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Statement of Cash Flows
12-41
Be. 187
Lake Norman Company reported net income of $225,000 for the current year. Depreciation
recorded on buildings and equipment amounted to $75,000 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 22,000 32,000
Inventory 50,000 60,000
Accounts payable 12,000 18,000
Instructions
Prepare the cash flows from the operating activities section of the statement of cash flows using
the indirect method.
Be. 188
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
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 Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-42
Solution 188 (10 min.)
Be. 189
Assuming a statement of cash flows is prepared using the indirect method, 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. 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 _____
Statement of Cash Flows
12-43
9. Land is sold for cash at an amount equal to book value IA
10. Patent amortization expense recorded for a period A
Be. 190
Lacey Company prepared the tabulation below at December 31, 2014.
Net Income .................................................. $310,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $45,000 .................................................................... ______
Increase in accounts receivable, $55,000 ..................................................... ______
Decrease in inventory, $12,000 .................................................................... ______
Increase in accounts payable, $6,000 ........................................................... ______
Increase in prepaid expenses, $4,000 .......................................................... ______
Decrease in income taxes payable, $3,500 .................................................. ______
Gain on disposal of land, $7,500 ................................................................... ______
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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-44
*Be. 191
O'Conner Company had total operating expenses of $135,000 in 2014, which included
depreciation expense of $22,000. Also during 2014, prepaid expenses increased by $9,000 and
accrued expenses decreased by $5,500.
Instructions
Calculate the amount of cash payments for operating expenses in 2014 using the direct method.
*Be. 192
a. Sales = $650,500; Accounts receivable increased by $27,500. Calculate cash receipts from
sales.
b. Cost of goods sold = $430,000; inventory decreased by $75,000; accounts payable decreased
by $28,500. Calculate cash payments for purchases.
c. The Income statement shows $12,500 in income taxes. The balance sheet shows an increase
in taxes payable of $1,500. Calculate the cash paid for income taxes.
d. Operating expenses total $75,750; Depreciation expense = $37,200; Prepaid expenses
increased by $15,400; Accrued wages decreased by $10,600. Calculate cash payments for
operating expenses.
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-45
*Be. 193
a. Sales = $850,000; Accounts receivable decreased by $40,000. Calculate cash receipts from
sales.
b. Cost of goods sold = $650,000; inventory increased by $22,000; accounts payable increased
by $28,000. Calculate cash payments for purchases.
c. Income statement shows $25,500 in income taxes. The balance sheet shows an increase in
taxes payable of $3,500. Calculate the cash paid for income taxes.
d. Operating expenses total $103,000; Depreciation expense = $14,000; Prepaid expenses
decreased by $13,000; Accrued liabilities increased by $6,000. Calculate cash payments for
operating expenses.
*Be. 194
The general ledger of the Summer Company provides the following information:
End of Year Beginning of Year
Accounts Receivable $ 64,000 $ 84,000
Inventory 240,000 205,000
Accounts Payable 42,000 62,000
The company's net sales for the year was $2,000,000 and cost of goods sold amounted to
$1,700,000.
Instructions
Compute the following:
(a) Cash receipts from customers
(b) Cash payments to suppliers
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC:
Problem Solving, IMA: FSA
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-46
*Solution 194 (8-12 min.)
*Be. 195
The income statement of Patterson Inc. for the year ended December 31, 2014, reported the
following condensed information:
Service revenue $600,000
Operating expenses 360,000
Income from operations 240,000
Income tax expense 24,000
Net income $216,000
Patterson's balance sheet contained the following comparative data at December 31:
2014 2013
Accounts receivable $50,000 $60,000
Accounts payable 37,000 46,000
Income taxes payable 4,000 2,000
Patterson 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.
Ans: N/A, LO: 6, Bloom: AP, Difficulty: Medium, Min: 9, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-47
*Solution 195 (9-14 min.)
