Chapter 5 The statement of cash flows can be thought of as a “cash-basis” income

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Authors
Robert W. Ingram, Thomas L. Albright
179
Chapter 5--Reporting Cash Flows
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180 Chapter 5
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Reporting Cash Flows 181
TRUE/FALSE
1. The statement of cash flows can be thought of as a “cash-basis” income statement.
2. The sale of equipment is a financing activity.
3. The statement of cash flows is the only financial statement prepared on an accrual basis.
4. The payment of wages is a financing activity.
5. When determining cash flows from operating activities using the indirect format, depreciation
expense is subtracted from net income.
6. Decreases in current liability accounts are added to net income in computing cash flows from
operating activities, using the indirect format.
7. Since the amortization of an intangible asset does not affect cash, it does not appear on the cash-
flow statement using the indirect method.
8. In the long run, a firm must depend on its operating activities to meet most of its cash flow needs.
9. A firm that has negative cash flows from operating activities and positive cash flows from
investing and financing activities is experiencing prosperous growth.
182 Chapter 5
10. A combination of positive cash flows from operating activities and negative cash flows from
investing activities can be a sign of good performance and growth.
MULTIPLE CHOICE
1. Which of the following is a cash flow from an investing activity?
a.
payment for advertising
b.
cash receipt from a customer for a previous credit sale
c.
cash received from sale of equipment
d.
payment of dividends
2. Sonny’s Liquors, Inc. had the following cash flows during March:
Paid for inventory
$ 20,000
Paid wages to employees
40,000
Received from cash sales
100,000
Paid for equipment
60,000
Received a loan
70,000
What was the cash flow from financing activities?
a.
$70,000 inflow
b.
$80,000 outflow
c.
$120,000 outflow
d.
$60,000 outflow
3. The direct and indirect formats are methods of preparing the
a.
operating activities section of a statement of cash flows
b.
investing activities section of a statement of cash flows
c.
income statement
d.
balance sheet
4. A company's net income and operating cash flow are _______ equal.
a.
never
b.
seldom
c.
approximately
d.
always
Reporting Cash Flows 183
5. In the long run, a firm must depend on its _______ activities to meet most of its cash flow needs.
a.
financing
b.
investing
c.
operating
d.
nonrecurring
6. The primary difference between the cash flows statement and all other primary external financial
statements is that the cash flows statement is
a.
not an accrual based statement and all others are
b.
not prepared unless the firm is a manufacturer
c.
an optional statement in the external reporting package
d.
prepared before the end of the year and not after
7. Which of the following best describes the purpose of the statement of cash flows?
a.
identify the revenues and expenses of the accounting period
b.
report the inflows and outflows of cash
c.
balance current period revenues with those of the previous period
d.
report assets, liabilities and owners' equity as of a specific date
8. Which of the following is a fundamental purpose of the statement of cash flows?
To report the To report the
inflows of cash outflows of cash
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
9. Differences between the direct format and indirect format of the statement of cash flows are found
in which section(s) of the statement?
a.
financing activities
b.
investing activities
c.
operating activities
d.
all three sections (operating, financing, investing)
184 Chapter 5
10. The statement of cash flows is designed to report
a.
how the previous period's income statement relates to the current period's income
statement
b.
only the sources and uses of cash during the current period
c.
the cash from operating, financing and investing activities of the firm during the current
period
d.
the effects of the current period's income statement on the current period's balance sheet
11. The following information is available to prepare a statement of cash flows:
Cash paid to owners for dividends
$1,000
Cash received from customers from prior credit sales
8,600
Cash paid for long-term assets
3,300
Cash paid for income taxes
2,700
What are the cash flows from operations under the direct method?
a.
$11,300
b.
$ 5,900
c.
$ 5,300
d.
