978-1337276337 Test Bank Chapter 12 Part 4

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138. Washington Corp. reported the following information for 2017 and 2018:

2017 2018

Accounts receivable $101,000 $93,000

Prepaid expenses 5,000 6,000

Accounts payable 71,000 76,000

Salaries payable 5,000 4,000

Net income 80,000

Depreciation expense 9,000

Gain on sale of equipment 5,000

If Washington uses the indirect method to prepare the Operating Activities section of the statement of cash flows, what

amount will be reported as net cash inflow from operating activities for 2018?

a. $73,000

b. $83,000

c. $95,000

d. $105,000

139. Two methods are available to prepare the Operating Activities section of a statement of cash flows. Which of the

following statements regarding these two methods is false?

a. If a company uses the indirect method, it must separately disclose the cash payments made for interest and income

taxes.

b. If a company uses the direct method, it must present a separate schedule that reconciles net income to net cash

from operating activities.

c. Advocates of the direct method believe that the indirect method reveals too much by telling readers gross amounts

of cash receipts and cash payments from operations.

d. The FASB prefers the direct method, while most companies use the indirect method in practice.

140. Which of the following is an addition to net income when the indirect method is used?

a. An increase in inventory

b. A loss on sale of equipment

c. A decrease in accounts payable

d. An increase in accounts receivable

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142. Which of the following measures can be used to evaluate a company’s ability to meet future debt obligations after

paying income taxes and interest and making capital expenditures?

a. Earnings per share

b. Net income

c. Cash flow adequacy ratio

d. Net increase or decrease in cash and cash equivalents

143. Where would you tell someone to find the information needed to compute the cash flow adequacy ratio?

a. The balance sheet only

b. The statement of cash flows and the notes to the statements

c. The statement of cash flows only

Completion

144. The financial statement that primarily reflects events related to the operating activities of a business or the selling of

products or providing services is the __________.

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145. The financial statement that summarizes the operating, investing, and financing activities of a business over a period

of time is the __________.

146. __________ are items that are readily convertible into a known amount of cash and have an original maturity to the

investor of three months or less.

147. The term cash on the statement of cash flows includes __________.

148. An important __________ activity for many companies is acquiring property.

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149. The purchase of merchandise is an important __________ activity for a retailer.

150. The decrease in accounts receivable over a period results in a(n) __________ to net income reported in the Operating

Activities section of the statement of cash flows using the indirect method.

151. __________ activities involve long-term liabilities and stockholders’ equity.

152. Under the __________, a company reports its major classes of gross cash receipts and cash payments in the

Operating Activities section of the statement of cash flows.

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153. Under the __________, the net cash flow from operating activities is computed by adjusting net income to remove

the effect of all deferrals of past operating cash receipts and payments, and all accruals of future operating cash receipts or

payments.

154. If the balance of accounts receivable decreases during the year, then cash collections will __________ sales on

account for the period.

155. If the balance of wages payable increases during the year, then the __________ for the period will be greater than the

actual cash wages paid in the period.

156. If the balance of prepaid insurance was the same on January 1, 2017, and December 31, 2017, then the insurance

expense would __________ the cash payments made for insurance during the year.

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157. A decrease in retained earnings represents dividends that were __________ during the period, not necessarily those

that were paid.

158. The objective of the indirect method is to reconcile net income to net cash flow from __________.

159. __________ is a noncash expense related to plant assets.

160. Under the indirect method, a loss from the retirement of bonds is __________ to net income in the Operating

Activities section of the statement of cash flows.

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161. The amount of cash provided from operating activities is __________ under both the direct and indirect methods.

162. __________ is a measure of a company’s ability to meet its future debt obligations after paying income taxes and

interest costs and making capital expenditures.

