Cash Flow - Part 3 - Asset Essay Example

Learning Objectives

1.Identify the purposes of the statement of cash flows 2.Classify activities affecting cash as operating, investing, or financing activities 3.Compute and interpret cash flows from financing activities 4.Compute and interpret cash flows from investing activities 5.Use the direct method to calculate cash flows from operations 6.Use the indirect method to explain the difference between net income and net cash provided by (used for) operating activities 7.Understand why we add depreciation to net income when using the indirect method for computing cash flow from operating activities 8.Show how the balance sheet equation provides a conceptual framework the statement of cash flows

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True False

1.The statement of cash flows reports on where cash came from and how it was used. a.True
b.False

L.O.:1Type:EasySolution:a

2.Like the income statement, the statement of cash flows covers a period of time. a.True
b.False

L.O.:1Type:EasySolution:a

3.A firm may have a significant amount of net income, as computed by accountants on the accrual basis, and yet have a severe decline in cash. a.True
b.False

L.O.:1Type:EasySolution:a

4.A statement of cash flows covers a date in time rather than a period of time. a.True
b.False

L.O.:1Type:EasySolution:b

5.One of the purposes of a statement of cash flows is to determine a company’s ability to pay its debts when they become due. a.True
b.False

L.O.:1Type:EasySolution:a

6.Investing activities involve obtaining resources as a borrower and repaying creditors. a.True
b.False

L.O.:2Type:EasySolution:b

7.The issuance of long-term debt results in a cash outflow as reported in the financing section. a.True
b.False

L.O.:2Type:ModerateSolution:b

8.The purchase of another company’s stock is an example of an investing activity. a.True
b.False

L.O.:2Type:EasySolution:a

9.Cash flows from financing activities includes borrowing cash through a lender. a.True
b.False

L.O.:2Type:EasySolution:a

10.Cash flows from operating activities includes the receipt of
interest income.
a.True
b.False

L.O.:2Type:ModerateSolution:a

11.Cash flows from financing activities includes the payment of interest on a note payable. a.True
b.False

L.O.:2Type:ModerateSolution:b

12.A transaction in which long-term debt of $35,000 is converted to common stock would be reported in the financing section of the cash flow statement. a.True
b.False

L.O.:2Type:ModerateSolution:b

13.Dividends received from a subsidiary would be classified as an investing activity on a statement of cash flows. a.True
b.False

L.O.:2Type:ModerateSolution:b

14.Issuing equity securities is an operating activity on the statement of cash flows. a.True
b.False

L.O.:2Type:ModerateSolution:b

15.Operating activities on a statement of cash flows relate to acquiring assets such as buildings and equipment. a.True
b.False

L.O.:2Type:ModerateSolution:b

16.Cash received from customers is a financing activity on the statement of cash flows. a.True
b.False

L.O.:2Type:EasySolution:b

17.Cash dividends paid to stockholders are an operating activity on the statement of cash flows. a.True
b.False

L.O.:2Type:EasySolution:b

18.The receipt of loan repayments is an investing activity on the statement of cash flows. a.True
b.False

L.O.:2Type:ModerateSolution:a

19.The purchase of an intangible asset such as a trademark would be a financing activity on the statement of cash flows. a.True
b.False

L.O.:3Type:EasySolution:b

20.The purchase of treasury stock would be considered a financing activity. a.True
b.False

L.O.:3Type:EasySolution:a

21.Payment of dividends is a financing activity.
a.True
b.False

L.O.:3Type:ModerateSolution:a

22.Receipt of loan repayments is a financing activity.
a.True
b.False

L.O.:3Type:ModerateSolution:b

23.The indirect method of determining cash from operations is most often used as this method produces larger positive cash flows. a.True
b.False

L.O.:4Type:EasySolution:b

24.The Financial Accounting Standards Board (FASB) prefers the indirect method of determining cash flows from operations. a.True
b.False

L.O.:4Type:EasySolution:b

25.Net income is always used in determining a company’s cash flow from operations. a.True
b.False

L.O.:4Type:EasySolution:b

26.Wages and salaries expense plus the increase in wages and salaries payable equals cash paid for wages and salaries. a.True
b.False

L.O.:4Type:DifficultSolution:b

27.Both the direct and indirect methods yield the same cash flow from operations. a.True
b.False

L.O.:4Type:EasySolution:a

28.The indirect method is used by the majority of US corporations in preparing the statement of cash flows.
a.True
b.False

L.O.:4 P5-9Type:EasySolution:a

29.Income tax expense minus the decrease in income taxes payable equals cash paid for income taxes. a.True
b.False

L.O.:4Type:DifficultSolution:b

30.Under the direct method, a gain from the sale of a fixed asset is added to net income when calculating cash flows from operations. a.True
b.False

L.O.:5Type:ModerateSolution:b

31.Under the direct method, depreciation is ignored when calculating cash flows from operations. a.True
b.False

L.O.:5Type:ModerateSolution:a

32.Under the direct method, dividends from investments are included when calculating cash flows from operations. a.True
b.False

