41
88) Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following
information for the year 2014.
42
Additional information provided:
• Equipment costing $52,000 was purchased for cash.
• Equipment with a net asset value of $10,000 was sold for $14,000
• Depreciation expense of $12,000 was recorded during the year.
• During 2014, the company repaid $40,000 of long–term notes payable.
• During 2014, the company borrowed $34,000 on a new note payable
• There were no stock retirements during the year.
• There were no sales of treasury stock during the year.
Please prepare a complete statement of cash flows using the following format:
Avatar Company
Statement of Cash Flows
Year Ended December 31, 2014
Operating activities:
Net income
Adjustments
Depreciation expense
Gain or loss on sale
Increase/decrease in current assets
Increase/decrease in current liabilities
Net cash from operating activities
Investing activities:
Proceeds from sale of assets
Acquisition of assets
Net cash from investing activities
Financing activities:
Issuance of stock
Purchase of treasury stock
Borrowing on notes payable
Repayments of notes payable
Payment of dividends
Net cash from financing activities
Net change in cash
Cash balance, December 31, 2013
Cash balance, December 31, 2014
44
89) Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following
information for the year 2014.
45
Additional information provided:
• Equipment costing $52,000 was purchased for cash.
• Equipment with a net asset value of $10,000 was sold for $14,000
• Depreciation expense of $12,000 was recorded during the year.
• During 2014, the company repaid $40,000 of long-term notes payable.
• During 2014, the company borrowed $34,000 on a new note payable
• There were no stock retirements during the year.
• There were no sales of treasury stock during the year.
Please prepare a complete statement of cash flows using the following format:
Avatar Company
Statement of Cash Flows
Year Ended December 31, 2014
Learning Objective 14-4
1) Which of the following sections from the statement of cash flows would include the purchase of a building totally
financed by a mortgage?
A) The investing section
B) The operating section
C) The financing section
D) The noncash investing and financing section
2) Which of the following sections from the statement of cash flows would include the acquisition of a building by
issuing common stock?
A) The investing section
B) The financing section
C) The operating section
D) The noncash investing and financing section
3) Which of the following sections from the statement of cash flows would include the payment of a note payable by
issuing common stock?
A) The payment of a note payable by issuing common stock would be included in the investing section.
B) The payment of a note payable by issuing common stock would be included in the financing section.
C) The payment of a note payable by issuing common stock would be included in the operating section.
D) The payment of a note payable by issuing common stock would not be included in the noncash investing and
financing section.
4) Where are noncash investing and financing activities reported?
A) Noncash investing and financing activities are reported in the financing activities section of the statement of cash
flows.
B) Noncash investing and financing activities are reported in the investing activities section of the statement of cash
flows.
C) Noncash investing and financing activities are reported in a separate schedule accompanying the statement of
cash flows.
D) Noncash investing and financing activities are not reported at all in connection with the statement of cash flows.
5) A company purchases land using its common stock. Where would this transaction appear when the company
prepares the statement of cash flows?
A) The purchase of land would be presented in the financing activities section as a cash payment.
B) The purchase of land would be presented in the investing activities section as a cash payment under both
methods.
C) The purchase of land would be presented in the non-cash investing and financing activities section.
D) The purchase of land would be presented in the operating activities section as a reduction in net income.
Learning Objective 14-5
1) Free cash flow is the measure of cash available from operations after paying for planned investment acquisitions
and planned dividend disbursements.
2) If an investor wants to know how much cash a company can free up for new opportunities, such as expanding into
a new sales region, they would most likely wish to calculate the company’s free cash flow figure.
3) Free cash flow is the same thing as cash flow from operating activities.
4) If an investor wants to know how much cash a company can free up for new opportunities, such as expanding into
a new sales region, they would most likely look at:
A) free cash flow.
B) cash flow from investing activities.
C) acid ratio.
D) earnings per share.
5) Free cash flow is equal to the cash flow from operating activities less cash payments:
A) to retire bonds.
B) for inventory purchases.
C) for planned investments and cash dividends.
D) for planned salary raises.
Learning Objective 14-6
1) Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported sales revenues of
$100,000 on its income statement for the year 2012. If the balance in accounts receivable has gone up by $4,000
during the year, then $4,000 will have to be added to $100,000 to calculate collections from customers.
2) Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported Cost of goods sold
of $70,000 on its income statement for the year 2012. If the balance in the inventory account has gone up by $2,000
during the year, then $2,000 will have to be added to $70,000 as part of the process to calculate payments to
suppliers for inventory purchases.
3) Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported Cost of goods sold
of $70,000 on its income statement for the year 2012. If the balance in accounts payable (for inventory suppliers
only) has gone down by $5,000 during the year, then $5,000 will have to be added to $70,000 as part of the process
to calculate payments to suppliers for inventory purchases.
4) Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported operating expenses
of $21,000 on its income statement for the year 2012. If the balance in accrued liabilities has gone up by $1,000
during the year, then $1,000 will have to be added to $21,000 as part of the process to calculate payments to
suppliers for operating expenses.
5) The statement of cash flows can be prepared using two different methods—the direct method and the indirect
method. Although the indirect method is easier to use, the direct method is considered to be a more favorable
method of presenting the data.
6) The total net amount of cash flow from operating activities will be the same, whether you use the direct or the
indirect method of preparing the statement of cash flow.
7) The cash flow from operating activities is calculated in the same way, whether the company uses the direct or the
indirect method of preparing the statement of cash flow. The only difference is the way the financing activities
section is prepared.
