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Chapter 12: The Statement of Cash Flows
85. Pilot Company reported the following information for 2015 and 2016.
Prepaid insurance, December 31, 2015 $ 2,400
Prepaid insurance, December 31, 2016 1,500
Insurance expense—2016 14,200
How much cash was paid for insurance during 2016?
a. $13,300
b. $14,200
c. $15,100
d. $15,700
86. Suma Corp. reported the following information for 2015 and 2016.
Salaries payable, December 31, 2015 $ 3,700
Salaries payable, December 31, 2016 1,800
Salaries expense—2016 57,000
How much cash was paid for salaries during 2016?
a. $55,100
b. $55,200
c. $57,000
d. $58,900
87. Tulsa Corp. reported the following information for 2015 and 2016.
Interest payable, December 31, 2015 $ 5,700
Interest payable, December 31, 2016 6,200
Interest expense—2016 12,250
How much cash was paid for interest during 2016?
a. $11,750
b. $12,250
c. $12,500
d. $12,750
88. Dallas Corp. reported the following information for 2015 and 2016.
Interest receivable, December 31, 2015 $1,100
Interest receivable, December 31, 2016 1,400
Interest income—2016 3,200
How much cash was received for interest during 2016?
a. $2,900
b. $3,200
c. $3,500
d. $3,800
89. Use the information below for Alpha Inc. for 2015 and 2016 to answer the following question.
Equipment, December 31, 2015
$65,000
Equipment, December 31, 2016
72,000
Accumulated depreciation, December 31, 2015
39,000
Accumulated depreciation, December 31, 2016
30,000
During 2016, Alpha Inc. sold equipment with a cost of $30,000 and accumulated depreciation of $25,000. A
gain of $3,000 was recognized on the sale of the equipment This was the only equipment sale during the year.
What amount would be reported as the cash proceeds from the sale of equipment?
a. $2,000
b. $3,000
c. $5,000
d. $8,000
Chapter 12: The Statement of Cash Flows
90. Use the information below for Shorter Inc. for 2015 and 2016 to answer the following question.
Equipment, December 31, 2015
$65,000
Equipment, December 31, 2016
72,000
Accumulated depreciation, December 31, 2015
39,000
Accumulated depreciation, December 31, 2016
30,000
During 2016, Shorter Inc. sold equipment with a cost of $30,000 and accumulated depreciation of $25,000. A
gain of $3,000 was recognized on the sale of the equipment This was the only equipment sale during the year.
Assume that all purchases of equipment were paid with cash. How much cash was paid by Shorter for the
purchase of equipment during 2016?
a. $ 7,000
b. $30,000
c. $37,000
d. $72,000
91. Use the information below for Flora Inc. for 2015 and 2016 to answer the following question.
Equipment, December 31, 2015
$65,000
Equipment, December 31, 2016
72,000
Accumulated depreciation, December 31, 2015
39,000
Accumulated depreciation, December 31, 2016
30,000
During 2016, Flora Inc. sold equipment with a cost of $30,000 and accumulated depreciation of $25,000. A gain
of $3,000 was recognized on the sale of the equipment This was the only equipment sale during the year.
What was depreciation expense for 2016?
a. $ 9,000
b. $16,000
c. $21,000
d. $30,000
92. Which of the following statements is false regarding how the cash flow effects of the changes in the
equipment and accumulated depreciation accounts would be reported on a statement of cash flows if the
indirect method is used to prepare the operating activities section?
a. Cash proceeds from the sale of the equipment would be reported as a cash inflow in the investing
activities section.
b. The cash paid to purchase equipment would be reported as a cash outflow in the investing activities section
c. Depreciation expense would be added to net income in the operating activities section.
d. A loss on the sale of the equipment would be subtracted from net income in the operating activities section
Chapter 12: The Statement of Cash Flows
93. Use the information below for Focal Point Corp. for 2015 and 2016 to answer the following question.
Retained earnings, December 31, 2015
$300,000
Retained earnings, December 31, 2016
345,000
Dividends payable, December 31, 2015
19,000
Dividends payable, December 31, 2016
29,000
Net income—2016
150,000
Assume that there were no retained earnings transactions other than those dealing with dividends and net
income. How much dividends did Focal Point declare during 2016?
a. $ 95,000
b. $105,000
c. $140,000
d. $150,000
94. Use the information below for Barton Shipping Corp. for 2015 and 2016 to answer the following question.
Retained earnings, December 31, 2015
$300,000
Retained earnings, December 31, 2016
345,000
Dividends payable, December 31, 2015
19,000
Dividends payable, December 31, 2016
29,000
Net income—2016
150,000
How much cash did Barton Shipping pay for dividends during 2016?
a. $ 95,000
b. $105,000
c. $115,000
d. $140,000
Chapter 12: The Statement of Cash Flows
95. Use the information below for Fargo Corp. for 2015 and 2016 to answer the following question.
Bonds payable, December 31, 2015
$500,000
Bonds payable, December 31, 2016
800,000
Loss on bond retirement—2016
15,000
Interest expense on bonds—2016
45,000
At the end of 2016, Fargo issued bonds at par value for $800,000 cash. The proceeds from these bonds were
used to retire the $500,000 bond issue outstanding at the end of 2015 (before their maturity date). All interest
expense was paid in cash during 2016.
