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CHAPTER 13
STATEMENT OF CASH FLOWS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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Multiple Choice Questions
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a143.
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a144.
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a145.
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sg146.
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st148.
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a125.
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sg150.
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51.
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sg152.
3,5
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3
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a128.
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a,sg153.
5
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a,sg154.
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a.sg155.
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3
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a135.
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8
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3,5
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Brief Exercises
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a170.
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AP
sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This topic is dealt with in an Appendix to the chapter.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
171.
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a188.
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Completion Statements
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Matching Statements
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Short-Answer Essay
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Item
Type
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Learning Objective 1
1.
TF
5.
TF
38.
MC
42.
MC
46.
MC
215.
SA
2.
TF
6.
TF
39.
MC
43.
MC
150.
MC
216.
SA
3.
TF
7.
TF
40.
MC
44.
MC
213.
SA
217.
SA
4.
TF
37.
MC
41.
MC
45.
MC
214.
SA
218.
SA
Learning Objective 2
8.
TF
16.
TF
49.
MC
57.
MC
65.
MC
149.
MC
212.
SA
9.
TF
17.
TF
50.
MC
58.
MC
66.
MC
161.
BE
10.
TF
31.
TF
51.
MC
59.
MC
67.
MC
171.
Ex
11.
TF
32.
TF
52.
MC
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MC
68.
MC
172.
Ex
12.
TF
33.
TF
53.
MC
61.
MC
69.
MC
173.
Ex
13.
TF
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MC
54.
MC
62.
MC
146.
MC
174.
Ex
14.
TF
47.
MC
55.
MC
63.
MC
147.
MC
197.
C
15.
TF
48.
MC
56.
MC
64.
MC
148.
MC
198.
C
Learning Objective 3
18.
TF
22.
TF
72.
MC
76.
MC
80.
MC
84.
MC
88.
MC
19.
TF
34.
TF
73.
MC
77.
MC
81.
MC
85.
MC
89.
MC
20.
TF
70.
MC
74.
MC
78.
MC
82.
MC
86.
MC
90.
MC
21.
TF
71.
MC
75.
MC
79.
MC
83.
MC
87.
MC
91.
MC
Continued on the next page.
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 3 (Cont.)
92.
MC
100.
MC
108.
MC
116.
MC
165.
BE
180.
Ex
200.
C
93.
MC
101.
MC
109.
MC
117.
MC
166.
BE
181.
Ex
201.
C
94.
MC
102.
MC
110.
MC
118.
MC
167.
BE
182.
Ex
202.
C
95.
MC
103.
MC
111.
MC
151.
MC
175.
Ex
183.
Ex
203.
C
96.
MC
104.
MC
112.
MC
152.
MC
176.
Ex
184.
Ex
210.
SA
97.
MC
105.
MC
113.
MC
162.
BE
177.
Ex
185.
Ex
98.
MC
106.
MC
114.
MC
163.
BE
178.
Ex
186.
Ex
99.
MC
107.
MC
115.
MC
164.
BE
179.
Ex
199.
C
Learning Objective 4
23.
TF
119.
MC
121.
MC
123.
MC
178.
Ex
186.
Ex
204.
C
24.
TF
120.
MC
122.
MC
168.
BE
185.
Ex
187.
Ex
Learning Objective a5
a25.
TF
a113.
MC
a126.
MC
a134.
MC
a152.
MC
a192.
Ex
a208.
C
a26.
TF
a114.
MC
a127.
MC
a135.
MC
a153.
MC
a193.
Ex
a209.
C
a27.
TF
a115.
MC
a128.
MC
a136.
MC
a154.
MC
a194.
Ex
a28.
TF
a116.
MC
a129.
MC
a137.
MC
a169.
BE
a195.
Ex
a35.
TF
a117.
MC
a130.
MC
a138.
MC
a170.
BE
a196.
Ex
a110.
MC
a118.
MC
a131.
MC
a139.
MC
a189.
Ex
a205.
C
a111.
MC
a124.
MC
a132.
MC
a140.
MC
a190.
Ex
a206.
C
a112.
MC
a125.
MC
a133.
MC
a141.
MC
a191.
Ex
a207.
C
Learning Objective a6
a29.
TF
a142.
MC
a143.
MC
a144.
MC
a145.
MC
a155.
MC
a188.
Ex
a36.
TF
Learning Objective a7
a30.
F
a31.
T
Learning Objective a8
a156.
MC
a157.
MC
a158.
MC
a159.
MC
a160.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
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. Prepare a statement of cash flows using the indirect method. The preparation of a
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)
Test Bank for Financial Accounting, Ninth Edition
13 - 4
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.
4. Analyze the statement of cash flows. Free cash flow indicates the amount of cash a
company generated during the current year that is available for the payment of additional
dividends or for expansion.
a5. 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.
a6. Explain how to use a worksheet to prepare the statement of cash flows using the
indirect method. When there are numerous adjustments, a worksheet can be a helpful tool
in preparing the statement of cash flows. Key guidelines for using a worksheet are as follows
(1) List accounts with debit balances separately from those with credit balances. (2) In the
reconciling columns in the bottom portion of the worksheet, show cash inflows as debits and
cash outflows as credits. (3) Do not enter reconciling items in any journal or account, but use
them only to help prepare the statement of cash flows.
The steps in preparing the worksheet are as follows (1) Enter beginning and ending balances
of balance sheet accounts. (2) Enter debits and credits in reconciling columns. (3) Enter the
increase or decrease in cash in two places as a balancing amount.
a7. 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 13-3 (page 654), entering debit and credit amounts as needed.
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.
Statement of Cash Flows
13 - 5
4. A statement of cash flows indicates the sources and uses of cash during a period.
5. A statement of cash flows should help investors and creditors assess the entity’s ability to
generate future income.
6. The information in a statement of cash flows helps investors and creditors assess the
company’s ability to pay dividends and meet obligations.
7. Financial statement readers can determine future investing and financing transactions by
examining a company’s statement of cash flows.
8. In preparing a statement of cash flows, the issuance of debt should be reported separately
from the retirement of debt.
9. Noncash investing and financing activities must be reported in the body of a statement of
cash flows.
10. The statement of cash flows classifies cash receipts and payments as operating,
nonoperating, financial, and extraordinary activities.
11. The sale of land for cash would be classified as a cash inflow from an investing activity.
12. 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.
13. The receipt of dividends from long-term investments in stock is classified as a cash inflow
from investing activities.
14. The payment of interest on bonds payable is classified as a cash outflow from operating
activities.
15. Any item that appears on the income statement would be considered as either a cash
inflow or cash outflow from operating activities.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 6
16. The acquisition of a building by issuing bonds would be considered an investing and
financing activity that did not affect cash.
17. All major financing and investing activities affect cash.
18. Cash provided by operations is generally equal to operating income.
19. Using the indirect method, an increase in accounts receivable during a period is deducted
from net income in calculating cash provided by operations.
20. Using the indirect method, an increase in accounts payable during a period is deducted
from net income in calculating cash provided by operations.
21. A loss on sale of equipment is added to net income in determining cash provided by
operations under the indirect method.
22. 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.
23. Cash provided by operating activities fails to take into account that a company must invest
in new fixed assets just to maintain its current level of operations.