L.O.:5Type:ModerateSolution:a

33.An increase in accounts payable will be added to net income when preparing the operating activities section under the direct method.
a.True
b.False

L.O.:6Type:ModerateSolution:b

34.A decrease in inventory will be added to net income when preparing the operating activities section under the indirect method. a.True
b.False

L.O.:6Type:ModerateSolution:a

35.Under the indirect method, a loss from the sale of a fixed asset is subtracted from net income.
a.True
b.False

L.O.:6Type:ModerateSolution:b

36.Under the indirect method, a gain from early extinguishment of debt is subtracted from net income. a.True
b.False

L.O.:6Type:ModerateSolution:a

37.A decrease in accounts receivable is added to the financing activities when preparing a statement of cash flows using the indirect method. a.True
b.False

L.O.:6Type:ModerateSolution:b

38.Depreciation expense is not a source of cash; however, it is added to net income when determining cash flows from operations under the indirect method. a.True
b.False

L.O.:7Type:ModerateSolution:a

39.Depreciation expense is not a source of cash; however, it is subtracted from net income when determining cash flows from operations under the direct method. a.True
b.False

L.O.:7Type:ModerateSolution:b

40.Cash received from customers is equal to sales plus the increase in accounts receivable. a.True
b.False

L.O.:7Type:DifficultSolution:b

41.Purchases of inventory on account minus the increase in accounts payable equals cash paid for inventory. a.True
b.False

L.O.:7Type:DifficultSolution:a

42.Cost of good sold plus the increase in inventory equals cash paid for inventory. a.True
b.False

L.O.:7Type:DifficultSolution:b

43.Increases in liabilities, owners’ equity and non-cash assets increase
cash. a.True
b.False

L.O.:8Type:ModerateSolution:b

44.Even though assets must always equal the sum of liabilities and owners’ equity, cash flow from operations does not have to equal the sum of the cash flow from investing and the cash flow from financing activities. a. True

b. False

L.O.:8Type:ModerateSolution:a

45.Net cash provided by operating activities is always equal to net income. a.True
b.False

L.O.:8 P5-21Type:EasySolution:b

46.Losses and gains on the disposal of assets are essentially non-operating items that are adjustments to net income under the direct method. a.True
b.False

L.O.:8Type:ModerateSolution:b

Multiple Choice

Multiple Objectives
Table 5-1
|Stratton Company | |Balance Sheet | |December 31, 20X4 and 20X3 | | |
|12/31/X4 12/31/X3 | |Current Assets: | |Cash $ 4,600 $ 3,100 | |Accounts Receivable 9,600 7,900 | |Inventory 17,500 18,600 | |Supplies 1,200 2,100 | |Prepaid Insurance 1,400 1,000 | |Total Current Assets 34,300 32,700 | |Long-term Assets: | |Fixed Assets 71,000 58,000 | |Accumulated Depreciation (30,400) (26,500) | |Patent 6,000 7,100 | |Total Long-term Assets 46,600 38,600 | |Total Assets $ 80,900 $ 71,300 | | | |Current Liabilities: | |Accounts Payable $ 6,100 $ 4,900 | |Wages Payable 2,200 2,600 | |Interest Payable 800 1,000 | |Taxes Payable 2,300 1,600 | |Total Current Liabilities 11,400 10,100 | |Long-term
Liabilities: Bonds Payable 20,300 24,000 | |Total Liabilities 31,700 34,100 | |Stockholders’ Equity: | |Common Stock 22,700 20,000 | |Retained Earnings 26,500 17,200 | |Total Stockholders’ Equity 49,200 37,200 | |Total Liabilities and Stockholders’ Equity $ 80,900 $ 71,300 | | | |Stratton Company | |Income Statement | |For the Year Ended December 31, 20X4 | | | |Sales $147,600 | |Cost of Goods Sold (63,800) | |Gross Profit 83,800 | |Less Operating Expenses: | |Wage Expense $40,100 | |Supply Expense 3,600 | |Insurance Expense 3,000 | |Depreciation Expense 3,900 | |Amortization Expense 1,100 | |Rent Expense 5,400 57,100
| |Operating Income 26,700 | |Interest Expense (2,600) | |Income before Taxes 24,100 | |Income Tax Expense (10,800) | |Net Income $ 13,300 |

47.Referring to Table 5-1, what was the cash collected from customers by Stratton Company in 20X4? a.$138,000
b.$145,900
c.$147,600
d.$149,200
e.$157,200

L.O.:5Type:ModerateSolution:b

48.Referring to Table 5-1, how much inventory did Stratton Company purchase in 20X4? a.$81,300
b.$63,800
c.$64,900
d.$46,300
e.$62,700

L.O.:5Type:DifficultSolution:e

49.Referring to Table 5-1, what was the cash paid to suppliers of inventory by Stratton Company in 20X4? a.$63,800
b.$61,500
c.$63,700
d.$63,900
e.$66,100

L.O.:5Type:DifficultSolution:b

50.Referring to Table 5-1, what was the cash paid to employees by Stratton Company in 20X4? a.$40,500
b.$39,700
c.$40,100
d.$38,000
e.$42,300

