ESSAY QUESTIONS
182)
Explain the purpose and format of the statement of cash flows. Also describe its relevance to
decision makers.
183)
Define and discuss the differences between operating, investing, and financing activities.
184)
Define and explain significant noncash investing and financing activities and the method of
reporting them on the statement of cash flows.
185)
Describe the format of the statement of cash flows, including the reporting of significant noncash
investing and financing activities.
186)
Explain the value of separating cash flows into operating activities, investing activities, and
financing activities to financial statement users in analyzing cash flows and the company’s financial
performance and condition.
187)
Define the cash flow on total assets ratio and explain how it is used to evaluate cash flows and to
assess company performance.
188)
What are the five usual steps involved in the preparation of the statement of cash flows?
189)
Explain how the cash flows from operating activities section of the statement of cash flows is
prepared using the indirect method.
190)
Explain how cash flows from investing and financing activities are determined.
191)
Explain the use of a spreadsheet in the preparation of the statement of cash flows.
192)
Explain how the cash flows from operating activities section of the statement of cash flows is
prepared using the direct method.
193)
Use the following company information to prepare a schedule of significant noncash investing and
financing activities:
(a) Sold a building with a book value of $300,000 for $225,000 cash and sold land with a book
value of $40,000 for $65,000 cash.
(b) Issued 15,000 shares of $10 par value common stock in exchange for equipment with a market
value of $175,000.
(c) Retired a $100,000, 8% bond by issuing another $100,000, 7% bond issue.
(d) Acquired land by issuing a twenty-year, 5%, $73,000 note payable.
194)
Based on the following information provided about a company’s operations, calculate its cost of
goods purchased and its cash paid for merchandise.
Cost of goods sold……………………………………
$522,000
Merchandise inventory, beginning year……………..
70,000
Accounts payable, beginning year…………………..
53,000
Merchandise inventory, end-of–year…………………
57,000
Accounts payable, end-of–year………………………
48,000
195)
Use the following income statement and information about selected current assets and current
liabilities to calculate the net cash provided or used by operating activities using the indirect method.
PULLMAN COMPANY
Income Statement
For Year Ended December 31, 20X2
Sales
$180,000
Cost of goods sold
104,000
Gross profit from sales
$ 76,000
Operating expenses:
Salaries and wages expense
$25,000
Depreciation expense
7,000
Rent expense
7,200
Interest expense
1,900
41,100
Income from operations
$34,900
Loss on sale of land
3,500
Net income
$31,400
Selected beginning and ending balances of current asset and current liability accounts, all of which
relate to operating activities, are as follows:
Balance
Dec. 31, 20X2
Dec. 31, 20X1
Accounts receivable
$27,600
$24,000
Merchandise inventory
22,300
20,000
Prepaid rent
550
400
Accounts payable
27,100
26,000
Salaries and wages payable
10,400
9,000
Interest payable
300
250
127
196)
Use the following income statement and information about selected current assets and current
liabilities for Kimberline Industries to calculate the net cash provided or used by operating activities
using the indirect method.
KIMBERLINE INDUSTRIE
SIncome Statement
For Year Ended December 31, 20X1
Sales
$280,000
Cost of goods sold
124,000
Gross profit from sales
$156,000
Operating expenses:
Salaries and wages expense
$35,000
Depreciation expense
11,000
Rent expense
27,200
Interest expense
3,900
77,100
Income from operations
$78,900
Loss on sale of land
4,700
Net income
$74,200
Increases and decreases of current asset and current liability accounts, all of which relate to operating
activities, are as follows:
Change
Accounts receivable increase $3,600
Merchandise inventory decrease 1,700
Accounts payable increase 1,100
Salaries and wages payable decrease 2,600
Assets
20X2
20X1
Cash
$ 62,650
$ 55,800
Accounts receivable
21,000
29,000
Inventory
58,000
52,100
Equipment
240,000
222,000
197)
Based on the following income statement and balance sheet for Bankowski Corporation, determine
the cash flows from operating activities using the indirect method.