24. Free cash flow equals cash provided by operations less capital expenditures and cash
dividends.
a25. Operating expenses + an increase in prepaid expenses – a decrease in accrued
expenses payable = cash payments for operating expenses.
a26. During the year, Income Tax Expense amounted to $30,000 and Income Taxes Payable
increased by $4,000; therefore, the cash paid for income taxes was $26,000.
a27. In preparing 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.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 7
a28. During a period, cost of goods sold + an increase in inventory + an increase in accounts
payable = cash paid to suppliers.
a29. The use of a worksheet to prepare a statement of cash flows is optional.
FSA
a30. The change in cash is equal to the change in liabilities less the change in equity plus the
change in noncash assets.
a31. Analysis of the changes in all of the noncash balance sheet accounts will explain the
change in the Cash account.
32. The statement of cash flows classifies cash receipts and cash payments into two
categories: operating activities and nonoperating activities.
33. Financing activities include the obtaining of cash from issuing debt and repaying the
amounts borrowed.
34. Under the indirect method, retained earnings is adjusted for items that affected reported
net income but did not affect cash.
a35. Under the direct method, the formula for computing cash collections from customers is
sales revenues plus the increase in accounts receivable or minus the decrease in
accounts receivable.
a36. The reconciling entry for depreciation expense in a worksheet is a credit to Accumulated
Depreciation and a debit to Operating-Depreciation Expense.
Answers to True-False Statements
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Test Bank for Financial Accounting, Ninth Edition
13 - 8
MULTIPLE CHOICE QUESTIONS
37. The statement of cash flows should help investors and creditors assess each of the
following except the
a. entity's ability to generate future income.
b. entity's ability to pay dividends.
c. reasons for the difference between net income and net cash provided by operating
activities.
d. cash investing and financing transactions during the period.
38. 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.
39. 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
40. 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.
41. 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.
42. In addition to the three basic financial statements, which of the following is also a required
financial statement?
a. the "Cash Budget"
b. the Statement of Cash Flows
c. the Statement of Cash Inflows and Outflows
d. the "Cash Reconciliation"
Statement of Cash Flows
13 - 9
43. 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.
44. The statement of cash flows reports each of the following except
a. cash receipts from operating activities.
b. cash payments from investing activities.
c. the net change in cash.
d. cash sales.
45. Each of the following are particularly interested in the statement of cash flows except
a. creditors.
b. employees.
c. shareholders.
d. government agencies.
46. Lending money and collecting the loans are
a. operating activities.
b. investing activities.
c. financing activities.
d. Non-cash investing and financing activities.
47. The cash effects of transactions that create revenues and expenses are
a. financing activities.
b. investing activities.
c. operating activities.
d. processing activities.
48. The acquisition of land by issuing common stock is
a. a noncash transaction which 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.
49. 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.
Test Bank for Financial Accounting, Ninth Edition
13 - 10
50. Financing activities involve
a. lending money.
b. acquiring investments.
c. issuing debt.
d. acquiring long-lived assets.
51. Investing activities include
a. collecting cash on loans made.
b. obtaining cash from creditors.
c. obtaining capital from owners.
d. repaying money previously borrowed.
52. 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.
53. 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.
54. Cash receipts from interest and dividends are classified as
a. financing activities.
b. investing activities.
c. operating activities.
d. either financing or investing activities.
55. Each of the following is an example of a significant noncash activity except
a. conversion of bonds into common stock.
b. exchanges of plant assets.
c. issuance of debt to purchase assets.
d. stock dividends.
56. If a company has both an inflow and outflow of cash related to property, plant, and
equipment, the
a. two cash effects can be netted and presented as one item in the investing activities
section.
b. cash inflow and cash outflow should be reported separately in the investing activities
section.
c. two cash effects can be netted and presented as one item in the financing activities
section.
d. cash inflow and cash outflow should be reported separately in the financing activities
section.
Statement of Cash Flows
13 - 11
57. 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.
58. 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. Exercise of the call option on bonds payable
59. 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.
60. 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.
61. Indicate where the payment of income taxes would appear, if at all, 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. Indicate where the issuance of common stock issued for cash would appear, if at all, on
the indirect statement of cash flows.
a. Operating activities section
b. Investing activities section
c. Financing activities section
d. Does not represent a cash flow
63. Indicate where the purchase of land for cash would appear, if at all, on the indirect
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 Financial Accounting, Ninth Edition
13 - 12
64. Indicate where the event purchase of land and a building with a mortgage would appear, if
at all, on the indirect statement of cash flows.
a. Operating activities section
b. Investing activities section
c. Financing activities section
d. Does not represent a cash flow
65. Jean’s Vegetable Market had the following transactions during 2014:
1. Issued $50,000 of par value common stock for cash.
2. Repaid a 6 year note payable in the amount of $22,000.
3. Acquired land by issuing common stock of par value $50,000.
4. Declared and paid a cash dividend of $7,000.
5. Sold a long-term investment (cost $3,000) for cash of $6,000.
6. Acquired an investment in IBM stock for cash of $10,000.
What is the net cash provided by financing activities?
a. $21,000
b. $67,000
c. $28,000
d. $0
66. Jean’s Vegetable Market had the following transactions during 2014:
1. Issued $50,000 of par value common stock for cash.
2. Repaid a 6 year note payable in the amount of $22,000.
3. Acquired land by issuing common stock of par value $100,000.
4. Declared and paid a cash dividend of $2,000.
5. Sold a long-term investment (cost $3,000) for cash of $8,000.
6. Acquired an investment in IBM stock for cash of $15,000.
What is the net cash provided (used) by investing activities?
a. $15,000
b. $33,000
c. ($7,000)
d. $8,000
67. Vision Company purchased treasury stock with a cost of $16,000 during 2014. During the
year, the company paid dividends of $20,000 and issued bonds payable for proceeds of
$860,000. Cash flows from financing activities for 2014 total
a. $840,000 net cash inflow.
b. $856,000 net cash inflow.
c. $860,000 net cash outflow.
d. $824,000 net cash inflow.
Statement of Cash Flows
13 - 13
68. Kanet Company issued common stock for proceeds of $386,000 during 2014. The
company paid dividends of $80,000 and issued a long-term note payable for $95,000 in
exchange for equipment during the year. The company also purchased treasury stock that
had a cost of $15,000. The financing section of the statement of cash flows will report net
cash inflows of
a. $291,000.
b. $481,000.
c. $306,000.
d. $371,000.
69. In Jude Company, land decreased $150,000 because of a cash sale for $150,000, the
equipment account increased $60,000 as a result of a cash purchase, and Bonds Payable
increased $120,000 from issuance for cash at face value. The net cash provided by
investing activities is
a. $150,000.
b. $210,000.
c. $90,000.
d. $270,000.
70. Accounts receivable arising from sales to customers amounted to $86,000 and $77,000 at
the beginning and end of the year, respectively. Income reported on the income statement
for the year was $290,000. Exclusive of the effect of other adjustments, the cash flows
from operating activities to be reported on the statement of cash flows is
a. $290,000.
b. $299,000.
c. $213,000.
d. $280,000.
