15. During 2015, equipment was sold for $57,000. This equipment cost $90,000 and had a
book value of $47,000. Accumulated depreciation for equipment was $184,000 at
12/31/15 and $147,000 at 12/31/14. Show how the results of the three items will appear
on the statement of cash flows using the indirect method from this information.
16. Wilson Corporation reported cost of goods sold of $100,000. On January 1, Wilson
Corporation had inventory and accounts payable of $21,000 and $33,000, respectively.
On December 31, inventory and accounts payable were $28,000 and $20,000,
respectively. Calculate cash payments to suppliers of inventory.
Solution:
17. Parton Inc.. reported accounting service revenue of $450,000 for 2015. On January 1,
2015, Parton Inc. had $38,000 of accounts receivable and $0 of cash deposits received
from customers. On December 31, 2015, accounts receivable and deposits received
were $49,000 and $6,000, respectively. Calculate the amount of cash collected from
clients during 2015.
Solution:
18. Lawson Co. sold equipment that cost $40,000 and a current book value of $18,000, for
$20,000 cash. Lawson purchased additional equipment during the year. Data from the
company’s balance sheets at December 31, 2015 and 2014 are:
12/31/15
12/31/14
Equipment
$650,000
$520,000
Accumulated depreciation
106,000
82,000
Show how the results of the transactions will appear on the statement of cash flows
using the indirect method.
Solution:
Net income
$ XX
Gain on sale of equipment ($20,000 – $18,000)
(2,000)
Depreciation expense ($82,000 – $22,000 – $106,000)
46,000
Sale of machine
$ 20,000
Purchase of machine ($520,000 – $40,000 – $650,000)
(170,000)
19. Relevant account balances for Jeremy Supply Co. are:
Accounts
12/31/15
1/01/15
Accounts receivable
$16,000
$ 9,000
Inventory
6,000
3,000
Accounts payable
11,000
20,000
Income information:
Revenue
$ 48,000
Cost of goods sold
$27,000
Operating expenses
18,000
Depreciation
5,000
50,000
Net loss
$ (2,000)
Determine the amount of cash provided (used) by operations for 2015.
Solution:
Net loss
($2,000)
Depreciation
5,000
Increase in accounts receivable
(7,000)
Increase in inventory
(3,000)
Decrease in accounts payable
(9,000)
Cash used by operations
($16,000)
KP 6 BT: K Difficulty: Easy TOT: 5 min. AACSB: Analytic
AICPA BB: Critical Thinking AICPA FN: Reporting
20. Benton Company reported insurance expense of $301,000 during the current year. On
January 1 and December 31 of the current year, prepaid insurance was $28,000 and
$41,000, respectively. Calculate cash paid for insurance premiums for the current year.
Solution:
Use the information for Winthrop Company for the year ending December 31, 2015 that
follows to answers questions 21 through 23.
The following are relevant account balances from Winthrop Company’s comparative
balance sheet and 2015 income statement.
December 31, 2015
January 1, 2015
Accounts receivable
$15,000
$19,000
Prepaid insurance
5,000
3,000
Unearned revenue
8,000
11,000
Salaries payable
9,000
6,000
Winthrop’s 2015 income statement includes the following:
Sales revenue
$89,000
Insurance expense
4,000
Salaries expense
31,000
21. Determine the amount of cash collected from customers during 2015.
Solution:
22. Determine the amount of cash paid for insurance during 2015.
Solution:
23. Determine the amount of cash paid for salaries during 2015.
Solution:
24. During 2015, Bacon Co. reported a net operating loss of $19,000. The only asset or
liability changes during 2015 were a decrease in accounts receivable of $11,000 and an
increase in accumulated depreciation of $42,000. Calculate cash flows from operations
during 2015 (indicate outflow or inflow).
Solution:
Use the information for Hampton Inc. for the year ending December 31, 2009 that follows
to answer questions 25 through 28.
