Chapter 12
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Page 21
59. Cash flows from issuing and repurchasing stock or issuing and repaying (retiring) debt are classified as
a. operating activities.
b. investing activities.
c. financing activities.
d. borrowing activities.
60. Which of the following is not an operating activity?
a. Cash collections from credit customers
b. Cash payments for operating expenses
c. Cash receipts for interest earned
d. Cash payments for dividends to stockholders
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61. Which of the following is not an investing activity?
a. Purchase of investments for cash
b. Purchase of equipment for cash
c. Sale of merchandise for cash
d. Sale of land for cash
62. Which of the following is not a financing activity?
a. Issuing bonds for cash
b. Selling an investment in IBM stock for cash
c. Purchasing a company’s own stock (treasury stock) for cash
d. Making a cash payment to repay a bank loan
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63. Below is information for Dakota Corp. for 2017 and 2018:
Bonds payable, December 31, 2017 $500,000
Bonds payable, December 31, 2018 800,000
Loss on bond retirement—2018 15,000
Interest expense on bonds—2018 45,000
At the end of 2018, Dakota issued bonds at par value for $800,000 cash. The proceeds from these bonds were used to
retire the $500,000 bond issue outstanding at the end of 2018 (before their maturity date). All interest expense was paid in
cash during 2018.
The following statements describe how Dakota reported the cash flow effects of the items described above on its 2018
statement of cash flows. The indirect method is used to prepare the Operating Activities section. Which of the following
has been reported incorrectly by Dakota?
a. Proceeds of $800,000 from the issuance of bonds were reported as a cash inflow in the Financing Activities
section.
b. The loss on bond retirement of $15,000 was added to net income in the Operating Activities section.
c. Payments of $500,000 for the bond retirement were reported as a cash outflow in the Investing Activities section.
d. Interest expense of $45,000 was not reported separately because it is included in net income in the Operating
Activities section.
64. Which of the following should be classified as an investing activity on the statement of cash flows?
a. Interest on notes payable
b. Payment to suppliers for inventory
c. Payment of dividends
d. None of these are correct
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Page 24
65. In 2017, Valencia Company purchased equipment for $363,000 and also sold some special purpose machinery with a
book value of $155,000 for $182,000. In its statement of cash flows for 2017, Valencia should report the following with
respect to the above transactions:
a. $363,000 cash used by operating activities; $182,000 cash provided by financing activities.
b. $181,000 net cash used by investing activities.
c. $181,000 net cash used by investing activities; $27,000 net cash provided by operating activities.
d. $363,000 net cash used by investing activities.
66. Below are several transactions for Louisville Company:
Proceeds from issuance of bonds payable $635,000
Payment to purchase equipment 275,000
Payment of wages 115,000
Payment of dividends 155,000
Payment to pay off notes payable 195,000
Based on these transactions, what is the net cash flow from financing activities?
a. $285,000 net cash provided by financing activities
b. $275,000 net cash used for financing activities
c. $0, because cash inflows equal cash outflows from financing activities
d. $440,000 net cash provided by financing activities
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Page 25
67. Operating, investing, and financing activities affect certain balance sheet accounts. Which of the following statements
is true?
a. Operating activities primarily involve transactions that affect noncurrent assets.
b. Investing activities primarily involve U.S. government securities and long-term productive assets.
c. Financing activities primarily involve transactions that affect current liabilities.
d. Different balance sheet accounts are affected depending on whether the direct or indirect method is used.
68. Which balance sheet accounts are most affected by operating activities?
a. Current assets and current liabilities
b. Long-term assets
c. Long-term liabilities
d. Stockholders’ equity
69. Which balance sheet accounts are most affected by investing activities?
a. Current assets and current liabilities
b. Long-term assets
c. Long-term liabilities
d. Stockholders’ equity
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Page 26
70. Which balance sheet accounts are most affected by financing activities?
a. Current assets
b. Current liabilities
c. Long-term assets
d. Long-term liabilities and stockholders’ equity
71. Springdale Co. reported net income of $200,000. Cash from operations
a. will be more than $200,000.
b. will be less than $200,000.
c. will be equal to $200,000.
d. cannot be determined without more information.
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Page 27
72. Carson City Saloon purchased a $25,000 truck for catering from its restaurant. It made a down payment of one-fourth
of the price. What combination of amounts would affect the income statement and statement of cash flows for the
purchase of the truck?
Income Statement Cash Flow Statement
a.
$25,000 $0
b.
$0 $(25,000)
c.
$25,000 $(6,250)
d.
$0 $(6,250)
73. A review of Young’s Garden’s Center statement of cash flows showed the following:
Cash flows from operating activities $ 15,000
Cash flows from investing activities 80,000
Cash flows from financing activities (60,000)
From this information, the most likely explanation is that Young’s is
a. using cash from operations and selling long-term assets to pay back debt.
b. using cash from operations and borrowing to purchase long-term assets.
c. using its profits to expand growth.
d. using cash from investors to provide for operations.