71. Accounts receivable arising from sales to customers amounted to $40,000 and $55,000 at
the beginning and end of the year, respectively. Income reported on the income statement
for the year was $180,000. Exclusive of the effect of other adjustments, the cash flows
from operating activities to be reported on the statement of cash flows is
a. $180,000.
b. $195,000.
c. $220,000.
d. $165,000.
Test Bank for Financial Accounting, Ninth Edition
13 - 14
72. Bush Company reported net income of $60,000 for the year. During the year, accounts
receivable decreased by $8,000, accounts payable increased by $4,000 and depreciation
expense of $5,000 was recorded. Net cash provided by operating activities for the year is
a. $48,000.
b. $77,000.
c. $59,000.
d. $55,000.
73. Adama Company reported a net loss of $6,000 for the year ended December 31, 2014.
During the year, accounts receivable increased $15,000, merchandise inventory
decreased $12,000, accounts payable decreased by $20,000, and depreciation expense
of $12,000 was recorded. During 2014, operating activities
a. used net cash of $17,000.
b. used net cash of $29,000.
c. provided net cash of $24,000.
d. provided net cash of $21,000.
74. The net income reported on the income statement for the current year was $220,000.
Depreciation recorded on plant assets was $35,000. Accounts receivable and inventories
increased by $2,000 and $8,000, respectively. Prepaid expenses and accounts payable
decreased by $2,000 and $12,000 respectively. How much cash was provided by
operating activities?
a. $200,000
b. $235,000
c. $220,000
d. $255,000
75. The net income reported on the income statement for the current year was $245,000.
Depreciation was $40,000. Account receivable and inventories decreased by $12,000 and
$35,000, respectively. Prepaid expenses and accounts payable increased, respectively,
by $1,000 and $8,000. How much cash was provided by operating activities?
a. $296,000
b. $339,000
c. $323,000
d. $311,000
Statement of Cash Flows
13 - 15
76. If a gain of $12,000 is incurred in selling (for cash) office equipment having a book value
of $110,000, the total amount reported in the cash flows from investing activities section of
the statement of cash flows is
a. $98,000.
b. $122,000.
c. $110,000.
d. $12,000.
77. If a loss of $25,000 is incurred in selling (for cash) office equipment having a book value of
$90,000, the total amount reported in the cash flows from investing activities section of the
statement of cash flows is
a. $65,000.
b. $90,000.
c. $115,000.
d. $25,000.
78. Wilson Company reported net income of $105,000 for the year ended December 31,
2014. During the year, inventories decreased by $15,000, accounts payable decreased
by $20,000, depreciation expense was $18,000 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. $101,000.
b. $109,000.
c. $120,000.
d. $118,000.
79. The third (final) step in preparing the statement of cash flows is to
a. analyze changes in noncurrent asset and liability accounts.
b. compare the net change in cash with the change in the cash account reported on the
balance sheet.
c. determine net cash provided by operating activities.
d. list the noncash activities.
80. 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 all bank accounts
Test Bank for Financial Accounting, Ninth Edition
13 - 16
81. 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.
82. 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.
83. 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
84. 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.
85. Rubble Company reported net income of $70,000 for the year. During the year, accounts
receivable increased by $6,000, accounts payable decreased by $5,000 and depreciation
expense of $8,000 was recorded. Net cash provided by operating activities for the year is
a. $67,000.
b. $89,000.
c. $63,000.
d. $70,000.
86. Pare Company reported a net loss of $30,000 for the year ended December 31, 2014.
During the year, accounts receivable decreased $15,000, merchandise inventory
increased $25,000, accounts payable increased by $30,000, and depreciation expense of
$20,000 was recorded. During 2014, operating activities
a. used net cash of $10,000.
b. used net cash of $25,000.
c. provided net cash of $10,000.
d. provided net cash of $25,000.
Statement of Cash Flows
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87. 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.
88. 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.
89. 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.
90. In developing the cash flows from operating activities, most companies in the U. S.
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.
91. Each of the following is added to net income in computing net cash provided by operating
activities except
a. amortization expense.
b. an increase in accrued expenses payable.
c. a gain on sale of equipment.
d. a decrease in inventory.
92. 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
93. Which of the following would be added to net income using the indirect method?
a. An increase in accounts receivable
b. An increase in prepaid expenses
c. Depreciation expense
d. A decrease in accounts payable
Test Bank for Financial Accounting, Ninth Edition
13 - 18
94. 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
95. 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.
96. 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
97. 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
98. 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 Sale of Equipment
b. Depreciation Expense
c. Patent Amortization Expense
d. Depletion Expense
99. Using the indirect method, if equipment is sold at a gain, the
a. sale proceeds received are deducted in the operating activities section.
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.
Statement of Cash Flows
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100. A company had net income of $210,000. Depreciation expense is $27,000. During the
year, Accounts Receivable and Inventory increased $17,000 and $42,000, respectively.
Prepaid Expenses and Accounts Payable decreased $5,000 and $6,000, respectively.
There was also a loss on the sale of equipment of $2,000. How much cash was provided
by operating activities?
a. $175,000
b. $179,000
c. $241,000
d. $271,000
101. 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.
102. 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.
103. Land acquired from the issuance of common stock is reported
a. as a financing activity.
b. as an investing activity.
c. as an operating activity.
d. in a separate schedule at the bottom of the statement of cash flows.
104. In Ramon Company, Treasury Stock increased $20,000 from a cash purchase, and
Retained Earnings increased $80,000 as a result of net income of $120,000 and cash
dividends paid of $40,000. Net cash used by financing activities is:
a. $20,000.
b. $40,000.
c. $120,000.
d. $60,000.
Test Bank for Financial Accounting, Ninth Edition
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105. In Alona Company, net income is $285,000. If accounts receivable increased $140,000
and accounts payable decreased $40,000, net cash provided by operating activities using
the indirect method is:
a. $105,000.
b. $185,000.
c. $385,000.
d. $465,000.
106. In Lynne Company, there was an increase in the land account during the year of $43,000.
Analysis reveals that the change resulted from a cash sale of land at cost $115,000, and a
cash purchase of land for $158,000. In the statement of cash flows, the change in the land
account should be reported in the investment section:
a. as a net purchase of land, $43,000.
b. only as a purchase of land $158,000.
c. as a purchase of land $158,000 and a sale of land $115,000.
d. only as a sale of land $115,000.
107. The following data are available for Sampson Corporation.
Net income $200,000
Depreciation expense 60,000
Dividends paid 90,000
Loss on sale of land 15,000
Decrease in accounts receivable 30,000
Decrease in accounts payable 45,000
Net cash provided by operating activities is:
a. $140,000.
b. $260,000.
c. $160,000.
d. $240,000.
108. The following data are available for Alamo Corporation.
Sale of land $225,000
Sale of equipment $130,000
Issuance of common stock 140,000
Purchase of equipment 70,000
Payment of cash dividends 120,000
Net cash provided by investing activities is:
a. $285,000.
b. $260,000.
c. $305,000.
d. $425,000.
Statement of Cash Flows
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109. The following data are available for Two-off Company.
Increase in accounts payable $120,000
Increase in bonds payable 300,000
Sale of investments 150,000
Issuance of common stock 160,000
Payment of cash dividends 90,000
Net cash provided by financing activities is:
a. $180,000.
b. $370,000.
c. $360,000.
d. $420,000.