$ 2,600
12. Activities that involve the production or delivery of goods for sale or the providing of services for
sale should be listed under which classification on a statement of cash flows?
a.
financing activities
b.
operating activities
c.
refunding activities
d.
investing activities
13. Which of the following is an investing activity?
a.
sale of equipment
b.
payment of cash dividends
c.
payment of interest
d.
purchase of inventory
14. Which one of the following is a financing activity?
a.
sale of worn out factory equipment
b.
sale of inventory
c.
collection of an account receivable
d.
sale of bonds payable
Reporting Cash Flows 185
15. Which of the following is an operating activity?
a.
sale of long-term fixed assets
b.
payment of dividends to owners
c.
sale of inventory
d.
purchase of new factory building
16. What type of activity is the paying off of a bank loan?
a.
operating
b.
financing
c.
investing
d.
operating if it was a short-term loan; financing if it was a long-term loan
17. A statement of cash flows has been prepared. The sum of the three major components (operating
activities, investing activities, financing activities) will add up to an amount equal to
a.
the ending cash balance reported on the balance sheet
b.
net income for the period on the accrual basis
c.
the ending amount of working capital
d.
the net change in the cash account during the year
18. Which of the following is properly classified on a statement of cash flows as an operating activity?
Payment of Interest Payment of dividends
on a bank loan to shareholders
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
19. Which of the following is an operating activity?
a.
payment of interest on a loan
b.
payment of dividends on common stock
c.
sale of fully depreciated assets previously used in operations
d.
purchase of new fixed assets to be used in operations
186 Chapter 5
20. Sales on account for the year totaled $200,000. The following information is also available from
the accounting system:
Accounts Receivable Balances
Beginning of year $30,000
End of year 25,000
What amount of cash was collected from customers during the year?
a.
$200,000
b.
$195,000
c.
$205,000
d.
$170,000
21. Bombay Imports reported a substantial net income for the most recent accounting period. Its net
cash flows for the same period
a.
must have been positive
b.
must have been negative
c.
could have been either positive or negative
d.
cannot be measured
22. Red River Manufacturing reported a substantial net loss for the most recent accounting period. Its
net cash flows for the same period
a.
must have been negative
b.
must have been positive
c.
could have been either negative or positive
d.
cannot be measured
23. When preparing the operating activities section of the statement of cash flows under the indirect
method, which of the following is an addition to net income?
Amortization Increase in current
Expense asset accounts
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
Reporting Cash Flows 187
24. Boomer’s Auto Sound Company reported 2007 sales of $640,000. The following information is
also available:
Accounts Receivable Balances
Beginning of year $50,000
End of year 80,000
On a statement of cash flows (direct format) what amount would be reported for "cash collected
from customers" for 2007?
a.
$510,000
b.
$670,000
c.
$610,000
d.
$720,000
25. Which of the following are permissible methods of presenting "Cash Flow from Operating
Activities?"
Indirect Method Direct Method
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
26. Which financial statement reports the events that caused changes in a company's assets, liabilities,
and owners equity?
a.
income statement
b.
statement of stockholders' equity
c.
statement of cash flows
d.
balance sheet
27. Under which format(s) of the statement of cash flows would you expect to find a line titled
"Depreciation Expense?"
Direct Method Format Indirect Method Format
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
188 Chapter 5
28. Under which format(s) of the statement of cash flows would you expect to find a line titled "Net
Cash Flow from Operating Activities?"
Indirect Method Format Direct Method Format
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
29. Diversified Ventures reported the following information for fiscal year 2007. Determine cash flow
from operations.
Net income
$1,000,000
Net increase in current asset accounts
300,000
Net decrease in current liability accounts
120,000
Amortization expense
80,000
Depreciation expense
40,000
a.
$700,000
b.
$1,060,000
c.
$1,180,000
d.
$580,000
30. Sales for the year totaled $85,000 with $70,000 of it sold on account. Beginning accounts
receivable was $9,000 while ending accounts receivable totaled $12,000. What amounts of
revenue and cash flow will be reported for the period as a result of these facts?
Revenue Cash Flow
a.
$70,000 $82,000
b.
$85,000 $88,000
c.
$70,000 $88,000
d.
$85,000 $82,000
31. Magnum Company reports 2007 net income of $20,000; depreciation expense of $3,000; an
increase in accounts receivable during the year of $1,600; and $1,000 of interest earned but not
received. Based on this information, net cash flow from operations in 2007 is
a.
$18,600
b.
$19,400
c.
$20,400
d.
$22,600
Reporting Cash Flows 189
32. Given the following information for the last fiscal year
1. Accounts receivable increased by $12,000
2. Net income was $24,000
3. Wages payable decreased by $8,000
4. Amortization expense was $4,000
5. Prepaid expense decreased by $10,000
Determine net cash flow from operating activities.
a.
