Introduction to Financial Accounting, 10e (Horngren)
Chapter 5 Statement of Cash Flows
Learning Objective 5.1 Questions
5.1-1) Which of the following statements show the results of a company over a period of time?
1. Balance sheet
2. Income statement
3. Statement of cash flows
4. Statement of retained earnings
A) 2 and 4
B) 3 and 4
C) 1
D) 2
E) 2, 3, and 4
5.1-2) The statement of cash flows has classifications of
A) operating, investing, and debt activities.
B) investing, operating, and expense activities.
C) operating, investing, and equity activities.
D) operating, financing, and equity activities.
E) operating, investing, and financing activities.
5.1-3) Which of the following statements is false?
A) The statement of cash flows reports the cash receipts and cash payments of an entity over a period of
time.
B) The statement of cash flows is similar to the income statement, as they both determine the net income
for a company.
C) The operating activities in a cash flow statement include transactions which affect the sale and the
purchase or production of goods and services.
D) Investing activities in a cash flow statement include acquiring and selling long–term assets.
E) Financing activities in a cash flow statement include obtaining resources from owners and creditors
and repaying amounts borrowed.
5.1-4) The statement of cash flows reports on where cash came from and how it was used.
5.1-5) Like the income statement, the statement of cash flows covers a period of time.
5.1-6) A firm may have a significant amount of net income, as computed by accountants on the accrual
basis, and yet have a severe decline in cash.
5.1-7) A statement of cash flows covers a date in time rather than a period of time.
5.1-8) One of the purposes of a statement of cash flows is to determine a company’s ability to pay its debts
when they become due.
5.1-9) A company acquired a small building by signing a mortgage payable. How would this transaction
be shown in the statement of cash flows? Explain how this treatment fulfills the investors’ need for
information regarding the financial management of the company.
Learning Objective 5.2 Questions
5.2-1) Cash payments to suppliers would appear on a statement of cash flows using the direct method as
a(n)
A) financing activity.
B) operating activity.
C) investing activity.
D) debt activity.
E) equity activity.
5.2-2) The issuance of a long–term debt for cash would appear on the statement of cash flows as a(n)
A) investing activity.
B) operating activity.
C) financing activity.
D) equity activity.
E) debt activity.
5.2-3) The issuance of stock for cash would be classified as a(n)
A) investing activity on the statement of cash flows.
B) equity activity on the statement of cash flows.
C) operating activity on the statement of cash flows.
D) would not appear on the statement of cash flows.
E) financing activity on the statement of cash flows.
5.2-4) Activities or transactions that affect the income statement are included in which section of the
statement of cash flows?
A) Operating
B) investing
C) Financing
D) Managing
E) Net income
5.2-5) Activities that involve (1) providing and collecting cash as a lender or as an owner of securities and
(2) acquiring and disposing of fixed assets are included in which section of the statement of cash flows?
A) Operating
B) Investing
C) Financing
D) Managing
E) Fixed assets
5.2-6) Activities that involve obtaining resources as a borrower or issuer of securities and repaying
creditors and owners are included in which section of the statement of cash flows?
A) Operating
B) Investing
C) Financing
D) Managing
E) Net income
5.2-7) All of the following would be included in a company‘s operating activities except
A) dividend payments.
B) collections from customers.
C) cash payments to suppliers.
D) income tax payments.
E) interest and dividends collected.
5.2-8) Which of the following would be classified as an operating activity on a statement of cash flows?
A) Purchase of a building
B) Sale of another company’s stock
C) Borrowing money through a promissory note
D) Payment of dividends
E) Purchase of inventory for cash
5.2-9) Which of the following would be classified as an operating activity on a statement of cash flows?
A) Issuing bonds
B) Receipt of loan repayments
C) Collections from customers
D) Issuing stock
E) Repayment of amounts borrowed
5.2-10) All of the following activities would be included in a company’s operating activities except
A) payments to employees.
B) payment to a local government for property taxes.
C) payment to suppliers.
D) payment to the bank to reduce loan balance.
E) payment to landlord for rent.
5.2-11) All of the following would be included in a company‘s investing activities except
A) taking out a loan from the bank.
B) purchase of equipment.
C) sale of another company’s stock.
D) making loans to another company.
E) sale of a building.
5.2-12) All of the following would be included in a company’s investing activities except
A) purchase of land.
B) payment of dividends.
C) collection of loan repayments.
D) purchase of equipment.
E) purchase of another company’s stock.
5.2-13) All of the following would be included in a company’s financing activities except
A) issuing equity securities.
B) purchasing treasury stock.
C) repayment of amounts borrowed.
