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FOR INSTRUCTOR USE ONLY
CHAPTER 12
STATEMENT OF CASH FLOWS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
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BT
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True-False Statements
1.
1
K
10.
2
C
19.
2
C
28.
4
C
*37.
6
C
2.
1
K
11.
2
K
20.
3
K
29.
5
K
*38.
6
C
3.
1
K
12.
2
K
21.
3
K
30.
5
K
*39.
6
K
4.
1
K
13.
2
K
22.
4
C
31.
5
C
*40.
7
K
5.
1
K
14.
2
C
23.
4
C
32.
5
K
*41.
7
K
6.
2
K
15.
2
C
24.
4
K
33.
5
C
7.
2
K
16.
2
C
25.
4
C
*34.
6
C
8.
2
C
17.
2
C
26.
4
C
*35.
6
AP
9.
2
K
18.
2
K
27.
4
C
*36.
6
K
Multiple Choice Questions
42.
1
K
71.
2
C
100.
4
K
129.
4
AP
158.
5
K
43.
1
K
72.
2
C
101.
4
C
130.
4
AP
159.
5
AN
44.
1
K
73.
2
C
102.
4
AP
131.
4
AP
160.
5
AN
45.
1
K
74.
2
K
103.
4
AP
132.
4
K
161.
5
AN
46.
1
K
75.
2
K
104.
4
AP
133.
4,6
AP
162.
5
AN
47.
1
K
76.
2
K
105.
4
C
134.
4,6
AP
163.
5
AN
48.
1
C
77.
2
K
106.
4
C
135.
4,6
C
164.
5
K
49.
2
K
78.
2
K
107.
4
C
136.
4,6
K
165.
5
K
50.
2
K
79.
2
AP
108.
4
C
137.
4,6
K
166.
5
AN
51.
2
K
80.
2
AP
109.
4
AP
138.
4,6
K
167.
5
AN
52.
2
K
81.
2
AP
110.
4
AP
139.
4,6
K
*168.
6
AP
53.
2
K
82.
2
AP
111.
4
AP
140.
4,6
K
*169.
6
AP
54.
2
K
83.
2
AP
112.
4
AP
141.
4,6
K
*170.
6
AP
55.
2
K
84.
2
K
113.
4
K
142.
4,6
AP
*171.
6
AP
56.
2
C
85.
2
AP
114.
4
C
143.
4,6
AP
*172.
6
AP
57.
2
C
86.
2
AP
115.
4
K
144.
4,6
AP
*173.
6
AP
58.
2
C
87.
2
AP
116.
4
K
145.
4,6
AP
*174.
6
AP
59.
2
C
88.
3
K
117.
4
K
146.
4,6
AP
*175.
6
C
60.
2
C
89.
3
K
118.
4
K
147.
4
C
*176.
6
AP
61.
2
C
90.
3
K
119.
4
K
148.
4
C
*177.
6
K
62.
2
C
91.
3
K
120.
4
C
149.
4
AP
*178.
6
AP
63.
2
C
92.
3
K
121.
4
C
150.
4
C
*179.
6
AP
64.
2
C
93.
3
K
122.
4
C
151.
4
C
*180.
6
K
65.
2
C
94.
3
K
123.
4
C
152.
4
C
*181.
6
K
66.
2
C
95.
3
C
124.
4
C
153.
5
K
*182.
6
AP
67.
2
C
96.
3
C
125.
4
C
154.
5
AP
*183.
6
AP
68.
2
C
97.
3
K
126.
4
AP
155.
5
AP
69.
2
K
98.
3
K
127.
4
AP
156.
5
K
70.
2
C
99.
3
AN
128.
4
AP
157.
5
K
Brief Exercises
184.
2
AP
187.
4
AP
190.
4
AP
*193.
6
AP
185.
2
AP
188.
4
K
*191.
6
AP
*194.
6
AP
186.
2
K
189.
4
K
*192.
6
AP
*195.
6
AP
Exercises
196.
4
AP
200.
4
AP
204.
4,5
AP
*208.
6
AP
197.
4
AP
201.
4
AP
205.
4,5
AP
*209.
6
AP
198.
4
AP
202.
4
AP
206.
5
AN
*210.
6
AP
199.
4
AP
203.
4
AN
*207.
5,6
AP
*211.
6
AP
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-2
Completion Statements
Item
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Item
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Item
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Item
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Item
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212.
1
K
215.
3
K
218.
4
K
221.
5
K
*224.
6
K
213.
2
K
216.
3
K
219.
4,6
K
*222.
6
K
*225.
6
K
214.
3
K
217.
4
K
220.
5
K
*223.
6
K
Matching
226.
2
AP
*227.
6
AP
Short Answer Essay
228.
1
K
230.
3
K
232.
4
C
234.
4,6
C
236.
4,6
E
229.
2
C
231.
3,4
C
233.
4,6
C
*235.
6
C
237.
1
C
*This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
1.
TF
4.
TF
43.
MC
46.
MC
212.
C
2.
TF
5.
TF
44.
MC
47.
MC
228.
SA
3.
TF
42.
MC
45.
MC
48.
MC
237.
SA
Learning Objective 2
6.
TF
16.
TF
55.
MC
65.
MC
75.
MC
85.
MC
7.
TF
17.
TF
56.
MC
66.
MC
76.
MC
86.
MC
8.
TF
18.
TF
57.
MC
67.
MC
77.
MC
87.
MC
9.
TF
19.
TF
58.
MC
68.
MC
78.
MC
184.
BE
10.
TF
49.
MC
59.
MC
69.
MC
79.
MC
185.
BE
11.
TF
50.
MC
60.
MC
70.
MC
80.
MC
186.
BE
12.
TF
51.
MC
61.
MC
71.
MC
81.
MC
213.
C
13.
TF
52.
MC
62.
MC
72.
MC
82.
MC
226.
Ma
14.
TF
53.
MC
63.
MC
73.
MC
83.
MC
229.
SA
15.
TF
54.
MC
64.
MC
74.
MC
84.
MC
Learning Objective 3
20.
TF
89.
MC
92.
MC
95.
MC
98.
MC
231.
SA
21.
TF
90.
MC
93.
MC
96.
MC
99.
MC
88.
MC
91.
MC
94.
MC
97.
MC
230.
SA
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-3
Learning Objective 4
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
Item
Type
22.
TF
107.
MC
121.
MC
135.
MC
149.
MC
202.
Ex
23.
TF
108.
MC
122.
MC
136.
MC
150.
MC
203.
Ex
24.
TF
109.
MC
123.
MC
137.
MC
151.
MC
204.
Ex
25.
TF
110.
MC
124.
MC
138.
MC
152.
MC
205.
Ex
26.
TF
111.
MC
125.
MC
139.
MC
187.
BE
217.
C
27.
TF
112.
MC
126.
MC
140.
MC
188.
BE
218.
C
28.
TF
113.
MC
127.
MC
141.
MC
189.
BE
219.
C
100.
MC
114.
MC
128.
MC
142.
MC
190.
BE
231.
SA
101.
MC
115.
MC
129.
MC
143.
MC
196.
Ex
232.
SA
102.
MC
116.
MC
130.
MC
144.
MC
197.
Ex
233.
SA
103.
MC
117.
MC
131.
MC
145.
MC
198.
Ex
234.
SA
104.
MC
118.
MC
132.
MC
146.
MC
199.
Ex
236.
SA
105.
MC
119.
MC
133.
MC
147.
MC
200.
Ex
106.
MC
120.
MC
134.
MC
148.
MC
201.
Ex
Learning Objective 5
29.
TF
153.
MC
158.
MC
163.
MC
204.
Ex
221.
C
30.
TF
154.
MC
159.
MC
164.
MC
205.
Ex
31.
TF
155.
MC
160.
MC
165.
MC
206.
Ex
32.
TF
156.
MC
161.
MC
166.
MC
207.
Ex
33.
TF
157.
MC
162.
MC
167.
MC
220.
C
Learning Objective 6
34.
TF
137.
MC
168.
MC
178.
MC
195.
BE
227.
Ma
35.
TF
138.
MC
169.
MC
179.
MC
207.
Ex
233.
SA
36.
TF
139.
MC
170.
MC
180.
MC
208.
Ex
234.
SA
37.
TF
140.
MC
171.
MC
181.
MC
209.
Ex
235.
SA
38.
TF
141.
MC
172.
MC
182.
MC
210.
Ex
236.
SA
39.
TF
142.
MC
173.
MC
183.
MC
211.
Ex
133.
MC
143.
MC
174.
MC
191.
BE
222.
C
134.
MC
144.
MC
175.
MC
192.
BE
223.
C
135.
MC
145.
MC
176.
MC
193.
BE
224.
C
136.
MC
146.
MC
177.
MC
194.
BE
225.
C
Learning Objective 7
40.
TF
41.
TF
Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-4
CHAPTER LEARNING OBJECTIVES
1. Indicate the usefulness of the statement of cash flows. The statement of cash flows
provides information about the cash receipts, cash payments, and net change in cash
resulting from the operating, investing, and financing activities of a company during the
period.
2. Distinguish among operating, investing, and financing activities. Operating activities
include the cash effects of transactions that enter into the determination of net income.
