Final Exam the entry to record collection in full within the discount period

Final Exam: Chapters 1-14 Name _________________________

Financial Accounting, 9e Instructor ______________________

Section # _______ Date _________

Part

I

II

III

IV

V

VI

VII

VIII

Total

Points

90

24

15

12

15

14

15

200

Score

PART I — MULTIPLE CHOICE (90 points)

Instructions

Designate the best answer for each of the following questions.

Questions 1 and 2 are based on the following information:

Long Company recently incurred the following costs:

(1) Purchase price of land and dilapidated building $280,000

(2) Real estate broker’s commission 14,000

(3) Net demolition costs of dilapidated building 39,000

(4) Excavation costs for new building 44,000

(5) Architect’s fees and building permits 30,000

(6) Costs associated with new building construction 650,000

(7) Costs associated with new furniture and equipment 250,000

(8) Actual interest cost during building construction 168,000

(9) Actual interest cost after completion of building construction 120,000

(10) Cost of walks, driveways, and parking lot 55,000

____ 1. The building should be recorded on Long’s books at

a. $580,000.

b. $624,000.

c. $663,000.

d. $892,000.

____ 2. Land should be recorded on Long‘s books at

a. $280,000.

b. $294,000.

c. $333,000.

d. $363,000.

Test Bank for Financial Accounting, Ninth Edition

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____ 3. Larson Supply bought equipment at a cost of $72,000 on January 2, 2012. It originally

had an estimated life of ten years and a salvage value of $12,000. Larson uses the

straight-line depreciation method. On December 31, 2015, Larson decided the useful

life likely would end on December 31, 2019, with a salvage value of $6,000. The

depreciation expense recorded on December 31, 2015, should be

a. $6,000.

b. $6,600.

c. $9,600.

d. $13,200.

____ 4. In order to be relevant, accounting information must

a. be neutral.

b. be verifiable.

c. have predictive value.

d. be a faithful representation.

____ 5. Riodan Company sold old equipment for $105,000. The equipment had a cost of

$210,000 and accumulated depreciation of $126,000. The entry to record the sale of

the equipment would include a

a. loss on disposal of $105,000.

b. gain on disposal of $105,000.

c. loss on disposal of $21,000.

d. gain on disposal of $21,000.

____ 6. The cost of intangible assets should be

a. amortized over the assets’ estimated useful life, or legal life, whichever is shorter.

b. amortized over a period not exceeding 5 years.

c. amortized over the assets’ estimated useful life.

d. charged to an expense account at acquisition.

____ 7. In a period of rising prices, the inventory method that results in the lowest income tax

payment is

a. LIFO.

b. FIFO.

c. average cost.

d. specific identification.

____ 8. On November 30, Thatcher Company issued a $15,000, 6%, 4-month note to the

National Bank. The entry on Thatcher’s books to record the payment of the note at

maturity will include a credit to Cash for

a. $15,000.

b. $15,900.

c. $15,300

d. $15,600

____ 9. The inventory methods that result in the most current costs in the income statement

and balance sheet are

Income Statement Balance Sheet

a. FIFO FIFO

b. LIFO FIFO

c. LIFO LIFO

d. FIFO LIFO

Test Bank for Financial Accounting, Ninth Edition

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____ 10. The following information is available for Lighten Company:

Sales $130,000 Freight-in $10,000

Ending Merchandise Inventory 12,000 Purchase Returns and Allowances 5,000

Purchases 100,000 Beginning Merchandise Inventory 15,000

Lighten’s cost of goods sold is

a. $125,000.

b. $120,000.

c. $108,000.

d. $105,000.

____ 11. If ending inventory is understated, net income and assets will be

Net Income Assets

a. Understated Understated

b. Overstated Overstated

c. Understated Unaffected

d. None of the above.

____ 12. With regard to the accounts used to record freight costs,

a. Freight-out is added to cost of goods sold.

b. Freight-out has a normal debit balance .

c. Freight-out is recorded when freight terms are FOB shipping point.

d. Freight-out is a contra account to Sales.

____ 13. The assumption that assumes a company will continue in operation long enough to

carry out its existing objectives is the

a. economic entity assumption.

b. going concern assumption.

c. monetary unit assumption.

d. time period assumption.

