10. B

12-56


Set 2 — Direct Method

*206.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 direct method.

A. Added in determining cash receipts from customersB. Deducted in determining cash receipts from customersC. Added in determining cash payments to suppliersD. Deducted in determining cash payments to suppliersE. Cash outflow—investing activityF. Cash inflow—investing activityG. Cash outflow—financing activityH. Cash inflow—financing activityI. Significant noncash investing and financing activityJ. Is not shown

____ 1. Decrease in accounts payable during a period.

____ 2. Declaration and payment of a cash dividend.

____ 3. Decrease in accounts receivable during a period.

____ 4. Depreciation expense.

____ 5. Conversion of bonds payable into common stock.

____ 6. Decrease in merchandise inventory during a period.

____ 7. Sale of equipment for cash at book value.

____ 8. Issuance of preferred stock for cash.

____ 9. Purchase of land for cash.

____ 10. Loss on sale of a plant asset.

Answers to Matching

1. C 6. D2. G 7. F3. A 8. H4. J 9. E5. I 10. J

12-57


SHORT-ANSWER ESSAY QUESTIONS

S-A E 207

The statement of cash flows is the only required financial statement that is not prepared from an adjusted trial balance. What are the sources of information for preparing a statement of cash flows? Explain how the accrual basis of accounting affects the statement of cash flows.

Solution 207

The information used to prepare the statement of cash flows usually comes from three sources. These sources are (1) a comparative balance sheet, (2) current income statement, and (3) additional information.

The accrual basis of accounting requires that revenues be recorded when earned and that expenses be recorded when incurred. Thus, net income may include earned revenues for which cash has not yet been collected and include incurred expenses which have not yet been paid for in cash. These noncash revenues and noncash expenses do not affect the cash balance. Therefore, the noncash revenues and noncash expenses must be eliminated to determine the net cash provided by operating activities.

*S-A E 208

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 dollar amount for net cash provided by operating activities.

*Solution 208

The indirect method (or reconciliation method) starts with net income and converts it to the net cash provided by 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 accounts receivable is deducted from net income and an increase in accounts 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.

12-58


S-A E 209

When preparing a statement of cash flows using the indirect method, why is depreciation added back to net income within the operating activities section?

Solution 209

The indirect method begins with net income based on accrual accounting. 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.

S-A E 210

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?

Solution 210

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.

*S-A E 211

When preparing a statement of cash flows using the direct method, why must the sales revenue figure be adjusted to arrive at cash receipts from sales?

*Solution 211

Sales revenue is an accrual-based figure that includes both cash and credit sales for the period. The statement of cash flows is to report the cash collections for the period, whether or not the sale arose in that period or whether the credit sale had yet to be collected. An adjustment based on the change in accounts receivable accomplishes this conversion.

12-59


S-A E 212 (Ethics)

Flint Hills Trading Company's most recent financial statements showed dismal performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash decrease in all categories. The company president called all the managers together and asked them to do all they could to make sure the next quarter's performance was better.

Levi Logan, manager of the manufacturing division, sold off old manufacturing equipment. He also reclassified several workers to part time (30 hours per week) and hired additional temporary workers to take up the slack. This saved the company money, since part-time workers do not have the same insurance and other benefits as full-time workers.

Gary Gilmour, financial manager, immediately suspended payments on all accounts except those on which interest would accrue. He also instituted aggressive collection procedures.

Required:1. Were Levi Logan's actions ethical? Explain.2. Were Gary Gilmour's actions ethical? Explain.3. Were the company president's actions ethical? Explain.

Solution 212

1. There is a valid question as to whether Levi Logan's actions are ethical or not. Either answer could be considered correct. On the one hand, he was probably within his legal rights to reclassify the workers. He also might be commended for allowing more workers to have a job than was previously the case. On the other hand, he has removed a very real benefit from the former full-time workers, and he has done it fairly arbitrarily. He may have harmed morale, and harmed the company if the workers quit and new workers have to be hired.

2. Gary Gilmour's actions all appear to be ethical.

3. The company president may have placed undue pressure on the employees to show better results. The managers may feel that they need to sacrifice the long-term goals of the firm for short-term benefits.

S-A E 213 (Communication)

You are the accountant for a small manufacturing firm. Your company is privately held, so there is no current requirement to issue financial statements using GAAP. You were hired four years ago, and at that time you instituted a cash budgeting system. Presently, you prepare a schedule of predicted cash sources and cash needs at the end of each week for the following week.

Jake Griffith, the company's president, has asked whether a statement of cash flows would also be useful.

Required:Prepare a short memorandum to the president indicating whether you believe such an addition to the financial statements to be useful. Include in your memo the benefits that might be expected from a statement of cash flows and whether those are different from the benefits of a cash sources and cash needs listing.

12-60


Solution 213

TO: Jake Griffith

FROM: Martha King

RE: Statement of Cash Flows vs. Cash Sources and Needs

You asked whether a statement of cash flows would be useful, in addition to the cash sources and needs schedule. In my opinion, the statement of cash flows would be extremely useful. It gives different information than the cash sources and needs does. A statement of cash flows would provide historical information about where we got the funds for operating, financing, and investing activities, as well as how we used the funds. It is a summary of our performance. The cash sources and needs statement, on the other hand, is a prediction of the cash we will need and the source from which it will be obtained. One is our plan, the other is our result.

Please let me know if you'd like more details about the statement of cash flows.

(signed)

12-61

Chapter 12 Cash Flows Blooms Taxonomy

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Transcript of Chapter 12 Cash Flows Blooms Taxonomy