89. The effect of patent amortization on cash flow is conceptually identical to that of
90. To avoid understating the amount of cash flow from operations, the accountant
91. During Year 7, Seven Corporation wrote down marketable equity securities to their market value. The
journal entry made for this write-down is as follows:
Unrealized Holding Loss on Marketable Equity Securities
Available for Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.000
Marketable Equity Securities Available for Sale . . . . . . . . . . . . . . . . . 7,000
This entry
92. During Year 5, Taylor Corporation signed a long-term lease for a building. It classified the lease as a capital
lease and recorded it in the accounts as follows:
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Capitalized Lease Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
The transaction requires
93. Kendrick Company began the current year with the following:
Accounts receivable
$ 10,000
Allowance for doubtful accounts
(800)
Net account receivable
9,200
During the current year, the following events occurred:
Accounts written off
$ 1,200
Sales on account
30,000
Bad debt expense recognized
2,000
At the end of the current year, the company showed a balance in gross accounts receivable (before the allowance for doubtful accounts) of $16,800.
What amount would be shown as an operating cash inflow in the statement of cash flows under the indirect method?
94. Zanies Corporation reports its income from investments under the equity method and recognized income of
$15,000 from its investment in Travis Company during the current year. Travis declared no dividends during
the current year. On Daniels’ statement of cash flows the $15,000 would
95. The amortization of patents should be presented in a statement of cash flows prepared using the indirect
method as a(n)
96. A company’s income statement disclosed $45,000 of investment revenue on equity method investments.
The company did not purchase or dispose of any such investments during the year, yet the equity method
investments account increased $30,000 during the year. What is the complete disclosure of these events in the
statement of cash flows prepared under the indirect method?
97. The amortization of bond discount related to long-term debt should be presented in a statement of cash
flows prepared using the indirect method as a(n)
98. Which of the following items involving current trade accounts receivable is most likely to appear in a
statement of cash flows?
99. Which of the following transactions would not be reported in the one of the three main activity sections of
the statement of cash flows prepared under the indirect method?
100. A gain on the sale of a plant assets should be included in which of the following sections of a statement of
cash flows prepared using the indirect method?
101. A firm sold an investment in securities available for sale originally costing $30,000, for $28,000. At the
beginning of the year, the investment had a valuation allowance of $3,000, debit. What is the correct disclosure
for these events in the statement of cash flows prepared under the direct method, assuming this is the only
investment in securities available for sale?
102. At the beginning of the year, a firm leased equipment on a capital lease, capitalizing $60,000 in its lease
receivable account. The contract calls for December 31 payments of $15,000. The lessor’s annual reporting
period ends December 31 and the contract reflects 10% interest. The lessee made the first payment as required.
The direct method statement of cash flows for the lessor should reflect which of the following in the first year of
the lease contract (ignore noncash disclosures)?
103. Under the direct method, cash paid to suppliers can be computed as cost of goods sold for the period
104. During Year 3, investors in bonds of Kline Corporation exercised their option to convert their debt
securities into shares of common stock. The entry made in the accounting records to record the conversion is as
follows:
Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Additional Paid-in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,000
The transaction requires
105. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. _____ will usually show additions
or subtractions for losses and gains on the disposal of assets.
106. The adjustment for changes in operating working capital accounts depends in part on a firm’s rate of
growth. _____ firms usually experience significant increases in accounts receivable and inventories.
107. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. Some firms use _____ to finance
the working capital needs.
108. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. During the _____ cash outflow
exceeds cash inflow from operations because operations are not yet earning profits while the firm must invest in
accounts receivable and inventories. Investing activities result in a net cash outflow to build productive
capacity. Firms must rely on external financing during this phase to overcome the negative cash flow from
operations and investing.
109. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. The _____ phase reflects sales of
successful products, and net income turns positive. The firm makes more sales, but it also needs to acquire more
goods to sell. Because it usually must pay for the goods it acquires before it collects for the goods it sells, the
firm finds itself often short of cash from operations. The faster it grows (even though profitable), the more cash
it needs. Banks do not like to lend for such needs. They view such needs (even though for current assets) as a
permanent part of the firm’s financing needs. Thus, banks want firms to use shareholders’ equity or long-term
debt to finance growth in nonseasonal inventories and receivables.
110. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. During the _____, net income
usually reaches a peak, and working capital stops growing. Operations generate positive cash flow, enough to
finance expenditures on property, plant, and equipment. Capital expenditures usually maintain, rather than
increase, productive capacity. Firms use the excess cash flow to repay borrowing from the introduction and
growth phases and to begin paying dividends to shareholders.
111. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. During the _____, weakening
profitability—from reduced sales or reduced profit margins on existing sales— signals the beginning of the
phase, but ever-declining accounts receivable and inventories can produce positive cash flow from operations.
In addition, sales of unneeded property, plant, and equipment can result in positive cash flow from investing
activities. Firms can use the excess cash flow to repay remaining debt or diversify into other areas of business.
112. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations among cash flows from operating, investing, and financing activities. Biotechnology firms are in their
_____ phase, consumer foods companies are in their _____ phase, and U.S. auto manufacturers are in the _____
phase.
113. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations under the indirect method depends on the nature of its operations. Capital–
intensive firms will likely show a substantial
114. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations under the indirect method depends on the nature of its operations. Service
firms will likely show a small amount of
115. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations under the indirect method depends on the nature of its operations. Rapidly
growing firms usually
116. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations under the indirect method depends on the nature of its operations. Firms
that stop growing or that shrink usually
117. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations under the indirect method depends on the nature of its operations Firms that
grow or diversify by acquiring minority ownership positions in other businesses will often show
118. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations under the indirect method depends on the nature of its operations. Firms that
decrease in size will usually show
119. The adjustment for changes in operating working capital accounts depends in part on a firm’s rate of
growth. Rapidly growing firms usually experience significant increases in.
120. The adjustment for changes in operating working capital accounts depends in part on a firm’s rate of
growth. Some firms use suppliers or other creditors to finance these working capital needs, which are
121. The adjustment for changes in operating working capital accounts depends in part on a firm’s rate of
growth. Some firms use short- or long-term borrowing or equity financing, which is
122. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. During the introduction phase
123. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. During the introduction phase
124. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. During the introduction phase
125. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. During the growth phase
126. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. During the maturity phase
127. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. When a product matures
128. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. When a product matures,
129. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. At the beginning of the decline
phase,
130. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. The beginning of the decline
phase can produce
131. The product life-cycle concept from microeconomics and marketing provides useful insights into the
relations between cash flows from operating, investing, and financing activities. In the United States, which
phase best describes:
Biotechnology firms Consumer foods companies Steel manufacturers
132. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. _____ will likely show a substantial
addback to net income for depreciation expense, whereas _____will show a smaller amount.
133. The extent to which a firm adjusts net income for changes in noncurrent assets and noncurrent liabilities in
deriving cash flow from operations depends on the nature of its operations. _____ usually show an addback for
deferred tax expense, whereas firms that _____ show a subtraction.
134. For each of the following items:
1.
2.
1. addition
2. operations
1. subtraction
2. operations
1. addition
2. operations
d.
1. addition
2. investing
135. Dmitri Company reported the following changes in the balance sheet accounts between Year 1 and Year 2.
Change In
Dr.(Cr.)
Cash
$100
Accounts receivable
(50)
Inventory
80
Equipment
100
Accumulated depreciation
(20)
Prepaid insurance
(10)
Accounts payable
(20)
Warranties payable
(10)
Deferred tax liability
(10)
Notes payable
(110)
Retained earnings
(30)
Common stock
0
Preferred stock
(20)
Assume that there were no sales of equipment and that no dividends were declared or paid.
Required:
Given the changes in the balance sheet for Year 2, state:
a.
b.