110. If $250,000 of bonds are issued during the year but $130,000 of old bonds are retired
during the year, the statement of cash flows will show a(n)
a. net increase in cash of $120,000.
b. net decrease in cash of $120,000.
c. increase in cash of $250,000 and a decrease in cash of $130,000.
d. net gain on retirement of bonds of $120,000.
111. 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.
112. 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.
113. 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 balance sheet.
c. a comparative balance sheet.
d. a comparative income statement.
Test Bank for Financial Accounting, Ninth Edition
13 - 22
114. 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 answers are correct.
115. 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
116. 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.
117. 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.
118. Which of the following transactions would not be classified as a financing activity?
a. Purchase of treasury stock
b. Payment of dividends
c. Issuance of bonds at a discount
d. Purchase of a long-term investment in bonds
119. A measure that describes the cash remaining from operations after adjustment for capital
expenditures and dividends is
a. adjusted cash from operations.
b. cash provided by operations.
c. free cash flow.
d. net cash provided by operating activities.
120. Free cash flow equals cash provided by
a. operations less capital expenditures and cash dividends.
b. operations less cash dividends.
c. investing activities less capital expenditures and cash dividends.
d. operations less capital expenditures.
Statement of Cash Flows
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121. Tomas Pest Control Products has the following information available:
Net Income $25,000
Cash Provided by Operations 33,000
Cash Sales 65,000
Capital Expenditures 10,000
Dividends Paid 2,000
What is Tomas’ free cash flow?
a. $27,000
b. $23,000
c. $21,000
d. $10,000
122. During 2014, Harvey Industries reported cash provided by operations of $670,000, cash
used in investing of $1,039,000, and cash used in financing of $145,000. In addition, cash
spent for fixed assets during the period was $404,000. No dividends were paid. Based on
this information, what was Harvey's free cash flow?
a. ($369,000)
b. $1,450,000
c. $266,000
d. ($918,000)
123. All of the following statements about free cash flow are false except:
a. Significant free cash flow indicates less potential to finance new investments.
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.
a124. The cost of goods sold during the year was $183,000. Merchandise inventory decreased
by $8,000 during the year and accounts payable decreased by $4,000 during the year.
Using the direct method of reporting cash flows from operating activities, cash payments
for merchandise total
a. $187,000.
b. $179,000.
c. $171,000.
d. $195,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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a125. Gonzo Company reports a $25,000 increase in inventory and a $12,000 decrease in
accounts payable during the year. Cost of Goods Sold for the year was $185,000. Using
the direct method of reporting cash flows from operating activities, cash payments made
to suppliers were
a. $185,000.
b. $197,000.
c. $222,000.
d. $148,000.
a126. During 2015, Zuma Company had $150,000 in cash sales and $1,240,000 in credit sales.
The accounts receivable balances were $180,000 and $215,000 at December 31, 2014
and 2015, respectively. Using the direct method of reporting cash flows from operating
activities, what was the total cash collected from all customers during 2015?
a. $1,205,000
b. $1,425,000
c. $1,390,000
d. $1,355,000
a127. Lager Company has other operating expenses of $260,000. There has been an increase
in prepaid expenses of $20,000 during the year, and accrued liabilities are $15,000 lower
than in the prior period. Using the direct method of reporting cash flows from operating
activities, what were Lager's cash payments for operating expenses?
a. $255,000
b. $265,000
c. $225,000
d. $295,000
128. In the Papyrus Corporation, cash receipts from customers were $136,000, cash payments
for operating expenses were $102,000, and one-third of the company's $9,300 income
taxes were paid during the year. Net cash provided by operating activities is:
a. $34,000.
b. $24,700.
c. $30,900.
d. $27,800.
a129. Each of the following would be reported under operating activities except cash receipts
a. from sales of goods.
b. from sales of investments.
c. of interest on loans.
d. of dividends from investments.
Statement of Cash Flows
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a130. 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.
a131. Squeeze Company reports the following:
End of Year Beginning of Year
Inventory $25,000 $42,000
Accounts Payable 22,000 12,000
If cost of goods sold for the year is $220,000, the amount of cash paid to suppliers is
a. $227,000.
b. $205,000.
c. $193,000.
d. $247,000.
a132. During the year, Salaries Payable decreased by $5,000. If Salary Expense amounted to
$174,000 for the year, the cash paid to employees (including deductions from gross pay) is
a. $179,000.
b. $174,000.
c. $169,000.
d. $184,000.
a133. Ale Company reports a $16,000 increase in inventory and a $8,000 increase in accounts
payable during the year. Cost of Goods Sold for the year was $150,000. The cash
payments made to suppliers were
a. $150,000.
b. $158,000.
c. $126,000.
d. $174,000.
a134. LRRP Company had credit sales of $650,000. The beginning accounts receivable balance
was $15,000 and the ending accounts receivable balance was $140,000. What were the
cash collections from customers during the period?
a. $775,000
b. $650,000
c. $525,000
d. $665,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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a135. Marke Inc. had cash sales of $400,000 and credit sales of $1,150,000. The accounts
receivable balance increased $30,000 during the year. How much cash did Marke receive
from its customers during the year?
a. $1,520,000
b. $1,120,000
c. $1,550,000
d. $780,000
a136. Ware Company had purchases of $260,000. The comparative balance sheet analysis
revealed a $15,000 decrease in inventory and a $25,000 increase in accounts payable.
What were Ware's cash payments to suppliers?
a. $235,000
b. $220,000
c. $275,000
d. $300,000
a137. Christine Company had an increase in inventory of $55,000. The cost of goods sold was
$95,000. There was a $6,000 decrease in accounts payable from the prior period. What
were Christine’s cash payments to suppliers?
a. $156,000
b. $61,000
c. $144,000
d. $101,000
Solution; $95,000 + $55,000 + $6,000 = $156,000
a138. 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
a139. Ale Company has other operating expenses of $80,000. There has been a decrease in
prepaid expenses of $6,000 during the year, and accrued liabilities are $5,000 larger than
in the prior period. What were Ale's cash payments for operating expenses?
a. $81,000
b. $82,000
c. $69,000
d. $80,000
Statement of Cash Flows
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a140. Beane Corporation shows income tax expense of $82,000. There has been a $6,000
decrease in federal income taxes payable and a $7,000 increase in state income taxes
payable during the year. What was Beane's cash payment for income taxes?
a. $82,000
b. $81,000
c. $76,000
d. $95,000
a141. 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
a142. In the Garnet Company, the beginning and ending balances in Land were $198,000 and
$240,000 respectively. During the year, land costing $50,000 was sold for $50,000 cash,
and land costing $92,000 was purchased for cash. The entries in the reconciling columns
of the worksheet will include a:
a. credit to Land $50,000 and a debit to Sale of Land $50,000 under investing activities.
b. debit to Land $92,000 and a credit to Purchase of Land $92,000 under financing
activities.
c. net debit to Land $42,000 and a credit to Purchase of Land $42,000 under investing
activities.
d. credit to Land $50,000 and a debit to Sale of Land $50,000 under financing activities.
a143. When listing accounts in the statement of cash flows worksheet, the accumulated
depreciation account is shown
a. with accounts that have credit balances.
b. with accounts that have debit balances.
c. as a credit under the reconciling items.
d. as a debit under the reconciling items.
a144. In the bottom portion of the statement of cash flows worksheet,
a. inflows of cash are debits in the reconciling columns.
b. outflows of cash are debits in the reconciling columns.
c. information pertaining to investing and financing activities only is entered.
d. only significant noncash transactions are entered.