Investing activities involve cash flows resulting from changes in investments and long-term
asset items. Financing activities involve cash flows resulting from changes in long-term
liability and stockholders' equity items.
3. Explain the impact of the product life cycle on a company’s cash flows. During the
introductory stage, cash provided by operating activities and cash from investing are
negative, and cash from financing is positive. During the growth stage, cash provided by
operating activities becomes positive but is still not sufficient to meet investing needs. During
the maturity stage, cash provided by operating activities exceeds investing needs, so the
company begins to retire debt. During the decline stage, cash provided by operating activities
is reduced, cash from investing becomes positive (from selling off assets), and cash from
financing becomes more negative.
4. Prepare a statement of cash flows using the indirect method. The preparation of the
statement of cash flows involves three major steps: (1) Determine net cash provided/used by
operating activities by converting net income from an accrual basis to a cash basis. (2)
Analyze changes in noncurrent asset and liability accounts and record as investing and
financing activities, or disclose as noncash transactions. (3) Compare the net change in cash
on the statement of cash flows with the change in the cash account reported on the balance
sheet to make sure the amounts agree.
5. Use the statement of cash flows to evaluate a company. A number of measures can be
derived by using information from the statement of cash flows as well as the other required
financial statements. Free cash flow indicates the amount of cash a company generated
during the current year that is available for the payment of dividends or for expansion.
Liquidity can be measured with the current cash debt coverage (cash provided by operating
activities divided by average current liabilities). Solvency can be measured by the cash debt
coverage (cash provided by operating activities divided by average total liabilities).
*6. Prepare a statement of cash flows using the direct method. The preparation of the
statement of cash flows involves three major steps: (1) Determine net cash provided/used by
operating activities by converting net income from an accrual basis to a cash basis. (2)
Analyze changes in noncurrent asset and liability accounts and record as investing and
financing activities, or disclose as noncash transactions. (3) Compare the net change in cash
on the statement of cash flows with the change in the cash account reported on the balance
sheet to make sure the amounts agree. The direct method reports cash receipts less cash
payments to arrive at net cash provided by operating activities.
*7.Use the T-account approach to prepare a statement of cash flows. To use T-accounts to
prepare the statement of cash flows: (1) prepare a large Cash T-account with sections for
operating, investing, and financing activities; (2) prepare smaller T-accounts for all other
noncash accounts; (3) insert beginning and ending balances for all accounts; and (4) follow
the steps in Illustration 12-4 (page 633), enter debit and credit amounts as needed.
Statement of Cash Flows
12-5
TRUE-FALSE STATEMENTS
1. The statement of cash flows is a required statement that must be prepared along with an
income statement, balance sheet, and retained earnings statement.
2. For external reporting, a company must prepare either an income statement or a statement
of cash flows, but not both.
3. A primary objective of the statement of cash flows is to show the income or loss on
investing and financing transactions.
4. The primary purpose of the statement of cash flows is to provide information about a
company’s cash receipts and cash payments during an accounting period.
5. A statement of cash flows indicates the sources and uses of cash during a period.
6. The statement of cash flows shows the effects on net income of a company’s operating,
investing, and financing activities for an accounting period.
7. Operating activities include the cash effects of transactions that create revenues and
expenses.
8. The activity from the balance sheet to be presented in the financing activities section of the
statement of cash flows is based on an analysis of stockholders’ equity only.
9. The statement of cash flows explains the difference between net income, as shown on the
income statement, and the net cash flows generated from operations.
10. In preparing a statement of cash flows, the issuance of debt should be reported separately
from the retirement of debt.
11. Noncash investing and financing activities must be reported in the body of a statement of
cash flows.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-6
12. Noncash investing and financing transactions, such as the exchange of common stock to
purchase assets, represent significant investing and financing activities and are reflected
either in a schedule separate from the statement of cash flows or in a separate note to the
financial statements.
13. The statement of cash flows classifies cash receipts and payments as operating,
nonoperating, financial, and extraordinary activities.
14. The sale of land for cash would be classified as a cash inflow from an investing activity.
15. Cash flow from investing activities is considered the most important category on the
statement of cash flows because it is considered the best measure of expected income.
16. The receipt of dividends from long-term investments in stock is classified as a cash inflow
from investing activities.
17. The payment of interest on bonds payable is classified as a cash outflow from operating
activities.
18. Any item that appears on the income statement would be considered as either a cash
inflow or cash outflow from operating activities.
19. The acquisition of a building by issuing bonds would be considered an investing and
financing activity that did not affect cash.
20. The growth phase of the product life cycle occurs when the company is purchasing fixed
assets and beginning to produce and sell.
21. During the maturity phase, cash from operations and net income are approximately the
same.
22. A loss on sale of equipment is added to net income in determining cash provided by
operations under the indirect method.
Statement of Cash Flows
12-7
23. Under the indirect method, gains and losses from the sale of equipment used in operations
would be included in the cash flows from operating activities section on the statement of
cash flows.
24. Cash provided by operations is generally equal to operating income.
25. Using the indirect method, an increase in accounts receivable during a period is deducted
from net income in calculating cash provided by operations.
26. A major disadvantage of the indirect method of reporting cash flows from operating
activities is that the difference between the net amount of cash flows from operating
activities and net income is not emphasized.
27. Using the indirect method, an increase in accounts payable during a period is deducted
from net income in calculating cash provided by operations.
28. In preparing a statement of cash flows, an increase in the Common Stock and Treasury
Stock accounts during a period would be an investing activity.
29. Free cash flow is cash from operations less dividends.
30. The current cash debt coverage ratio is computed by dividing net cash provided by
operations by average total liabilities.
31. The cash debt coverage ratio indicates a company’s ability to repay its liabilities from cash
generated from operations.
32. The cash basis measure of liquidity is the cash debt coverage ratio.
33. The current cash debt coverage ratio is considered a better representative of liquidity than
the current ratio because it involves the entire year rather than a balance at one point in
time.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-8
*34. During a period, cost of goods sold plus an increase in inventory plus an increase in
accounts payable equals cash paid to suppliers.
*35. During the year, Income Tax Expense amounted to $12,500 and Income Taxes Payable
increased by $1,500; therefore, the cash paid for income taxes was $11,000.
*36. In computing net cash flow from operating activities using the direct method, each item in
the income statement is adjusted from the accrual basis to the cash basis.
*37. An increase in inventory would be added to cost of goods sold to determine net purchases
for the period.
*38. As an adjustment to operating expenses per the income statement, an increase in accrued
liabilities would be added to operating expenses to determine cash payments for operating
expenses.
*39. Using the direct method, major classes of investing and financing activities are listed in the
operating activities section.
*40. The change in cash is equal to the change in liabilities less the change in equity plus the
change in noncash assets.
*41. Analysis of the changes in all of the noncash balance sheet accounts will explain the
change in the Cash account.
Answers to True-False Statements
Statement of Cash Flows
12-9
MULTIPLE CHOICE QUESTIONS
42. The statement of cash flows
a. must be prepared on a daily basis.
b. summarizes the operating, financing, and investing activities of an entity.
c. is another name for the income statement.
d. is a special section of the income statement.
43. Which one of the following items is not generally used in preparing a statement of cash
flows?
a. Adjusted trial balance.
b. Comparative balance sheets.
c. Current income statement.
d. Additional information.
44. The primary purpose of the statement of cash flows is to
a. provide information about the investing and financing activities during a period.
b. prove that revenues exceed expenses if there is a net income.
c. provide information about the cash receipts and cash payments during a period.
d. facilitate banking relationships.
45. If a company reports a net loss, it
a. may still have a net increase in cash.
b. will not be able to pay cash dividends.
c. will not be able to get a loan.
d. will not be able to make capital expenditures.
46. In addition to the three basic financial statements, which of the following is also a required
financial statement?
a. The Cash Budget.
b. Statement of Cash Flows.
c. Statement of Cash Inflows and Outflows.
d. The Cash Reconciliation.
47. The statement of cash flows will not report the
a. amount of checks outstanding at the end of the period.
b. sources of cash in the current period.
c. uses of cash in the current period.
d. change in the cash balance for the current period.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-10
48. All of the following statements are true regarding cash flow presentations except
a. the balance sheet provides only limited information about a company's cash flows.
b. the balance sheet provides information about how property, plant, and equipment were
financed.
c. the income statement does not show how much cash was generated by operating
activities.
d. if cash from operations is compared to net income, information about the quality of
reported net income is revealed.
49. The acquisition of land by issuing common stock is
a. a noncash transaction that is not reported in the body of a statement of cash flows.
b. a cash transaction and would be reported in the body of a statement of cash flows.
c. a noncash transaction and would be reported in the body of a statement of cash flows.
d. only reported if the statement of cash flows is prepared using the direct method.
50. The order of presentation of activities on the statement of cash flows is
a. operating, investing, and financing.
b. operating, financing, and investing.
c. financing, operating, and investing.
d. financing, investing, and operating.
51. Financing activities involve
a. lending money.
b. acquiring investments.
c. issuing debt.
d. acquiring long-lived assets.
52. Investing activities include
a. collecting cash on loans made.
b. obtaining cash from creditors.
c. obtaining capital from owners.
d. repaying money previously borrowed.