L.O.:5Type:ModerateSolution:a

51.Referring to Table 5-1, what was the cash paid for supplies by Stratton Company in 20X4 (Assume all purchases of supplies were for cash)? a.$3,600
b.$4,500
c.$2,400
d.$2,700
e.$4,800

L.O.:5Type:ModerateSolution:d

52.Referring to Table 5-1, what was the cash paid for income taxes by Stratton Company in 20X4? a.$7,100
b.$11,700
c.$10,100
d.$10,900
e.$8,600

L.O.:5Type:ModerateSolution:c

53.Referring to Table 5-1, what was the cash flow from operations for Stratton Company in 20X4? a.$18,300
b.$19,500
c.$8,200
d.$14,500
e.$13,000

L.O.:5Type:DifficultSolution:b

54.Referring to Table 5-1, what was the cash (paid or received) from the purchase and/or sale of fixed assets by Stratton Company in 20X4? a.$(13,000)
b.$(9,100)
c.$(16,900)
d.$9,100
e.Cannot be determined from the information given

L.O.:4Type:DifficultSolution:a

55.Referring to Table 5-1, what was the cash flow from investing activities for Stratton Company in 20X4? c.$(9,100)
d.$9,100
a.$(13,000)
b.$(12,000)
e.$2,000

L.O.:4Type:DifficultSolution:c

56.Referring to Table 5-1, what were the dividends paid by Stratton Company in 20X4? a.$11,900
b.$0
c.$22,600
d.$4,000
e.$9,300

L.O.:3Type:DifficultSolution:d

Multiple Objectivies
Table 10-2
|Yeager Inc
| |Balance Sheet | |December 31, 20X4 and 20X3 | |12/31/X4 12/31/X3 | |Current Assets: | |Cash $ 6,900 $ 4,650 | |Accounts Receivable 14,250 11,850 | |Inventory 26,250 27,900 | |Supplies 1,800 3,150 | |Prepaid Insurance 2,100 1,500 | |Total Current Assets 51,300 49,050 | |Long-term Assets: | |Fixed Assets 106,500 86,000 | |Accumulated Depreciation (45,600) (39,750) | |Patent 9,000 10,500 | |Total Long-term Assets 69,900 56,750 | |Total Assets $121,200 $105,800 | | | |Current Liabilities: | |Accounts Payable $ 9,150 $ 7,350 | |Wages Payable 3,300 3,900 | |Interest Payable 1,200 1,500 | |Taxes Payable 3,450 2,250
| |Total Current Liabilities 17,100 15,000 | |Long-term Liabilities: | |Bonds Payable 30,450 35,000 | |Total Liabilities 47,550 50,000 | |Stockholders’ Equity: | |Common Stock $ 34,050 $ 30,000 | |Retained Earnings 39,600 25,800 | |Total Stockholders’ Equity $ 73,650 $ 55,800 | |Total Liabilities and Stockholders’ Equity $121,200 $105,800 | | | |Yeager Inc | |Income Statement | |For the Year Ended December 31, 20X4 | |Sales $223,250 | |Cost of Goods Sold (94,700) | |Gross Profit 128,550 | |Less Operating Expenses: | |Wage Expense $60,300 | |Supply Expense 5,400 | |Insurance Expense 4,500 | |Depreciation Expense 5,850 | |Amortization Expense
1,500 | |Rent Expense 8,100 85,650 | |Operating Income 42,900 | |Interest Expense (3,900) | |Income before Taxes 39,000 | |Income Tax Expense (16,200) | |Net Income $ 22,800 |

57.Referring to Table 5-2, what was the cash collected from customers by Yeager Inc in 20X4?
a.$223,250
b.$225,650
c.$237,500
d.$209,000
e.$220,850

L.O.:5Type:ModerateSolution:e

58.Referring to Table 5-2, how much inventory did Yeager Inc purchase in 20X4? a.$68,450
b.$93,050
c.$94,700
d.$96,350
e.$120,950

L.O.:5Type:ModerateSolution:b

59.Referring to Table 5-2, what was the cash paid to suppliers of inventory by Yeager Inc in 20X4? a.$94,700
b.$94,550
c.$91,250
d.$94,850
e.$102,300

L.O.:5Type:ModerateSolution:c

60.Referring to Table 5-2, what was the cash flow from operations for Yeager Inc in 20X4? a.$17,550
b.$21,700
c.$24,900
d.$28,050
e.$32,250

L.O.:5Type:DifficultSolution:e

61.Referring to Table 5-2, what was the cash flow from investing activities for Yeager Inc in 20X4? a.$(19,000)
b.$(20,500)
c.$(14,650)
d.$14,650
e.Cannot be determined from the information given

L.O.:4Type:DifficultSolution:b

62.Referring to Table 5-2, what was the cash flow from financing activities for Yeager Inc in 20X4? a.$15,850
b.$(3,950)
c.$(1,500)
d.$11,300
e.$(9,500)

L.O.:3Type:DifficultSolution:e

Single Objectives

63.Which of the following statements show the results of a company over a period of time? 1. balance sheet
2. income statement
3. statement of cash flows
4. statement of retained earnings
a.2 and 4
b.3 and 4
c.1
d.2
e.2, 3, and 4