Test Bank for Financial Accounting, Ninth Edition
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a145. On the statement of cash flows worksheet,
a. significant noncash investing and financing activities are not entered in the reconciling
columns.
b. a decrease in cash will be offset by a debit in the reconciling items columns at the
bottom of the worksheet.
c. an increase in cash will be offset by a debit in the reconciling items column at the
bottom of the worksheet.
d. income statement accounts are listed after balance sheet accounts in the top half of
the worksheet under the indirect method.
146. Which of the following steps is not required in preparing the statement of cash flows?
a. Determine the net change in cash.
b. Determine the net cash provided by operating activities.
c. Determine cash from investing and financing activities.
d. Determine the change in current assets.
147. Financing activities involve
a. lending money to other entities and collecting on those loans.
b. cash receipts from sales of goods and services.
c. acquiring and disposing of productive long-lived assets.
d. long-term liability and stockholders' equity items.
148. The information to prepare the statement of cash flows usually comes from each of the
following except
a. the comparative balance sheet.
b. the prior year’s income statement.
c. additional information.
d. the current income statement.
149. The statement of cash flows is prepared from all of the following except
a. the adjusted trial balance.
b. comparative balance sheets.
c. selected transaction data.
d. the current income statement.
150. The information in a statement of cash flows will not help investors to assess the entity's
ability to
a. generate future cash flows.
b. obtain favorable borrowing terms at a bank.
c. pay dividends.
d. pay its obligations when they become due.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 29
151. In converting net income to net cash provided by operating activities, under the indirect
method:
a. decreases in accounts receivable and increases in prepaid expenses are added.
b. decreases in inventory and increases in accrued liabilities are added.
c. decreases in accounts payable and decreases in inventory are deducted.
d. increases in accounts receivable and increases in accrued liabilities are deducted.
152. In the Buans Company, land decreased $80,000 because of a cash sale for $80,000, the
equipment account increased $35,000 as a result of a cash purchase, and Bonds Payable
increased $60,000 from an issuance for cash at face value. The net cash provided by
investing activities is
a. $80,000.
b. $165,000.
c. $45,000.
d. $25,000.
a153. Hogan Company uses the direct method in determining net cash provided by operating
activities, During the year, operating expenses were $295,000, prepaid expenses
increased $23,000, and accrued expenses payable increased $33,000. Cash payments
for operating expenses were
a. $39,000.
b. $51,000.
c. $305,000.
d. $285,000.
a154. Spa Company uses the direct method in determining net cash provided by operating
activities. The income statement shows income tax expense $85,000. Income taxes
payable were $35,000 at the beginning of the year and $20,000 at the end of the year.
Cash payments for income taxes are
a. $70,000.
b. $85,000.
c. $100,000.
d. $140,000.
a155. When a worksheet is used, all but one of the following statements is correct. The
incorrect statement is
a. Reconciling items on the worksheet are not journalized or posted.
b. The bottom portion of the worksheet shows the statement of cash flows effects.
c. The balance sheet accounts portion of the worksheet is divided into two parts: assets,
and liabilities and stockholders' equity.
d. Each line pertaining to a balance sheet account should foot across.
Test Bank for Financial Accounting, Ninth Edition
13 - 30
156. 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.
157. Under IFRS, bank overdrafts are classified as
a. operating activities.
b. investing activities.
c. financing activities.
d. cash and cash equivalents.
158. 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
FSA
159. 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 answers are correct.
FSA
160. 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
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 31
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
BRIEF EXERCISES
BE 161
Selected transactions for the Ecker 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.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 32
BE 162
Garton Company had net income of $195,000 in 2014. Depreciation expense for the year is
$50,000. During the year, Accounts Receivable increased $8,000 and Prepaid Expenses
decreased $1,000. The company also sold equipment at a loss of $3,000.
Instructions
Calculate net cash flows from operating activities using the indirect method.
BE 163
During 2014, Blaine Company sold a building with a book value of $145,000 for proceeds of
$175,000. The company also sold long-term investments for proceeds of $32,000. The company
purchased land and a new building for $320,000 by signing a long-term note payable. No other
transactions impacted long-term asset accounts during 2014.
Instructions
Compute net cash flows from investing activities.
BE 164
Madisun Company issued common stock for proceeds of $20,000 during 2014. The company
paid dividends of $5,000. The company also issued a long-term note payable for $35,000 in
exchange for equipment during the year. The company sold treasury stock that had a cost of
$3,000 for $9,000.
Instructions
Compute net cash flows from financing activities.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 33
BE 165
At January 1, 2014, Benny Enterprises reported a balance in the Equipment account of $45,000.
During the year the company purchased equipment with a cost of $60,000 and sold equipment
with a book value of $30,000. The company reported a loss on the sale of equipment of $4,000.
Assume the indirect method is used.
Instructions
Determine what amount will be reported in (a) the operating activities section and (b) the
investing activities section with regard to the purchase and sale of equipment.
BE 166
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
Cash Flows From Operating Activities
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 Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 34
BE 167
Doctor Company prepared the tabulation below at December 31, 2015.
Net Income ............................................................................................................ $307,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $32,000 .................................................................... ______
Decrease in accounts receivable, $50,000 ................................................... ______
Increase in inventory, $12,000 ...................................................................... ______
Decrease in accounts payable, $8,600 ......................................................... ______
Increase in income taxes payable, $1,500 .................................................... ______
Loss on sale of land, $5,000 ......................................................................... ______
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.
BE 168
Hogan Enterprises reported cash flow from operations of $275,000. The company made capital
expenditures of $110,000 and paid dividends of $35,000.
Instructions
Compute free cash flow.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 35
aBE 169
Small Company reported cost of goods sold of $179,000 on its 2014 income statement. The
company’s beginning inventory was $35,000. The ending inventory was valued at $40,000. The
Accounts Payable balance at January 1 was $25,000. The December 31 balance in Accounts
Payable was $22,000.
Instructions
Compute cash payments to suppliers.
aBE 170
Show Company had total operating expenses of $153,000 in 2014, which included Depreciation
Expense of $30,000. Also during 2014, prepaid expenses decreased by $9,500 and accrued
expenses increased by $8,500.
Instructions
Calculate the amount of cash payments for operating expenses in 2014 using the direct method.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 36
EXERCISES
Ex. 171
Classify each of the following as a(n):
A. Operating Activity
B. Investing Activity
C. Financing Activity
_____ 1 Issuance of bonds.
_____ 2. Sale of equipment.
_____ 3. Amortization expense.
_____ 4. Purchase of treasury stock.
_____ 5. Receipt of dividends on investment.
_____ 6. Purchase of land.
Ex. 172
Selected transactions of Alton 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 receivable on a short-term note receivable is collected.