163. A __________, is a useful device to help in the preparation of a statement of cash flows.

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Matching

Use the following codes to indicate how the cash flow effect, if any, of each transaction would be reported on a statement

of cash flows if the Operating Activities section is prepared using the direct method.

a. Inflow from operating activity

b. Outflow from operating activity

c. Inflow from investing activity

d. Outflow from investing activity

e. Inflow from financing activity

f. Outflow from financing activity

g. Noncash investing and financing activity

h. Not reported on statement of cash flows

DIFFICULTY: Moderate

REFERENCES: pp. 559-563

LEARNING OBJECTIVES: FACC.PONO.18.12-03 – LO: 12–03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-24-Statement of Cash

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

164. Purchased computer equipment for cash.

165. Issued preferred stock.

166. Paid employee salaries and wages.

167. Repaid a long-term bank loan.

168. Received payments from credit sales.

169. Issued common stock to acquire land and a building.

170. Declared cash dividends.

171. Paid the cash dividends declared.

172. Recorded depreciation for the year.

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173. Paid interest on bonds.

Use the following codes to indicate how the cash flow effect, if any, of each transaction or event would be reported on a

statement of cash flows if the Operating Activities section is prepared using the indirect method.

a. Operating activity—add to net income

b. Operating activity—deduct from net income

c. Inflow from investing activity

d. Outflow from investing activity

e. Inflow from financing activity

f. Outflow from financing activity

g. Noncash investing and financing activity

h. Not reported on statement of cash flows

DIFFICULTY: Moderate

REFERENCES: pp. 559-563

LEARNING OBJECTIVES: FACC.PONO.18.12-03 – LO: 12–03

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-24-Statement of Cash

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

174. Purchased store equipment for cash.

175. Issued 20-year bonds.

176. Increased the accounts receivable balance.

177. Reissued treasury stock.

178. Increased the accounts payable balance.

179. Issued stock to retire bonds.

180. Declared cash dividends.

181. Paid the cash dividends declared.

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182. Received cash from the sale of securities.

183. Recognized a gain on the sale of the securities.

184. Recorded depreciation expenses for the year.

185. Obtained a long-term bank loan.

For each of the following items, indicate whether it would appear on a statement of cash flows prepared using the direct

method (a) or the indirect method (b).

a. Direct

b. Indirect

DIFFICULTY: Easy

REFERENCES: pp. 563-567

LEARNING OBJECTIVES: FACC.PONO.18.12-04 – LO: 12–04

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-24-Statement of Cash

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

186. Cash sales

187. Gain on early retirement of bonds

188. Depreciation expense

189. Decrease in accounts payable

190. Payments on accounts payable

191. Collections on accounts receivable

192. Increase in accounts receivable

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193. Net income

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Assuming the indirect method for preparing the statement of cash flows is used, indicate whether these items should be

added to net income (A), deducted from net income (D), or not be reported in the Operating section of the statement under

the indirect method (NR).

a. Added (A)

b. Deducted (D)

c. Not reported (NR)

DIFFICULTY: Easy

REFERENCES: pp. 579-582

LEARNING OBJECTIVES: FACC.PONO.18.12-06 – LO: 12–06

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: APC-24-Statement of Cash

AICPA: FN-Reporting

KEYWORDS: Bloom’s: Remembering

194. Decrease in prepaid insurance

195. Decrease in accounts payable

196. Purchase of new factory equipment

197. Depreciation expense

198. Increase in accounts receivable

199. Exchange of a note for equipment

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Flannery Company uses a work sheet to prepare its statement of cash flows. The company also uses the indirect method

for the Operating Activities section of its statement. For each of the following changes in the balance sheet, indicate what

activity it affects and whether it is an addition or deduction.