L.O.:1Type:EasySolution:e

64.The statement of cash flows has classifications of:
a.operating, investing, and debt activities
b.investing, operating, and expense activities
c.operating, investing, and equity activities
d.operating, financing, and equity activities
e.operating, investing, and financing activities

L.O.:1Type:ModerateSolution:e

65.Which of the following statements is false?
a.The statement of cash flows reports the cash receipts and cash payments of an entity over a period of time. b.The statement of cash flows is similar to the income statement, as they both determine the net income for a company. c.The operating activities in a cash flow statement include transactions which affect the sale and the purchase or production of goods and services. d.Investing activities in a cash flow statement include acquiring and selling long-term assets. e.Financing activities in a cash flow statement include obtaining resources from owners and creditors and repaying amounts borrowed.

L.O.:1Type:ModerateSolution:b

66.Cash payments to suppliers would appear on a statement of cash flows using the direct method as a(n): a.financing activity
b.operating activity
c.investing activity
d.debt activity
e.equity activity

L.O.:2Type:ModerateSolution:b

67.The issuance of a long-term debt for cash would appear on the statement of cash flows as a(n): a.investing activity
b.operating activity
c.financing activity
d.equity activity
e.debt activity

L.O.:2Type:ModerateSolution:c

68.The issuance of stock for cash would be classified as a(n): a.investing activity on the statement of cash flows b.equity activity on the statement of cash flows
c.operating activity on the statement of cash flows
d.would not appear on the statement of cash flows
e.financing activity on the statement of cash flows

L.O.:2Type:ModerateSolution:e

69.Activities or transactions that affect the income statement are included in which section of the statement of cash flows? a.operating
b.investing
c.financing
d.managing
e.net income

L.O.:2Type:EasySolution:a

70.Activities that involve (1) providing and collecting cash as a lender or as an owner of securities and (2) acquiring and disposing of fixed assets are included in which section of the statement of cash flows? a.operating

b.investing
c.financing
d.managing
e.fixed assets

L.O.:2Type:EasySolution:b

71.Activities that involve obtaining resources as a borrower or issuer of securities and repaying creditors and owners are included in which section of the statement of cash flows? a.operating

b.investing
c.financing
d.managing
e.net income

L.O.:2Type:EasySolution:c

73.All of the following would be included in a company’s operating activities except: a.dividend payments
b.collections from customers
c.cash payments to suppliers
d.income tax payments
e.interest and dividends collected

L.O.:2Type:EasySolution:a

74.Which of the following would be classified as an operating activity on a
statement of cash flows? a.purchase of a building
b.sale of another company’s stock
c.borrowing money through a promissory note
d.payment of dividends
e.purchase of inventory for cash

L.O.:2Type:ModerateSolution:e

75.Which of the following would be classified as an operating activity on a statement of cash flows? a.issuing bonds
b.receipt of loan repayments
c.collections from customers
d.issuing stock
e.repayment of amounts borrowed

L.O.:2Type:ModerateSolution:c

76.All of the following activities would be included in a company’s operating activities except: a.payments to employees
b.payment to a local government for property taxes
c.payment to suppliers
d.payment to the bank to reduce loan balance
e.payment to landlord for rent

L.O.:2Type:ModerateSolution:d

77.All of the following would be included in a company’s investing activities except: a.taking out a loan from the bank
b.purchase of equipment
c.sale of another company’s stock
d.making loans to another company
e.sale of a building

L.O.:2Type:ModerateSolution:a

78.All of the following would be included in a company’s investing activities except: a.purchase of land
b.payment of dividends
c.collection of loan repayments
d.purchase of equipment
e.purchase of another company’s stock

L.O.:2Type:ModerateSolution:b

79.All of the following would be included in a company’s financing activities except: a.issuing equity securities
b.purchasing treasury stock
c.repayment of amounts borrowed
d.borrowing cash from a bank
e.interest payments

L.O.:2Type:ModerateSolution:e

80.All of the following would be included in a company’s financing activities except: a.receipt of dividends
b.payment of dividends
c.issuing stock
d.purchase of treasury stock
e.issuing bonds

L.O.:2Type:ModerateSolution:a

81.Which of the following would appear in the financing activities section of a statement of cash flows? a.cash payments to employees
b.cash payment of dividends
c.cash purchase of equipment
d.cash paid for income taxes
e.cash purchase of land

L.O.:2Type:ModerateSolution:b

Table 5-3
Williams Company had the following account balances on its balance sheet at December 31, 20X4 and 20X3, respectively: 12/31/X4 12/31/X3
Long-term Bonds Payable $39,000 $36,000

The company extinguished $7,000 face value of long-term bonds, incurring a $3,000 gain.

