Chapter 2
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233. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2017. Cash generated by
operations was $40,000. In addition, Hindsville Company borrowed $24,000 from a bank. During 2018, Hindsville
purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders. Hindsville’s cash balance
at the beginning of 2017 was $22,000.
A) Identify the amount of cash flows for financing, investing, and operating activities for 2017 by filling in the
amounts below.
Financing Cash Flows:
Investing Cash Flows:
Operating Cash Flows:
B) Did Hindsville Company’s operating activities generate enough cash to cover its investing and financing activities?
Explain.
C) How much did Hindsville Company’s cash balance increase or decrease during 2016?
Chapter 2
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234. Presented below are items from Joplin Shoes’ statement of cash flows for 2017.
Cash flows provided by operating activities $ 75,000
Cash flows provided by financing activities 115,000
Cash at the beginning of the year 60,000
Cash flows used by investing activities (100,000)
A) Determine whether Joplin Shoes’ cash increased or decreased during the year.
B) How much cash does Joplin Shoes have at the end of 2016?
C) What is the purpose of the statement of cash flows?
Chapter 2
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235. Unideno Corporation was organized on January 1, 2017, with the investment of $225,000 in cash by its stockholders.
The company immediately purchased an office building for $300,000, paying $201,000 in cash and signing a three-year
promissory note for the balance. Unideno signed a five-year, $50,000 promissory note at a local bank during 2017 and
received cash in the same amount. During its first year, Unideno collected $93,000 from its customers. It paid $60,600 for
inventory, $22,400 in salaries and wages, and another $5,100 in taxes. Unideno paid $5,300 in cash dividends.
Required
1. Prepare a statement of cash flows for the year ended December 31, 2017.
2. What does this statement tell you that an income statement does not?
Chapter 2
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236. Identify each of the following items as operating (O), investing (I), or financing (F) activities on the statement of
cash flows(assuming the indirect method). If an item is not on the statement, please mark it as none of these (N). If the
item is an inflow, please indicate by a (+), (e.g. O+, I+ or F+). If the item is an outflow, please indicate by brackets (e.g.,
<O> for operating outflow, <I> for investing outflow, and <F> for financing outflow):
____ (a) Paid an account payable for inventory purchased in the previous accounting period.
____ (b) Received cash from a customer
____ (c) Paid a dividend to stockholders.
____ (d) Paid the interest on a note payable to National Street Bank.
____ (e) Paid the principal amount due on the note payable to National Street Bank.
____ (f) Transferred cash from a checking account into a money market fund.
____ (g) Purchased equipment for cash.
Chapter 2
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237. Most financial reports contain the following list of basic elements. For each element identify the person(s) who
prepared the element and describe the information a user would expect to find in each element.
Elements Prepared By Information Provided
Management
Discussion &
Analysis
Financial Statements
Notes to Financial
Statements
Report of
Independent
Accountants
ANSWER:
Elements Prepared By Information
Chapter 2
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238. Comparative income statements for Jameson Inc. are as follows:
2018 2017
Sales $2,000,000 $600,000
Cost of sales 800,000 400,000
Gross profit $1,200,000 $200,000
Operating expenses 520,000 120,000
Operating income $ 680,000 $ 80,000
Loss on sale of subsidiary (800,000) 0
Net income (loss) $ (120,000) $ 80,000
Required
The president and management believe that the company performed better in 2018 than it did in 2017. Write the
president’s letter to be included in the 2018 annual report. Explain why the company is financially sound and why
shareholders should not be alarmed by the $120,000 loss in a year when gross profit increased significantly.
Chapter 2
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Essay
239. What financial statement items are investors and creditors most interested in and why?
240. Cory Harper, a newly hired accountant, wanted to impress his boss, so he stayed late one night to analyze the office
supplies expense account. He determined the cost by month, for the past 12 months, of each of the following: computer
paper, copy paper, fax paper, pencils and pens, note pads, postage, stationery, and miscellaneous items. Why do
companies not include information of this nature in published financial statements?
Chapter 2
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241. Service-oriented companies have different needs than product-oriented companies when analyzing financial
statements.
Required
Why is this true? Give an example of a financial ratio that is meaningless to a service business.
242. Ginger Company claims its financial information is useful. What two qualities must be present in order to have
“useful” accounting information? Explain these two qualities.
243. What is the difference between comparability and consistency?
244. What is conservatism, and why is it important in accounting?
Chapter 2
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247. How does the definition of a current liability relate to that of a current asset?
248. Potential stockholders and lenders are interested in a company’s financial statements. Several financial statement
items appear below. Answer the questions that follow.
Accounts receivable Accounts payable Advertising expense
Cash Depreciation expense Income taxes
Common stock Land held for future expansion Dividends
Retained earnings Loss on the sale of equipment Service revenue
Office supplies Patent amortization expense Sales
Unearned revenue Utilities expense
A)
Which two items would stockholders be most interested in that can either be computed from the above data or are
included in the items listed above? Explain why the two you selected are important to stockholders.
B) In which one item would lenders be most interested? Explain why this item is important.
Chapter 2
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249. What is the purpose of a statement of stockholders’ equity? How does it differ from the statement of retained
earnings? Which statement is required?
250. What is the purpose of a statement of cash flows? Give an example of one of each of the three activities.
251. What information is provided in an annual report in addition to the financial statements?