How much did Fargo pay to retire the $500,000 bond issue during 2016?
a. $485,000
b. $500,000
c. $515,000
d. $560,000
96. Carpet World Inc. reported the following information for 2015 and 2016.
2015
2016
Accounts receivable
$51,000
$57,000
Inventories
42,000
39,000
Accounts payable
43,000
48,000
Net income
60,000
Depreciation expense
8,000
If Carpet World 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 2016?
a. $64,000
b. $66,000
c. $68,000
d. $70,000
Chapter 12: The Statement of Cash Flows
97. Washington Corp. reported the following information for 2015 and 2016.
2015
2016
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 2016?
a. $ 73,000
b. $ 83,000
c. $ 95,000
d. $105,000
98. 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 which 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.
99. 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
Chapter 12: The Statement of Cash Flows
100. Vencenzia Company reported the following information in its annual report for 2016.
Cash flows from operating activities
$300,000
Capital Expenditures
225,000
Average amount of debt maturing over the next 5 years
200,000
What is the cash flow adequacy ratio for 2016 for Vencenzia Company?
a. 0.38
b. 1.50
c. 1.88
d. 7.50
101. 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
102. 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
d. the income statement only
103. The statement of cash flows summarizes the operating, investing, and financing activities of a business for a
period of time.
a. True
b. False
104. The accrual-based income statement is considered to be a good indicator of current cash inflows and outflows.
a. True
b. False
Chapter 12: The Statement of Cash Flows
105. Depreciation is a noncash expense that is added back to net income in determining cash provided from
operating activities under the indirect method.
a. True
b. False
106. In terms of the statement of cash flows, cash includes actual cash items plus certain cash equivalents such
as commercial paper, money market funds, and Treasury bills.
a. True
b. False
107. To be classified as a cash equivalent, an item must be readily convertible to a known amount of cash and have
an original maturity to the investor of three months or more.
a. True
b. False
108. Under certain conditions, an investment in common stock can be considered a cash equivalent.
a. True
b. False
109. Cash equivalents are reported in the Operating Activities section of the statement of cash flows.
a. True
b. False
110. The repurchase of a company’s own stock should be reported on the statement of cash flows as an investing
activity.
a. True
b. False
111. For the statement of cash flows, companies are required to classify their cash activities into three
categories: operating, investing, and borrowing.
a. True
b. False
Chapter 12: The Statement of Cash Flows
112. Operating activities involve the acquiring and selling of goods and services for cash or on account.
a. True
b. False
113. Cash flows from purchases of merchandise are classified as investing activities.
a. True
b. False
114. Issuance of stock results in cash inflows that appear in the financing section of the statement of cash flows.
a. True
b. False
115. Cash flows from operating activities usually relate to an increase or decrease in either a current asset or a
current liability.
a. True
b. False
116. A building with a cost of $163,000 and accumulated depreciation of $32,000 was sold for a $11,000 gain.
When using the indirect method, the cash generated from this investing activity was $131,000.
a. True
b. False
117. Net income was $ 61,000 for the year. The accumulated depreciation balance increased by $14,000 over the
year. There were no sales of fixed assets or changes in noncash current assets or liabilities. Under the indirect
method, the cash flow from operations is $47,000.
a. True
b. False
118. Companies can use two different methods to report the amount of cash flow from their investing and
financing activities.
a. True
b. False
Chapter 12: The Statement of Cash Flows
119. The direct method of reporting cash flows from operating activities involves reconciling net income and cash
flow from operations.
a. True
b. False
120. Under the indirect method, the first line in the operating activities section of the statement of cash flows is the
net income or loss for the period.
a. True
b. False
121. The issuance of common stock in exchange for a building would appear both as a cash inflow in the
financing activities section of the cash flow statement and also as a cash outflow in the investing activities
section.
a. True
b. False
122. Significant noncash transactions are not reported on the statement of cash flows, but either in a separate
schedule or in a note to the financial statements.
a. True
b. False
123. The statement of cash flows emphasizes explanations for the change in net income.
a. True
b. False
124. The Financial Accounting Standards Board (FASB) has expressed a strong preference for the indirect method,
but allows companies to use the direct method in calculating the cash flow from operating activities.
a. True
b. False
125. The basic accounting equation can be restated in terms of cash by the following equation: Cash = current
liabilities + long-term liabilities + capital stock - retained earnings - noncash current assets + long-term assets.
a. True
b. False
Chapter 12: The Statement of Cash Flows
126. Determining the cash flows from operating activities generally requires analyzing each item on the
income statement as well as the current asset (except cash) and current liability accounts.