4. Land is sold for cash at book value.
5. Accounts payable are paid in cash.
6. Equipment is purchased by signing a 3-year, 10% note payable.
7. Cash dividends on common stock are declared and paid.
8. 100 shares of XYZ common stock are purchased for cash.
9. Merchandise is sold to customers for cash.
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.
Statement of Cash Flows
13 - 37
Ex. 173
(a) Identify several alternatives for presenting significant noncash activities in financial
statements.
(b) Give three examples of significant noncash transactions.
Ex. 174
The following information is available for Redcands Company:
Receipts from customers $215,000
Dividends from stock investments 3,000
Proceeds from sale of equipment 18,000
Proceeds from issuance of stock 90,000
Payments for inventory 100,000
Payments for operating expenses 78,000
Interest paid 6,000
Taxes paid 4,000
Dividends paid 20,000
Instructions
Based on the preceding information, compute the net cash provided by operating activities.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 38
Ex. 175
Plough Company reported net income of $180,000 for the current year. Depreciation recorded on
buildings and equipment amounted to $80,000 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 24,000 32,000
Inventories 50,000 65,000
Prepaid expenses 9,500 5,000
Accounts payable 12,000 18,000
Income taxes payable 1,600 1,200
Instructions
Prepare the cash flows from the operating activities section of the statement of cash flows using
the indirect method.
Ex. 176
Plexis Company reported net income of $148,000. For 2014, depreciation was $45,000, and the
company reported a gain on sale of investments of $12,000. Accounts receivable increased
$25,000 and accounts payable decreased $23,000.
Instructions
Compute net cash provided by operating activities using the indirect method.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 39
Ex. 177
Assuming a statement of cash flows is prepared, 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. Merchandise 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. _____
Test Bank for Financial Accounting, Ninth Edition
13 - 40
Ex. 178
A comparative balance sheet for Rocker Company appears below:
ROCKER COMPANY
Comparative Balance Sheet
Dec. 31, 2015 Dec. 31, 2014
Assets
Cash $ 34,000 $11,000
Accounts receivable 18,000 13,000
Inventory 25,000 17,000
Prepaid expenses 6,000 9,000
Long-term investments -0- 17,000
Equipment 60,000 33,000
Accumulated depreciation—equipment (20,000) (15,000)
Total assets $123,000 $85,000
Liabilities and Stockholders' Equity
Accounts payable $ 17,000 $ 7,000
Bonds payable 36,000 45,000
Common stock 40,000 23,000
Retained earnings 30,000 10,000
Total liabilities and stockholders' equity $123,000 $85,000
Additional information:
1. Net income for the year ending December 31, 2015 was $35,000.
2. Cash dividends of $15,000 were declared and paid during the year.
3. Long-term investments that had a cost of $17,000 were sold for $14,000.
4. Sales for 2015 were $120,000.
Instructions
Prepare a statement of cash flows for the year ended December 31, 2015, using the indirect
method.
Statement of Cash Flows
13 - 41
Solution 178 (Cont.)
Ex. 179
A comparative balance sheet for Halpern Corporation is presented below:
HALPERN CORPORATION
Comparative Balance Sheet
2015 2014
Assets
Cash $ 36,000 $ 31,000
Accounts receivable (net) 70,000 60,000
Prepaid insurance 25,000 17,000
Land 18,000 40,000
Equipment 70,000 60,000
Accumulated depreciation (20,000) (13,000)
Total Assets $199,000 $195,000
Liabilities and Stockholders' Equity
Accounts payable $ 11,000 $ 6,000
Bonds payable 27,000 19,000
Common stock 140,000 115,000
Retained earnings 21,000 55,000
Total liabilities and stockholders' equity $199,000 $195,000
Additional information:
1. Net loss for 2015 is $20,000.
2. Cash dividends of $14,000 were declared and paid in 2015.
3. Land was sold for cash at a loss of $4,000. 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. $22,000 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
Prepare a statement of cash flows for the year ended 2015, using the indirect method.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 42
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 43
Ex. 180
The following information is available for Sally Corporation for the year ended December 31,
2015:
Collection of principal on long-term loan to a supplier $15,000
Acquisition of equipment for cash 10,000
Proceeds from the sale of long-term investment at book value 20,000
Issuance of common stock for cash 27,000
Depreciation expense 28,000
Redemption of bonds payable at carrying (book) value 35,000
Payment of cash dividends 15,000
Net income 25,000
Purchase of land by issuing bonds payable 45,000
In addition, the following information is available from the comparative balance sheet for Sally at
the end of 2014 and 2015:
2015 2014
Cash $ 66,000 $14,000
Accounts receivable (net) 20,000 16,000
Prepaid insurance 18,000 13,000
Total current assets $104,000 $43,000
Accounts payable $ 30,000 $20,000
Salaries payable 3,000 7,000
Total current liabilities $ 33,000 $27,000
Instructions
Prepare Sally's statement of cash flows for the year ended December 31, 2015 using the indirect
method.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 44
Ex. 181
Towson Company prepared the tabulation below at December 31, 2014.
Net Income ............................................................................................................ $340,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $43,000 .................................................................... ______
Increase in accounts receivable, $50,000 ..................................................... ______
Decrease in inventory, $13,000 .................................................................... ______
Amortization of patent, $4,000 ...................................................................... ______
Increase in accounts payable, $5,600 ........................................................... ______
Decrease in interest receivable, $7,000 ........................................................ ______
Increase in prepaid expenses, $6,000 .......................................................... ______
Decrease in income taxes payable, $1,500 .................................................. ______
Gain on sale of land, $5,000 ......................................................................... ______
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
13 - 45
Ex. 182
The current sections of Donny Inc.'s balance sheets at December 31, 2014 and 2015, are
presented here.
Donny's net income for 2015 was $203,000. Depreciation expense was $25,000.
2015 2014
Current assets
Cash $115,000 $99,000
Accounts receivable 105,000 89,000
Inventory 154,000 172,000
Prepaid expense 27,000 21,000
Total current assets $401,000 $381,000
Current liabilities
Accrued expenses payable $ 15,000 $ 5,000
Accounts payable 85,000 93,000
Total current liabilities $100,000 $ 98,000
Instructions
Prepare the net cash provided by operating activities section of the company's statement of cash
flows for the year ended December 31, 2015, using the indirect method.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 46
Ex. 183
Wayne Company reported net income of $265,000 for 2014. Wayne also reported depreciation
expense of $45,000 and a loss of $8,000 on the sale of equipment. The comparative balance
sheet shows a decrease in accounts receivable of $15,000 for the year, a $17,000 increase in
accounts payable, and a $6,000 decrease in prepaid expenses.
Instructions
Prepare the operating activities section of the statement of cash flows for 2014. Use the indirect
method.
Ex. 184
The three accounts shown below appear in the general ledger of Lawson Corp. during 2014.
Equipment
Date Debit Credit Balance
Jan. 1 Balance 160,000
July 31 Purchase of equipment 75,000 235,000
Sept. 2 Cost of equipment constructed 56,000 291,000
Nov. 10 Cost of equipment sold 45,000 246,000
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 20,000 61,000
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 47
Ex. 184 (Cont.)