____ 14. All of the following are intangible assets except

a. patents.

b. land improvements.

c. goodwill.

d. franchises.

____ 15. A daily cash count of register receipts made by a cashier department supervisor

demonstrates an application of which of the following internal control principles?

a. Documentation procedures

b. Segregation of duties

c. Establishment of responsibility

d. Independent internal verification

____ 16. When the allowance method is used for bad debts, the entry to write off an individual

account known to be uncollectible involves a

a. debit to an expense account.

b. credit to an expense account.

c. credit to the allowance account.

d. debit to the allowance account.

Test Bank for Financial Accounting, Ninth Edition

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____ 17. Shipping terms of FOB destination mean that the

a. purchaser is responsible for the shipping charges.

b. shipping charges are debited to Freight-Out.

c. items should be in the purchaser’s inventory account at year-end if the items are in

transit.

d. both (a) and (c) above.

____ 18. Bates Company has a $300,000 balance in Accounts Receivable and a $1,000 debit

balance in Allowance for Doubtful Accounts. Credit sales for the period totaled

$1,800,000. What is the amount of the bad debt adjusting entry if Bates uses a

percentage of receivables basis at 5%?

a. $15,000

b. $14,000

c. $16,000

d. $15,050

____ 19. With regard to accounting for a merchandising company versus a service company,

which of the following is false?

a. Additional accounts and entries are typically required for a merchandising

company.

b. Both retail and wholesale enterprises generally use accounting techniques of a

merchandising company.

c. The process of measuring net income is conceptually different.

d. There are just as many steps as in the accounting cycle for a merchandising

company.

____ 20. If merchandise is sold for $3,000 subject to credit terms of 2/10, n/30, the entry to

record collection in full within the discount period would include a

a. credit to Sales Discounts for $60.

b. credit to Cash for $2,940

c. credit to Accounts Receivable for $60.

d. none of These answer choices are correct.

____ 21. Barker Company‘s records show the following for the month of January:

Balance, Retained Earnings at January 1 ………………………….. $600,000

Balance, Retained Earnings at January 31 ………………………… 900,000

Revenues ……………………………………………………………………… 1,005,000

Dividends Declared ………………………………………………………… 45,000

Expenses for January were

a. $960,000.

b. $1,005,000.

c. $705,000.

d. $660,000.

Test Bank for Financial Accounting, Ninth Edition

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22. Jetson Company‘s financial information is presented below.

Sales $ ???? Purchase Returns and Allowances $ 30,000

Sales Returns and Allowances 60,000 Ending Merchandise Inventory 70,000

Net Sales 700,000 Cost of Goods Sold 360,000

Beginning Merchandise Inventory ???? Gross Profit ????

Purchases 340,000

The missing amounts above are:

Sales Beginning Inventory Gross Profit

a. $760,000 $90,000 $340,000

b. $640,000 $90,000 $400,000

c. $760,000 $120,000 $340,000

d. $640,000 $120,000 $400,000

____ 23. The necessity of making adjusting entries relates mostly to the

a. economic entity assumption.

b. time period assumption.

c. going concern assumption.

d. monetary unit assumption.

____ 24. The preparation of closing entries

a. is an optional step in the accounting cycle.

b. results in zero balances in all accounts at the end of the period so that they are

ready for the following period’s transactions.

c. is necessary before financial statements can be prepared.

d. results in transferring the balances in all temporary accounts to retained earnings.

____ 25. Allowance for Doubtful Accounts is reported in the

a. balance sheet as a contra asset.

b. balance sheet as a contra liability account.

c. income statement under other expenses and losses.

d. income statement under other revenues and gains.

____ 26. Current liabilities are obligations that are reasonably expected to be paid from

Existing Creation of Other

Current Assets Current Liabilities

a. No No

b. Yes Yes

c. Yes No

d. No Yes

____ 27. Which of the following errors will cause a trial balance to be out of balance? The entry

to record a payment on account was

a. not posted at all.

b. posted as a debit to Cash and a credit to Accounts Payable.

c. posted as a debit to Cash and a debit to Accounts Payable.

d. posted as a debit to Accounts Receivable and a credit to Cash.

