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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
12-58
*Ex. 197
Condensed financial data of Gorni Company appear below:
GORNI COMPANY
Comparative Balance Sheet
December 31
2017 2016
Assets
Cash $ 70,000 $ 35,000
Accounts receivable 82,000 53,000
Inventories 120,000 132,000
Prepaid expenses 19,000 25,000
Investments 80,000 65,000
Plant assets 310,000 250,000
Accumulated depreciation (65,000) (60,000)
Total $616,000 $500,000
Liabilities and Stockholders' Equity
Accounts payable $ 85,000 $ 75,000
Accrued expenses payable 22,000 24,000
Bonds payable 130,000 150,000
Common stock 245,000 170,000
Retained earnings 134,000 81,000
Total $616,000 $500,000
GORNI COMPANY
Income Statement
For the Year Ended December 31, 2017
Sales $480,000
Less:
Cost of goods sold $290,000
Operating expenses (excluding depreciation) 60,000
Depreciation expense 17,000
Income taxes 15,000
Interest expense 13,000
Loss on disposal of plant assets 8,000 403,000
Net income $ 77,000
Additional information:
1. New plant assets costing $85,000 were purchased for cash in 2017.
2. Old plant assets costing $25,000 were sold for $5,000 cash when book value was $13,000.
3. Bonds with a face value of $20,000 were converted into $20,000 of common stock.
4. A cash dividend of $24,000 was declared and paid during the year.
5. Accounts payable pertain to merchandise purchases.
Instructions
Prepare a statement of cash flows for the year using the direct method.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-59
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-60
*Ex. 198
The income statement of Gise Company is shown below:
GISE COMPANY
Income Statement
For the Year Ended December 31, 2017
Sales $8,500,000
Cost of goods sold 5,300,000
Gross profit 3,200,000
Operating expenses
Selling and administrative expenses $1,210,000
Depreciation expense 70,000
Amortization expense 30,000 1,310,000
Net income $1,890,000
Additional information:
1. Accounts receivable increased $600,000 during the year.
2. Inventory increased $250,000 during the year.
3. Prepaid expenses increased $150,000 during the year.
4. Accounts payable to merchandise suppliers increased $125,000 during the year.
5. Accrued expenses payable increased $180,000 during the year.
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended
December 31, 2017, for Gise Company, using the direct method.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-61
*Ex. 199
The financial statements of Appalachian Mountain Company appear below:
APPALACHIAN MOUNTAIN COMPANY
Comparative Balance Sheet
December 31
2017 2016
Assets
Cash $ 47,000 $ 25,000
Accounts receivable 21,000 34,000
Inventory 22,000 15,000
Property, plant, and equipment 50,000 78,000
Accumulated depreciation (20,000) (24,000)
Total $120,000 $128,000
Liabilities and Stockholders' Equity
Accounts payable $ 12,000 $ 31,000
Income taxes payable 13,000 10,000
Bonds payable 10,000 25,000
Common stock 41,000 24,000
Retained earnings 44,000 38,000
Total $120,000 $128,000
APPALACHIAN MOUNTAIN COMPANY
Income Statement
For the Year Ended December 31, 2017
Sales $350,000
Cost of goods sold 280,000
Gross profit 70,000
Selling expenses $20,000
Administrative expenses 16,000 36,000
Income from operations 34,000
Interest expense 4,000
Income before income taxes 30,000
Income tax expense 8,000
Net income $ 22,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-62
*Ex. 199 (Cont.)
The following additional data were provided:
1. Dividends declared and paid were $16,000.
2. During the year equipment was sold for $12,000 cash. This equipment cost $28,000 originally
and had a book value of $12,000 at the time of sale.
3. All depreciation expense is in the selling expense category.
4. All sales and purchases are on account.
5. Accounts payable pertain to merchandise suppliers.
6. All operating expenses except for depreciation were paid in cash.
Instructions
Prepare a statement of cash flows for Appalachian Mountain Company using the direct method.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-63
*Ex. 200
Wave Rider Company completed its first year of operations on December 31, 2017. Its initial
income statement showed that Wave Rider had revenues of $207,000 and operating expenses of
$108,000. Accounts receivable and accounts payable at year-end were $80,000 and $28,000,
respectively. Assume that accounts payable related to operating expenses. Ignore income taxes.