Retained Earnings
Date Debit Credit Balance
Jan. 1 Balance 105,000
Aug. 23 Dividends (cash) 15,000 90,000
Dec. 31 Net income 50,000 140,000
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 of equipment was $7,000. (Hint: Cost of
equipment constructed is reported in the investing activities section as a decrease in cash of
$56,000.)
Test Bank for Financial Accounting, Ninth Edition
13 - 48
Ex. 185
Planner Corporation's comparative balance sheets are presented below.
PLANNER CORPORATION
Comparative Balance Sheets
December 31
2015 2014
Cash $ 21,570 $ 10,700
Accounts receivable 18,200 23,400
Land 18,000 26,000
Building 70,000 70,000
Accumulated depreciation (15,000) (10,000)
Total $112,770 $120,100
Accounts payable $ 12,370 $31,100
Common stock 75,000 69,000
Retained earnings 25,400 20,000
Total $112,770 $120,100
Additional information:
1. Net income was $27,900. Dividends declared and paid were $22,500.
2. All other changes in noncurrent account balances had a direct effect on cash flows, except
the change in accumulated depreciation. The land was sold for $5,900.
Instruction
(a) Prepare a statement of cash flows for 2015 using the indirect method.
(b) Compute free cash flow.
Statement of Cash Flows
13 - 49
Solution 185 (Cont.)
Ex. 186
Miroz Corporation's comparative balance sheets are presented below.
MIROZ CORPORATION
Comparative Balance Sheets
December 31
2015 2014
Cash $ 18,700 $ 22,700
Accounts receivable 24,700 22,300
Investments 25,000 16,000
Equipment 59,000 70,000
Accumulated depreciation (14,500) (10,000)
Total $112,900 $121,000
Accounts payable $ 13,600 $11,100
Bonds payable 6,000 30,000
Common stock 50,000 45,000
Retained earnings 43,300 34,900
Total $112,900 $121,000
Additional information:
1. Net income was $17,700. Dividends declared and paid were $9,300.
2. Equipment which cost $11,000 and had accumulated depreciation of $2,000 was sold for
$4,000.
3. All other changes in noncurrent account balances had a direct effect on cash flows, except
the change in accumulated depreciation.
Instruction
(a) Prepare a statement of cash flows for 2015 using the indirect method.
(b) Compute free cash flow.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 50
Ex. 187
The following information is available for Young Corporation:
Capital expenditures $115,000
Cash dividends 75,000
Cash provided by operations 220,000
Net income 130,000
Sales 600,000
Instructions
Compute Young Corporation's free cash flow.
Statement of Cash Flows
13 - 51
aEx. 188
Dredd Company has begun a worksheet for preparing a statement of cash flows. The following
additional information is provided:
1. Cash dividends of $8,000 were paid during the year.
2. Land which originally cost $60,000 was sold for $52,000.
3. Common stock was issued at par value for cash.
Instructions
Complete the worksheet for Dredd Company.
DREDD COMPANY
Worksheet
Statement of Cash Flows
For the Year Ended December 31, 2015
Balance Reconciling Items Balance
Balance Sheet Accounts 12/31/14 Debits Credits 12/31/15
Debits
Cash 30,000 60,000
Accounts receivable 40,000 54,000
Inventory 90,000 112,000
Land 60,000 -0-
Equipment 131,000 142,000
Total 351,000 368,000
Credits
Accounts payable 15,000 10,000
Bonds payable 25,000 10,000
Accumulated depreciation—
equipment 81,000 96,000
Common stock 170,000 180,000
Retained earnings 60,000 72,000
Total 351,000 368,000
Statement of Cash Flows Effects
Operating activities
Net income 20,000
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 52
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 53
aEx. 189
Dense Company's income statement showed revenues of $275,000 and operating expenses of
$135,000. Accounts receivable decreased by $40,000 and accounts payable increased by
$35,000 during the year.
Instructions
Compute (a) cash receipts from customers and (b) cash payments for operating expenses using
the direct method.
aEx. 190
Clare Company had total operating expenses of $185,000 in 2014, which included Depreciation
Expense of $36,000. Also, during 2014, prepaid expenses increased by $8,000 and accrued
expenses decreased by $7,600.
Instructions
Calculate the amount of cash payments for operating expenses in 2014 using the direct method.
aEx. 191
The general ledger of Link Company provides the following information:
End of Year Beginning of Year
Accounts Receivable $ 55,000 $ 94,000
Inventory 310,000 210,000
Accounts Payable 40,000 65,000
The company's net sales for the year was $2,200,000 and cost of goods sold amounted to
$1,500,000.
Instructions
Compute the following:
(a) Cash receipts from customers.
(b) Cash payments to suppliers.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 54
aEx. 192
The income statement of Reagan Inc. for the year ended December 31, 2015, reported the
following condensed information:
Service revenue $700,000
Operating expenses 340,000
Income from operations 360,000
Income tax expense 50,000
Net income $310,000
Roman's balance sheet contained the following comparative data at December 31:
2015 2014
Accounts receivable $75,000 $45,000
Accounts payable 40,000 50,000
Income taxes payable 6,000 4,000
Reagan 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
13 - 55
aEx. 193
The income statement of Frank Company is shown below:
FRANK COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales $8,400,000
Cost of goods sold 5,400,000
Gross profit 3,000,000
Operating expenses
Selling expenses $500,000
Administrative expense 700,000
Depreciation expense 90,000
Amortization expense 30,000 1,320,000
Net income $1,680,000
Additional information:
1. Accounts receivable increased $400,000 during the year.
2. Inventory increased $250,000 during the year.
3. Prepaid expenses increased $200,000 during the year.
4. Accounts payable to merchandise suppliers increased $100,000 during the year.
5. Accrued expenses payable increased $160,000 during the year.
Instructions
Prepare the operating activities section of the statement of cash flows for the year ended
December 31, 2015, for Frank Company, using the direct method.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
13 - 56
aEx. 194
The financial statements of Lowz Company appear below:
LOWZ COMPANY
Comparative Balance Sheet
December 31
2015 2014
Assets
Cash $ 36,000 $ 23,000
Accounts receivable 25,000 34,000
Merchandise inventory 32,000 15,000
Property, plant, and equipment 50,000 78,000
Accumulated depreciation (21,000) (24,000)
Total $122,000 $126,000
Liabilities and Stockholders' Equity
Accounts payable $ 18,000 $ 23,000
Income taxes payable 9,000 8,000
Bonds payable 8,000 33,000
Common stock 28,000 24,000
Retained earnings 59,000 38,000
Total $122,000 $126,000
LOWZ COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales $400,000
Cost of goods sold 270,000
Gross profit 130,000
Operating expenses 45,000
Income from operations 85,000
Interest expense 5,000
Income before income taxes 80,000
Income tax expense 24,000
Net income $ 56,000
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
13 - 57
Ex. 194 (Cont.)
The following additional data were provided:
1. Dividends declared and paid were $35,000.
2. During the year, equipment was sold for $17,000 cash. This equipment cost $28,000
originally and had a book value of $17,000 at the time of sale.
3. All depreciation expense is in the operating expenses.
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 Lowz Company using the direct method.