D) borrowing cash from a bank.
E) interest payments.
5.2-14) All of the following would be included in a company’s financing activities except
A) receipt of dividends.
B) payment of dividends.
C) issuing stock.
D) purchase of treasury stock.
E) issuing bonds.
5.2-15) Which of the following would appear in the financing activities section of a statement of cash
flows?
A) Cash payments to employees
B) Cash payment of dividends
C) Cash purchase of equipment
D) Cash paid for income taxes
E) Cash purchase of land
5.2-16) Investing activities involve obtaining resources as a borrower and repaying creditors.
5.2-17) The issuance of long–term debt results in a cash outflow as reported in the financing section.
5.2-18) The purchase of another company’s stock is an example of an investing activity.
5.2-19) Cash flows from financing activities include borrowing cash through a lender.
5.2-20) Cash flows from operating activities include the receipt of interest income.
5.2-21) Cash flows from financing activities include the payment of interest on a note payable.
5.2-22) A transaction in which long–term debt of $50,000 is converted to common stock would be reported
in the financing section of the cash flow statement.
5.2-23) Dividends received from a subsidiary would be classified as an investing activity on a statement
of cash flows.
5.2-24) Issuing equity securities is an operating activity on the statement of cash flows.
5.2-25) Operating activities on a statement of cash flows relate to acquiring assets such as buildings and
equipment.
5.2-26) Cash received from customers is a financing activity on the statement of cash flows.
5.2-27) Cash dividends paid to stockholders are an operating activity on the statement of cash flows.
5.2-28) The receipt of loan repayments is an investing activity on the statement of cash flows.
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5.2-29) Designate how each transaction would be reported on the statement of cash flows using OP for
operating activities, IN for investing activities, FI for financing activities, I for an inflow of cash and O for
an outflow of cash. If the transaction is included only in a supplemental schedule, denote this as SS.
Section Inflow or Outflow
1. Paid cash dividends ________ ________
2. Purchased 3 months of rent in advance ________ ________
3. Sold inventory for cash ________ ________
4. Purchased equipment signing a one–year note ________ ________
5. Collected accounts receivable balance from a customer ________ ________
6. Sold shares of another company’s stock held for
speculative purposes ________ ________
7. Reclassified a note from long term to short term ________ ________
8. Issued bonds at a premium ________ ________
Learning Objective 5.3 Questions
Table 5–3
Fergie Inc. had the following account balances on its balance sheet at December 31, 20X9 and 20X8,
respectively:
12/31/X9 12/31/X8
Long–term Bonds Payable $39,000 $36,000
The company extinguished $7,000 face value of long–term bonds, incurring a $3,000 gain.
5.3-1) Referring to Table 5–3, what was the positive cash flow associated with long–term debt for Fergie,
Inc. in 20X9?
A) $10,000
B) $3,000
C) $13,000
D) $4,000
E) $7,000
5.3-2) Referring to Table 5–3, what was the negative cash flow associated with long–term debt for Fergie,
Inc. in 20X9?
A) $10,000
B) $4,000
C) $7,000
D) $0
E) $3,000
5.3-3) If a company extinguishes debt, which of the following explains the effect of this transaction on a
statement of cash flows?
A) If the debt is extinguished with a loss, the loss is subtracted from the operations section if the company
uses the direct method.
B) If the debt is extinguished with a loss, the loss will not appear in the operations or the investing section
if the company uses the direct method.
C) If the debt is extinguished with a gain, the gain is added to the cash flow from financing section if the
company uses the indirect method.
D) If the debt is extinguished with a gain, the gain is added to the operations section if the company uses
the indirect method.
E) If the debt is extinguished with a loss, the loss is added to the financing section if the company uses the
indirect method.
5.3-4) The purchase of an intangible asset such as a trademark would be a financing activity on the
statement of cash flows.
5.3-5) The purchase of treasury stock would be considered a financing activity.
5.3-6) Payment of dividends is a financing activity.
5.3-7) Receipt of loan repayments is a financing activity.
5.3-8) During 20X9, Ware Company refinanced its long–term debt. It spent $66,000 to retire long–term debt
due in 3 years and issued $100,000 of 10–year bonds at par. The company then bought and retired
common shares of stock for cash of $35,000. Interest expense for 20X9 was $21,000, of which $17,000 was
paid in cash; the other $4,000 was still payable at the end of the year. Dividends declared and paid during
the year were $12,500. Determine net cash flows from financing activities.
