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100
200) Listed below are several transactions. For each transaction, indicate by letter whether the cash
effect of each transaction is reported in a statement of cash flows as an operating (O), investing (I),
financing (F), or noncash (NC) activity. Also, indicate whether the transaction is a cash inflow
(CI), cash outflow (CO), or no effect on cash (NE). The first answer is provided as an example.
Type of
Activity
Cash Inflow
or Outflow
Transaction
F
CI
1. Issuance of common stock
2. Issuance of bonds
3. Investment in bonds
4. Collection of a note receivable
5. Sale of inventory
6. Repayment of note payable
7. Payment of a cash dividend
8. Purchase of land for cash
9. Reissue of treasury stock
10. Collection of an account receivable
11. Issuance of a note payable
12. Payment of employee salaries
13. Sale of equipment for a note receivable
14. Payment of interest on bonds payable
15. Sale of a building
101
102
201) Portions of the financial statements for Security Solutions are provided below.
Security Solutions
Income Statement
For the Year Ended December 31, 2021
Revenues
$960,000
Expenses:
Cost of goods sold
$650,000
Operating expenses
210,000
Depreciation expense
25,000
Income tax expense
20,000
Total expenses
905,000
Net Income
$55,000
Security Solutions
Selected Balance Sheet Data
December 31, 2021
Increase in accounts receivable
5,000
Decrease in inventory
10,000
Increase in prepaid rent
4,000
Decrease in salaries payable
6,000
Increase in accounts payable
8,000
Decrease in income tax payable
3,000
Required:
Prepare the operating activities section of the statement of cash flows for Security Solutions using
the indirect method.
104
202) Amy Bourne completed the basic format to be used in preparing the statement of cash flows
(indirect method) for Alpha Technologies. All amounts are in thousands (000's).
Alpha Technologies
Statement of Cash Flows
For the Year Ended December 31, 2021
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net
cash flows from operating activities:
Net cash flows from operating activities
Cash Flows from Investing Activities
Net cash flows from investing activities
Cash Flows from Financing Activities
Net cash flows from financing activities
Net increase (decrease) in cash
(40,000)
Cash at the beginning of the period
80,000
Cash at the end of the period
$40,000
Listed below in random order are line items to be included in the statement of cash flows.
Purchase of equipment
$220,000
Payment of dividends
40,000
Net income
80,000
Increase in inventory
30,000
Increase in prepaid rent
10,000
Repayment of notes payable
50,000
Cash received from the sale of land
3,000
Issuance of common stock
250,000
Increase in accounts payable
10,000
Loss on sale of land
7,000
Depreciation expense
20,000
Increase in accounts receivable
60,000
Required:
Prepare the statement of cash flows for Alpha Technologies using the indirect method.
106
203) The income statement, balance sheets, and additional information for Communication
Accessories are provided.
Communication Accessories
Income Statement
For the Year Ended December 31, 2021
Revenues
$2,800,000
Gain on sale of land
4,000
Total revenues
2,804,000
Expenses:
Cost of goods sold
1,900,000
Operating expenses
575,000
Depreciation expense
38,000
Interest expense
16,000
Income tax expense
63,000
Total expenses
2,592,000
Net Income
$212,000
Communication Accessories
Balance Sheets
December 31
Assets
2021
2020
Current Assets:
Cash
$182,000
$187,000
Accounts receivable
83,000
95,000
Inventory
121,000
138,000
Prepaid rent
7,000
5,000
Long-Term Assets:
Investment in stock
195,000
100,000
Land
230,000
260,000
Equipment
305,000
225,000
Accumulated depreciation
(138,000)
(100,000)
Total Assets
$985,000
$910,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
$40,000
$58,000
Interest payable
1,000
2,000
Income tax payable
12,000
10,000
Long-Term Liabilities:
Notes payable
285,000
205,000
Stockholders' Equity:
Common stock
350,000
350,000
Retained earnings
297,000
285,000
Total Liabilities and Equity
$985,000
$910,000
Additional Information for 2021:
1. Purchase additional investment in stocks for $95,000.
2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land.
3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years.
No cash is exchanged in the transaction.
4. The company declares and pays a cash dividend of $200,000.
Required:
Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions
in an accompanying note.
108
204) Selected financial data for two competitors in the telecommunications industry are as
follows:
($ in millions)
2021
2020
Company A
Net Sales
$71,486
$475,203
Net Income
5,622
10,612
Net Cash Flows from Operations
4,507
11,609
Total Assets
55,799
55,380
Company B
Net Sales
$39,540
$34,922
Net Income
8,052
7,333
Net Cash Flows from Operations
12,089
10,104
Total Assets
58,734
53,340
Required:
1. Calculate the return on assets for 2021 for both companies. Which company has the better return
on assets?