8) The cash flow from investing activities appears exactly the same, whether the company uses the direct or the
indirect method to prepare the statement of cash flows.
9) The direct method of preparing the statement of cash flows provides a clearer way of analyzing cash flow
information than the indirect method.
10) Most public companies use the direct method to prepare their statement of cash flows because the computations
are simpler.
11) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
information reported for the year 2014:
• Sales revenue: $240,000
• Accounts receivable beginning balance: $35,000
• Accounts receivable ending balance: $31,000
In the operating activity section of the statement of cash flows, what amount would be shown for collections from
customers?
A) $244,000
B) $236,000
C) $240,000
D) $258,000
12) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
information reported for the year 2014:
• Sales revenue: $240,000
• Interest revenue: $1,000
• Accounts receivable beginning balance: $35,000
• Accounts receivable ending balance: $31,000
There were no amounts reported for Interest receivable
In the operating activity section of the statement of cash flows, what amount would be shown for total cash receipts?
A) $244,000
B) $237,000
C) $245,000
D) $235,000
13) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
information reported for the year 2014:
• Cost of goods sold $110,000
• Inventory beginning balance: $25,000
• Inventory ending balance: $53,000
• Accounts payable beginning balance: $6,000
• Accounts payable ending balance: $4,000
What amount was paid to suppliers for inventory purchases on a cash basis?
A) $140,000
B) $136,000
C) $80,000
D) $82,000
14) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
information reported for the year 2014:
• Operating expenses $23,000
• Accrued liabilities beginning balance: $1,000
• Accrued liabilities ending balance: $2,000
What amount was paid to suppliers for operating expenses on a cash basis?
A) $26,000
B) $20,000
C) $22,000
D) $24,000
15) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
information reported for the year 2014:
• Cost of goods sold $110,000
• Inventory beginning balance: $25,000
• Inventory ending balance: $53,000
• Accounts payable beginning balance: $6,000
• Accounts payable ending balance: $4,000
• Operating expenses $23,000
• Accrued liabilities, beginning balance: $1,000
• Accrued liabilities, ending balance: $2,000
In the operating activities section of the statement of cash flows, what amount will be shown for payments to
suppliers?
A) $136,000
B) $132,000
C) $118,000
D) $162,000
16) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
financial statement information for the year 2014:
On Avatar’s statement of cash flows, using the direct method, what amount will be shown for total cash receipts?
A) $240,000
B) $245,000
C) $244,000
D) $241,000
17) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
financial statement information for the year 2014:
On Avatar’s statement of cash flows, using the direct method, what amount will be shown for payments to suppliers
for Inventory and Other operating expenses?
A) $162,000
B) $142,000
C) $244,000
D) $136,000
18) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
financial statement information for the year 2014:
On Avatar’s statement of cash flows, using the direct method, what amount will be shown for payments to
employees?
A) $62,000
B) $42,000
C) $24,000
D) $45,000
19) Avatar Company uses the direct method to prepare its statement of cash flows. Please refer to the following
financial statement information for the year 2014:
On Avatar’s statement of cash flows, using the direct method, what amount will be shown for total net cash flow
from operating activities?
A) $213,000 negative
B) $32,000 positive
C) $32,000 negative
D) $245,000 positive
20) Which of the following would appear on a statement of cash flows prepared using the direct method?
A) Adjustments to net income
B) Cash payments for salaries
C) Adjustments for gains and losses on sale of property
D) Increase/decrease in current assets
21) Which of the following would NOT appear on a statement of cash flows prepared using the direct method?
A) Collections from customers
B) Payments to suppliers
C) Interest received
D) Increase/decrease in current liabilities
22) The only part that differs in a statement of cash flows using the direct method from one using the indirect
method is the:
A) financing activities section.
B) investing activities section.
C) operating activities section.
D) noncash investing and financing activities section.
23) Which would NOT be included in the operating activities section of a direct method statement of cash flow?
A) Changes in accounts payable
B) Changes in accounts receivable
C) Changes in inventory
D) Changes in long-term notes payable
24) A company’s Inventory account increased $26,800 and its Accounts payable account decreased $18,240 during
the year. The accounts payable relates only to the acquisition of inventory. Sales were $789,500 and Cost of goods
sold was $532,700. What was the amount of payments to the supplier of inventory?
A) $541,260
B) $559,500
C) $577,740
D) $532,700
25) Parmesan Company uses the direct method for its statement of cash flow. It reports the following information
regarding the year 2013:
From the income statement:
Revenues: $240,000
Cost of goods sold: $190,000
Operating expenses: $25,000
From the balance sheet: Beginning balance Ending balance
Accounts receivable: $12,000 $15,000
Inventory: $22,000 $18,000
Accounts payable: $7,000 $12,000
Accrued liabilities: $3,000 $1,200
On the statement of cash flows, what amount will be shown for collections from customers?
A) $237,000
B) $243,000
C) $240,000
D) $50,000
26) Parmesan Company uses the direct method for its statement of cash flow. It reports the following information
regarding the year 2013:
From the income statement:
Revenues: $240,000
Cost of goods sold: $190,000
Operating expenses: $25,000
From the balance sheet: Beginning balance Ending balance
Accounts receivable: $12,000 $15,000
Inventory: $22,000 $18,000
Accounts payable: $7,000 $12,000
Accrued liabilities: $3,000 $1,200
On the statement of cash flows, what amount will be shown for payments to suppliers for inventory purchases?
(Please assume that accounts payable are for purchases of inventory only.)
A) $185,000
B) $194,000
C) $181,000
D) $191,000