Test Bank for Financial Accounting, Ninth Edition

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____ 28. The primary accounting standard-setting body in the United States is the

a. Securities and Exchange Commission.

b. Accounting Principles Board.

c. Financial Accounting Standards Board.

d. Internal Revenue Service.

____ 29. Lawford Company‘s equipment account increased $800,000 during the period; the

related accumulated depreciation increased $60,000. New equipment was purchased

at a cost of $1,400,000 and used equipment was sold at a loss of $40,000.

Depreciation expense was $200,000. Proceeds from the sale of the used equipment

were

a. $420,000.

b. $500,000.

c. $560,000.

d. $640,000.

____ 30. Which of the following would not be included in the operating activities section of a

statement of cash flows?

a. Cash inflows from returns on loans (i.e., interest)

b. Cash inflows from returns on equity securities (i.e., dividends)

c. Cash outflows to governments for taxes

d. Cash outflows to reacquire treasury stock

____ 31. Which of the following combinations presents correct examples of liquidity, profitability,

and solvency ratios, respectively?

Liquidity Profitability Solvency

a. Inventory turnover Inventory turnover Times interest earned

b. Current ratio Inventory turnover Debt to assets ratio

c. Accounts receivable turnover Return on assets Times interest earned

d. Average days collection Payout ratio Return on assets

____ 32. Nadine Manufacturing declared a 10% stock dividend when it had 200,000 shares of

$5 par value common stock outstanding. The market price per common share was

$12 per share when the dividend was declared. The entry to record this dividend

declaration includes a credit to

a. Stock Dividends of $100,000.

b. Paid-in Capital in Excess of Par – Common Stock for $140,000.

c. Common Stock for $100,000.

d. Stock Dividends for $240,000.

____ 33. Which of the following pairs of terms in the area of financial statement analysis are

synonymous?

a. Ratio — Trend

b. Horizontal — Trend

c. Vertical — Ratio

d. Horizontal — Ratio

Test Bank for Financial Accounting, Ninth Edition

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____ 34. Which of the following statements is true?

a. Trading securities are debt securities that the investor has the intent to hold to

maturity.

b. Trading securities are securities bought and held primarily for sale in the near

term.

c. Trading securities are securities that may be sold in the future.

d. Trading securities are reported at cost in the balance sheet.

____ 35. Dividends received are credited to what account under the equity method and cost

method, respectively?

Equity Method Cost Method

a. Stock Investments Dividend Revenue

b. Dividend Revenue Dividend Revenue

c. Stock Investments Stock Investments

d. Dividend Revenue Stock Investments

____ 36. In accounting for available-for-sale securities, the Unrealized Loss—Equity account

should be classified as a

a. liability on the balance sheet.

b. loss on the income statement.

c. deduction in the stockholders’ equity section of the balance sheet.

d. contra asset on the balance sheet.

____ 37. Barr Corporation has the following stock outstanding:

5% Preferred Stock, $100 Par $2,000,000

Common Stock, $50 Par 4,000,000

No dividends were paid the previous 2 years. If Barr declares $500,000 of dividends in

the current year, how much will preferred stockholders receive if the preferred stock is

cumulative?

a. $200,000

b. $300,000

c. $400,000

d. $100,000

____ 38. The statement of cash flows is a(n)

a. required supplemental financial statement.

b. required basic financial statement.

c. optional basic financial statement.

d. optional supplementary statement.

____ 39. The directors of Chandler Corp. are trying to decide whether they should issue par or

no par stock. They are considering two alternatives for their new stock, which they are

assuming will be issued at $8 per share. The alternatives are: (A) $5 par value and (B)

no par, no stated value. If 100,000 shares are issued, what amount will be credited to

the common stock account in each of these cases?

(A) (B)

a. $100,000 $800,000

b. $100,000 $800,000

c. $800,000 $800,000

d. $500,000 $800,000

Test Bank for Financial Accounting, Ninth Edition

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____ 40. Dixon Corp. purchased 20,000 shares of its own $2 par common stock at a cost of

$13 per share on April 30, 2015. The stock was originally issued at $11 per share. The

entry to record the purchase of the stock should include a debit to

a. Common Stock for $40,000.

b. Treasury Stock for $40,000.

c. Common Stock for $260,000.

d. Treasury Stock for $260,000.