Instructions
Compute net cash provided by operating activities using the direct method.
*Ex. 201
The income statement for McDonald's Corporation shows cost of goods sold $6,175.6 million and
operating expenses (including depreciation expense of $1,214.1 million) $18,907.6 million. The
comparative balance sheet for the year shows that inventory increased $12.9 million, prepaid
expenses increased $102.9 million, accounts payable (merchandise suppliers) decreased $44.6
million, and accrued expenses payable increased $162.4 million.
Instructions
Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for
operating expenses.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-64
COMPLETION STATEMENTS
202. A statement of cash flows summarizes the operating, ____________, and ___________
activities of an entity.
203. The cash effects of selling goods and services appears in the ______________ activities
section of a statement of cash flows.
204. Net cash provided/used by operating activities can be determined using the ____________
method or the ______________ method.
205. During the _______________, cash from operations and net income are approximately the
same.
206. During the growth phase, a company will start to generate small amounts of cash
_______________.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-65
207. Using the indirect approach, noncash charges in the income statement are ___________
to net income and noncash credits are ______________ to compute cash provided by
operations.
208. If accounts receivable increase during a period, revenues on an accrual basis are
______________ than revenues on a cash basis.
209. The sale of equipment at less than its book value is a(an) ______________ of cash that is
reported in the ______________ activities section.
210. During the _________________ phase, net cash provided by operating activities and net
income are approximately the same.
211. ______________ describes the net cash provided by operating activities after adjustment
for capital expenditures and dividends.
*212. Cost of goods sold for the year amounted to $100,000, and during the year, inventory
______________ by $7,000 and accounts payable ______________ by $3,000 resulting
in cash paid to suppliers of $90,000.
*213. In computing cash payments for operating expenses, a decrease in prepaid expenses is
______________ and an increase in accrued expenses payable is ______________ to
(from) operating expenses, exclusive of depreciation.
*214. In computing cash payments for income taxes, a decrease in income taxes payable is
______________ to (from) income tax expense.
*215. Under the direct method, the two largest classes of items in the operating activities section
for a merchandising company are cash ________________________ and cash
_________________________.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
12-66
Answers to Completion Statements
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-67
MATCHING
Set 1 — Indirect Method
216. For each of the following items, indicate by using the appropriate code letter, how the item
should be reported in the statement of cash flows, using the indirect method.
A. Added to net income
B. Deducted from net income
C. Cash outflow—investing activity
D. Cash inflow—investing activity
E. Cash outflow—financing activity
F. Cash inflow—financing activity
G. Significant noncash investing and financing activity
____ 1. Decrease in accounts payable during a period
____ 2. Declaration and payment of a cash dividend.
____ 3. Loss on disposal of land.
____ 4. Decrease in accounts receivable during a period.
____ 5. Redemption of bonds for cash.
____ 6. Proceeds from sale of equipment at book value.
____ 7. Issuance of common stock for cash.
____ 8. Purchase of a building for cash.
____ 9. Acquisition of land in exchange for common stock.
____ 10. Increase in inventory during a period.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
12-68
Set 2 — Direct Method
*217. For each of the following items, indicate by using the appropriate code letter, how the item
should be reported in the statement of cash flows, using the direct method.