53. Generally, the most important category on the statement of cash flows is cash flows from
a. operating activities.
b. investing activities.
c. financing activities.
d. significant noncash activities.
Statement of Cash Flows
12-11
54. The category that is generally considered to be the best measure of a company's ability to
continue as a going concern is
a. cash flows from operating activities.
b. cash flows from investing activities.
c. cash flows from financing activities.
d. usually different from year to year.
55. Cash receipts from interest and dividends are classified as
a. financing activities.
b. investing activities.
c. operating activities.
d. either financing or investing activities.
56. Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows.
Indicate where, if at all, a stock dividend declared and issued would be classified on the
statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
57. Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows.
Indicate where, if at all, accounts receivable collected would be classified on the statement
of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
58. Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows.
Indicate where, if at all, inventory purchased with cash would be classified on the
statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-12
59. Assume that the Fitzgerald Corporation uses the indirect method to depict cash flows.
Indicate where, if at all, long-term debt retired with cash would be classified on the
statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
60. Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, interest paid on note would be classified on the statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
61. Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, stock issued for equipment would be classified on the statement of cash
flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
62. Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, dividends received on securities held would be classified on the statement
of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
63. Assume that the Quinn Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, income taxes paid would be classified on the statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
Statement of Cash Flows
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64. Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, common stock issued for cash would be classified.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
65. Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, land purchased for cash would be classified on the statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
66. Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, land and building purchased with a mortgage would be classified on the
statement of cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
67. Assume that the E-Zip Corporation uses the indirect method to depict cash flows. Indicate
where, if at all, treasury stock purchased with cash would be classified on the statement of
cash flows.
a. Operating activities section.
b. Investing activities section.
c. Financing activities section.
d. Does not represent a cash flow.
68. If a company has both an inflow and outflow of cash related to property, plant, and
equipment, the ______________ in the investing activities section.
a. two cash effects must be netted and presented as one item
b. cash inflow and cash outflow must be reported separately
c. cash outflow is only is presented
d. cash inflow and cash outflow can either be reported separately or presented as one
item
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69. Of the items below, the one that appears first on the statement of cash flows is
a. noncash investing and financing activities.
b. net increase (decrease) in cash.
c. cash at the end of the period.
d. cash at the beginning of the period.
70. Which of the following transactions does not affect cash during a period?
a. Write-off of an uncollectible account.
b. Collection of an accounts receivable.
c. Sale of treasury stock.
d. Redeeming bonds before maturity.
71. Significant noncash transactions would not include
a. conversion of bonds into common stock.
b. asset acquisition through bond issuance.
c. treasury stock acquisition.
d. exchange of plant assets.
72. Preferred stock issued in exchange for land would be reported in the statement of cash
flows in
a. the cash flows from financing activities section.
b. the cash flows from investing activities section.
c. a separate schedule or note to the financial statements.
d. the cash flows from operating section.
73. In preparing a statement of cash flows, a conversion of bonds into common stock will be
reported in
a. the financing section.
b. the "extraordinary" section.
c. a separate schedule or note to the financial statements.
d. the stockholders' equity section.
74. On the statement of cash flows, the cash flows from operating activities section would
include
a. receipts from the issuance of capital stock.
b. receipts from the sale of investments.
c. payments for the acquisition of investments.
d. cash receipts from sales activities.
Statement of Cash Flows
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75. Cash flows from operating activities, as reported on the statement of cash flows under the
indirect method, would include
a. receipts from the sale of investments.
b. net income.
c. payments for dividends.
d. receipts from the issuance of capital stock.
76. The issuance of debt to purchase assets would be classified as a(n)
a. operating activity.
b. investing activity.
c. financing activity.
d. none of these answers are correct.
77. The payment of a cash dividend would be classified as a(n)
a. operating activity.
b. investing activity.
c. financing activity.
d. significant noncash activity.
78. Which of the following activities would be classified as an investing activity?
a. Cash received from interest revenue.
b. Cash paid (loaned) to a borrower as a loan.
c. Cash received from dividend revenue.
d. Cash paid to reacquire capital stock.
79. Zoum Corporation had the following transactions during 2014:
1. Issued $125,000 of par value common stock for cash.
2. Recorded and paid wages expense of $60,000.
3. Acquired land by issuing common stock of par value $50,000.
4. Declared and paid a cash dividend of $10,000.
5. Sold a long-term investment (cost $3,000) for cash of $3,000.
6. Recorded cash sales of $400,000.
7. Bought inventory for cash of $160,000.
8. Acquired an investment in Zynga stock for cash of $21,000.
9. Converted bonds payable to common stock in the amount of $500,000.
10. Repaid a 6 year note payable in the amount of $220,000.
What is the net cash provided by operating activities?
a. $305,000.
b. $290,000.
c. $240,000.
d. $180,000.
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80. Zoum Corporation had the following transactions during 2014:
1. Issued $125,000 of par value common stock for cash.
2. Recorded and paid wages expense of $60,000.
3. Acquired land by issuing common stock of par value $50,000.
4. Declared and paid a cash dividend of $10,000.
5. Sold a long-term investment (cost $3,000) for cash of $3,000.
6. Recorded cash sales of $400,000.
7. Bought inventory for cash of $160,000.
8. Acquired an investment in Zynga stock for cash of $21,000.
9. Converted bonds payable to common stock in the amount of $500,000.
10. Repaid a 6 year note payable in the amount of $220,000.
What is the net cash provided by financing activities?
a. $<105,000>.
b. $395,000.
c. $<605,000>.
d. $115,000.
81. Zoum Corporation had the following transactions during 2014:
1. Issued $125,000 of par value common stock for cash.
2. Recorded and paid wages expense of $60,000.
3. Acquired land by issuing common stock of par value $50,000.
4. Declared and paid a cash dividend of $10,000.
5. Sold a long-term investment (cost $3,000) for cash of $3,000.
6. Recorded cash sales of $400,000.
7. Bought inventory for cash of $160,000.
8. Acquired an investment in Zynga stock for cash of $21,000.
9. Converted bonds payable to common stock in the amount of $500,000.
10. Repaid a 6 year note payable in the amount of $220,000.
What is the net cash provided by investing activities?
a. $432,000.
b. $212,000
c. ($18,000).
d. ($68,000).
82. APS Company issued 15,000 shares of $1 par common stock for $40 per share during
2014. The company paid dividends of $36,000 and issued long-term notes payable of
$330,000 during the year. What amount of cash flows from financing activities will be
reported on the statement of cash flows?
a. $9,000 net cash inflow.
b. $264,000 net cash inflow.
c. $705,000 net cash outflow.
d. $894,000 net cash inflow.
Statement of Cash Flows
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83. Vangaurd Company purchased treasury stock with a cost of $55,000 during 2014. During
the year, the company paid dividends of $20,000 and issued bonds payable for proceeds
of $836,000. Cash flows from financing activities for 2014 total
a. $816,000 net cash inflow.
b. $831,000 net cash inflow.
c. $75,000 net cash outflow.
d. $761,000 net cash inflow.
84. Which of the following is the first step in preparing the statement of cash flows?
a. Determine the net cash provided by operating activities.
b. Determine the net income.
c. Determine net cash provided by investing and financing activities.
d. Determine the net increase (decrease) in cash.
85. McLaughlin Company issued common stock for proceeds of $372,000 during 2014. The
company paid dividends of $66,000 and issued a long-term note payable for $250,000 in
exchange for equipment during the year. The company also purchased treasury stock that
had a cost of $54,000. The financing section of the statement of cash flows will report net
cash inflows of
a. $252,000.
b. $556,000.
c. $306,000.
d. $502,000.
86. During 2014, Lowes Company sold equipment with a book value of $90,000 for proceeds
of $109,000. The company purchased new equipment for $240,000 by signing a long-term
note payable. No other transactions impacted long-term asset accounts during 2014. The
investing section of the statement of cash flows will report
a. net cash outflows of $226,000.
b. net cash outflows of $131,000.
c. net cash inflows of $109,000.
d. net cash inflows of $14,000.
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87. In Jackson Jones Company, land decreased $180,000 because of a cash sale for
$180,000, the equipment account increased $60,000 as a result of a cash purchase, and
Bonds Payable increased $200,000 from issuance for cash at face value. The net cash
provided by investing activities is
a. $180,000.
b. $320,000.
c. $120,000.
d. $140,000.
88. In order to determine net cash provided by operating activities, a company must convert
net income from an accrual basis to a cash basis under
a. the direct method only.
b. the indirect method only.
c. both the direct method and the indirect method.
d. neither the direct nor the indirect method.
89. Cash from investing becomes positive and cash from financing becomes more negative
during the
a. introductory phase.
b. growth phase.
c. maturity phase.
d. decline phase.
90. Cash generated from operations exceeds investing needs, and the company can begin
retiring debt during the
a. introductory phase.
b. growth phase.
c. maturity phase.
d. decline phase.
91. Collections on accounts receivable will lag behind sales, and accrual sales during a period
will exceed cash collections during the
a. introductory phase.
b. growth phase.
c. maturity phase.
d. decline phase.