Cash
$100
n/a
n/a
Accounts receivable
(50)
Addition
Operations
Inventory
Subtract
Operations
Equipment
100
Subtract
Investing
Accumulated depreciation
(20)
Addition
Operations
Prepaid insurance
(10)
Addition
Operations
Accounts payable
(20)
Addition
Operations
Warranties payable
(10)
Addition
Operations
Deferred taxes
(10)
Addition
Operations
Notes payable
(110)
Addition
Financing
Retained earnings
(30)
Addition
Operations
Common stock
0
n/a
n/a
Preferred stock
(20)
Addition
Financing
136. Clayborne Company reported the following changes in the balance sheet accounts between Year 1 and
Year 2. No dividends are paid during the year, land was sold at its book value of $30,000 and any change in the
patent account is due to amortization.
Change In
Dr.(Cr.)
Cash
$(50)
Accounts receivable
(10)
Inventory
(20)
Patent, net of amortization
(10)
Equipment & land
(30)
Accumulated depreciation
(10)
Accounts payable
40
Notes payable
0
Retained earnings
40
Common stock
50
Required:
Given the changes in the balance sheet for Year 2, state:
a.
b.
137. For each of the following transactions, determine what adjustments are necessary to prepare the statement
of cash flows using the indirect method.
a.
b.
c.
Change In
Dr.(Cr.)
ADD/SUB
ACTIVITY
Cash
$(50)
n/a
n/a
Accounts receivable
(10)
Addition
Operations
Inventory
(20)
Addition
Operations
Patent
(10)
Addition
Operations
Equipment & Land
(30)
Addition
Investing
Accumulated depreciation
(10)
Addition
Operations
Accounts payable
40
Subtract
Operations
Notes payable
0
n/a
n/a
Retained earnings
40
Subtract
Operations
Common stock
50
Subtract
Financing
138. For each of the following transactions, determine what adjustment is necessary to prepare the statement of
cash flows using the indirect method.
a.
b.
c.
.
a.
Subtract $200 gain on sale from income from operations. Show $400 as cash from investing activity-sale of equipment.
Subtract $1,000 from income from operations.
139. (CMA adapted, Jun 94 #4) Spring Corporation, a public company, has prepared all of its year-end financial
statements with the exception of the statement of cash flows. Presented below is condensed financial
information for the years ended May 31, Year 3 and Year 4, as well as supplemental data on certain transactions
that occurred during the year ended May 31, Year 4.
Spring Corporation
Statement of Financial Position
at May 31, Year 3 and Year 4
Year 3
Year 4
Cash
$ 4,300
$ 5,100
Accounts receivable
3,700
4,200
Inventories
34,200
31,700
Prepaid expenses
1,800
2,100
Land
38,000
27,000
Buildings (net)
126,800
117,700
Equipment (net)
50,500
66,800
Leased equipment
–
7,700
Total assets
$259,300
$262,300
Accounts payable
$ 5,900
$ 3,400
Income taxes payable
2,600
2,100
Obligation under capital lease
–
7,700
Bonds payable
50,000
60,000
Deferred income taxes
2,200
2,400
Common stock, $10 par
125,000
135,000
Paid-in capital in excess of par
12,000
14,000
Retained earnings
61,600
37,700
Total liabilities and shareholders’ equity
$259,300
$262,300
Spring Corporation
Income Statement
For the Year Ended May 31, Year 4
Sales
$127,900
Cost of goods sold
$69,800
Selling expense
21,000
Administrative expense
20,000
Deprec. expense-buildings
700
Deprec. expense-equipment
1,200
Bond interest expense
4,000
116,700
Income before gain & tax
$ 11,200
Gain on sale of land
3,500
Less: Income tax expense
800
Income from operations
$ 13,900
Extraordinary loss (net of tax)
2,600
Net income
$ 11,300
Spring Corporation
Retained Earnings Statement
at May 31, Year 4
Beginning retained earnings
$61,600
Net income
11,300
Stock dividends
(12,000)
Cash dividends
(23,200)
Ending retained earnings
$37,700