5.3-9) Marand Company produces fishing equipment. Its 20X9 statement of cash flows included the
following items, among others:
Dividends paid $ 26,000
Depreciation on equipment 22,500
Issued common stock 123,250
Paid off long–term note payable 47,000
Net income 36,234
Purchases of stock of other companies 4,500
Purchases of equipment 75,000
Prepare the cash flows from financing activities section of the statement of cash flows. All items necessary
for that section appear above, in addition to items that belong in the operating and investing sections.
Learning Objective 5.4 Questions
Table 5–4
Larkin Manufacturing had the following account balances on its balance sheets at December 31, 20X9 and
20X8, respectively:
12/31/X9 12/31/X8
Fixed Assets $80,000 $67,000
Accumulated Depreciation 44,000 39,000
Depreciation expense for 20X9 was $7,000. There were no gains or losses on the 20X9 income statement.
One fixed asset with an original cost of $8,000 was sold during 20X9.
5.4-1) Referring to Table 5–4, what was the cash flow associated with the acquisition of fixed assets by
Larkin Manufacturing in 20X9?
A) $(2,000)
B) $(8,000)
C) $(14,000)
D) $(13,000)
E) $(21,000)
5.4-2) Referring to Table 5–4, what would be the cash flow from investing activities for Larkin
Manufacturing in 20X9?
A) ($2,000)
B) ($8,000)
C) ($13,000)
D) ($15,000)
E) ($21,000)
5.4-3) When a fixed asset is sold for other than its book value, which one of the following incorrectly
states the effect of this transaction on a company’s statement of cash flows?
A) Under the direct method, no gain or loss is included in the operations section.
B) Under the indirect method, gains are subtracted from net income in the cash flow from operations
section.
C) Under the indirect method, losses are added back to net income to arrive at cash from operations.
D) Losses and gains are operating items to be listed in the cash flow from operations activities under both
the direct and indirect methods.
E) Under both the direct and indirect methods, the sale of a fixed asset would affect the cash flow from
investing activities section.
5.4-4) Which balance sheet accounts are most affected by investing activities?
A) Current assets
B) Current liabilities
C) Long term assets
D) Long term liabilities
E) Stockholders’ equity
5.4-5) The indirect method of determining cash from operations is most often used as this method
produces larger positive cash flows.
5.4-6) The Financial Accounting Standards Board (FASB) prefers the indirect method of determining cash
flows from operations.
5.4-7) Net income is always used in determining a company’s cash flow from operations.
5.4-8) Wages and salaries expense plus the increase in wages and salaries payable equals cash paid for
wages and salaries.
5.4-9) Both the direct and indirect methods yield the same cash flow from operations.
5.4-10) The indirect method is used by the majority of US corporations in preparing the statement of cash
flows.
5.4-11) Income tax expense minus the decrease in income taxes payable equals cash paid for income taxes.
5.4-12) Lowan Manufacturing issued common stock for $650,000 on the first day of 20X9. The company
bought fixed assets for $435,000 cash and inventory for $50,000 cash. Later that same year, the company
sold fixed assets for $10,000 more than their book value of $65,000. Half of the inventory was sold for
$98,350 during the year. On December 15, cash was used to purchase $45,000 worth of King Crab
common stock, which Lowan regarded as a long–term investment. Prepare the cash flows from investing
activities of the statement of cash flows for Lowan Manufacturing.
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Learning Objective 5.5 Questions
Table 5–1
Kasian Catering
Balance Sheet
December 31, 20X9 and 20X8
12/31/X9 12/31/X8
Current Assets:
Cash $ 4,600 $ 3,100
Accounts Receivable 9,600 7,900
Inventory 17,500 18,600
Supplies 1,200 2,100
Prepaid Insurance 1,400 1,000
Total Current Assets 34,300 32,700
Long–term Assets:
Fixed Assets 71,000 58,000
Accumulated Depreciation (30,400) (26,500)
Patent 6,000 7,100
Total Long–term Assets 46,600 38,600
Total Assets $ 80,900 $ 71,300
Current Liabilities:
Accounts Payable $ 6,100 $ 4,900
Wages Payable 2,200 2,600
Interest Payable 800 1,000
Taxes Payable 2,300 1,600
Total Current Liabilities 11,400 10,100
Long–term Liabilities: Bonds Payable 20,300 24,000
Total Liabilities 31,700 34,100
Stockholders’ Equity:
Common Stock 22,700 20,000
Retained Earnings 26,500 17,200
Total Stockholders’ Equity 49,200 37,200
Total Liabilities and Stockholders’ Equity $ 80,900 $ 71,300
Kasian Catering
Income Statement
For the Year Ended December 31, 20X9
Sales $147,600
Cost of Goods Sold (63,800)
Gross Profit 83,800
Less Operating Expenses:
Wage Expense $ 40,100
Supply Expense 3,600
Insurance Expense 3,000
Depreciation Expense 3,900
Amortization Expense 1,100
Rent Expense 5,400 57,100
Operating Income 26,700
Interest Expense (2,600)
Income before Taxes 24,100
Income Tax Expense (10,800)
Net Income $ 13,300
5.5-1) Referring to Table 5–1, what was the cash collected from customers by Kasian Catering in 20X9?