____ 41. What is the effect on total paid-in capital of a stock dividend and a stock split,

respectively?

Stock Dividend Stock Split

a. Increase No effect

b. No effect No effect

c. Decrease No effect

d. Decrease Decrease

____ 42. Which of the following should be classified as an extraordinary item?

a. Effects of major casualties not infrequent in the area

b. Write-off of a significant amount of receivables

c. Loss from the expropriation of facilities by a foreign government

d. Losses due to a bitter, lengthy labor strike

____ 43. A Discount on Bonds Payable account

a. is a contra account to Bonds Payable.

b. will cause interest expense to be less than cash interest payable.

c. is increased over the life of the bond until it equals the bond’s face value.

d. is an adjunct account to Bonds Payable.

____ 44. In order to be considered extraordinary, an item must be

a. frequent and uninsured.

b. unusual and uninsured.

c. uninsured and infrequent.

d. infrequent and unusual.

____ 45. If the market rate of interest is lower than the stated rate, bonds will sell at an amount

a. equal to face value.

b. not determinable from the given information.

c. lower than face value.

d. higher than face value.

Test Bank for Financial Accounting, Ninth Edition

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PART II — MATCHING (24 points)

Instructions

Designate the terminology that best represents the definition or statement given below by placing

the identifying letter(s) in the space provided. No letter should be used more than once.

A. Additions and improvements X. Full disclosure principle

B. Allowance method Y. Going-concern assumption

C. Amortization Z. Held-to-maturity securities

D. Asset turnover AA. Internal control

E. Average-cost method AB. Last-in, first-out method

F. Book value AC. Liquidity

G. Capital expenditure AD. Expense recognition principle.

H. Debt to assets ratio AE. Materiality constraint

I. Consistency AF. Monetary unit assumption

J. Contra asset account AG. Net purchases

K. Cost method AH. Periodic inventory system

L. Credit memorandum AI. Permanent accounts

M. Debit memorandum AJ. Perpetual inventory system

N. Declining-balance method AK. Ratio analysis

O. Depreciable cost AL. Relevance

P. Depreciation AM. Retained earnings

Q. Direct write-off method AN. Revenue expenditure

R. Discontinued operations AO. Revenue recognition principle

S. Earnings per share AP. Stock dividend

T. Economic entity assumption AQ. Stock split

U. Equity method AR. Temporary accounts

V. Extraordinary items AS. Time period assumption

W. First-in, first-out method AT. Units-of-activity method

___ 1. The periodic write-off of an intangible asset.

___ 2. The total amount subject to depreciation.

___ 3. The principle that efforts be matched with accomplishments.

___ 4. An expenditure charged against revenues as an expense when incurred.

___ 5. The inventory costing method that assumes that the costs of the earliest goods

purchased are the first to be recognized as cost of goods sold.

___ 6. Measures the percentage of total assets provided by creditors.

___ 7. An inventory costing method that assumes that the latest units purchased are the first to

be allocated to cost of goods sold.

Test Bank for Financial Accounting, Ninth Edition

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PART II — MATCHING (cont.)

___ 8. An assumption that economic events can be identified with a particular unit of

accountability.

___ 9. A quality of information that indicates the information makes a difference in a decision.

___ 10. An assumption that the economic life of a business can be divided into artificial time

periods.

___ 11. This method of accounting for uncollectible accounts is required when bad debts are

significant in size.

___ 12. An accounting method in which cash dividends received are credited to Dividend

Revenue.

___ 13. Used by a bank when a previously deposited customer’s check “bounces” because of

insufficient funds.

___ 14. The assumption that the enterprise will continue in operation long enough to carry out its

existing objectives and commitments.

___ 15. A system in which detailed records are not maintained and cost of goods sold is

determined only at the end of an accounting period.

___ 16. The ability to pay maturing obligations and meet unexpected needs for cash.

___ 17. The methods and measures adopted within a business to safeguard its assets and

enhance the accuracy and reliability of its accounting records.