a. Deducted from Operating activity

b. Added to Operating activity

c. Deducted from Investing activity

d. Added to Investing activity

e. Deducted from Financing activity

f. Added to Financing activity

DIFFICULTY: Easy

REFERENCES: pp. 586-588

LEARNING OBJECTIVES: FACC.PONO.18.12-08 – LO: 12–08

NATIONAL STANDARDS: United States – BUSPROG: Communications

ACCREDITING STANDARDS: ACBSP: – APC-01-Purpose

AICPA: – FN-Reporting

KEYWORDS: Bloom’s: Analyzing

200. Accounts receivable increased

201. Land increased

202. Inventory decreased

203. Accounts payable decreased

204. Income taxes payable increased

205. Capital stock increased

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Subjective Short Answer

206. The following events occurred at Jack Company during its first year of business:

a. To establish the company, the two owners contributed a total of $60,000 in exchange for common stock.

b. Grooming service revenue for the first year amounted to $175,000, of which $50,000 was on account.

c. Customers owe $15,000 at the end of the year from the services provided on account.

d.

At the beginning of the year, a storage building was rented. The company was required to sign a three-year lease for

$15,000 per year and make a $3,000 refundable security deposit. The first year’s lease payment and the security deposit

were paid at the beginning of the year.

e.

At the beginning of the year, the company purchased a patent at a cost of $120,000 for a revolutionary system to be

used for dog grooming. The patent is expected to be useful for ten years. The company paid 20% down in cash and signed

a four-year note at the bank for the remainder.

f.

Operating expenses, including amortization of the patent and rent on the storage building noted in (d) and (e) above,

totaled $90,000 for the first year. No expenses were accrued or unpaid at the end of the year.

g. The company declared and paid a $25,000 cash dividend at the end of the first year.

Required

1. Prepare an income statement for the first year.

2. Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section.

3. Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is

a difference.

4. Prepare a balance sheet as of the end of the first year.

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2. Statement of cash flows:

3. The company generated slightly less cash flow from operations, $79,000, than it earned in net income, $85,000. The

differences between the two can be reconciled as follows:

4. Balance sheet:

Jack Company

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207. Fairleigh Industries invested its excess cash in the following instruments during December 2017:

Certificate of deposit, due January 31, 2018 $ 45,000

Certificate of deposit, due June 30, 2018 95,000

Investment in City of Cleveland bonds, due May 1, 2019 15,000

Investment in Techno Data stock 66,000

Money market fund 125,000

90-day Treasury bills 95,000

Treasury note, due December 1, 2018 200,000

Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at

December 31, 2017, and for purposes of preparing a statement of cash flows for the year ended December 31, 2017.

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208. Bucknelli Inc. has the following debt outstanding on December 31, 2017:

10% bonds payable, due December 31, 2021 $600,000

Discount on bonds payable (70,000)

Net bonds payable $530,000

On this date, Bucknelli retired the entire bond issue by paying cash of $610,000.

Required

1. Analyze the impact on the accounting equation of the journal entry to record the bond retirement.

2. Describe how the bond retirement would be reported on the statement of cash flows assuming that Bucknelli uses the

indirect method.

2. The $610,000 in cash paid to retire the bonds would be reported as a cash outflow in the Financing Activities section.

Assuming the company uses the indirect method, the loss of $80,000 would be added back in the Operating Activities

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209. The following account balances are taken from the records of Morgantown Corp. for the past two years. (Credit

balances are shown in parentheses.)

December 31,

2018 2017

Plant and equipment $ 820,000 $ 600,000

Accumulated depreciation (170,000) (250,000)

Patents 99,000 86,000

Retained earnings (825,000) (675,000)

Other information available for 2018 is as follows:

a. Net income for the year was $240,000.

b. Depreciation expense on plant and equipment was $60,000.

c. Plant and equipment with an original cost of $210,000 were sold for $84,000. (You will need to determine the book

value of the assets sold.)

d. Amortization expense on patents was $11,000.

e. Both new plant and equipment and patents were purchased for cash during the year.

Required

Indicate, with amounts, how all items related to these long-term assets would be reported in the 2019 statement of cash

flows, including any adjustments in the Operating Activities section of the statement. Assume that Morgantown uses the

indirect method.

Balance Sheet