A) $138,000
B) $145,900
C) $147,600
D) $149,200
E) $157,200
5.5-2) Referring to Table 5–1, how much inventory did Kasian Catering purchase in 20X9?
A) $81,300
B) $63,800
C) $64,900
D) $46,300
E) $62,700
5.5-3) Referring to Table 5–1, what was the cash paid to suppliers of inventory by Kasian Catering in
20X9?
A) $63,800
B) $61,500
C) $63,700
D) $63,900
E) $66,100
5.5-4) Referring to Table 5–1, what was the cash paid to employees by Kasian Catering in 20X9?
A) $40,500
B) $39,700
C) $40,100
D) $38,000
E) $42,300
5.5-5) Referring to Table 5–1, what was the cash paid for supplies by Kasian Catering in 20X9? (Assume all
purchases of supplies were for cash.)
A) $3,600
B) $4,500
C) $2,400
D) $2,700
E) $4,800
5.5-6) Referring to Table 5–1, what was the cash paid for income taxes by Kasian Catering in 20X9?
A) $7,100
B) $11,700
C) $10,100
D) $10,900
E) $8,600
5.5-7) Referring to Table 5–1, what was the cash flow from operations for Kasian Catering in 20X9?
A) $18,300
B) $19,500
C) $8,200
D) $14,500
E) $13,000
5.5-8) Referring to Table 5–1, what was the cash (paid or received) from the purchase and/or sale of fixed
assets by Kasian Catering in 20X9?
A) $(13,000)
B) $(9,100)
C) $(16,900)
D) $9,100
E) Cannot be determined from the information given
5.5-9) Referring to Table 5–1, what was the cash flow from investing activities for Kasian Catering in
20X9?
A) $(9,100)
B) $9,100
C) $(13,000)
D) $(12,000)
E) $2,000
5.5-10) Referring to Table 5–1, what were the dividends paid by Kasian Catering in 20X9?
A) $11,900
B) $0
C) $22,600
D) $4,000
E) $9,300
Table 5–2
Hanover Company
Balance Sheet
December 31, 20X9 and 20X8
12/31/X9 12/31/X8
Current Assets:
Cash $ 6,900 $ 4,650
Accounts Receivable 14,250 11,850
Inventory 26,250 27,900
Supplies 1,800 3,150
Prepaid Insurance 2,100 1,500
Total Current Assets 51,300 49,050
Long–term Assets:
Fixed Assets 106,500 86,000
Accumulated Depreciation (45,600) (39,750)
Patent 9,000 10,500
Total Long–term Assets 69,900 56,750
Total Assets $121,200 $105,800
Current Liabilities:
Accounts Payable $ 9,150 $ 7,350
Wages Payable 3,300 3,900
Interest Payable 1,200 1,500
Taxes Payable 3,450 2,250
Total Current Liabilities 17,100 15,000
Long–term Liabilities:
Bonds Payable 30,450 35,000
Total Liabilities 47,550 50,000
Stockholders’ Equity:
Common Stock $ 34,050 $30,000
Retained Earnings 39,600 25,800
Total Stockholders’ Equity $ 73,650 $ 55,800
Total Liabilities and Stockholders’ Equity $121,200 $105,800
5.5-11) Referring to Table 5–2, what was the cash collected from customers by Hanover Company in 20X9?
A) $223,250
B) $225,650
C) $237,500
D) $209,000
E) $220,850
5.5-12) Referring to Table 5–2, how much inventory did Hanover Company purchase in 20X9?
A) $68,450
B) $93,050
C) $94,700
D) $96,350
E) $120,950
5.5-13) Referring to Table 5–2, what was the cash paid to suppliers of inventory by Hanover Company in
20X9?
A) $94,700
B) $94,550
C) $91,250
D) $94,850
E) $102,300
5.5-14) Referring to Table 5–2, what was the cash flow from operations for Hanover Company in 20X9?
A) $17,550
B) $21,700
C) $24,900
D) $28,050
E) $32,250
5.5-15) Referring to Table 5–2, what was the cash flow from investing activities for Hanover Company in
20X9?
A) $(19,000)
B) $(20,500)
C) $(14,650)
D) $14,650
E) Cannot be determined from the information given