2. Calculate the cash return on assets for 2021 for both companies. Which company has the better
cash return on assets?
3. Calculate the cash flow to sales ratio and the asset turnover ratio for 2021 for both companies.
Which company has the better ratios?
109
110
205) Cash flows from operating activities for both the indirect and direct methods are presented for
Audio Systems.
Cash Flows from Operating Activities
Net income
$45,000
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation expense
7,000
Decrease in accounts receivable
9,000
Increase in accounts payable
4,000
Decrease in income tax payable
(6,000)
Net cash flows from operating activities
$59,000
Cash Flows from Operating Activities
Cash received from customers
$93,000
Cash paid for operating expenses
(22,000)
Cash paid for income taxes
(12,000)
Net cash flows from operating activities
$59,000
Required:
Complete the following income statement for Audio Systems. Assume all accounts payable are for
operating expenses.
Audio Systems
Income Statement
For the Year Ended December 31, 2021
Revenues
$?
Expenses:
Operating expenses
?
Depreciation expense
7,000
Income tax expense
?
Total expenses
?
Net Income
$45,000
Hint: Use the following calculations and work backwards from bottom to top for each item.
Revenues
± Change in accounts receivable
= Cash received from customers
Operating expenses
± Change in accounts payable
= Cash paid for operating expenses
Income tax expense
± Change in income tax payable
= Cash paid for income taxes
112
206) The income statement, balance sheets, and additional information for Communication
Accessories are provided.
Communication Accessories
Income Statement
For the Year Ended December 31, 2021
Revenues
$2,800,000
Gain on sale of land
4,000
Total revenues
2,804,000
Expenses:
Cost of goods sold
1,900,000
Operating expenses
575,000
Depreciation expense
38,000
Interest expense
16,000
Income tax expense
63,000
Total expenses
2,592,000
Net Income
$212,000
Communication Accessories
Balance Sheets
December 31
Assets
2021
2020
Current Assets:
Cash
$182,000
$187,000
Accounts receivable
83,000
95,000
Inventory
121,000
138,000
Prepaid rent
7,000
5,000
Long-Term Assets:
Investment in stock
195,000
100,000
Land
230,000
260,000
Equipment
305,000
225,000
Accumulated depreciation
(138,000)
(100,000)
Total Assets
$985,000
$910,000
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
$40,000
$58,000
Interest payable
1,000
2,000
Income tax payable
12,000
10,000
Long-Term Liabilities:
Notes payable
285,000
205,000
Stockholders' Equity:
Common stock
350,000
350,000
Retained earnings
297,000
285,000
Total Liabilities and Equity
$985,000
$910,000
113
Additional Information for 2021:
1. Purchase additional investment in stocks for $95,000.
2. Sell land costing $30,000 for $34,000 resulting in a $4,000 gain on sale of land.
3. Purchase $80,000 in equipment by borrowing $80,000 with a note payable due in three years.
No cash is exchanged in the transaction.
4. The company declares and pays a cash dividend of $200,000.
Required:
Prepare the statement of cash flows for Communication Accessories using the direct method.
Disclose any noncash transactions in an accompanying note.
115
207) Portions of the financial statements for Security Solutions are provided below.
Security Solutions
Income Statement
For the Year Ended December 31, 2021
Revenues
$960,000
Expenses:
Cost of goods sold
$650,000
Operating expenses
210,000
Depreciation expense
25,000
Income tax expense
20,000
Total expenses
905,000
Net Income
$55,000
Security Solutions
Selected Balance Sheet Data
December 31, 2021
Increase in accounts receivable
5,000
Decrease in inventory
10,000
Increase in prepaid rent
4,000
Decrease in salaries payable
6,000
Increase in accounts payable
8,000
Decrease in income tax payable
3,000
Required:
Prepare the operating activities section of the statement of cash flows for Security Solutions using
the direct method.
117
208) Identify and briefly describe the three categories of cash flows reported in the statement of
cash flows.
209) Distinguish between the indirect method and the direct method for reporting net cash flows
from operating activities. Which method is more common in practice? Which method provides a
more logical presentation of cash flows?
118
210) Highland Park Homes reports net income of $300,000, and yet its net cash flow from
operating activities is a negative $200,000 during the same period. Is this possible? Explain.
211) A $10,000 investment on the books of the company is sold for $11,000. How does this
transaction affect operating, investing, and financing activities under the indirect method?
212) Explain the difference in the calculation of return on assets and cash return on assets. How
can cash-based ratios supplement the analysis of ratios based on income statement and balance
sheet information?