82.Referring to Table 5-3, what was the positive cash flow associated with long-term debt for Williams Company in 20X4? a.$10,000
b.$3,000
c.$13,000
d.$4,000
e.$7,000

L.O.:3Type:DifficultSolution:a

83.Referring to Table 5-3, what was the negative cash flow associated with long-term debt for Williams Company in 20X4? a.$10,000
b.$4,000
c.$7,000
d.$0
e.$3,000

L.O.:3Type:DifficultSolution:b

84.If a company extinguishes debt, which of the following explains the effect of this transaction on a statement of cash flows? a.If the debt is extinguished with a loss, the loss is subtracted from the operations section if the company uses the direct method. b.If the debt is extinguished with a loss, the loss will not appear in the operations or the investing section if the company uses the direct method. c.If the debt is extinguished with a gain, the gain is added to the cash flow from
financing section if the company uses the indirect method. d.If the debt is extinguished with a gain, the gain is added to the operations section if the company uses the indirect method. e.If the debt is extinguished with a loss, the loss is added to the financing section if the company uses the indirect method.

L.O.:3Type:DifficultSolution:b

Table 5-4
Treadmill Company had the following account balances on its balance sheets at December 31, 20X4 and 20X3, respectively:

12/31/X4 12/31/X3
Fixed Assets $80,000 $67,000
Accumulated Depreciation 44,000 39,000

Depreciation expense for 20X4 was $7,000. There were no gains or losses on the 20X4 income statement. One fixed asset with an original cost of $8,000 was sold during 20X4.

85.Referring to Table 5-4, what was the cash flow associated with the acquisition of fixed assets by Treadmill Company in 20X4? a.$(2,000)
b.$(8,000)
c.$(14,000)
d.$(13,000)
e.$(21,000)

L.O.:4Type:DifficultSolution:e

86.Referring to Table 5-4, what would be the cash flow from investing activities for Treadmill Company in 20X4? a.($2,000)
b.($8,000)
c.($13,000)
d.($15,000)
e.($21,000)

L.O.:4Type:DifficultSolution:d

87.When a fixed asset is sold for other than its book value, which one of the following incorrectly states the effect of this transaction on a company’s statement of cash flows? a.Under the direct method, no gain or loss is included in the operations section. b.Under the indirect method, gains are subtracted from net income in the cash flow from operations section. c.Under the indirect method, losses are added back to net income to arrive at cash from operations. d.Losses and gains are operating items to be listed in the cash flow from operations activities under both the direct and indirect methods. e.Under both the direct and indirect methods, the sale of a fixed asset would affect the cash flow from investing activities section.

L.O.:4Type:ModerateSolution:d

88.Which of the following items will not appear in the cash flow from operations section when using the direct method? a.payments to employees
b.collections from customers
c.net income
d.payments to suppliers
e.income tax payments

L.O.:5Type:ModerateSolution:c

89.Which of the following items will not appear in the cash flow from operations section when using the direct method? a.collections from customers
b.depreciation expense
c.cash paid for income taxes
d.payments to employees
e.payments to suppliers

L.O.:5Type:ModerateSolution:b

90.When preparing the statement of cash flows under the direct method, all of the following would be an inappropriate procedure except: a.add depreciation expense to net income under the operating activities b.subtract depreciation expense from net income under the operating activities c.add depreciation expense to net income under the financing activities d.subtract depreciation expense from net income under the financing activities e.ignore depreciation expense

L.O.:5Type:ModerateSolution:e

91.When preparing the statement of cash flows under the direct method, an appropriate procedure would be to: a.subtract a gain from the sale of a fixed asset to net income b.subtract an increase in accounts receivable from sales when calculating cash received from customers c.subtract depreciation expense from net income

d.add a loss from the sale of a fixed asset to net income e.add depreciation expense to net income

L.O.:5Type:DifficultSolution:b

92.The indirect method:
a.is seldom used by companies because of the extra effort required to gather cash flow information b.calculates only the cash effect of each operating activity c.is the method preferred by the FASB

d.begins with net income; adds back non cash expenses; and adjusts for changes in the current asset and current liability accounts e.can be used to determine cash flows from operating, investing, and financing activities

L.O.:6Type:ModerateSolution:d

93.When preparing the statement of cash flows under the indirect method, an appropriate procedure would be to: a.add a loss from the sale of a fixed asset
b.add an increase in accounts receivable
c.subtract depreciation expense
d.subtract an increase in accounts payable
e.determine cash received from customers

L.O.:6Type:ModerateSolution:a

94.When preparing the statement of cash flows under the indirect method, an appropriate procedure would be to: a.subtract an increase in wages payable
b.subtract an increase in accounts receivable
c.subtract amortization expense
d.determine cash paid to suppliers
e.add a gain from the sale of a fixed asset

L.O.:6Type:ModerateSolution:b

95.When preparing the statement of cash flows under the indirect method, all of the following would be an appropriate procedure except: a.adding depreciation expense
b.subtracting a decrease in accounts payable
c.subtracting a decrease in prepaid expenses
d.adding a decrease in inventories
e.subtracting a gain from the sale of a fixed asset

L.O.:6Type:ModerateSolution:c

96.The following selected information is for Clarke Company at, and for the year ended, December 31, 20X4, and 20X3:

Selected Balance Sheet Accounts 12/31/X4 12/31/X3 Accounts Payable $19,000 $13,000 Inventory
26,000 30,000 Prepaid Expense 7,000 5,000 Retained Earnings 23,000 19,000 Wages Payable 2,000 7,000 Accounts Receivable 29,000 22,000 Accumulated Depreciation 43,000 35,000 Cash 19,000 14,000 Fixed Assets 94,000 79,000

Selected Income Statement Accounts
Depreciation Expense $14,000
Gain on Sale of Fixed Asset 3,000
Net Income 23,000
Sales 91,000
Wages Expense 34,000

Using the indirect method, what is the cash flow from operations for Clarke Company for the year ended December 31, 20X4? a.$30,000
b.$33,000
c.$36,000
d.$43,000
e.$44,000

L.O.:6Type:DifficultSolution:a

97.Which of the following transactions do not affect cash?
1. convert debt to common stock
2. credit sales
3. purchase a fixed asset by issuing debt
4. accept rental deposit
5. write-off of prepaid expenses
a.1 and 2
b.4 and 5
c.1, 2, and 3
d.3, 4, and 5
e.1, 2, 3, and 5

L.O.:6Type:DifficultSolution:e

98.Which of the following transactions do not affect cash?
1. purchase inventory on credit
2. accrue operating expenses
3. collection of accounts receivable
4. accrue taxes and interest
5. reclassify long-term debt to short-term debt
a.1 and 2
b.1, 2, and 4
c.1, 2, 3, and 5
d.1, 2, 4, and 5
e.1, 2, 3, 4, and 5

L.O.:6Type:ModerateSolution:d

99.Which of the following transactions decrease cash?
1. purchase inventory from cash
2. pay trade accounts payable
3. accruing operating expenses
4. purchase stock in R&D partner
5. charging depreciation
a.1, 2, and 5
b.1, 2, and 4
c.1, 2, 3, and 5
d.1, 2, 3, and 4
e.1, 2, 4, and 5

L.O.:6Type:ModerateSolution:b

100.Which of the following transactions decrease cash?
1. reduce prepaid expenses
2. increase treasury stock
3. make a loan
4. recognize cost of goods sold
5. reduce long-term or short-term debt
a.1 and 4
b.3 and 5
c.1, 3, and 5
d.2, 3, and 5
e.1, 2, 3, 4, and 5

L.O.:6Type:ModerateSolution:d

101.Which of the following transactions increase cash?
1. convert debt to common stock
2. credit sales
3. increase long-term debt
4. issue common stock
a.1 and 3
b.2 and 4
c.3 and 4
d.1, 2, and 4
e.1, 2, 3, and 4

L.O.:6Type:ModerateSolution:c

102.Which of the following transactions increase cash?
1. sales of goods and services for cash
2. receiving cash dividends
3. collection of accounts receivable
4. reclassifying long-term debt to short-term debt
5. accruing interest revenue
a.1 and 2
b.1 and 3
c.1, 2, and 3
d.1, 2, 3, and 4
e.1, 2, 3, and 5

L.O.:6Type:ModerateSolution:c

103.The following selected information is for Scot’s Farm at, and for the year ended, December 31, 20X4, and 20X3:

Selected Balance Sheet Accounts 12/31/X4 12/31/X3 Fixed Assets $ 188,000 $ 158,000 Inventory 52,000 60,000 Prepaid Expense 14,000 10,000 Retained Earnings 46,000 38,000 Accounts Payable 38,000 25,000 Accounts Receivable 58,000 44,000 Accumulated Depreciation 86,000 70,000 Cash 38,000 28,000 Wages Payable 4,000 14,000

Selected Income Statement Accounts
Depreciation Expense $ 28,000
Gain on Sale of Fixed Asset 6,000
Net Income 43,000
Sales 182,000
Wages Expense 68,000

Using the indirect method, hat is the cash flow from operations for Scot’s Farm for the year ended December 31, 20X4? a.$63,000
b.$57,000
c.$83,000
d.$58,000
e.$87,000

L.O.:6Type:DifficultSolution:d

104.Which of the following statements is incorrect, regarding the effect of depreciation on a statement of cash flows using the indirect method? a.Depreciation expense is not an outflow of cash.

b.Ignoring income tax effects, increasing depreciation expense will increase cash flows from operations. c.Depreciation expense is added in the cash flow from operations section. d.Depreciation expense is not a source of cash.

e.Depreciation expense will reduce the net income used in determining cash flows from operations.