A. Added in determining cash receipts from customers
B. Deducted in determining cash receipts from customers
C. Added in determining cash payments to suppliers
D. Deducted in determining cash payments to suppliers
E. Cash outflow—investing activity
F. Cash inflow—investing activity
G. Cash outflow—financing activity
H. Cash inflow—financing activity
I. Significant noncash investing and financing activity
J. Is not shown
____ 1. Decrease in accounts payable during a period.
____ 2. Declaration and payment of a cash dividend.
____ 3. Decrease in accounts receivable during a period.
____ 4. Depreciation expense.
____ 5. Conversion of bonds payable into common stock.
____ 6. Decrease in inventory during a period.
____ 7. Sale of equipment for cash at book value.
____ 8. Issuance of preferred stock for cash.
____ 9. Purchase of land for cash.
____ 10. Loss on sale of a plant asset.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-69
SHORT-ANSWER ESSAY QUESTIONS
S-A E 218
Why is the statement of cash flows useful?
S-A E 219
Distinguish among the three activities reported in the statement of cash flows.
S-A E 220
(a) What are the phases of the corporate life cycle?
(b) What effect does each phase have on the numbers reported in a statement of cash flows?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
12-70
S-A E 221
The statement of cash flows is the only required financial statement that is not prepared from an
adjusted trial balance. What are the sources of information for preparing a statement of cash
flows? Explain how the accrual basis of accounting affects the statement of cash flows.
S-A E 222
When preparing a statement of cash flows using the indirect method, why is depreciation added
back to net income within the operating activities section when using the indirect method?
*S-A E 223
Cash flows from operating activities can be calculated using the indirect or direct method. Briefly
describe how the two methods differ yet arrive at the same dollar amount for net cash provided by
operating activities.
Statement of Cash Flows
12-71
S-A E 224
How is it possible for a company to suffer a net loss for a given year, yet produce a positive net
cash flow from operating activities?
*S-A E 225
When preparing a statement of cash flows using the direct method, why must the sales revenue
figure be adjusted to arrive at cash receipts from sales?
S-A E 226 (Ethics)
Mooresville Hills Trading Company's most recent financial statements showed dismal
performance. There was a net loss of $10,000 and the statement of cash flows showed a net cash
decrease in all categories. The company president called all the managers together and asked
them to do all they could to make sure the next quarter's performance was better.
Mindy Ross, manager of the manufacturing division, sold off old manufacturing equipment. He
also reclassified several workers to part-time (30 hours per week) and hired additional temporary
workers to take up the slack. This saved the company money, since part-time workers do not have
the same insurance and other benefits as full-time workers.
William Bowden, financial manager, immediately suspended payments on all accounts except
those on which interest would accrue. He also instituted aggressive collection procedures.
Required:
1. Were Mindy Ross's actions ethical? Explain.
2. Were William Bowden's actions ethical? Explain.
3. Were the company president's actions ethical? Explain.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
12-72
Solution 226
S-A E 227 (Communication)
You are the accountant for a small manufacturing firm. Your company is privately held, so there is
no current requirement to issue financial statements using GAAP. You were hired four years ago,
and at that time you instituted a cash budgeting system. Presently, you prepare a schedule of
predicted cash sources and cash needs at the end of each week for the following week.
Isabelle Alix, the company's president, has asked whether a statement of cash flows would also
be useful.
Required:
Prepare a short memorandum to the president indicating whether you believe such an addition to
the financial statements to be useful. Include in your memo the benefits that might be expected
from a statement of cash flows and whether those are different from the benefits of a cash sources
and cash needs listing.
Statement of Cash Flows
12-73
IFRS QUESTIONS
1. Under IFRS, the cash flow statement can be prepared using
a. the direct method only.
b. the indirect method only.
c. either the direct or indirect method.
d. the T-account method only.
2. Under IFRS, bank overdrafts are classified as
a. operating activities.
b. investing activities.
c. financing activities.
d. cash and cash equivalents.
3. Which of the following activities is excluded from the statement of cash flows under IFRS?
a. Financing activities
b. Investing activities
c. Noncash investing and financing activities
d. Operating activities
4. Each of the following items may be classified as operating or financing activities under IFRS
except
a. dividends paid.
b. dividends received.
c. interest paid.
d. All of these answer choices may be classified as such.
5. Under IFRS, some companies present which section of the cash flow statement as a single line
item?
a. Operating activities
b. Investing activities
c. Financing activities
d. Noncash investing and financing activities