Bankowski Corporation
Income Statement
For Year Ended December 31, 20X2
Sales
$504,000
Cost of goods sold
$327,600
Depreciation expense
33,000
Other operating expenses
125,500
(486,100
)
Other gains (losses):
Gain on sale of equipment
5,200
Income before taxes
$ 23,100
Income tax expense
(4,800
)
Net income
$ 18,300
Bankowski Corporation
Balance Sheets
At December 31
128
Equipment
240,000
222,000
Accumulated depreciation
(97,000)
( 96,000
Total assets
$284,650
$262,900
Liabilities:
Accounts payable
$ 28,400
$ 23,700
Income taxes payable
1,050
1,200
Total liabilities
$ 29,450
$ 24,900
Equity:
Common stock
$106,000
$106,000
Paid-in Capital in excess of par value
18,000
18,000
Retained earnings
131,200
114,000
Total equity
$255,200
$238,000
Total liabilities and equity
$284,650
$262,900
)
Additional information:
Increase in accounts receivable
$ 4,000
Increase in accounts payable
16,000
Increase in income taxes payable
300
Decrease in prepaid expenses
10,000
Decrease in merchandise inventory
14,000
Decrease in long-term notes payable
20,000
198)
Rowan, Inc.’s, income statement is shown below. Based on this income statement and the other
information provided, calculate the net cash provided by operations using the indirect method.
Rowan, Inc.
Income Statement
For Year Ended December 31, 20X1
Sales
$248,000
Cost of goods sold
116,000
Gross profit
$132,000
Operating expenses
Wages and salaries expense
$ 44,000
Rent expense
16,000
Depreciation expense
30,000
Other operating expenses
18,000
108,000
Income from operations
$ 24,000
Gain on sale of equipment
26,000
Income before income taxes
$ 50,000
Income taxes expense
17,500
Net income
$ 32,500
20X2
20X1
Assets:
Cash
$ 24,640
$ 23,040
Accounts receivable
32,180
29,400
Merchandise inventory
73,125
61,710
Long-term investments
55,900
56,400
Equipment
175,500
145,500
Accumulated depreciation
(33,550
)
(31,200
Total assets
$327,795
$284,850
Liabilities:
Accounts payable
$ 65,000
$ 40,380
Income taxes payable
10,725
10,200
Bonds payable
48,750
66,000
Total liabilities
$124,475
$116,580
Equity:
Common stock
117,000
96,000
Paid-in capital in excess of par
13,000
9,000
Retained earnings
73,320
63,270
Total equity
$203,320
$168,270
Total liabilities and equity
$327,795
$284,850
199)
The following information is available for the Aarons Corporation:
Aarons Corporation
Balance Sheets
At December 31
)
131
Sales
$240,000
Cost of goods sold
$80,900
Depreciation expense
29,400
Other operating expenses
48,000
Interest expense
2,000
(160,300
Other gains (losses):
Loss on sale of equipment
(8,400
Income before taxes
71,300
Income taxes expense
27,650
Net income
$ 43,650
Aarons Corporation
Income Statement
For Year Ended December 31, 20X2
)
)
Additional information:
(1) There was no gain or loss on the sales of the long-term investments, nor on the bonds retired.
(2) Old equipment with an original cost of $37,550 was sold for $2,100 cash.
(3) New equipment was purchased for $67,550 cash.
(4) Cash dividends of $33,600 were paid.
(5) Additional shares of stock were issued for cash.
Prepare a complete statement of cash flows for calendar-year 20X2 using the indirect method.
200)
The following information is available for the Brookstone Company:
Brookstone Company
Balance Sheets
At December 31
20X2
20X1
Assets:
Cash
$ 29,568
$ 27,648
Accounts receivable
38,616
35,280
Merchandise inventory
87,750
74,052
Long-term investments
133
67,080
67,680
Long-term investments
67,080
67,680
Machinery
210,600
174,600
Accumulated depreciation
(40,260
)
(37,440
Total assets
$393,354
$341,820
Liabilities:
Accounts payable
$ 78,000
$ 48,456
Income taxes payable
12,870
12,240
Bonds payable
58,500
79,200
Total liabilities
$149,370
$139,896
Equity:
Common stock
140,400
115,200
Paid-in capital in excess of par
15,600
10,800
Retained earnings
87,984
75,924
Total equity
$243,984
$201,924
Total liabilities and equity
$393,354
$341,820
Sales
$288,000
Cost of goods sold
$97,080
Depreciation expense
35,280
Other operating expenses
57,600
Interest expense
2,400
(192,360
Other gains (losses):
Loss on sale of equipment
(10,080)
Income before taxes
85,560
Income taxes expense
33,180
Net income
$ 52,380
)
Brookstone Company
Income Statement
For Year Ended December 31, 20X2
)
Additional information:
(1) There was no gain or loss on the sales of the long-term investments, nor on the bonds retired.