L.O.:7Type:ModerateSolution:b

105.Increases in cash stem from:
1. increases in liabilities
2. increases in stockholders’ equity
3. increases in non-cash assets
4. decreases in liabilities
5. decreases in stockholders’ equity
6. decreases in non-cash assets
a.1, 2, and 3
b.2, 3, and 4
c.1, 2, and 6
d.2, 3, and 5
e.3, 4, and 5

L.O.:8Type:ModerateSolution:c

106.An increase in stockholders’ equity can be calculated as: a.new issuance of stock plus net income plus cash dividends b.new issuance of stock plus net income less cash dividends c.new issuance of stock less net income less cash dividends d.new issuance of stock less net income plus cash dividends e.cannot be determined from the information provided

L.O.:8Type:ModerateSolution:b

Problems

107.Orchard Company has the following selected balance sheet and income statement information:

Income Statement Accounts For The Year Ended
December 31, 20X4
Income Tax Expense $ 15,000
Cost of Goods Sold 164,000
Sales 523,000
Wage Expense 88,000

Balance Sheet Accounts At December 31, 20X4 At December 31, 20X3 Accounts Payable $19,000 $17,000 Cash 19,000 12,000 Income Taxes Payable 21,000 9,000 Accounts Receivable 41,000 36,000 Inventory 12,000 23,000 Wages Payable 5,000 12,000

Determine the following items for the Orchard Company for the year ended December 31, 20X4: a. Cash received from customers
b. Cash paid to suppliers
c. Cash paid for wages
d. Cash paid for income taxes

L.O.:5Type:ModerateSolution:

a. Sales $523,000
Less: increase in A/R (5,000)
Cash received from customers $518,000

b. Cost of goods sold $164,000
Less: decrease in Inventory (11,000)
Less: increase in A/P ( 2,000)
Cash paid to suppliers $151,000

c. Wage expense $88,000
Add: decrease in wages payable 7,000
Cash paid for wages $95,000

d. Income tax expense $15,000
Less: increase in taxes payable (12,000)
Cash paid for taxes $ 3,000

108.During 20X4, Grinnell Company refinanced its long-term debt. It spent $66,000 to retire long-term debt due in 3 years and issued $100,000 of 10-year bonds at par. The company then bought and retired common shares of stock for cash of $35,000. Interest expense for 20X4 was $21,000, of which $17,000 was paid in cash; the other $4,000 was still payable at the end of the year. Dividends declared and paid during the year were $12,500. Determine net cash flows from financing activities.

L.O.:3Type:ModerateSolution:

Cash Flows from financing activities:
Proceeds from issuance of long-term debt $ 100,000 Payment to retire long-term debt (66,000) Payment to retire common stock (35,000) Dividends paid (12,500) Net cash used by financing activities $ (13,500)

Notice that both proceeds from the new issue of bonds and the retirement long-term debt are listed. Presenting only the net amount, $34,000 of proceeds, is not permitted. Also, the interest expense is omitted because it is an operating activity, not a financing activity.

109.In 20X4, Fish Distribution, Inc. had net income of $575,000. Fish also recorded $215,000 in depreciation. The company also had the following changes in its balance sheet accounts. Accounts Receivable $26,000 increase Inventories 11,000
decrease Accounts Payable 19,000 decrease

Compute the net cash provided by operating activities using the indirect method.

L.O.:6Type:ModerateSolution:

Net income $575,000 Add: depreciation expense 215,000 Less: increase in accounts receivable (26,000) Add: decrease in inventories 11,000 Less: decrease in accounts payable (19,000) Net cash provided by operating activities $756,000

110.The following data pertains to the Beautiful Flowers Company for the year of 20X4: a. Salaries and wages: accrued, $175,000; paid in cash $200,000. b. Depreciation, $50,000.

c. Interest expense, all paid in cash, $12,500.
d. Other expenses, all paid in cash, $112,000.
e. Income taxes accrued, $35,000; income taxes paid in cash, $33,000.
f. Bought plant and facilities for $365,000 cash.
g. Sales of $1,500,000, all on credit. Cash collections from customers, $1,250,000.
h. The cost of items sold was $750,000. Purchases of inventory totaled $825,000; inventory and accounts payable were affected accordingly.
i. Cash payments on trade accounts payable were $700,000. j. Issued long-term debt for $110,000 cash.
k. Paid cash dividends of $45,000.

Prepare a statement of cash flows using the direct method for reporting cash flows from operating activities. Omit supporting schedules.

L.O.:5Type:DifficultSolution:

Beautiful Flowers Company
Statement of Cash Flows
For the Year Ended December 31, 20X4

Cash from Operating Activities:
Cash received from customers $1,250,000 Cash paid to suppliers (700,000) Cash paid to employees (200,000) Cash paid for interest ( 12,500) Cash paid for other expenses (112,000) Cash paid for income taxes ( 33,000) Net cash provided by operating activities 192,500

Cash from Investing Activities:
Purchased plant & facilities (365,000)

Cash from Financing Activities:
Issued long-term debt 110,000 Paid cash dividends ( 45,000) Net cash provided by financing activities 65,000 Net decrease in cash $ (107,500)

111.Bass Manufacturing produces fishing equipment. Its 20X4 statement of cash flows included the following items, among others: Dividends paid $ 26,000
Depreciation on equipment 22,500
Issued common stock 123,250
Paid off long-term note payable 47,000
Net income 36,234
Purchases of stock of other companies 14,500
Purchases of equipment 75,000

Prepare the cash flows from financing activities section of the statement of cash flows. All items necessary for that section appear above, in addition to items that belong in the operating and investing sections.

