Chapter 15
1. Net income for a particular period will likely differ from cash flow from operations for the same period.
2. Firms typically report cash flows from operations using the direct method.
3. The proper interpretation of information in the statement of cash flows requires an understanding of the
economic characteristics of the industries in which a firm conducts operations and a multi-period view.
4. Some investing and financing transactions do not involve cash but appear on the statement of cash flows.
5. When using the indirect method to calculate cash flow from operations, add back the subtraction for minority
interest in earnings of consolidated, but less than 100%-owned subsidiaries to derive cash flow from
operations.
6. The statement of cash flows explains the reasons for the change in cash and cash equivalents during a period.
This statement classifies the reasons as relating to
7. Which of the following is/are true?
8. Which of the following is/are not true?
9. Firms typically report cash flows from operations using the indirect method. The indirect
method starts with net income, then adds any expense amount that does not use cash, and subtracts any revenue
amount that does not provide cash. The adjustments to convert net income to cash flow from operations
generally does not involve
10. Cash flow from investing activities includes
11. Cash flow from investing activities does not include
12. Cash flow from financing activities includes
13. Cash flow from financing activities do not include
14. Some investing and financing transactions do not involve cash and therefore
15. What method starts with the total for net income? Then it adds amounts for expenses not using cash in the
amount of the expense and subtracts for revenues not producing cash in the amount of the revenue. Then it
removes the effects of nonoperating gains and losses—subtracting the amount of the gains and adding back the
amount of the losses. Finally, it adds or subtracts balance sheet changes involving non-cash operating
accounts.
16. What method starts with the components of income, the individual revenues and expenses, but not gains and
losses, then adds or subtracts the same balance sheet changes involving the same operating accounts? Take an
income statement line, then list next to it, horizontally, additions and subtractions.
17. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. _____ will likely show a substantial
addback to net income for depreciation expense, whereas _____will show a smaller amount.
18. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. _____ usually show an addback for
deferred tax expense, whereas firms that _____ show a subtraction.
19. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. Firms that grow or diversify by
acquiring minority ownership positions in other businesses will often show a
20. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. _____ will usually show additions
or subtractions for losses and gains on the disposal of assets.
21. The adjustment for changes in operating working capital accounts depends in part on a firm’s rate of
growth. _____ firms usually experience significant increases in accounts receivable and inventories.
22. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. Some firms use _____ to finance
the working capital needs.
23. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. During the _____ cash outflow
exceeds cash inflow from operations because operations are not yet earning profits while the firm must invest in
accounts receivable and inventories. Investing activities result in a net cash outflow to build productive
capacity. Firms must rely on external financing during this phase to overcome the negative cash flow from
operations and investing.
24. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. The _____ phase reflects sales of
successful products, and net income turns positive. The firm makes more sales, but it also needs to acquire more
goods to sell. Because it usually must pay for the goods it acquires before it collects for the goods it sells, the
firm finds itself often short of cash from operations. The faster it grows (even though profitable), the more cash
it needs. Banks do not like to lend for such needs. They view such needs (even though for current assets) as a
permanent part of the firm’s financing needs. Thus, banks want firms to use shareholders’ equity or long-term
debt to finance growth in nonseasonal inventories and receivables.
25. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. During the _____, net income
usually reaches a peak, and working capital stops growing. Operations generate positive cash flow, enough to
finance expenditures on property, plant, and equipment. Capital expenditures usually maintain, rather than
increase, productive capacity. Firms use the excess cash flow to repay borrowing from the introduction and
growth phases and to begin paying dividends to shareholders.
26. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. During the _____, weakening
profitability—from reduced sales or reduced profit margins on existing sales— signals the beginning of the
phase, but ever-declining accounts receivable and inventories can produce positive cash flow from operations.
In addition, sales of unneeded property, plant, and equipment can result in positive cash flow from investing
activities. Firms can use the excess cash flow to repay remaining debt or diversify into other areas of business.
27. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. Biotechnology firms are in their
_____ phase, consumer foods companies are in their _____ phase, and U.S. auto manufacturers are in the _____
phase.
28. Firms engage in transactions involving derivatives. For the most part, the complex parts of these
transactions occur _____, but those transactions do _____ until, possibly, their settlement.
29. Which of the following is/are true?
30. Which of the following is/are not true?
31. Which of the following is/are true?
32. Which of the following is not true regarding the fair value option for marketable securities and derivatives?
33. Which of the following istrue regarding the fair value option for marketable securities and derivatives?
34. Which of the following is not true regarding the fair value option for marketable securities and derivatives?
35. In U.S. GAAP, which of the following accurately describes the effects of transactions involving investments
on the statement of cash flows using the fair value method for securities available for sale and cash flow
hedges?