Statement of Cash Flows
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92. A company would be expected to generate small amounts of cash from operations during
the
a. introductory phase.
b. growth phase.
c. maturity phase.
d. decline phase.
93. The phase in the product life cycle when a company is purchasing fixed assets and
beginning to produce and sell is the
a. introductory phase.
b. growth phase.
c. maturity phase.
d. decline phase.
94. Cash from operations and net income are approximately the same during the
a. introductory phase.
b. growth phase.
c. maturity phase.
d. decline phase.
95. Which of the following is not typically a characteristic experienced by a company during the
introductory phase of the corporate life cycle?
a. Cash used in operations will exceed cash generated by operations.
b. Considerable cash will be used to purchase productive assets.
c. Cash from investing is positive.
d. Cash from financing is positive.
96. Which of the following is not typically a characteristic experienced by a company during the
growth phase of the corporate life cycle?
a. Cash from operations on the statements of cash flows will be less than net income on
the income statement.
b. Collections on accounts receivable will lag behind sales.
c. Cash from investing is positive.
d. Cash from financing is positive.
97. Which of the following would not create a cash flow?
a. Sale of equipment at book value.
b. Purchase of a delivery truck.
c. Payment of a cash dividend.
d. The company converts bonds into common stock.
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98. The information to prepare the statement of cash flows comes from all of the following
sources except
a. comparative balance sheets.
b. additional transaction data about cash provided or used during the period.
c. adjusted trial balance.
d. current income statement.
99. The information in the following table is from the statement of cash flows for a company at
four different points in time (Period 1, Period 2, Period 3, and Period 4). Negative values
are presented in parentheses.
Period 1
Period 2
Period 3
Period 4
Cash provided by operations
$ (180,000)
$ 90,000
$ 360,000
$ 50,000
Cash provided by investing
(300,000)
75,000
90,000
(120,000)
Cash provided by financing
290,000
(220,000)
($170,000)
$420,000
Net income
(120,000)
30,000
300,000
(15,000)
Based on this information, which of the following answers most likely corresponds with the
introductory phase, growth phase, maturity phase, or decline phase?
a. Period 2, Period 1, Period 3, Period 4.
b. Period 1, Period 4, Period 3, Period 2.
c. Period 3, Period 4, Period 1, Period 2.
d. Period 4, Period 3, Period 2, Period 1.
100. Which one of the following items is not necessary in preparing a statement of cash flows?
a. Determine the change in cash.
b. Determine the cash provided by operations.
c. Determine cash from financing and investing activities.
d. Determine the cash in each of the bank accounts.
101. If accounts receivable have increased during the period
a. revenues on an accrual basis are less than revenues on a cash basis.
b. revenues on an accrual basis are greater than revenues on a cash basis.
c. revenues on an accrual basis are the same as revenues on a cash basis.
d. expenses on an accrual basis are greater than expenses on a cash basis.
Statement of Cash Flows
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102. Accounts receivable arising from sales to customers amounted to $120,000 and $105,000
at the beginning and end of the year, respectively. Income reported on the income
statement for the year was $407,000. Exclusive of the effect of other adjustments, the cash
flows from operating activities to be reported on the statement of cash flows is
a. $407,000.
b. $422,000.
c. $512,000.
d. $392,000.
103. Accounts receivable arising from sales to customers amounted to $35,000 and $40,000 at
the beginning and end of the year, respectively. Income reported on the income statement
for the year was $203,000. Exclusive of the effect of other adjustments, the cash flows
from operating activities to be reported on the statement of cash flows is
a. $203,000.
b. $208,000.
c. $238,000.
d. $198,000.
104. Accounts receivable arising from sales to customers amounted to $80,000 and $70,000 at
the beginning and end of the year, respectively. Income reported on the income statement
for the year was $212,000. Exclusive of the effect of other adjustments, the cash flows
from operating activities to be reported on the statement of cash flows is
a. $212,000.
b. $202,000.
c. $222,000.
d. $292,000.
105. If accounts payable have increased during a period
a. revenues on an accrual basis are less than revenues on a cash basis.
b. expenses on an accrual basis are less than expenses on a cash basis.
c. expenses on an accrual basis are greater than expenses on a cash basis.
d. expenses on an accrual basis are the same as expenses on a cash basis.
106. Which one of the following affects cash during a period?
a. Recording depreciation expense.
b. Declaration of a cash dividend.
c. Write-off of an uncollectible account receivable.
d. Payment of an accounts payable.
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107. In calculating cash flows from operating activities using the indirect method, a gain on the
sale of equipment is
a. added to net income.
b. deducted from net income.
c. ignored because it does not affect cash.
d. not reported on a statement of cash flows.
108. In calculating cash flows from operating activities using the indirect method, a loss on the
sale of equipment is
a. added to net income.
b. deducted from net income.
c. ignored because it does not affect cash.
d. not reported on a statement of cash flows.
109. Peninsula Company reported net income of $260,000 for the year. During the year,
accounts receivable increased by $21,000, accounts payable decreased by $9,000 and
depreciation expense of $45,000 was recorded. Net cash provided by operating activities
for the year is
a. $275,000.
b. $245,000.
c. $227,000.
d. $260,000.
110. LKN Company reported net income of $80,000 for the year. During the year, accounts
receivable increased by $6,000, accounts payable decreased by $4,000 and depreciation
expense of $10,000 was recorded. Net cash provided by operating activities for the year is
a. $90,000.
b. $70,000.
c. $72,000.
d. $80,000.
111. Catalina Company reported a net loss of $10,000 for the year ended December 31, 2014.
During the year, accounts receivable decreased $5,000, inventory increased $8,000,
accounts payable increased by $10,000, and depreciation expense of $6,000 was
recorded. During 2014, operating activities
a. used net cash of $3,000.
b. used net cash of $7,000.
c. provided net cash of $3,000.
d. provided net cash of $7,000.
Statement of Cash Flows
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112. Hunter Company reported a net loss of $6,000 for the year ended December 31, 2014.
During the year, accounts receivable decreased $14,000, inventory increased $10,000,
accounts payable increased by $15,000, and depreciation expense of $12,000 was
recorded. During 2014, operating activities
a. used net cash of $7,000.
b. used net cash of $25,000.
c. provided net cash of $25,000.
d. provided net cash of $37,000.
113. Starting with net income and adjusting it for items that affected reported net income but
which did not affect cash is called the
a. direct method.
b. indirect method.
c. working capital method.
d. cost-benefit method.
114. In calculating net cash provided by operating activities using the indirect method, an
increase in prepaid expenses during a period is
a. deducted from net income.
b. added to net income.
c. ignored because it does not affect income.
d. ignored because it does not affect expenses.
115. Using the indirect method, patent amortization expense for the period
a. is deducted from net income.
b. causes cash to increase.
c. causes cash to decrease.
d. is added to net income.
116. In developing the cash flows from operating activities, most companies in the United States
a. use the direct method.
b. use the indirect method.
c. present both the indirect and direct methods in their financial reports.
d. prepare the operating activities section on the accrual basis.
117. Which of the following would be subtracted from net income using the indirect method?
a. Depreciation expense.
b. An increase in accounts receivable.
c. An increase in accounts payable.
d. A decrease in prepaid expenses.
118. Which of the following would be added to net income using the indirect method?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
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a. An increase in accounts receivable.
b. An increase in prepaid expenses.
c. Depreciation expense.
d. A decrease in accounts payable.
119. Which of the following would not be an adjustment to net income using the indirect
method?
a. Depreciation Expense.
b. An increase in Prepaid Insurance.
c. Amortization Expense.
d. An increase in Land.
120. In calculating cash flows from operating activities using the indirect method, a loss on the
sale of equipment will appear as a(n)
a. subtraction from net income.
b. addition to net income.
c. addition to cash flow from investing activities.
d. subtraction from cash flow from investing activities.
121. Using the indirect method, which of the following adjustments to convert net income to net
cash provided by operating activities is correct?
Add to Net Income Deduct from Net Income
a. Accounts Receivable increase decrease
b. Prepaid Expenses increase decrease
c. Inventory decrease increase
d. Taxes Payable decrease increase
122. Using the indirect method, which of the following adjustments to convert net income to net
cash provided by operating activities is incorrect?
Add to Net Income Deduct from Net Income
a. Accounts Receivable decrease increase
b. Prepaid Expenses increase decrease
c. Inventory decrease increase
d. Accounts Payable increase decrease
123. Which of the following adjustments to convert net income to net cash provided by
operating activities is not added to net income?
a. Gain on Disposal of Equipment.
b. Depreciation Expense.
c. Patent Amortization Expense.
d. Depletion Expense.
124. Using the indirect method, if equipment is sold at a gain, the
a. sale proceeds received are deducted in the operating activities section.
Statement of Cash Flows
12-25
b. sale proceeds received are added in the operating activities section.
c. amount of the gain is added in the operating activities section.
d. amount of the gain is deducted in the operating activities section.
125. On the statement of cash flows using the indirect method, patent amortization expense will
a. be added to net income in the operating section.
b. be deducted from net income in the operating section.
c. appear as an inflow of cash in the investing section.
d. appear as an outflow of cash in the investing section.