(2) Old machinery with an original cost of $45,060 was sold for $2,520 cash.
(3) New machinery was purchased for $81,060 cash.
(4) Cash dividends of $40,320 were paid.
(5) Additional shares of stock were issued for cash.
Prepare a complete statement of cash flows for calendar-year 20X2 using the indirect method.
201)
Use the following company information to calculate net cash provided or used by investing activities:
(a) Equipment with a book value of $175,000 and an original cost of $300,000 was sold at a loss of
$17,000.
(b) Paid $62,000 cash for a new truck.
(c) Sold land costing $32,000 for $36,000 cash, realizing a $4,000 gain.
(d) Purchased treasury stock for $61,000 cash.
(e) Long-term investments in stock are sold for $41,000 cash, realizing a gain of $3,500.
202)
Use the following information to calculate the net cash provided or used by financing activities for
the Streams Corporation:
(a) Net income, $10,000
(b) Sold common stock for $40,000 cash
(c) Paid cash dividend of $13,000
(d) Paid bond payable, $28,000
(e) Purchased equipment for $12,000 cash
203)
Based on the information provided below for Krackle Corp., complete the following worksheet to be
used to prepare the statement of cash flows using the indirect method.
(a) Net income for the year was $30,000.
(b) Dividends of $10,000 were declared and paid.
(c) Krackle’s only noncash expense was depreciation which totaled $50,000.
(d) The company purchased plant assets for $70,000.
(e) Notes payable in the amount of $40,000 were issued during the year for cash.
Krackle CorporationSpreadsheet for Statement of Cash Flows–Indirect MethodFor Year
Ended December 31, 20X2
Analysis of Changes
12/31/X1
Debit
Credit
12/31/X2
Balance Sheet–Debits
Cash
70,000
60,000
Accounts receivable
180,000
190,000
Merchandise inventory
200,000
230,000
Plant assets
500,000
570,000
950,000
1,050,000
Balance Sheet–Credits
Accumulated depreciation
100,000
150,000
Accounts payable
170,01
03
0
7
160,000
Accounts payable
170,000
160,000
Notes payable
350,000
390,000
Capital stock
200,000
200,000
Retained earnings
130,000
150,000
950,000
1,050,000
Statement of Cash Flows
Operating activities
Net income
Increase in accounts receivable
Increase in merchandise inventory
Decrease in accounts payable
Depreciation expense
Investing activities
Cash paid to purchase plant assets
Financing activities
Cash paid for dividends
Cash received from note payable
204)
The following selected account balances are taken from a merchandising company’s records:
Dec. 31
Dec. 31,
For the
20X2
20X1
Year 20X2
Merchandise inventory
$ 15,600
$ 21,200
Accounts receivable
42,000
36,000
Accounts payable
32,400
27,400
Salaries payable
4,400
3,000
Total assets
234,000
286,000
Sales
$312,000
Cost of goods sold
165,600
Salaries expense 139
48,000
Salaries expense 48,000
(a) Calculate the cash payments made during 20X2 for merchandise. Assume all of the company’s
accounts payable balances result from merchandise purchases.
(b) Calculate the cash receipts from customer sales during 20X2.
(c) Calculate the cash payments for salaries during 20X2.
205)
Use the following calendar-year information to prepare Adam Company’s statement of cash flows
using the direct method.
Cash paid to purchase machinery
$ 124,000
Cash paid for merchandise inventory
220,000
Cash paid for operating expenses
280,000
Cash paid for interest
4,000
Cash received for interest
10,000
Cash proceeds from sale of land
100,000
Cash balance at beginning of year
15,000
Cash balance at end of year
77,000
Cash borrowed on a short-term note
25,000
Cash dividends paid
24,000
Cash received from stock issuance
57,000
Cash collections from customers
522,000
206)
For each of the following separate cases, use the information provided to calculate the missing cash
inflow or cash outflow using the direct method.
(a)
Accounts receivable balances:
Beginning of year ………………………
$ 60,000
End of year ……………………………..
57,000
Sales revenue (all on credit) ……………..
375,000
Cash received from customers
$______
(b)
Accounts payable balances:
Beginning of year ……………………….
$ 42,000
End of year………………………………
45,000
Merchandise inventory balances:
Beginning of year ………………………
50,000
End of year ……………………………..
47,500
Cost of goods sold………………………..
250,000
Cash paid for merchandise inventory…….
$______
141