a. True
b. False
127. If the December 31, 2016, balance of accounts receivable is higher than the January 1, 2016, balance,
then the amount of cash collections will be less than the sales on account for the year.
a. True
b. False
128. If the December 31, 2016, balance of accounts payable is higher than the January 1, 2016, balance, then the
amount of cash payments will exceed the purchases on account for the year.
a. True
b. False
129. Because the cash received from the sale of long-term assets is reported in the investing activities section of
the statement of cash flows, any gain or loss is built into the cash received under the direct method.
a. True
b. False
130. A decrease in retained earnings indicates that a cash dividend has been paid.
a. True
b. False
131. Under the direct method, depreciation expense is treated as an outflow in the Investing Activities section of
the statement of cash flows.
a. True
b. False
132. Under the indirect method, instead of reporting cash receipts and payments, net income is reconciled with net
cash from operating activities.
a. True
b. False
Chapter 12: The Statement of Cash Flows
133. The cash flow adequacy ratio is defined as:
a. True
b. False
134. Many companies report cash flow per common share on the statement of cash flows.
a. True
b. False
135. All the information needed to compute the cash flow adequacy ratio is found on the balance sheet.
a. True
b. False
136. The cash flow adequacy ratio can only be calculated if a company uses the direct method to report cash flows
from operating activities.
a. True
b. False
137. Cash flow per share is computed by dividing cash on the balance sheet by the number of shares outstanding.
a. True
b. False
138. Some companies use a work sheet approach, which functions like the T account approach, as a tool to
aid in preparing the statement of cash flows.
a. True
b. False
139. The work sheet used to prepare a statement of cash flows (indirect method to determine cash flows from
operating activities) should have a total in the Changes column equal to total assets.
a. True
b. False
Chapter 12: The Statement of Cash Flows
140. A work sheet is an alternative to T accounts to help in the preparation of a statement of cash flows.
a. True
b. False
141. 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 .
142. The financial statement that summarizes the operating, investing, and financing activities of a business over a
period of time is the ___________________________________.
143. are items which are readily convertible into a known amount of cash and
have an original maturity to the investor of three months or less.
144. The term cash on the statement of cash flows includes .
145. An important activity for many companies is acquiring property.
146. The purchase of merchandise is an important activity for a retailer.
147. 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.
148. activities involve long-term liabilities and stockholders' equity.
149. 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.
150. 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.
Chapter 12: The Statement of Cash Flows
151. If the balance of accounts receivable decreases during the year, then cash collections will
____________________________ sales on account for the period.
152. 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.
153. If the balance of prepaid insurance was the same on January 1, 2016, and December 31, 2016, then the
insurance expense would the cash payments made for insurance during the year.
154. A decrease in retained earnings represents dividends that were during the period, not
necessarily those that were paid.
155. The objective of the indirect method is to reconcile net income to net cash flow from
_______________________________.
156. ___________________________ is a noncash expense related to plant assets.
157. 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.
158. The amount of cash provided from operating activities is under both the direct
and indirect methods.
159. 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.
160. In place of _____________, a worksheet is a useful device to help in the preparation of a statement of
cash flows.
Chapter 12: The Statement of Cash Flows
161. The following events occurred at Cute Canines 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 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, totaled $90,000
for the 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.
Chapter 12: The Statement of Cash Flows
Chapter 12: The Statement of Cash Flows
162. Fairleigh Industries invested its excess cash in the following instruments during December 2015:
Certificate of deposit, due January 31, 2016
$ 45,000
Certificate of deposit, due June 30, 2016
95,000
Investment in City of Cleveland bonds, due May 1, 2017
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, 2016
200,000
Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at
December 31, 2015, and for purposes of preparing a statement of cash flows for the year ended December 31,
2015.
Chapter 12: The Statement of Cash Flows
163. Dickinson Inc. has the following debt outstanding on December 31, 2015:
10% bonds payable, due 12/31/19
$600,000
Discount on bonds payable
(70,000)
Net bonds payable
$530,000
On this date, Dickinson retired the entire bond issue by paying cash of $610,000.
REQUIRED:
1. Prepare 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
Dickinson uses the indirect method.
Chapter 12: The Statement of Cash Flows
164. The following account balances are taken from the records of Morgantown Corp. for the past two years.
(Credit balances are shown in parentheses.)
Other information available for 2016 is as follows:
December 31,
2016
2015
Plant and equipment
$ 820,000
$ 600,000
Accumulated depreciation
(170,000)
(250,000)
Patents
99,000
86,000
Retained earnings
(825,000)
(675,000)
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 2016
statement of cash flows, including any adjustments in the Operating Activities section of the statement.
Assume that Morgantown uses the indirect method.
Chapter 12: The Statement of Cash Flows
Cash Flows from Operating Activities
Net income
$240,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense
60,000
Amortization expense
11,000
Gain on sale of plant and equipment
(14,000)
Cash Flows from Investing Activities
Sale of plant and equipment
$84,000
Acquisition of plant and equipment
(430,000)
Acquisition of patents
(24,000)