126. A company had net income of $990,000. Depreciation expense is $110,000. During the
year, accounts receivable and inventory increased $60,000 and $160,000, respectively.
Prepaid expenses and accounts payable decreased $8,000 and $16,000, respectively.
There was also a loss on the sale of equipment of $12,000. How much cash was provided
by operating activities?
a. $860,000.
b. $884,000.
c. $1,180,000.
d. $1,228,000.
127. A company had net income of $242,000. Depreciation expense is $26,000. During the
year, accounts receivable and inventory increased $15,000 and $40,000, respectively.
Prepaid expenses and accounts payable decreased $2,000 and $14,000, respectively.
There was also a loss on the sale of equipment of $17,000. How much cash was provided
by operating activities?
a. $218,000.
b. $201,000.
c. $278,000.
d. $299,000.
128. The net income reported on the income statement for the current year was $1,260,000.
Depreciation recorded on plant assets was $257,000. Accounts receivable and inventories
increased by $72,000 and $48,000, respectively. Prepaid expenses and accounts payable
decreased by $6,000 and $66,000, respectively. How much cash was provided by
operating activities?
a. $1,280,000.
b. $1,400,000.
c. $1,337,000.
d. $1,697,000.
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129. The net income reported on the income statement for the current year was $410,000.
Depreciation recorded on plant assets was $76,000. Accounts receivable and inventories
increased by $40,000 and $16,000, respectively. Prepaid expenses and accounts payable
decreased by $2,000 and $32,000, respectively. How much cash was provided by
operating activities?
a. $380,000.
b. $400,000.
c. $364,000.
d. $572,000.
130. The net income reported on the income statement for the current year was $440,000.
Depreciation was $62,000. Accounts receivable and inventories decreased by $20,000 and
$32,000, respectively. Prepaid expenses and accounts payable increased, respectively, by
$2,000 and $16,000. How much cash was provided by operating activities?
a. $496,000.
b. $568,000.
c. $536,000.
d. $436,000.
131. The net income reported on the income statement for the current year was $210,000.
Depreciation was $52,000. Accounts receivable and inventories decreased by $5,000 and
$15,000, respectively. Prepaid expenses and accounts payable increased, respectively, by
$500 and $14,000. How much cash was provided by operating activities?
a. $277,500.
b. $287,500.
c. $295,500.
d. $228,500.
132. The indirect and direct methods of preparing the statement of cash flows are identical
except for the
a. significant noncash activity section.
b. operating activities section.
c. investing activities section.
d. financing activities section.
Statement of Cash Flows
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133. If $2,500,000 of bonds are issued during the year but $4,000,000 of old bonds are retired
during the year, the statement of cash flows will show a(n)
a. net increase in cash of $1,500,000.
b. net decrease in cash of $1,500,000.
c. increase in cash of $2,500,000 and a decrease in cash of $4,000,000.
d. net loss on retirement of bonds of $1,500,000.
134. If $1,200,000 of bonds are issued during the year but $2,500,000 of old bonds are retired
during the year, the statement of cash flows will show a(n)
a. net increase in cash of $1,300,000.
b. net decrease in cash of $1,200,000.
c. increase in cash of $1,200,000 and a decrease in cash of $2,500,000.
d. net loss on retirement of bonds of $1,300,000.
135. Which of the following changes in retained earnings during a period will be reported in the
financing activities section of the statement of cash flows?
1. Declaration and payment of a cash dividend during the period.
2. Net income for the period.
a. 1.
b. 2.
c. Neither 1 nor 2.
d. Both 1 and 2.
136. The statement of cash flows
a. is prepared instead of an income statement under generally accepted accounting
principles.
b. is used to assess an entity's ability to pay dividends and meet obligations.
c. is prepared from comparative income statements.
d. reflects earnings per share figures on a cash basis and on an accrual basis in the body
of the statement.
137. In preparing the statement of cash flows, determining the net increase or decrease in cash
requires the use of
a. the adjusted trial balance.
b. the current period's retained earnings statement.
c. a comparative balance sheet.
d. a comparative income statement.
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138. To determine the net cash provided (used) by operating activities, it is necessary to
analyze
a. the current year's income statement.
b. a comparative balance sheet.
c. additional information.
d. All of these answer choices are correct.
139. Which of the following would not be needed to determine net cash provided by operating
activities?
a. Depreciation expense.
b. Change in accounts receivable.
c. Payment of cash dividends.
d. Change in prepaid expenses.
140. When equipment is sold for cash, the amount received is reflected as a cash
a. inflow in the operating section.
b. inflow in the financing section.
c. inflow in the investing section.
d. outflow in the operating section.
141. The statement of cash flows will not provide insight into
a. why dividends were not increased.
b. whether cash flow is greater than net income.
c. the exact proceeds of a future bond issue.
d. how the retirement of debt was accomplished.
142. If a gain of $45,000 is incurred in selling (for cash) office equipment having a book value of
$180,000, the total amount reported in the cash flows from investing activities section of
the statement of cash flows is
a. $135,000.
b. $180,000.
c. $225,000.
d. $45,000.
143. If a loss of $27,000 is incurred in selling (for cash) office equipment having a book value of
$200,000, the total amount reported in the cash flows from investing activities section of
the statement of cash flows is
a. $173,000.
b. $200,000.
c. $227,000.
d. $27,000.
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144. If a gain of $13,500 is incurred in selling (for cash) office equipment having a book value of
$100,000, the total amount reported in the cash flows from investing activities section of
the statement of cash flows is
a. $86,500.
b. $113,500.
c. $100,000.
d. $13,500.
145. If a loss of $9,000 is incurred in selling (for cash) office equipment having a book value of
$80,000, the total amount reported in the cash flows from investing activities section of the
statement of cash flows is
a. $71,000.
b. $80,000.
c. $89,000.
d. $9,000.
146. Land costing $125,000 was sold for $325,000 cash. The gain on the sale was reported on
the income statement as other income. On the statement of cash flows, what amount
should be reported as an investing activity from the sale of land?
a. $125,000.
b. $325,000.
c. $280,000.
d. $200,000.
147. When using the indirect method to compute cash provided by operating activities
a. income taxes paid may be ignored.
b. amortization expense is added to net income.
c. decreases in inventory are subtracted from net income.
d. increases in accounts receivable are added to net income.
148. A transaction involving a gain on the sale of equipment affects cash provided (used) by
a. financing and investing activities.
b. operating and financing activities.
c. operating and investing activities.
d. operating, financing, and investing activities.
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12-30
149. Minette Company reported net income of $120,000 for the year ended December 31,
2014. During the year, inventories decreased by $24,000, accounts payable decreased by
$36,000, depreciation expense was $27,000 and a gain on disposal of equipment of
$9,000 was recorded. Net cash provided by operating activities in 2014 using the indirect
method was
a. $168,000.
b. $126,000.
c. $147,000.
d. $144.000.
150. All of the following adjustments are added to net income in computing net cash provided by
operating activities except
a. amortization expense.
b. a decrease in accounts receivable.
c. an increase in accounts payable.
d. an increase in prepaid expenses.
151. All of the following adjustments would be deducted in determining net cash provided by
operating activities except a(n)
a. increase in inventories.
b. depreciation expense.
c. gain on disposal of plant assets.
d. decrease in accrued expenses payable.
152. Each of the following is an adjustment to convert net income to net cash provided by
operating activities except
a. adding back noncash expenses.
b. adding gains and deducting losses.
c. analyzing changes to noncash current asset and current liability accounts.
d. All of these answer choices are adjustments.
153. The current cash debt coverage is computed by dividing
a. average current liabilities by cash provided by operating activities.
b. cash provided by operating activities by average current liabilities.
c. ending current liabilities by cash provided by operating activities.
d. cash provided by operating activities by ending current liabilities.
Statement of Cash Flows
12-31
154. Laser Performance Inc. has the following information available (amount in thousands).
Net Income $30,000
Average Total Liabilities 80,000
Average Current Liabilities 36,000
Cash Provided by Operations 48,000
Cash Sales 130,000
Capital Expenditures 22,000
Dividends Paid 6,000
What is the current cash debt coverage?
a. 1.333 times.
b. .600 times .
c. .833 times .
d. .369 times.
155. Laser Performance Inc. has the following information available (amount in thousands).
Net Income $30,000
Average Total Liabilities 80,000
Average Current Liabilities 36,000
Cash Provided by Operations 48,000
Cash Sales 130,000
Capital Expenditures 22,000
Dividends Paid 6,000
What is the cash debt coverage?
a. .375 times.
b. 1.33 times.
c. .600 times.
d. 1.625 times.
156. The current cash debt coverage is used to evaluate
a. solvency.
b. profitability.
c. liquidity.
d. earning power.
157. The cash debt coverage is computed by dividing net cash provided by operating activities
by
a. average current liabilities.
b. net sales.
c. average long-term liabilities.
d. average total liabilities.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-32
158. Free cash flow provides an indication of a company’s ability to
a. generate cash to invest in new capital expenditures.
b. generate net income.
c. generate cash to pay dividends.
d. both (a) and (c).