EXERCISES
Ex. 196
Annapolis Company reported net income of $365,000 for the current year. Depreciation recorded
on buildings and equipment amounted to $73,000 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 $22,000 $15,000
Accounts receivable 17,000 32,000
Inventory 55,000 65,000
Prepaid insurance 7,500 5,000
Accounts payable 11,000 18,000
Income taxes payable 600 1,200
Instructions
Prepare the cash flows from the operating activities section of the statement of cash flows using
the indirect method.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 196 (10-15 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-48
Ex. 197
Using the indirect method, calculate the amount of cash flows from operating activities from the
following data:
Net income $199,000
Beginning accounts receivable 22,000
Ending accounts receivable 29,000
Beginning prepaid insurance 5,000
Ending prepaid insurance 2,000
Beginning accounts payable 15,000
Ending accounts payable 14,000
Depreciation expense 50,000
Amortization of intangible asset 6,000
Dividends declared and paid 11,000
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 15, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 197 (15 min.)
Ex. 198
Use the following information to perform the calculations below (using the indirect method). Clearly
label the amount of each answer as positive or negative and show all your calculations.
Net income $401,000 Beginning accounts payable $119,000
Depreciation expense 97,000 Ending accounts payable 146,000
Beginning accounts receivable 420,000 Purchase of long-term assets 612,000
Ending accounts receivable 439,000 Issuance of long-term debt 220,000
Beginning inventory 516,000 Issuance of stock for cash 180,000
Ending inventory 550,000 Issuance of stock for long-term assets 110,000
Beginning prepaid insurance 42,000 Purchase of treasury stock 64,000
Ending prepaid insurance 48,000 Sale of long-term investment at cost 56,000
a. Calculate the amount of cash flows from operating activities. _____________
b. Calculate the amount of cash flows from investing activities. _____________
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-49
Ex. 198 (Cont.)
c. Calculate the amount of cash flows from financing activities. _____________
d. Calculate the net change in cash. _____________
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 198 (20 –25 minutes)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-50
Ex. 199
The following information is available for Mergenthaler Corporation for the year ended December
31, 2014:
Collection of principal on long-term loan to a supplier $16,000
Acquisition of equipment for cash 10,000
Proceeds from the sale of long-term investment at book value 22,000
Issuance of common stock for cash 20,000
Depreciation expense 25,000
Redemption of bonds payable at carrying (book) value 34,000
Payment of cash dividends 6,000
Net income 30,000
Purchase of land by issuing bonds payable 40,000
In addition, the following information is available from the comparative balance sheet for
Mergenthaler at the end of 2014 and 2013:
2014 2013
Cash $148,000 $91,000
Accounts receivable (net) 25,000 15,000
Prepaid insurance 19,000 13,000
Total current assets $192,000 $119,000
Accounts payable $ 30,000 $19,000
Salaries and wages payable 6,000 7,000
Total current liabilities $ 36,000 $26,000
Instructions
Prepare Mergenthaler's statement of cash flows for the year ended December 31, 2014, using the
indirect method.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-51
Solution 199 (22-27 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-52
Ex. 200
Draper Company prepared the tabulation below at December 31, 2014.
Net Income .............................................................. $323,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense, $27,000 ..................................................................... _______
Increase in accounts receivable, $75,000 ..................................................... _______
Decrease in inventory, $18,000 ..................................................................... _______
Amortization of patent, $4,000 ....................................................................... _______
Increase in accounts payable, $7,500 ........................................................... _______
Decrease in interest receivable, $4,000 ........................................................ _______
Increase in prepaid insurance, $7,000 ........................................................... _______
Decrease in income taxes payable, $2,500 ................................................... _______
Gain on disposal of plant assets, $11,000 ..................................................... _______
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.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 200 (10-14 min.)
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-53
Ex. 201
The current sections of Magic Marine Inc.'s balance sheets at December 31, 2013 and 2014, are
presented here.
Magic Marine 's net income for 2014 was $216,000. Depreciation expense was $34,000.
2014
2013
Current assets
Cash
$106,000
$ 99,000
Accounts receivable
91,000
89,000
Inventory
168,000
173,000
Prepaid insurance
28,000
22,000
Total current assets
$393,000
$383,000
Current liabilities
Interest payable
$ 13,000
$ 5,000
Accounts payable
85,000
92,000
Total current liabilities
$ 98,000
$ 97,000
Instructions
Prepare the net cash provided by operating activities section of the company's statement of cash
flows for the year ended December 31, 2014, using the indirect method.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 201 (5 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-54
Ex. 202
The following information is available for Chenard Corporation for the year ended December 31,
2014.
