Finance Chapter 12 January And December Then The Insurance Expense Would The Cash Payments Made

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subject Pages 14
subject Words 4007
subject Textbook Financial Accounting: The Impact on Decision Makers 10th Edition
subject Authors Curtis L. Norton, Gary A. Porter
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Chapter 12: The Statement of Cash Flows
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
134. Use the information below for Focal Point Corp. for 2016 and 2017 to answer the following question.
Retained earnings, December 31, 2016
$300,000
Retained earnings, December 31, 2017
345,000
Dividends payable, December 31, 2016
19,000
Dividends payable, December 31, 2017
29,000
Net income—2017
150,000
Assume that there were no retained earnings transactions other than those dealing with dividends and net income. How
much dividends did Focal Point declare during 2017?
a.
$95,000
b.
$105,000
c.
$140,000
d.
$150,000
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
135. Use the information below for Barton Shipping Corp. for 2016 and 2017 to answer the following question.
Retained earnings, December 31, 2016
$300,000
Retained earnings, December 31, 2017
345,000
Dividends payable, December 31, 2016
19,000
Dividends payable, December 31, 2017
29,000
Net income—2017
150,000
How much cash did Barton Shipping pay for dividends during 2017?
a.
$95,000
b.
$105,000
c.
$115,000
d.
$140,000
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
136. Use the information below for Dakota Corp. for 2016 and 2017 to answer the following question.
Bonds payable, December 31, 2016
$500,000
Bonds payable, December 31, 2017
800,000
Loss on bond retirement—2017
15,000
Interest expense on bonds—2017
45,000
At the end of 2017, Dakota issued bonds at par value for $800,000 cash. The proceeds from these bonds were used to
retire the $500,000 bond issue outstanding at the end of 2016 (before their maturity date). All interest expense was paid in
cash during 2017.
How much did Dakota pay to retire the $500,000 bond issue during 2017?
a.
$485,000
b.
$500,000
c.
$515,000
d.
$560,000
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
137. Carpet World Inc. reported the following information for 2016 and 2017.
2016
2017
Accounts receivable
$51,000
$57,000
Inventories
42,000
39,000
Accounts payable
43,000
48,000
Net income
60,000
Depreciation expense
8,000
If Carpet World uses the indirect method to prepare the operating activities section of the statement of cash flows, what
amount will be reported as net cash inflow from operating activities for 2017?
a.
$64,000
b.
$66,000
c.
$68,000
d.
$70,000
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
138. Washington Corp. reported the following information for 2016 and 2017.
2016
2017
Accounts receivable
$101,000
$93,000
Prepaid expenses
5,000
6,000
Accounts payable
71,000
76,000
Salaries payable
5,000
4,000
Net income
80,000
Depreciation expense
9,000
Gain on sale of equipment
5,000
If Washington uses the indirect method to prepare the operating activities section of the statement of cash flows, what
amount will be reported as net cash inflow from operating activities for 2017?
a.
$73,000
b.
$83,000
c.
$95,000
d.
$105,000
ANSWER:
c
RATIONALE:
$80,000 + ($101,000 – 93,000) – ($6,000 – 5,000) + ($76,000 – 71,000) – ($5,000 - 4,000) +
$9,000 – 5,000 = $95,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-06 - LO: 12-06
KEYWORDS:
Bloom's: Analyzing
139. Two methods are available to prepare the operating activities section of a statement of cash flows. Which of the
following statements regarding these two methods is false?
a.
If a company uses the indirect method, it must separately disclose the cash payments made for interest and
income taxes.
b.
If a company uses the direct method, it must present a separate schedule which reconciles net income to net
cash from operating activities.
c.
Advocates of the direct method believe that the indirect method reveals too much by telling readers gross
amounts of cash receipts and cash payments from operations.
d.
The FASB prefers the direct method, while most companies use the indirect method in practice.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
140. Which of the following is an addition to net income when the indirect method is used?
a.
an increase in inventory
b.
a loss on sale of equipment
c.
a decrease in accounts payable
d.
an increase in accounts receivable
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
141. Lincoln Company reported the following information in its annual report for 2016.
Cash flows from operating activities
$300,000
Capital Expenditures
225,000
Average amount of debt maturing over the next 5 years
200,000
What is the cash flow adequacy ratio for 2016 for Lincoln Company?
a.
0.38
b.
1.50
c.
1.88
d.
7.50
ANSWER:
a
RATIONALE:
($300,000 – 225,000) / 200,000 = 0.38
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-07 - LO: 12-07
KEYWORDS:
Bloom's: Analyzing
142. Which of the following measures can be used to evaluate a company's ability to meet future debt obligations after
paying income taxes and interest and making capital expenditures?
a.
Earnings per share
b.
Net income
c.
Cash flow adequacy ratio
d.