159. During 2014, Ecuyer Industries reported cash provided by operations of $397,000,000,
cash used in investing of $343,000,000, and cash used in financing of $95,000,000. In
addition, cash spent for fixed assets during the period was $138,000,000. Average current
liabilities were $325,000,000 and average total liabilities were $858,000,000. No dividends
were paid. Based on this information, what was Ecuyer's free cash flow?
a. ($72,000,000).
b. $54,000,000.
c. $259,000,000.
d. ($302,000,000).
160. During 2014, Ecuyer Industries reported cash provided by operations of $397,000,000,
cash used in investing of $343,000,000, and cash used in financing of $95,000,000. In
addition, cash spent for fixed assets during the period was $138,000,000. Average current
liabilities were $325,000,000 and average total liabilities were $858,000,000. No dividends
were paid. Based on this information, what was Ecuyer's current cash debt coverage?
a. 1.16 times.
b. 2.88 times.
c. 0.82 times.
d. 1.22 times.
161. During 2014, Ecuyer Industries reported cash provided by operations of $397,000,000,
cash used in investing of $343,000,000, and cash used in financing of $95,000,000. In
addition, cash spent for fixed assets during the period was $138,000,000. Average current
liabilities were $325,000,000 and average total liabilities were $858,000,000. No dividends
were paid. Based on this information, what was Ecuyer's cash debt coverage?
a. 0.38 times.
b. 0.46 times.
c. 1.22 times.
d. 0.40 times.
Statement of Cash Flows
12-33
162. Authentic Exposure Company had the following transactions that took place during the
year:
I. Recorded credit sales of $2,500
II. Collected $1,500 owning from customers
III. Recorded sales returns of $500 and credited the customer's account.
What is the total effect of these transactions on Free Cash Flow, Current Cash Debt
Coverage, and Cash Debt Coverage, respectively?
Free Current Cash Debt Cash Debt
Cash Flow Coverage Coverage
a. Increase Increase Increase
b. Decrease Decrease Decrease
c. No Effect No Effect No Effect
d. Decrease No Effect No Effect
163. Authentic Exposure Company had the following transactions that took place during the
year:
I. Paid amount owing to suppliers $2,750.
II. Purchased new equipment for $5,000 by signing a long-term note payable.
III. Purchased a patent and paid $15,000 cash for the asset.
How what is the total effect of these transactions on Free Cash Flow, Current Cash Debt
Coverage, and Cash Debt Coverage respectively?
Free Current Cash Debt Cash Debt
Cash Flow Coverage Coverage
a. Increase Increase Increase
b. Decrease Decrease Decrease
c. No Effect No Effect No Effect
d. Increase No Effect No Effect
164. All of the following statements about free cash flow are false except
a. significant free cash flow indicates less potential to finance new investment.
b. free cash flow is most commonly calculated by subtracting capital expenditures from
cash provided by operations and then adding cash dividends.
c. free cash flow is not reported on the statement of cash flows.
d. significant free cash flow indicates less potential to pay additional dividends.
165. Typically a value below what amount for the current cash debt coverage ratio should be
further investigated?
a. 2.0.
b. 1.4.
c. 0.6.
d. 0.4.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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166. Using the following information, which company appears to be most liquid?
(in $ Millions)
Jones
Company
Parksh
Company
Brady
Company
Chambers
Company
Cash provided by operating activities for 2014
140
295
110
200
Current liabilities for 2013
230
335
205
300
Current liabilities for 2014
280
375
240
360
Total liabilities for 2013
600
440
275
500
Total liabilities for 2014
720
530
325
540
a. Jones Company
b. Parksh Company
c. Brady Company
d. Chambers Company
167. Using the following information, which company appears to be least solvent?
(in $ Millions)
Jones
Company
Parles
Company
Brady
Company
Chambers
Company
Cash provided by operating activities for 2014
140
295
110
200
Current liabilities for 2013
230
335
205
300
Current liabilities for 2014
280
375
240
360
Total liabilities for 2013
600
440
275
500
Total liabilities for 2014
720
530
325
540
a. Jones Company
b. Parles Company
c. Brady Company
d. Chambers Company
*168. Brad Ford Company reports a $32,000 increase in inventory and a $8,000 increase in
accounts payable during the year. Cost of goods sold for the year was $190,000. Using the
direct method of reporting cash flows from operating activities, cash payments made to
suppliers were
a. $190,000.
b. $214,000.
c. $166,000.
d. $180,000.
Statement of Cash Flows
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*169. The cost of goods sold during the year was $275,000. Inventory decreased by $10,000
during the year and accounts payable decreased by $12,000 during the year. Using the
direct method of reporting cash flows from operating activities, cash payments for inventory
total
a. $287,000.
b. $277,000.
c. $253,000.
d. $297,000.
*170. Tito Company reports a $20,000 increase in inventory and a $5,000 decrease in accounts
payable during the year. Cost of Goods Sold for the year was $182,000. Using the direct
method of reporting cash flows from operating activities, cash payments made to suppliers
were
a. $182,000.
b. $162,000.
c. $207,000.
d. $157,000.
*171. The cost of goods sold during the year was $330,000. Inventory increased by $12,000
during the year and accounts payable decreased by $19,000 during the year. Using the
direct method of reporting cash flows from operating activities, cash payments for inventory
total
a. $349,000.
b. $311,000.
c. $337,000.
d. $361,000.
*172. Anjili Company had credit sales of $1,400,000. The beginning accounts receivable balance
was $165,000 and the ending accounts receivable balance was $280,000. Using the direct
method of reporting cash flows from operating activities, what were the cash collections
from customers during the period?
a. $1,615,000.
b. $1,400,000.
c. $1,285,000.
d. $1,565,000.
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*173. During 2014, Bronze Company had $130,000 in cash sales and $970,000 in credit sales.
The accounts receivable balances were $180,000 and $212,000 at December 31, 2013
and 2014, respectively. Using the direct method of reporting cash flows from operating
activities, what was the total cash collected from all customers during 2014?
a. $1,368,000.
b. $1,592,000.
c. $1,132,000.
d. $1,068,000.
*174. The following information relates to Layline Company:
Prepaid Insurance, December 31, 2013 $302,000
Prepaid Insurance, December 31, 2014 280,000
Insurance expense for 2014 1,400,000
Using the direct method of reporting cash flows from operating activities, what was the
amount of cash paid for insurance premiums by Layline during 2014?
a. $1,378,000.
b. $1,422,000.
c. $1,680,000.
d. $1,476,000.
*175. Cash receipts from customers are greater than sales revenues when there is a(n)
a. increase in accounts receivable.
b. decrease in accounts receivable.
c. increase in cost of goods sold.
d. decrease in cost of goods sold.
*176. Colie Company had an increase in inventory of $120,000. The cost of goods sold was
$490,000. There was a $30,000 decrease in accounts payable from the prior period. Using
the direct method of reporting cash flows from operating activities, what were Colie's cash
payments to suppliers?
a. $640,000.
b. $580,000.
c. $370,000.
d. $310,000.
*177. Which of the following items does not appear in the statement of cash flows under the
direct method?
a. Cash payments to suppliers.
b. Cash collections from customers.
c. Depreciation Expense.
d. Cash from the sale of equipment.
*178. North Company has other operating expenses of $330,000. There has been a decrease in
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-37
prepaid expenses of $16,000 during the year, and accrued liabilities are $24,000 larger
than in the prior period. Using the direct method of reporting cash flows from operating
activities, what were North's cash payments for operating expenses?
a. $338,000.
b. $322,000.
c. $290,000.
d. $370,000.
*179. Westwind Corporation shows income tax expense of $180,000. There has been a $20,000
decrease in federal income taxes payable and a $28,000 increase in state income taxes
payable during the year. Using the direct method of reporting cash flows from operating
activities, what was Westwind 's cash payment for income taxes?
a. $180,000.
b. $172,000.
c. $132,000.
d. $228,000.
*180. Which of the following would not appear in the operating activities section of a statement of
cash flows prepared under the direct method?
a. Cash receipts from customers.
b. Cash paid for income taxes.
c. Gain on sale of equipment.
d. Cash paid to employees.
*181. Which of the following statements concerning the statement of cash flows is true?
a. The statement of cash flows is usually more accurate when using the indirect method.
b. If the direct method is used, a supplementary schedule reconciling the net income to
net cash from operating activities must still be provided.
c. The statement of cash flows reflects both earnings per share and cash per share.
d. The statement of cash flows is an optional financial statement for external reporting
purposes.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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*182. Seachest Company reports the following:
End of Year Beginning of Year
Inventory $25,000 $40,000
Accounts Payable 30,000 10,000
If cost of goods sold for the year is $190,000, the amount of cash paid to suppliers using
the direct method is
a. $195,000.
b. $185,000.
c. $155,000.
d. $230,000.
*183. During the year, Salaries Payable decreased by $12,000. Using the direct method of
reporting cash flows from operating activities, if Salary Expense amounted to $400,000 for
the year, the cash paid to employees (including deductions from gross pay) is
a. $412,000.
b. $388,000.
c. $400,000.
d. $404,000.
Answers to Multiple Choice Questions
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-39
BRIEF EXERCISES
Be. 184
Selected transactions of the Carolina Company are listed below.