Beginning cash balance
$ 35,000
Accounts payable decrease
3,200
Depreciation expense
76,000
Accounts receivable increase
8,200
Inventory increase
13,000
Net income
269,100
Cash received for sale of land at book value
35,000
Sales revenue
747,000
Cash dividends paid
12,000
Income tax payable increase
4,700
Cash used to purchase building
144,000
Cash used to purchase treasury stock
32,000
Cash received from issuing bonds
206,000
Instructions
Prepare a statement of cash flows using the indirect method.
Ans: N/A, LO: 4, Bloom: AP, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 202 (8 min.)
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-55
Ex. 203
The three accounts shown below appear in the general ledger of Hale Corp. during 2014
Equipment
Date
Debit
Credit
Balance
Jan. 1
Balance
160,000
July 31
Purchase of equipment
70,000
230,000
Sept. 2
Cost of equipment constructed
53,000
283,000
Nov. 10
Cost of equipment sold
59,000
224,000
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
23,000
64,000
Retained Earnings
Date
Debit
Credit
Balance
Jan. 1
Balance
105,000
Aug. 23
Dividends (cash)
19,000
86,000
Dec. 31
Net income
54,000
143,000
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 equipment was $7,000.
Ans: N/A, LO: 4, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 203 (10 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-56
Solution 203 (Cont.)
Ex. 204
The comparative balance sheets for Russell Company appear below:
RUSSELL COMPANY
Comparative Balance Sheet
Dec. 31, 2014 Dec. 31, 2013
Assets
Cash $ 38,000 $13,000
Accounts receivable 18,000 14,000
Inventory 25,000 15,000
Prepaid insurance 7,000 9,000
Stock investments -0- 18,000
Equipment 60,000 30,000
Accumulated depreciation—equipment (18,000) (14,000)
Total assets $130,000 $85,000
Liabilities and Stockholders' Equity
Accounts payable $ 25,000 $ 7,000
Bonds payable 37,000 45,000
Common stock 40,000 23,000
Retained earnings 28,000 10,000
Total liabilities and stockholders' equity $130,000 $85,000
Additional information:
1. Net income for the year ending December 31, 2014, was $30,000.
2. Cash dividends of $12,000 were declared and paid during the year.
3. Stock investments that had a book value of $18,000 were sold for $13,000.
4. Sales for 2014 are $130,000.
Instructions
1. Prepare a statement of cash flows for the year ended December 31, 2014, using the indirect
method.
2. Compute the following cash based ratios:
a. Current cash debt coverage
b. Cash debt coverage
Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Statement of Cash Flows
FOR INSTRUCTOR USE ONLY
12-57
Solution 204 (25-30 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
12-58
Ex. 205
A comparative balance sheet for the Beneteau Corporation is presented below:
BENETEAU CORPORATION
Comparative Balance Sheet
2014 2013
Assets
Cash $ 37,000 $ 31,000
Accounts receivable (net) 80,000 60,000
Prepaid insurance 22,000 17,000
Land 18,000 40,000
Equipment 70,000 60,000
Accumulated depreciation (20,000) (13,000)
Total Assets $207,000 $195,000
Liabilities and Stockholders' Equity
Accounts payable $ 12,000 $ 6,000
Bonds payable 27,000 19,000
Common stock 140,000 115,000
Retained earnings 28,000 55,000
Total liabilities and stockholders' equity $207,000 $195,000
Additional information:
1. Net loss for 2014 is $12,000. Net sales for 2014 are $250,000.
2. Cash dividends of $15,000 were declared and paid in 2014.
3. Land was sold for cash at a loss of $2,000. 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. $12,000 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
1. Prepare a statement of cash flows for the year ended 2014 using the indirect method.
2. Compute the following cash based ratios:
a. Current cash debt coverage
b. Cash debt coverage
Ans: N/A, LO: 4,5, Bloom: AP, Difficulty: Medium, Min: 22, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