36. In U.S. GAAP, which of the following accurately describes the effects of transactions involving investments
on the statement of cash flows using the Fair value method for trading securities and fair value hedges.
37. In U.S. GAAP, which of the following accurately describes the effects of transactions involving investments
on the statement of cash flows?
38. In U.S. GAAP, which of the following accurately describes the effects of transactions involving investments
on the statement of cash flows?
39. The ____ explains the reasons for the changes in cash and cash equivalents during a period. This statement
classifies the reasons as relating to operating, investing, and financing activities.
40. Firms typically report cash flows from operations using the
41. In determining cash flows from operations, which method starts with net income, then add noncash
expenses and subtracts noncash revenues?
42. Which method of preparing the statement of cash flows starts with the total for net income and removes the
effects of gains and losses from nonoperating transactions, and then adds or subtracts balance sheet changes
involving operating accounts?
43. Which method of preparing the statement of cash flows starts with the components of income, the individual
revenues and expenses, but not gains and losses, then adds or subtracts the same balance sheet changes
involving the same operating accounts?
44. In determining cash flows from operations under the indirect method, the adjustments to convert net income
to cash flow from operations generally involve _____ the amount by which an expense exceeds the related cash
expenditure for the period (for depreciation, the entire amount).
45. In determining cash flows from operations under the indirect method, the adjustments to convert net income
to cash flow from operations generally involve ____ the amount by which a revenue exceeds the related cash
receipt for the period (such as equity method earnings exceeding dividends).
46. In determining cash flows from operations under the indirect method, the adjustments to convert net income
to cash flow from operations generally involve ____ credit changes in operating working capital accounts, such
as accounts receivable, inventories, or accounts payable.
47. In determining cash flows from operations under the indirect method, the adjustments to convert net income
to cash flow from operations generally involve ____ debit changes in operating working capital accounts.
48. Cash flow from ____ activities includes purchases and sales of marketable securities, investments in
securities, property, plant, and equipment, and intangibles.
49. Cash flow from ____ activities includes increases and decreases in short-term and long-term borrowing,
increases and decreases in common and preferred stock, and dividends.
50. The accountant prepares the statement of cash flows after completing the
51. The first step in theprocedure for preparing the statement of cash flows using a T-account work sheet is to
52. In theprocedure for preparing the statement of cash flows using a T-account work sheet, a master T-account
for _____ appears at the top of the work sheet.
53. In preparing a T-account work sheet, a master T-account for cash appears at the top of the work sheet. This
master T-account has three sections, labeled
54. The beginning and the ending balances in cash and cash equivalents are entered in the master T-account for
preparing the statement of cash flows. Cash equivalents represent _____ in which a firm has temporarily placed
excess cash.
55. Generally only investments with maturities of _____ months or less qualify as cash equivalents.
56. The term cash flows refers to changes in
57. The second step of completing the T-account work sheet for generating the statement of cash flows is to
prepare a T-account for each balance sheet account other than _____ and enter the beginning and the ending
balances.
58. In order to explain the change in the master cash account between the beginning and the end of the period,
the accountant reconstructs the entries originally made in the accounts during the period and enters them in
appropriate T-accounts on the T-account work sheet. By explaining the changes in balance sheet accounts other
than cash, this process also explains the change in
59. In preparing the statement of cash flows for Year 5, internal records indicate that depreciation on
manufacturing facilities totaled $500 and on selling and administrative facilities totaled $300 during the year.
The firm included these amounts in cost of goods sold and selling and administrative expenses, respectively, in
the income statement for Year 5. None of this $800 of depreciation required an operating cash flow during Year
5. The firm reported cash expenditures for these assets as investing activities in the earlier periods when it
acquired them. The T-account work sheet entry to explain the change in the Accumulated Depreciation
account.
60. In preparing the statement of cash flows for Year 4, internal records indicate that depreciation on
manufacturing facilities totaled $800. The firm included this amount in cost of goods sold in the income
statement for Year 4. None of the of depreciation required an operating cash flow during Year 4. The T-account
work sheet entry adds back the $800 of depreciation on manufacturing facilities. Accountants treat depreciation
charges on manufacturing facilities as
61. The effect of patent amortization on cash flow is conceptually identical to that of
62. To avoid understating the amount of cash flow from operations, the accountant
63. Notes to the Year 2 financial statements of Ben Corporation indicate that income tax expense of $3,000
comprises $2,000 currently payable taxes and $1,000 deferred to future periods. Ben Corporation made the
following entry during Year 2 to recognize income tax expense:
Income Tax Expense . . . . . . . . . . . . . . 3,000
Income Tax Payable . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Deferred Income Taxes Payable . . . . . . . . . . . . . . . 1,000
The $1,000 of deferred income taxes reduced net income but did not require a cash outflow during Year 2. To
explain the change in the Deferred Income Taxes account, the T-account work sheet must.