L.O.:3Type:ModerateSolution:

Cash Flows From Financing Activities:
Dividends paid $(26,000) Issued common stock 123,250 Paid off long-term note payable (47,000) Net cash provided by financing activities $ 50,250

112.Decker Recreation issued common stock for $650,000 on the first day of 20X4. The company bought fixed assets for $435,000 cash and inventory for $50,000 cash. Later that same year, the company sold fixed assets for $10,000 more than their book value of $65,000. Half of the inventory was sold for $98,350 during the year. On December 15, cash was used to purchase $45,000 worth of Best Umbrella common stock, which Decker regarded as a long-term investment. Prepare the cash flows from investing activities of the statement of cash flows for Decker Recreation.

L.O.:4Type:ModerateSolution:

Cash From Investing Activities:
Purchase of fixed assets $(435,000) Sale of fixed assets 75,000 Purchase of long-term investmenet ( 45,000) Net cash used by investing activities $(405,000)

Table 5-5
Greenwood Company
Income Statement
For the Year Ended December 31, 20X4

Sales $624,000
Less Expenses:
Cost of Goods Sold $332,000
Wage Expense 211,000
Depreciation Expense 20,000
Rent Expense 18,000
Income Tax Expense 16,000 597,000
Net Income $ 27,000

Greenwood Company
Balance Sheet
December 31, 20X3 and 20X4
12/31/X4 12/31/X3 12/31/X4 12/31/X3 Current Assets: Current Liabilities: Cash $ 8,100 $ 10,600 Accounts Payable $ 57,200 $ 59,900 Accts. Rec. 66,100 53,400 Wages Payable 17,500 11,300 Inventory 27,700 35,900 Taxes Payable 7,100 8,200 Prepaid Rent 3,000 4,500 81,800 79,400 104,900 104,400 Owners’ Equity:

Long-term Assets: Common Stock 75,000 74,000 Fixed Assets 165,500 147,700 Retained Earnings 44,800 43,500 Acc. Depre. (68,800) (55,200) 119,800 117,500 96,700 92,500 Total Liabilities

Total Assets $201,600 $196,900 & Owners’ Equity $201,600 $196,900

113.Refer to Table 5-5. Determine the cash flows from operations for Greenwood Company, assuming the company uses the direct method.

L.O.:5Type:DifficultSolution:

Sales $624,000
Less: increase in accounts rec. (12,700)
Cash received from customers $611,300

Cost of goods sold $ 332,000
Less: decrease in inventory (8,200)
Add: decrease in accounts payable 2,700
Cash paid to suppliers $(326,500)

Wage expense $ 211,000
Less: increase in wages payable (6,200)
Cash paid for wages $(204,800)

Rent expense $ 18,000
Less: decrease in prepaid rent (1,500)
Cash paid for rent $(16,500)

Income tax expense $ 16,000
Add: decrease in taxes payable 1,100
Cash paid for taxes $(17,100)

Net cash provided by operations $ 46,400

114.Refer to Table 5-5. Determine the cash flows from operations for Greenwood Company, assuming the company uses the indirect method.

L.O.:6Type:ModerateSolution:

Net Income $27,000
Add: depreciation expense 20,000
Less: increase in accounts receivable (12,700) Add: decrease in inventory 8,200
Add: decrease in prepaid rent 1,500
Less: decrease in accounts payable (2,700) Add: increase in wages payable 6,200
Less: decrease in taxes payable (1,100) Net cash provided by operations $46,400

115.Boutique Candle had sales of $450,000, all received in cash. Total operating expenses were $350,000. All expenses except depreciation were paid in cash. Depreciation of $60,000 was included in the operating expenses. Ignore income taxes.

a.Calculate net income and net cash provided by operating activities, using the direct method.
b.Assume that depreciation is doubled. Compute net income and net cash provided by operating activities, using the direct method. c.Compare the results under both part (a) and part (b) and comment on the effect depreciation has on both net income and net cash provided by operating activities.

L.O.:7Type:DifficultSolution:

a. Sales revenue $450,000
Less: operating expenses 350,000
Net income $100,000

Cash received from customers $450,000
Less: cash operating expenses 290,000
Cash provided by operating activities $160,000

b. Sales revenue $450,000
Less: operating expenses 410,000
Net income $ 40,000

Cash received from customers $450,000
Less: cash operating expenses 290,000
Cash provided by operating activities $160,000

c.Net income decreases by $60,000 when depreciation doubles. However, cash from operating activities remains the same; this is because depreciation is a non-cash expense. Depreciation is an allocation of historical cost to expense and does not entail a current outflow of cash.

Essays

116.A company acquired a small building by signing a mortgage payable. How
would this transaction be shown in the statement of cash flows? Explain how this treatment fulfills the investors’ need for information regarding the financial management of the company.

L.O.:1Type:ModerateSolution:

This transaction would not be shown in the body of the statement of cash flows because it doesn’t involve any cash activity. However, it should be reported in a separate schedule outlining significant investing and financing activities. This transaction is reported because it could have been accomplished by signing a note payable for cash and then buying the building with the cash. Readers of statements of cash flows should be informed about any significant investing and financing transactions, regardless of whether cash was directly involved. It helps investors understand where financing was obtained and how it was used (i.e., the financial management of the company).

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