Test Bank for Financial Accounting, Ninth Edition
13 - 58
+Ex. 195
Condensed financial data of Drake Company appear below:
DRAKE COMPANY
Comparative Balance Sheet
December 31
2015 2014
Assets
Cash $ 41,000 $ 35,000
Accounts receivable 75,000 53,000
Inventories 120,000 132,000
Prepaid expenses 19,000 25,000
Investments 100,000 75,000
Plant assets 325,000 250,000
Accumulated depreciation (65,000) (60,000)
Total $615,000 $510,000
Liabilities and Stockholders' Equity
Accounts payable $ 93,000 $ 75,000
Accrued expenses payable 29,000 24,000
Bonds payable 120,000 160,000
Common stock 275,000 170,000
Retained earnings 98,000 81,000
Total $615,000 $510,000
DRAKE COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales $450,000
Less:
Cost of goods sold $300,000
Operating expenses (excluding depreciation) 60,000
Depreciation expense 17,000
Income taxes 20,000
Interest expense 18,000
Loss on sale of plant assets 3,000 418,000
Net income $ 32,000
Additional information:
1. New plant assets costing $100,000 were purchased for cash in 2015.
2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was $13,000.
3. Bonds with a face value of $40,000 were converted into $40,000 of common stock.
4. A cash dividend of $15,000 was declared and paid during the year.
5. Accounts payable pertain to merchandise purchases.
Instructions
Prepare a statement of cash flows for the year using the direct method.
Statement of Cash Flows
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aEx. 196
The income statement for Jones Company showed cost of goods sold of $80,000 and operating
expenses of $65,000. The comparative balance sheets for the year show that inventory
decreased $5,000, prepaid expenses increased $7,000, accounts payable increased $3,000, and
accrued expenses payable decreased $5,000.
Instructions
Compute (a) cash payments to suppliers and (b) cash payments for operating expenses using the
direct method.
Test Bank for Financial Accounting, Ninth Edition
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COMPLETION STATEMENTS
197. A statement of cash flows summarizes the operating, ____________, and ___________
activities of an entity.
198. The cash effects of selling goods and services appears in the ______________ activities
section of a statement of cash flows.
199. The operating activities section of the statement of cash flows may be prepared using the
______________ method or the ______________ method.
200. Net income from operations is generally not the same as cash provided from operations
because revenues and expenses are recognized in the income statement on the
______________ basis.
201. Using the indirect approach, noncash charges in the income statement are
______________ to net income and noncash credits are ______________ to compute
cash provided by operations.
202. If accounts receivable increase during a period, revenues on an accrual basis are
______________ than revenues on a cash basis.
203. The sale of equipment at less than its book value is a(n) ______________ of cash that is
reported in the ______________ activities section.
204. Free _______________ equals cash provided by operations less capital expenditures and
cash dividends.
a205. Under the direct method, noncash charges, such as depreciation, are _______________
in the statement of cash flows.
a206. Under the direct method, the two largest classes of items in the operating activities section
for a merchandising company are cash ________________________ and cash
_________________________.
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a207. Cost of goods sold for the year amounted to $130,000, and during the year, accounts
payable ______________ by $9,000 and inventory ______________ by $5,000 resulting
in cash paid to suppliers of $116,000.
a208. 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.
a209. In computing cash payments for income taxes, a decrease in income taxes payable is
______________ to (from) income tax expense.
Answers to Completion Statements
MATCHING
Set 1 — Indirect Method
210. 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 sale 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.
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Set 1 (Cont.)
____ 8. Purchase of a building for cash.
____ 9. Acquisition of land in exchange for common stock.
____ 10. Increase in merchandise inventory during a period.
Set 2 — Direct Method
a211. 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 merchandise 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.
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Answers to Matching
SHORT-ANSWER ESSAY QUESTIONS
S-A E 212
Distinguish among the three types of activities reported in the statement of cash flows
The three activities are:
S-A E 213
Why is the statement of cash flows useful?
S-A E 214
The statement of cash flows is the only required financial statement that is not prepared from an
adjusted trial balance. (a) What are the sources of information for preparing a statement of cash
flows? (b) Explain how the accrual basis of accounting affects the statement of cash flows.
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S-A E 215
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 information about the net cash flows
from operating activities.
S-A E 216
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?
Statement of Cash Flows
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S-A E 217 (Ethics)
Sact Creek 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.
Ted Flay, 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.
Will Smith, financial manager, immediately suspended payments on all accounts except those on
which interest would accrue. He also instituted aggressive collection procedures.
Required:
1. Were Ted Flay's actions ethical? Explain.
2. Were Will Smith's actions ethical? Explain.
3. Were the company president's actions ethical? Explain.
S-A E 218 (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 present a schedule of
predicted cash sources and cash needs at the end of each week for the following week.
Jim Bangon, 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.
Test Bank for Financial Accounting, Ninth Edition
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Solution 218
Statement of Cash Flows
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CHALLENGE EXERCISES
CE 1
The current sections of Remington Inc.'s balance sheets at December 31, 2014 and 2015, are
presented here. Remington's net income for 2015 was $173,000. The income statement included
depreciation expense, $20,000, amortization expense, $10,000, and a gain on sale of equipment,
$7,000. The equipment was sold for $47,000. Remington also issued bonds for $60,000.
2015 2014
Current assets
Cash $217,000 $ 99,000
Accounts receivable 120,000 93,000
Inventory 159,000 176,000
Prepaid expense 29,000 24,000
Total current assets $525,000 $392,000
Current liabilities
Accrued expenses payable $ 17,000 $ 9,000
Accounts payable 88,000 94,000
Total current liabilities $105,000 $103,000
Instructions
Prepare the net cash provided by operating activities section of the company's statement of cash
flows for the year ended December 31, 2015, using the indirect method.
Test Bank for Financial Accounting, Ninth Edition
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CE 2
Here are comparative balance sheets for Porter Company
PORTER COMPANY
Comparative balance Sheets
December 31
Assets 2015 2014
Cash $ 53,000 $ 22,000
Accounts receivable 92,000 76,000
Inventories 175,000 191,000
Land 72,000 100,000
Equipment 270,000 200,000
Accumulated depreciation (56,000) (32,000)
Total $606,000 $557,000
Liabilities and Stockholder's Equity
Accounts payable $ 37,000 $ 47,000
Bonds payable 160,000 210,000
Common stock ($1 par) 216,000 174,000
Retained earnings 193,000 126,000
Total $606,000 $557,000
Additional information:
1. Net income for 2015 was $90,000.
2. Cash dividends of $23,000 were declared and paid.
3. Bonds payable amounting to $50,000 were redeemed for cash $50,000
4. Common stock was issued for $42,000 cash
5. Equipment that cost $50,000 and had a book value of $30,000 was sold for $36,000 during
2015; land was sold at cost.
Instructions
(a) Prepare a statement of cash flows for 2015 using the indirect method.
(b) Compute free cash flow for 2014
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Solution CE 2 (Cont.)
CE 3
For 2015, the income statement of Hylard Corporation had revenues of $152,000 and operating
expenses of $78,000. Accounts receivable and accounts payable at year-end were $60,000 and
$23,000, respectively. At the beginning of the year, the balances were $39,000 for accounts
receivable and $15,000 for accounts payable. Assume that accounts payable related to operating
expenses. Ignore income taxes.
Instructions
Compute net cash provided by operating activities using the direct method.