___ 18. Revenue, expense, and dividends accounts whose balances are transferred to retained

earnings at the end of an accounting period.

___ 19. A technique for evaluating financial statements that expresses the relationship among

selected financial statement data.

___ 20. A depreciation method that applies a constant rate to the declining balance book value

of the asset and produces a decreasing annual depreciation expense over the useful life

of the asset.

___ 21. A pro rata distribution of a corporation’s own stock to its stockholders.

___ 22. Events and transactions that are unusual in nature and infrequent in occurrence.

___ 23. The disposal of a significant component of a business.

___ 24. The net income earned by each share of outstanding common stock.

Test Bank for Financial Accounting, Ninth Edition

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PART III — ADJUSTING ENTRIES (15 points)

The trial balance of Timlin Company shows the following balances for selected accounts on

November 30, 2015

Prepaid Insurance $12,000 Unearned Service Revenue $ 4,800

Equipment 60,000 Notes Payable 25,000

Accumulated Depreciation-Equip. 8,800 Interest Payable 500

Instructions: Using the additional information given below, prepare the appropriate monthly

adjusting entries at November 30. Show computations.

A. Revenue for services rendered to customers, but not yet billed, totaled $6,000 on November

30.

_______________________________________________________________________

B. The note payable is a 6%, 1-year note issued September 1, 2015.

_______________________________________________________________________

C. The equipment was purchased on January 2, 2014, for $60,000 with an estimated life of 10

years and an estimated salvage value of $12,000. Timlin uses the straight-line depreciation

method.

_______________________________________________________________________

D. An insurance policy was acquired on June 30, 2015; the premium paid for 2 years was

$12,000

_______________________________________________________________________

E. Timlin received $4,800 fees in advance from a customer on November 1, 2015. Three-

fourths of this amount was earned by November 30.

_______________________________________________________________________

Test Bank for Financial Accounting, Ninth Edition

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PART IV — BANK RECONCILIATION (15 points)

A review of the November 30 bank statement and other data of James Company reveals the

following:

1. Balance per bank statement on November 30 ……………………………………………. $17,300

2. Balance per books on November 30 …………………………………………………………. $12,173

3. NSF Check from J. Smith in payment of account ………………………………………… $480

4. Collection of $3,000, 4-month, 9% note with a $30 collection fee. No interest

had been accrued ……………………………………………………….…………………………. $3,060

5. Deposits in transit at November 30 …………………………………………………………… $4,200

6. Outstanding checks at November 30 ………………………………………………………… $6,920

7. A check written by James to Green for equipment on November 10 was

recorded as $463 but correctly cleared the bank as $436.

8. A check drawn on the account of Johns Company for $200 was mistakenly

charged against James’ account by the bank.

Instructions: Prepare the November 30 (a) bank reconciliation (omit heading) and (b) related

journal entries.

(a) BANK RECONCILIATION:

Amount Amount

Balance per bank statement $17,300 Balance per books $12,173

Adjusted balance per bank $ Adjusted balance per books $

(b) ENTRIES:

Account Titles Debit Credit

Test Bank for Financial Accounting, Ninth Edition

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PART V — INVENTORY (12 points)

Finley Company had a beginning inventory of 200 units at a cost of $12 per unit on August 1.

During the month, the following purchases and sales were made.

Purchases Sales

August 4 250 units at $13 August 7 150 units

August 15 350 units at $15 August 11 100 units

August 28 200 units at $14 August 17 250 units

August 24 220 units

Finley uses a periodic inventory system.

Instructions

Determine ending inventory and cost of goods sold under (a) average cost, (b) FIFO, and (c)

LIFO.

(a) Average cost:

Ending inventory = $____________; cost of goods sold = $_____________.

(b) FIFO:

Ending inventory = $_____________; cost of goods sold = $____________.

(c) LIFO:

Ending inventory = $_____________; cost of goods sold = $____________.

Test Bank for Financial Accounting, Ninth Edition

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PART VI — DEPRECIATION (15 points)

Thomas Company purchased equipment for $760,000 cash on January 1, 2014. The estimated

life is 5 years or 1,000,000 units; salvage value is estimated at $60,000. Actual activity was

180,000 units in 2014, and 200,000 units in 2015.