$(2,000)
b.
$18,000
c.
$28,000
d.
$30,000
e.
$38,000
33. Dairy Delights reported the following information for its most recent fiscal year. Accounts payable
increased $3,900; inventory decreased $2,700; net income was $6,600; and depreciation expense
was $1,500. On the statement of cash flows, net cash flow from operating activities should be
reported as
a.
$1,500
b.
$6,900
c.
$9,300
d.
$14,700
34. Which of the following is a TRUE statement regarding the operating activities section of the
statement of cash flows when the indirect format is used?
a.
it explains the relationship between cash flows for a period and the results of operations
reported on the income statement
b.
it is designed to report to the reader what events caused cash to increase during the period
and what events caused cash to decrease during the period
c.
it results in a slightly higher amount of cash from operations being reported because
depreciation expense is included
d.
it is easier to understand and interpret correctly than when it is prepared using the direct
method
35. Nearly all major corporations use which format for reporting the statement of cash flows?
a.
accrual basis
b.
reconciliation
c.
indirect
d.
direct
190 Chapter 5
36. The indirect format of the cash flow statement reconciles
a.
assets to liabilities and owners' equity
b.
accrual basis net income to cash from operations
c.
accrual basis net income to change in cash balance
d.
sales revenues to accrual basis net income
37. Which of the following has a different effect on net income than it does on cash flow?
a.
payment for wages
b.
cash sale to customer
c.
amortization of a patent
d.
payment of office rent
38. Which of the following is subtracted from net income to arrive at cash from operations?
a.
depreciation
b.
an increase in wages payable
c.
an increase in prepaid rent
d.
a decrease in accounts receivable
39. Which of the following combinations represents adjustments that are made to net income to arrive
at cash from operations?
Increases in current assets Increases in current liabilities
a.
deducted from net income added to net income
b.
deducted from net income deducted from net income
c.
added to net income added to net income
d.
added to net income deducted from net income
40. Which of the following sections of the cash flow statement differs between the direct and indirect
formats?
a.
financing
b.
banking
c.
investing
d.
operating
Reporting Cash Flows 191
41. Which of the following is a FALSE statement?
a.
noncash expenses are added to net income to arrive at cash from operations
b.
payment of a current note payable is a financing activity but payment of interest on that
note is an operating activity
c.
the indirect format reconciles net income to cash flow from operating activities
d.
issuance of stock is a financing activity but payment of dividends on that stock is an
operating activity
42. Use the following information to calculate the cash from operating activities:
Net income
$3,308
Depreciation expense
712
Increase in accounts receivable
500
Decrease in merchandise
640
Increase in supplies
86
Increase in accounts payable
132
Decrease in wages payable
75
Increase in interest payable
56
Decrease in income tax payable
140
a.
$4,047
b.
$3,991
c.
$3,335
d.
$2,569
43. In the long run, a company should attempt to meet most of its cash flow needs through its
a.
income activities
b.
financing activities
c.
operating activities
d.
investing activities
44. Which of the following situations would best indicate strong company performance?
operating cash flow investing cash flow
a.
positive negative
b.
positive positive
c.
negative negative
d.
negative positive
192 Chapter 5
45. Cash outflow from financing activities may indicate that
a.
the company has a lot of good investing opportunities
b.
the company is performing well but does not have a lot of good investing opportunities
c.
the company has no excess cash
d.
the company cannot create enough cash from its operations to meet ongoing needs
46. Which pattern of cash flows would indicate that the company is experiencing serious financial
problems?
operating investing financing
a.
+ - +
b.
- + +
c.
+ - -
d.
+ + -
47. Which of the following is a false statement?
a.
a company can have a net income for the period but have a net decrease in cash from
operations
b.
a company that consistently reports net cash inflow from investing activities has many
growth opportunities
c.
a company that reports a net loss for the period may not necessarily report a net cash
outflow from operating activities
d.
depreciation expense is added back to net income to arrive at cash from operations
48. Net income for FJ Company was $1,000,000. Accounts payable at the beginning of the year was
$200,000. Accounts payable balance at the end of the year was $225,000. When preparing the
cash flow from operating activities under the indirect format, the required adjustment is
a.
add $25,000 to net income
b.
subtract $25,000 from net income
c.
add $200,000 to net income
d.
none
Reporting Cash Flows 193
MATCHING
For each of the following, enter a letter to indicate whether the transaction is an operating
activity, a financing activity, or an investing activity. Assume all purchase and sale transactions
are for cash unless otherwise stated.
a.