The following are relevant account balances from Hampton’s comparative balance sheet and
2015 income statement. Hampton’s balance sheets:
December 31, 2015
January 1, 2015
Cash
$ 6,000
$ 9,000
Accounts receivable
8,000
12,000
Merchandise inventory
29,000
18,000
Prepaid rent
6,000
4,000
Equipment
100,000
80,000
Accumulated depreciation
(28,000)
(13,000)
Total assets
$121,000
$110,000
Accounts payable
$ 9,000
$ 25,000
Dividends payable
6,000
4,000
Common stock
38,000
32,000
Retained earnings
68,000
49,000
Total liabilities and shareholders’ equity
$121,000
$110,000
Other information:
No equipment was sold or retired during 2015. Hampton’s net income for 2015 was
$33,000.
25. Calculate depreciation expense for 2015.
Solution:
26. Calculate the amount of dividends paid during 2015.
Solution:
27. Determine the cost of the equipment purchased during 2015.
Solution:
28. Calculate the cash proceeds from the issuance of common stock during 2015.
Solution:
29. Selected information from the 2014 and 2015 accounting records of Roman Corp. is
provided below:
12/31/15
12/31/14
Net cash provided by operations
$38,000
$7,000
Net cash provided (used) by investing activities
(19,000)
16,000
Net cash provided (used) by financing activities
43,000
(9,000)
Cash balance
?
23,000
Calculate the December 31, 2015 ending cash balance.
Solution:
SHORT ESSAY QUESTIONS
1. How is the statement of cash flows linked to the balance sheet?
Solution:
sheets. The statement of cash flows adds the beginning cash balance to the change in
14–38 Test Bank – Chapter 14 – The Statement of Cash Flows
KP 3 BT: K Difficulty: Easy TOT: 4 min. AACSB: Analytic, Communication
AICPA BB: Critical Thinking AICPA FN: Reporting
2. How do ‘cash equivalents’ fit into the statement of cash flows?
Solution:
Cash equivalents include typical cash items such as coins, currency, available funds on
deposit in the bank, money orders, certified checks, cashier‘s checks, personal checks,
3. How does the direct method of preparing the statement of cash flows differ from the
indirect method?
Solution:
4. In the operating activities section of a statement of cash flows prepared using the
indirect method certain items are added to net income. Why is depreciation added?
Test Bank – Chapter 14 – The Statement of Cash Flows 14–39
Solution:
Depreciation is added to net income because it is a non-cash item that was subtracted
5. In the operating activities section of a statement of cash flows prepared using the
indirect method certain items are added to, or subtracted from, net income. Why are
changes in current accounts added or subtracted?
Solution:
6. The international financial reporting standards are requiring a statement of cash flows.
Why is this and what are some of the unique issues that multinational companies must
understand when interpreting these statements?
Solution:
7. Why is cash generated from operating activities more important than cash generated
from other sources?
Solution:
Cash generated from operating activities is a normality in business and is expected to
8. Presented below is a partial statement of cash flows for Santiago Company for the year
ending June 30,2015.
Net income
$44,000
Adjustments to net income:
Add: Depreciation
7,000
Decrease in accounts receivable
12,000
Increase in salaries payable
5,000
Less: Gain on sale of equipment
(1,000)
Increase in inventories
(2,000)
Decrease in accounts payable
(5,000)
Net cash inflows from operating activities
$60,000
Mr. Santiago, the president of the Company, is puzzled by why a difference exists on the
statement presented above, as compared to the company’s income statement for the
same period that shows net income of $44,000. Provide justification why the two
amounts might not be equal.
Solution:
The operating activities section of the statement of cash flows reflects only the cash
basis of revenues—the cash inflows, and the cash basis of expenses—the cash
9. Explain financial flexibility and what information it provides.
Solution:
The ability to generate cash is determined by the strength of the company’s operating
10. How are changes in foreign currency valuations reported on a statement of cash flows?
Solution:
If a U.S. corporation sells goods or services to a customer in foreign country, a gain or
11. Explain the ways in which management can ‘window dress’ the statement of cash flows.
Solution:
In the short run, it is relatively easy for management to present a favorable cash