1. Common stock is sold for cash above par value.
2. Bonds payable are issued for cash at a discount.
3. Interest on a short-term note receivable is collected.
4. Merchandise is sold to customers for cash.
5. Cash is paid to purchase inventory.
6. Equipment is purchased by signing a 3-year, 10% note payable.
7. Cash dividends on common stock are declared and paid.
8. One hundred shares of Amazon.com common stock are purchased for cash.
9. Land is sold for cash at book value.
10. Bonds payable are converted into common stock.
Instructions
Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing
activity, or (d) a noncash investing and financing activity.
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Be. 185
Selected transactions for the Hamiltion Company are listed below.
1. Collected accounts receivable.
2. Declared and paid dividends on common stock.
3. Sold long-term investments for cash.
4. Issued stock for equipment.
5. Repaid five year note payable.
6. Paid employee wages.
7. Converted bonds payable to common stock.
8. Acquired long-term investment with cash.
9. Sold buildings and equipment for cash.
10. Sold merchandise to customers.
Instructions
Classify each transaction as either (a) an operating activity, (b) an investing activity, (c) a financing
activity, or (d) a noncash investing and financing activity.
Be. 186
(a) Identify several alternatives for presenting significant noncash activities in financial
statements.
(b) Give three examples of significant noncash activities.
Statement of Cash Flows
12-41
Be. 187
Lake Norman Company reported net income of $225,000 for the current year. Depreciation
recorded on buildings and equipment amounted to $75,000 for the year. Balances of the current
asset and current liability accounts at the beginning and end of the year are as follows:
End of Year Beginning of Year
Cash $20,000 $15,000
Accounts receivable 22,000 32,000
Inventory 50,000 60,000
Accounts payable 12,000 18,000
Instructions
Prepare the cash flows from the operating activities section of the statement of cash flows using
the indirect method.
Be. 188
Assume the indirect method is used to compute cash flows from operations. For each item listed
below, indicate the effect on net income in arriving at cash flows from operations by choosing one
of the following code letters.
Code
Add to Net Income A
Deduct from Net Income D
1. Increase in accounts receivable
2. Increase in inventory
3. Decrease in prepaid expenses
4. Decrease in accounts payable
5. Increase in accrued liabilities
6. Increase in income taxes payable
7. Depreciation expense
8. Loss on sale of investment
9. Gain on disposal of equipment
10. Amortization expense
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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12-42
Be. 189
Assuming a statement of cash flows is prepared using the indirect method, indicate the reporting
of the transactions and events listed below by major categories on the statement. Use the
following code letters to indicate the appropriate category under which the item would appear on
the statement of cash flows.
Code
Cash Flows From Operating Activities
Add to Net Income A
Deduct from Net Income D
Cash Flows From Investing Activities IA
Cash Flows From Financing Activities FA
Category
1. Common stock is issued for cash at an amount above par value _____
2. Inventory increased during the period _____
3. Depreciation expense recorded for the period _____
4. Building was purchased for cash _____
5. Bonds payable were acquired and retired at their carrying value _____
6. Accounts payable decreased during the period _____
7. Prepaid expenses decreased during the period _____
8. Treasury stock was acquired for cash _____
9. Land is sold for cash at an amount equal to book value _____
10. Patent amortization expense recorded for a period _____
Statement of Cash Flows
12-43
Be. 190
Lacey Company prepared the tabulation below at December 31, 2014.
Net Income ................................................. $310,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $45,000 .................................................................... ______
Increase in accounts receivable, $55,000 ..................................................... ______
Decrease in inventory, $12,000 .................................................................... ______
Increase in accounts payable, $6,000 .......................................................... ______
Increase in prepaid expenses, $4,000 .......................................................... ______
Decrease in income taxes payable, $3,500 .................................................. ______
Gain on disposal of land, $7,500 .................................................................. ______
Net cash provided (used) by operating activities ........................................... ______
Instructions
Show how each item should be reported in the statement of cash flows. Use parentheses for
deductions.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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12-44
*Be. 191
O'Conner Company had total operating expenses of $135,000 in 2014, which included
depreciation expense of $22,000. Also during 2014, prepaid expenses increased by $9,000 and
accrued expenses decreased by $5,500.
Instructions
Calculate the amount of cash payments for operating expenses in 2014 using the direct method.
*Be. 192
a. Sales = $650,500; Accounts receivable increased by $27,500. Calculate cash receipts from
sales.
b. Cost of goods sold = $430,000; inventory decreased by $75,000; accounts payable decreased
by $28,500. Calculate cash payments for purchases.
c. The Income statement shows $12,500 in income taxes. The balance sheet shows an increase
in taxes payable of $1,500. Calculate the cash paid for income taxes.
d. Operating expenses total $75,750; Depreciation expense = $37,200; Prepaid expenses
increased by $15,400; Accrued wages decreased by $10,600. Calculate cash payments for
operating expenses.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-45
*Be. 193
a. Sales = $850,000; Accounts receivable decreased by $40,000. Calculate cash receipts from
sales.
b. Cost of goods sold = $650,000; inventory increased by $22,000; accounts payable increased
by $28,000. Calculate cash payments for purchases.
c. Income statement shows $25,500 in income taxes. The balance sheet shows an increase in
taxes payable of $3,500. Calculate the cash paid for income taxes.
d. Operating expenses total $103,000; Depreciation expense = $14,000; Prepaid expenses
decreased by $13,000; Accrued liabilities increased by $6,000. Calculate cash payments for
operating expenses.
*Be. 194
The general ledger of the Summer Company provides the following information:
End of Year Beginning of Year
Accounts Receivable $ 64,000 $ 84,000
Inventory 240,000 205,000
Accounts Payable 42,000 62,000
The company's net sales for the year was $2,000,000 and cost of goods sold amounted to
$1,700,000.
Instructions
Compute the following:
(a) Cash receipts from customers
(b) Cash payments to suppliers
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*Be. 195
The income statement of Patterson Inc. for the year ended December 31, 2014, reported the
following condensed information:
Service revenue $600,000
Operating expenses 360,000
Income from operations 240,000
Income tax expense 24,000
Net income $216,000
Patterson's balance sheet contained the following comparative data at December 31:
2014 2013
Accounts receivable $50,000 $60,000
Accounts payable 37,000 46,000
Income taxes payable 4,000 2,000
Patterson has no depreciable assets. Accounts payable pertains to operating expenses.
Instructions
Prepare the operating activities section of the statement of cash flows using the direct method.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-47
EXERCISES
Ex. 196
Annapolis Company reported net income of $365,000 for the current year. Depreciation recorded
on buildings and equipment amounted to $73,000 for the year. Balances of the current asset and
current liability accounts at the beginning and end of the year are as follows:
End of Year Beginning of Year
Cash $22,000 $15,000
Accounts receivable 17,000 32,000
Inventory 55,000 65,000
Prepaid insurance 7,500 5,000
Accounts payable 11,000 18,000
Income taxes payable 600 1,200
Instructions
Prepare the cash flows from the operating activities section of the statement of cash flows using
the indirect method.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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12-48
Ex. 197
Using the indirect method, calculate the amount of cash flows from operating activities from the
following data:
Net income $199,000
Beginning accounts receivable 22,000
Ending accounts receivable 29,000
Beginning prepaid insurance 5,000
Ending prepaid insurance 2,000
Beginning accounts payable 15,000
Ending accounts payable 14,000
Depreciation expense 50,000
Amortization of intangible asset 6,000
Dividends declared and paid 11,000
Ex. 198
Use the following information to perform the calculations below (using the indirect method). Clearly
label the amount of each answer as positive or negative and show all your calculations.
Net income $401,000 Beginning accounts payable $119,000
Depreciation expense 97,000 Ending accounts payable 146,000
Beginning accounts receivable 420,000 Purchase of long-term assets 612,000
Ending accounts receivable 439,000 Issuance of long-term debt 220,000
Beginning inventory 516,000 Issuance of stock for cash 180,000
Ending inventory 550,000 Issuance of stock for long-term assets 110,000
Beginning prepaid insurance 42,000 Purchase of treasury stock 64,000
Ending prepaid insurance 48,000 Sale of long-term investment at cost 56,000
a. Calculate the amount of cash flows from operating activities. _____________
b. Calculate the amount of cash flows from investing activities. _____________
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-49
Ex. 198 (Cont.)
c. Calculate the amount of cash flows from financing activities. _____________
d. Calculate the net change in cash. _____________
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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12-50
Ex. 199
The following information is available for Mergenthaler Corporation for the year ended December
31, 2014:
Collection of principal on long-term loan to a supplier $16,000
Acquisition of equipment for cash 10,000
Proceeds from the sale of long-term investment at book value 22,000
Issuance of common stock for cash 20,000
Depreciation expense 25,000
Redemption of bonds payable at carrying (book) value 34,000
Payment of cash dividends 6,000
Net income 30,000
Purchase of land by issuing bonds payable 40,000
In addition, the following information is available from the comparative balance sheet for
Mergenthaler at the end of 2014 and 2013:
2014 2013
Cash $148,000 $91,000
Accounts receivable (net) 25,000 15,000
Prepaid insurance 19,000 13,000
Total current assets $192,000 $119,000
Accounts payable $ 30,000 $19,000
Salaries and wages payable 6,000 7,000
Total current liabilities $ 36,000 $26,000
Instructions
Prepare Mergenthaler's statement of cash flows for the year ended December 31, 2014, using the
indirect method.