64. Bonds Payable on the balance sheet of Peter LLC includes one series of bonds initially issued at a premium.
The entry made in the accounting records for interest expense during the period was as follows:
Interest Expense . . . . . . . . . . . . . . . . .4,500
Premium on Bonds Payable . . . . . . . . . . 500
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
The firm spent $5,000 of cash even though it subtracted only $4,500 of interest expense in computing net
income. In preparing the statement of cash flows using the T-account work sheet
65. The statement of cash flows classifies cash used for interest expense as
66. Keith Inc.
The accounting records of Keith Inc. indicate that the firm sold for $1,800 during Year 2 a machine originally
costing $6,000, with accumulated depreciation of $4,600. The journal entry made to record this sale was as
follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,800
Accumulated Depreciation. . . . . . . . . . . . . . . . . . . . . . .4,600
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Gain on Disposal of Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 400
In preparing the statement of cash flows using the T-account worksheet, the accountant
67. Keith Inc.
The accounting records of Keith Inc. indicate that the firm sold for $1,800 during Year 2 a machine originally
costing $6,000, with accumulated depreciation of $4,600. The journal entry made to record this sale was as
follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,800
Accumulated Depreciation. . . . . . . . . . . . . . . . . . . . . . .4,600
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Gain on Disposal of Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 400
In preparing the Statement of cash flows, all the cash proceeds of $1,800 appear as an increase in cash from
68. The balance sheet indicates that Paul Corporation owns 40 percent of the common stock of Sun Company.
During Year 2, Sun Company earned $12,000 and paid $4,000 of dividends. Paul Corporation made the
following entries on its books during the year.
Investment in Company B . . . . . . . . . . . . . . . . . . . . . 4,800
Equity in Earnings of Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Net income of Paul Corporation includes $4,800 of equity income. It received only $1,600 of cash.
The T-account work sheet for preparing the statement of cash flows
69. The accounting records of Keith Inc. indicate that the firm sold for $1,800 during Year 2 a machine
originally costing $6,000, with accumulated depreciation of $4,600. The journal entry made to record this sale
was as follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1,800
Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . 4,600
Loss on Disposal of Equipment . . . . . . . . . . . . . . . . . . . . 400
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
In preparing the statement of cash flows using the work sheet, the accountant.
70. Prepayments for Julianna Company decreased by $2,000 during Year 3, the firm expensed less cash during
Year 3 for new prepayments than it expensed prepayments of earlier years. Assume that all prepayments relate
to selling and administrative activities. The journal entries that Julianna Corporation made in the accounting
records during the year had the following combined effect:
Selling and Administrative Expenses . . . . . . . . . . . . . . 35,500
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,500
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
To explain the change in the statement of cash flows T-account work sheet for Prepayments
71. During Year 4, Charley Company had a net increase in accounts payable for purchases on account.
Accounting classifies this source of cash in the _____ section of the statement of cash flows.
72. During Year 6, Delta Company had a net $4,000 increase in customer advances. The T-account work sheet
for preparing the statement of cash flows
73. During Year 7, Frank Company had a net increase in accounts receivable of $10,000. The T-account work
sheet for preparing the statement of cash flows
74. In Year 8, Global Marketing Corporation had a net increase in inventories of $50,000. The T-account work
sheet for preparing the statement of cash flows
75. During Year 9, Happy Motors Corp. had a net $100,000 decrease in Warranties Payable. The T-account
work sheet for preparing the statement of cash flows
76. King Corporation borrowed $75,000 during Year 2 from its bank under a short-term borrowing
arrangement. The statement of cash flows for King Corporation classifies the transaction as a(n)
77. Queen Corporation borrowed $750,000 during Year 3 from its bank under a long-term borrowing
arrangement. The statement of cash flows classifies the transaction as a(n)
78. Jack Corporation issued preferred stock totaling $10,000,000 during Year 4. The statement of cash flows
classifies the transaction as a(n)
79. Ten Corporation retired $7,500,000 of long-term debt at maturity. The income statement shows no gain or
loss on retirement of debt. The statement of cash flows classifies the transaction as a(n)
80. Nine Corporation acquired 1,000,000 shares of its own common stock for $10,000,000 during Year 2. The
statement of cash flows classifies the transaction as a(n)