Instructions: Compute the annual depreciation expense for 2014 and 2015, and book value at

December 31, 2015, under the following depreciation methods: (a) units-of-activity, (b) straight-

line, and (c) double-declining-balance.

(a) Units-of-activity

2014 depreciation = $_______________.

2015 depreciation = $_______________.

12/31/15 book value = $_______________.

(b) Straight-line

2014 depreciation = $_______________.

2015 depreciation = $_______________.

12/31/15 book value = $_______________.

(c) Double-declining-balance

2014 depreciation = $_______________.

2015 depreciation = $_______________.

12/31/15 book value = $_______________.

Test Bank for Financial Accounting, Ninth Edition

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PART VII — RATIO ANALYSIS (14 points)

The condensed financial statements of Howard Corporation for 2015 are presented below.

Howard Corporation Howard Corporation

Balance Sheet Income Statement

December 31, 2015 For the Year Ended December 31, 2015

Assets Revenues $2,000,000

Current assets Expenses

Cash and short-term Cost of goods sold 1,020,000

investments $ 40,000 Operating expenses 730,000

Accounts receivable 70,000 Interest expense 50,000

Inventories 140,000 Total expenses 1,800,000

Total current assets 250,000 Income before income taxes 200,000

Property, plant, and Income tax expense 80,000

equipment (net) 750,000 Net income $ 120,000

Total assets $1,000,000

Liabilities and Stockholders’ Equity

Current liabilities $ 100,000

Long-term liabilities 350,000

Common stockholders’ equity 550,000

Total liabilities and

stockholders‘ equity $1,000,000

Additional data as of December 31, 2014: Inventory = $100,000; Total assets = $800,000;

Common stockholders’ equity = $450,000.

Instructions: Compute the following listed ratios for 2015 showing supporting calculations.

(a) Current ratio = _________________________________________________________ .

(b) Debt to assets ratio = ____________________________________________________ .

(c) Times interest earned = __________________________________________________ .

(d) Inventory turnover = _____________________________________________________ .

(e) Profit margin = _________________________________________________________ .

(f) Return on common stockholders’ equity = ___________________________________ .

(g) Return on assets = _____________________________________________________ .

Test Bank for Financial Accounting, Ninth Edition

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PART VIII — STATEMENT OF CASH FLOWS (15 points)

Presented below is information related to the operations of Simpson Corporation.

December

2015 2014 2015

Cash $120,000 $ 80,000 Sales revenue $760,000

Accounts receivable 110,000 96,000 Cost of goods sold 380,000

Inventory 60,000 44,000 Gross profit 380,000

Prepaid expenses 30,000 40,000 Depreciation expense 28,000

Land 78,000 40,000 Other operating expenses 266,000

Buildings 200,000 200,000 Income from operations 86,000

Accumulated depreciation— Loss on disposal of plant

buildings (34,000) (16,000) assets 4,000

Equipment 116,000 160,000 Income before income taxes 82,000

Accumulated depreciation— Income tax expense 26,000

equipment (30,000) (40,000) Net income $ 56,000

Total $650,000 $604,000

Accounts payable $ 80,000 $ 58,000

Bonds payable 0 200,000

Common stock 400,000 200,000

Retained earnings 170,000 146,000

Total $650,000 $604,000

Additional information:

(a) In 2015, Simpson declared and paid a cash dividend.

(b) The company converted $200,000 of bonds into common stock.

(c) Equipment with a cost of $44,000 and a book value of $24,000 was sold for $20,000. Land

was acquired for cash.

Instructions:

Prepare a statement of cash flows in proper form for 2015, using the indirect method.

Test Bank for Financial Accounting, Ninth Edition

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PART VIII — STATEMENT OF CASH FLOWS (cont.)

____________________________________________________________________________

Test Bank for Financial Accounting, Ninth Edition

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Solutions — Final Exam: Chapters 1–14

Test Bank for Financial Accounting, Ninth Edition

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Test Bank for Financial Accounting, Ninth Edition

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Test Bank for Financial Accounting, Ninth Edition

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