Statement of Cash Flows
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12-51
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Ex. 200
Draper Company prepared the tabulation below at December 31, 2014.
Net Income ............................................................ $323,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $27,000 ................................................................... _______
Increase in accounts receivable, $75,000 .................................................... _______
Decrease in inventory, $18,000 ................................................................... _______
Amortization of patent, $4,000 ..................................................................... _______
Increase in accounts payable, $7,500 .......................................................... _______
Decrease in interest receivable, $4,000 ....................................................... _______
Increase in prepaid insurance, $7,000 ......................................................... _______
Decrease in income taxes payable, $2,500 .................................................. _______
Gain on disposal of plant assets, $11,000 .................................................... _______
Net cash provided (used) by operating activities .......................................... _______
Instructions
Show how each item should be reported in the statement of cash flows. Use parentheses for
deductions.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-53
Ex. 201
The current sections of Magic Marine Inc.'s balance sheets at December 31, 2013 and 2014, are
presented here.
Magic Marine 's net income for 2014 was $216,000. Depreciation expense was $34,000.
2014
2013
Current assets
Cash
$106,000
$ 99,000
Accounts receivable
91,000
89,000
Inventory
168,000
173,000
Prepaid insurance
28,000
22,000
Total current assets
$393,000
$383,000
Current liabilities
Interest payable
$ 13,000
$ 5,000
Accounts payable
85,000
92,000
Total current liabilities
$ 98,000
$ 97,000
Instructions
Prepare the net cash provided by operating activities section of the company's statement of cash
flows for the year ended December 31, 2014, using the indirect method.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-54
Ex. 202
The following information is available for Chenard Corporation for the year ended December 31,
2014.
Beginning cash balance
$ 35,000
Accounts payable decrease
3,200
Depreciation expense
76,000
Accounts receivable increase
8,200
Inventory increase
13,000
Net income
269,100
Cash received for sale of land at book value
35,000
Sales revenue
747,000
Cash dividends paid
12,000
Income tax payable increase
4,700
Cash used to purchase building
144,000
Cash used to purchase treasury stock
32,000
Cash received from issuing bonds
206,000
Instructions
Prepare a statement of cash flows using the indirect method.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-55
Ex. 203
The three accounts shown below appear in the general ledger of Hale Corp. during 2014
Equipment
Date
Debit
Credit
Balance
Jan. 1
Balance
160,000
July 31
Purchase of equipment
70,000
230,000
Sept. 2
Cost of equipment constructed
53,000
283,000
Nov. 10
Cost of equipment sold
59,000
224,000
Accumulated Depreciation—Equipment
Date
Debit
Credit
Balance
Jan. 1
Balance
71,000
Nov. 10
Accumulated depreciation on
equipment sold
30,000
41,000
Dec. 31
Depreciation for year
23,000
64,000
Retained Earnings
Date
Debit
Credit
Balance
Jan. 1
Balance
105,000
Aug. 23
Dividends (cash)
19,000
86,000
Dec. 31
Net income
54,000
143,000
Instructions
From the postings in the accounts, indicate how the information is reported on a statement of cash
flows using the indirect method. The loss on sale equipment was $7,000.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-56
Ex. 204
The comparative balance sheets for Russell Company appear below:
RUSSELL COMPANY
Comparative Balance Sheet
Dec. 31, 2014 Dec. 31, 2013
Assets
Cash $ 38,000 $13,000
Accounts receivable 18,000 14,000
Inventory 25,000 15,000
Prepaid insurance 7,000 9,000
Stock investments -0- 18,000
Equipment 60,000 30,000
Accumulated depreciation—equipment (18,000) (14,000)
Total assets $130,000 $85,000
Liabilities and Stockholders' Equity
Accounts payable $ 25,000 $ 7,000
Bonds payable 37,000 45,000
Common stock 40,000 23,000
Retained earnings 28,000 10,000
Total liabilities and stockholders' equity $130,000 $85,000
Additional information:
1. Net income for the year ending December 31, 2014, was $30,000.
2. Cash dividends of $12,000 were declared and paid during the year.
3. Stock investments that had a book value of $18,000 were sold for $13,000.
4. Sales for 2014 are $130,000.
Instructions
1. Prepare a statement of cash flows for the year ended December 31, 2014, using the indirect
method.
2. Compute the following cash based ratios:
a. Current cash debt coverage
b. Cash debt coverage
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-57
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
12-58
Ex. 205
A comparative balance sheet for the Beneteau Corporation is presented below:
BENETEAU CORPORATION
Comparative Balance Sheet
2014 2013
Assets
Cash $ 37,000 $ 31,000
Accounts receivable (net) 80,000 60,000
Prepaid insurance 22,000 17,000
Land 18,000 40,000
Equipment 70,000 60,000
Accumulated depreciation (20,000) (13,000)
Total Assets $207,000 $195,000
Liabilities and Stockholders' Equity
Accounts payable $ 12,000 $ 6,000
Bonds payable 27,000 19,000
Common stock 140,000 115,000
Retained earnings 28,000 55,000
Total liabilities and stockholders' equity $207,000 $195,000
Additional information:
1. Net loss for 2014 is $12,000. Net sales for 2014 are $250,000.
2. Cash dividends of $15,000 were declared and paid in 2014.
3. Land was sold for cash at a loss of $2,000. This was the only land transaction during the year.
4. Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was sold for
$5,000 cash.
5. $12,000 of bonds were retired during the year at carrying (book) value.
6. Equipment was acquired for common stock. The fair value of the stock at the time of the
exchange was $25,000.
Instructions
1. Prepare a statement of cash flows for the year ended 2014 using the indirect method.
2. Compute the following cash based ratios:
a. Current cash debt coverage
b. Cash debt coverage
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-59
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-60
Ex. 206
Information for two companies in the same industry, Tucker Corporation and Wiggins Corporation,
is presented here.
Instructions
Using the cash-based measures presented in this chapter, compare the (a) liquidity and (b)
solvency of the two companies.
Tucker
Wiggins
Corporation
Corporation
Cash provided by operating activities
$140,000
$140,000
Average current liabilities
50,000
100,000
Average total liabilities
200,000
250,000
Net earnings
200,000
200,000
Capital expenditures
60,000
90,000
Dividends paid
5,000
10,000
Statement of Cash Flows
12-61
*Ex. 207
Condensed financial data of Gorni Company appear below:
GORNI COMPANY
Comparative Balance Sheet
December 31
2014 2013
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, 2014
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 2014.
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
1. Prepare a statement of cash flows for the year using the direct method.
2. Compute the following cash basis ratios:
a. Current cash debt coverage
b. Cash debt coverage
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-62
Statement of Cash Flows
12-63
*Ex. 208
The income statement of Gise Company is shown below:
GISE COMPANY
Income Statement
For the Year Ended December 31, 2014
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, 2014, for Gise Company, using the direct method.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-64
*Ex. 209
The financial statements of Appalachian Mountain Company appear below:
APPALACHIAN MOUNTAIN COMPANY
Comparative Balance Sheet
December 31
2014 2013
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, 2014
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
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-65
*Ex. 209 (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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-66
*Ex. 210
Wave Rider Company completed its first year of operations on December 31, 2014. 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. 211
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.
Statement of Cash Flows
12-67
COMPLETION STATEMENTS
212. A statement of cash flows summarizes the operating, ____________, and ___________
activities of an entity.
213. The cash effects of selling goods and services appears in the ______________ activities
section of a statement of cash flows.
214. Net cash provided/used by operating activities can be determined using the ____________
method or the ______________ method.
215. During the _______________, cash from operations and net income are approximately the
same.
216. During the growth phase, a company will start to generate small amounts of cash
_______________.
217. Using the indirect approach, noncash charges in the income statement are ___________
to net income and noncash credits are ______________ to compute cash provided by
operations.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-68
218. If accounts receivable increase during a period, revenues on an accrual basis are
______________ than revenues on a cash basis.
219. The sale of equipment at less than its book value is a(an) ______________ of cash that is
reported in the ______________ activities section.
220. The current cash debt coverage is computed by dividing net cash provided by operating
activities by _________________ liabilities.
221. The cash ______________ is a measure of solvency that uses cash figures.
*222. 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.
*223. 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.
*224. In computing cash payments for income taxes, a decrease in income taxes payable is
______________ to (from) income tax expense.
IMA: FSA
*225. Under the direct method, the two largest classes of items in the operating activities section
for a merchandising company are cash ________________________ and cash
_________________________.
Answers to Completion Statements
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-69
MATCHING
Set 1 — Indirect Method
226. 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 Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-70
Set 2 — Direct Method
*227. 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
12-71
SHORT-ANSWER ESSAY QUESTIONS
S-A E 228
Why is the statement of cash flows useful?
S-A E 229
Distinguish among the three activities reported in the statement of cash flows.
S-A E 230
(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 Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-72
S-A E 231
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 232
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 233
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
12-73
S-A E 234
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 235
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 236 (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 Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-74
Solution 236
S-A E 237 (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
12-75
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