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Page 28
74. A review of Jerry’s Canoe Gallery’s statement of cash flows showed the following:
Cash flows from operating activities $ 75,000
Cash flows from investing activities (135,000)
Cash flows from financing activities 125,000
From this information, the most likely explanation is that Jerry’s is
a. using cash from operations and selling long-term assets to pay back debt.
b. using cash from operations and borrowing to purchase long-term assets.
c. using its profits to expand growth.
d. using cash from investors to provide for operations.
75. A review of Jan’s Lakeside Resort’s statement of cash flows showed the following:
Cash flows from operating activities $ 35,000
Cash flows from investing activities 75,000
Cash flows from financing activities (125,000)
From this information, the most likely explanation is that Jan’s is
a. using cash from operations and selling long-term assets to pay back debt
b. using cash from operations and borrowing to purchase long-term assets.
c. using its profits to expand growth.
d. using cash from investors to provide for operations.
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Page 29
76. Eduardo’s Texas Cantina had the following results for December 31, 2017 and 2018, respectively:
2017 2018
Cash $ 42,000 $ 49,000
Noncash current assets 162,000 175,000
Cash flows from financing activities 313,000
Cash flows from operating activities 72,000
What was the amount of cash flows from investing activities for 2018?
a. Cash inflow of $378,000
b. Cash outflow of $378,000
c. Cash outflow of $7,000
d. Cash outflow of $391,000
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Page 30
77. Francetti Co. purchased $6,000 of napkins for its business. One-fourth of the bill is unpaid. A review of the napkins
still on hand showed that 20% were still available. What combination of amounts would affect the income statement and
statement of cash flows?
Statement of Cash Flow Income Statement
a.
$(6,000) $(6,000)
b.
$(4,500) $(6,000)
c.
$(4,500) $(4,800)
d.
$(6,000) $(4,800)
78. A mortgage incurred in exchange for an office building would be reported in the statement of cash flows in
a. the cash flows from Financing Activities section.
b. the cash flows from Investing Activities section.
c. a separate schedule.
d. the cash flows from Operating Activities section.
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Page 31
79. Which method of preparing the Operating Activities section of a statement of cash flows adjusts net income to remove
the effects of deferrals and accruals for revenues and expenses?
a. The direct method
b. The indirect method
c. Both the direct and indirect methods
d. Neither the direct method nor the indirect method
80. Which method of preparing the Operating Activities section of a statement of cash flows reports major classes of gross
cash receipts and cash payments for revenues and expenses?
a. The direct method
b. The indirect method
c. Both the direct method and indirect methods
d. Neither the direct method nor the indirect method
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Page 32
81. Which of the following statements is true?
a. The method of preparing the Operating Activities section of a statement of cash flows that adjusts net income to
remove the effects of deferrals and accruals for revenues and expenses is the direct method.
b. The method of preparing the Operating Activities section of a statement of cash flows that reports major classes
of gross cash receipts and cash payments for revenues and expenses is the indirect method.
c. The FASB prefers the indirect method of preparing the Operating Activities section of the statement of cash flows.
d. Most companies use the indirect method of preparing the Operating Activities section of the statement of cash
flows.
82. Which of the following statements is false?
a. The method of preparing the Operating Activities section of a statement of cash flows that adjusts net income to
remove the effects of deferrals and accruals for revenues and expenses is the indirect method.
b. The method of preparing the Operating Activities section of a statement of cash flows that reports major classes
of gross cash receipts and cash payments for revenues and expenses is the direct method.
c. The FASB prefers the direct method of preparing the Operating Activities section of the statement of cash flows.
d. Most companies use the direct method of preparing the Operating Activities section of the statement of cash
flows.
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Page 33
83. Presented below is the Operating Activities section of the statement of cash flows for Golden Consulting for 2017:
Operating activities:
Net income $ 92,000
Add: Depreciation 20,000
Decrease in accounts receivable 8,000
$120,000
Deduct: Decrease in accounts payable (6,000)
Net cash inflow from operating activities $114,000
Which method of preparing the Operating Activities section has Golden Consulting used?
a. The direct method
b. The indirect method
c. Either method
d. Cannot be determined without further information
84. Presented below is the Operating Activities section of the statement of cash flows for Feline Friends Corp. for 2017:
Operating activities:
Cash collected from customers $165,000
Cash payments for merchandise (83,000)
Cash payments for operating expenses (58,000)
Net cash inflow from operating activities $ 24,000
Which method of preparing the Operating Activities section has Feline used?