= operating activity
b.
= financing activity
c.
= investing activity
1. Collection of principal from a note receivable
2. Amortization of a patent
3. Purchase of an asset used in the company’s daily operations
4. Sale of treasury stock
5. Write-off of a bad debt
6. Depreciation expense
7. Sale of obsolete equipment no longer used in company operations
8. Collection of interest revenue on note receivable in (a) above
9. Borrow cash on a long-term note
10. Payment of a cash dividend
194 Chapter 5
Using the following letters, classify each of the items below according to the section of the
statement of cash flows in which they would be reported.
a.
operating activities, indirect format
b.
investing activities
c.
financing activities
11. Issuance of stock for cash
12. Sale of investment in a subsidiary company
13. Depreciation of equipment
14. Increase in accounts receivable
15. Proceeds from long-term borrowing
16. Increase in taxes payable
17. Payment of dividends
18. Purchase of land
Reporting Cash Flows 195
PROBLEM
1. Salzberg Company has the following information available at year-end:
Sale of bonds payable
$ 75,000
Net additions to plant and equipment
45,000
Purchase of another company
162,500
Cash paid out to suppliers of inventory
86,250
Cash received from customers
125,000
Dividends paid to owners
25,000
Issuance of common stock
40,000
Sale of land
17,500
Required:
Determine the net cash flow from (a) financing activities and (b) investing activities.
2. The RK Corporation reported the following information at the end of its most recent fiscal year:
Cash paid for insurance
$ 2,400
Cash paid for dividends
11,300
Cash paid to suppliers of inventory
59,925
Cash paid for interest
1,875
Cash collected from customers
92,650
Cash received from disposal of equipment
19,000
Cash paid for utilities
4,700
Cash paid to employees
15,750
Cash paid for equipment
32,550
Required:
Determine each of the following amounts. Show your work neatly and clearly.
a.
net cash flow from operating activities (direct basis)
b.
net cash flow from financing activities
c.
net cash flow from investing activities
196 Chapter 5
3. The following information reflects cash flow and other activities of Candy’s Candies, Inc. for the
month ended March 31, 2007:
Paid for equipment
$20,000
Paid to owners
$ 6,000
Paid for income taxes
1,500
Paid to suppliers
20,000
Paid for insurance
100
Depreciation expense
6,500
Paid for interest
200
Received from customers
44,000
Paid for utilities
400
Received from issuing long-term debt
12,000
Paid for advertising
150
Received from sale of land
10,000
Paid to employees
9,000
Use this information to answer the following questions:
a.
What was net cash flow from operating activities for the period?
b.
What was net cash flow from financing activities for the period?
c.
What was net cash flow from investing activities for the period?
d.
What was the net change in cash for the period?
Reporting Cash Flows 197
4. The following information is available for Fun & Games Company for the first month of 2007:
Revenues
$30,000
Expenses
16,000
Increase in accounts receivable
1,400
Decrease in inventory
2,000
Decrease in supplies
800
Increase in accounts payable
2,200
Decrease in wages payable
1,000
Depreciation expense
1,600
Patent expense
600
Required:
Determine the cash flow from operating activities for the month.
198 Chapter 5
5. Use the information provided in each of the following independent situations to answer the
questions.
a.
Cash paid to suppliers for merchandise during a period was $30,000. Accounts
Payable decreased during the period by $4,000. Inventory increased during the
period by $2,500. What was the Cost of Goods Sold for the period?
b.
Interest paid during a period was $6,000. Interest Payable decreased during the
period by $1,500. What was the Interest Expense during the period?
c.
Cash flow from operations for a period was $10,000. Current assets decreased during
the period by $1,200. Current liabilities decreased during the period by $2,500. What
was net income for the period?
d.
Cash collected from customers for a fiscal period was $20,000. Accounts Receivable
increased during the period by $5,000. What was Sales Revenue for the period?

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