a. The direct method
b. The indirect method
c. Either method
d. Cannot be determined without further information
85. The following items were reported on the balance sheets and income statement for Carlton Co.:
Accounts receivable, December 31, 2017 $185,000
Accounts receivable, December 31, 2018 178,000
Sales—2018 850,000
Chapter 12
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Page 34
What amount would be reported in the Operating Activities section of the statement of cash flows for collections from
customers under the direct method assuming that all sales are on credit?
a. $850,000
b. $857,000
c. $843,000
d. Cannot be determined without further information
86. The following items were reported on the balance sheets and income statement for Centerton Inc., a service company:
Accounts payable, December 31, 2017 $ 64,000
Accounts payable, December 31, 2018 48,000
Operating expenses—2018 170,000
What amount would be reported in the Operating Activities section of the statement of cash flows for payments for
operating expenses under the direct method?
a. $186,000
b. $154,000
c. $180,000
d. $170,000
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Page 35
87. The following items were reported on the balance sheets and income statement for Flying Mullet Company:
Accounts receivable, December 31, 2017 $ 85,000
Accounts receivable, December 31, 2018 98,000
Sales—2018 750,000
How would the change in accounts receivable be reported in the Operating Activities section of the statement of cash
flows under the indirect method?
a. As an addition to sales
b. As a deduction from sales
c. As an addition to net income
d. As a deduction from net income
88. The following items were reported on the balance sheets and income statement for Bezos Corp.:
Accounts payable, December 31, 2017 $ 42,000
Accounts payable, December 31, 2018 48,000
Operating expenses 286,000
How would the change in accounts payable be reported in the Operating Activities section of the statement of cash flows
under the indirect method?
a. As an addition to operating expenses
b. As a deduction from operating expenses
c. As an addition to net income
d. As a deduction from net income
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Page 36
89. During 2017, the accounts receivable balance of Dickerson Corp. increased. Which of the following statements is
true?
a. This indicates that Dickerson sold more than it collected in cash during the period.
b. This increase is added to net income in the Operating Activities section of a statement of cash flows prepared
under the indirect method.
c. This increase is added to sales recognized on the income statement to determine the cash collections from
customers during the period.
d. This increase is considered only when the Operating Activities section of a statement of cash flows is prepared
under the indirect method.
90. During 2017, the accounts payable balance of Andreas Corp. decreased. Which of the following statements is true?
a. This decrease indicates that Andreas paid less during the period than it recognized as expenses on the income
statement.
b. This decrease is added to net income in the Operating Activities section of a statement of cash flows prepared
under the indirect method.
c. This decrease is deducted from net income in the Operating Activities section of a statement of cash flows prepared
under the indirect method.
d. This decrease is considered only when the Operating Activities section of a statement of cash flows is prepared
under the direct method.
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Page 37
91. Occasionally, companies engage in important investing and financing activities that do not affect cash. If the amount
of the transaction is significant, how should it be disclosed when financial statements are prepared?
a. It should be disclosed in the Investing section if the amount of investing activities is greater than the financing
activities amount.
b. It should be disclosed in the Financing section if the amount of financing activities is greater than the investing
activities amount.
c. It should be disclosed in a note to the financial statements or in a supplemental schedule.
d. The transaction does not need to be disclosed.
92. Klein Corp. acquired land by issuing its common stock. How should this transaction be disclosed when a statement of
cash flows is prepared?
a. It should be disclosed in a supplemental schedule of noncash investing and financing activities or in a note.
b. The acquisition of land should be reported as an investing activity and the issuance of the stock as a financing
activity.
c. It should be included in a printout of the general ledger Common Stock account with the statement of cash flows.
d. The transaction does not need to be disclosed.
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Page 38
93. Which of the following transactions is a significant noncash investing and financing activity?
a. Land is purchased for cash.
b. Bonds are issued for cash.
c. Cash equivalents are purchased.
d. Equipment is acquired by issuing a long-term note.
94. Each of the following transactions would be classified as either an investing or a financing activity except when
a. investments in stock are purchased.
b. a bank loan is obtained.
c. stock is issued to acquire land.
d. dividends are paid.
95. When using the direct method, how is depreciation expense recorded on the statement of cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. Not reported on the statement of cash flows
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Page 39
96. When using the direct method, how is the purchase of equipment for cash shown on the statement of cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. As a noncash investing and financing activity
97. When using the direct method, how is the collection of cash from customers shown on the statement of cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. As a noncash investing and financing activity
98. When using the direct method, how is the issuance of stock for cash shown on the statement of cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. As a noncash investing and financing activity
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Page 40
99. When using the direct method, how is the retirement of bonds payable at their maturity date shown on the statement of
cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. As a noncash investing and financing activity
100. When using the direct method, how is the payment of a cash dividend shown on the statement of cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. As a noncash investing and financing activity
101. When using the direct method, how are salaries paid to employees reported on the statement of cash flows?
a. As an operating activity
b. As an investing activity
c. As a financing activity
d. As a noncash investing and financing activity