Net increase or decrease in cash and cash equivalents
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
143. Where would you tell someone to find the information needed to compute the cash flow adequacy ratio?
a.
the balance sheet only
b.
the statement of cash flows and the notes to the statements
c.
the statement of cash flows only
d.
the income statement only
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
144. The financial statement that primarily reflects events related to the operating activities of a business, or the selling of
products or providing services is the _________________________.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
145. The financial statement that summarizes the operating, investing, and financing activities of a business over a period
of time is the ___________________________________.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
146. __________________________ are items which are readily convertible into a known amount of cash and have an
original maturity to the investor of three months or less.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
147. The term cash on the statement of cash flows includes ________________________.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
148. An important __________________________ activity for many companies is acquiring property.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
149. The purchase of merchandise is an important ____________________ activity for a retailer.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
150. The decrease in accounts receivable over a period results in a(n) _________________________ to net income
reported in the operating activities section of the statement of cash flows using the indirect method.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
151. ________________________ activities involve long-term liabilities and stockholders' equity.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
152. Under the ______________________________, a company reports its major classes of gross cash receipts and cash
payments in the operating activities section of the statement of cash flows.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
153. Under the _______________________________, the net cash flow from operating activities is computed by
adjusting net income to remove the effect of all deferrals of past operating cash receipts and payments, and all accruals of
future operating cash receipts or payments.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
154. If the balance of accounts receivable decreases during the year, then cash collections will
____________________________ sales on account for the period.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
155. If the balance of wages payable increases during the year, then the _________________________ for the period will
be greater than the actual cash wages paid in the period.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
156. If the balance of prepaid insurance was the same on January 1, 2016, and December 31, 2016, then the insurance
expense would ____________________ the cash payments made for insurance during the year.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
157. A decrease in retained earnings represents dividends that were ___________________ during the period, not
necessarily those that were paid.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
158. The objective of the indirect method is to reconcile net income to net cash flow from
_______________________________.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
159. ___________________________ is a noncash expense related to plant assets.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
160. Under the indirect method, a loss from the retirement of bonds is _________________________ to net income in the
operating activities section of the statement of cash flows.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
161. The amount of cash provided from operating activities is ______________________ under both the direct and
indirect methods.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
162. ___________________________________ is a measure of a company's ability to meet its future debt obligations
after paying income taxes and interest costs and making capital expenditures.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
163. In place of _____________, a worksheet is a useful device to help in the preparation of a statement of cash flows.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
Use the following codes to indicate how the cash flow effect, if any, of each transaction would be reported on a statement
of cash flows if the operating activities section is prepared using the direct method.
a.
Inflow from operating activity
b.
Outflow from operating activity
c.
Inflow from investing activity
d.
Outflow from investing activity
e.
Inflow from financing activity
f.
Outflow from financing activity
g.
Noncash investing and financing activity
h.
Not reported on statement of cash flows
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
164. Purchased computer equipment for cash.
ANSWER:
d
165. Issued preferred stock.
ANSWER:
e
166. Paid employee salaries and wages.
ANSWER:
b
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
167. Repaid a long-term bank loan.
ANSWER:
f
168. Received payments from credit sales.
ANSWER:
a
169. Issued common stock to acquire land and a building.
ANSWER:
g
170. Declared cash dividends.
ANSWER:
h
171. Paid the cash dividends declared in (g) above.
ANSWER:
f
172. Recorded depreciation for the year.
ANSWER:
h
173. Paid interest on bonds.
ANSWER:
b
Use the following codes to indicate how the cash flow effect, if any, of each transaction or event would be reported on a
statement of cash flows if the operating activities section is prepared using the indirect method.
a.
Operating activity—add to net income
b.
Operating activity—deduct from net income
c.
Inflow from investing activity
d.
Outflow from investing activity
e.
Inflow from financing activity
f.
Outflow from financing activity
g.
Noncash investing and financing activity
h.
Not reported on statement of cash flows
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
174. Purchased store equipment for cash.
ANSWER:
d
175. Issued twenty-year bonds.
ANSWER:
e
176. Increased the accounts receivable balance.
ANSWER:
b
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177. Reissued treasury stock.
ANSWER:
e
178. Increased the accounts payable balance.
ANSWER:
a
179. Issued stock to retire bonds.
ANSWER:
g
180. Declared cash dividends.
ANSWER:
h
181. Paid the cash dividends declared above.
ANSWER:
f
182. Received cash from the sale of securities.
ANSWER:
c
183. Recognized a gain on the sale of the securities above.
ANSWER:
b
184. Recorded depreciation expenses for the year.
ANSWER:
a
185. Obtained a long-term bank loan.
ANSWER:
e
For each of the following items, indicate whether it would appear on a statement of cash
flows prepared using the Direct method (a) or the Indirect method (b).
a.
Direct
b.
Indirect
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
186. Cash sales
ANSWER:
a
187. Gain on early retirement of bonds
ANSWER:
b
188. Depreciation expense
ANSWER:
b
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
189. Decrease in accounts payable
ANSWER:
b
190. Payments on accounts payable
ANSWER:
a
191. Collections on accounts receivable
ANSWER:
a
192. Increase in accounts receivable
ANSWER:
b
193. Net income
ANSWER:
b
Assuming the indirect method for preparing the statement of cash flows is used, indicate whether these items should be
added to net income (A), deducted from net income (D), or not be reported in the operating section of the statement under
the indirect method (NR).
a.
Added (A)
b.
Deducted (D)
c.
Not reported (NR)
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
194. Decrease in prepaid insurance
ANSWER:
a
195. Decrease in accounts payable
ANSWER:
b
196. Purchase of new factory equipment
ANSWER:
c
197. Depreciation expense
ANSWER:
a
198. Increase in accounts receivable
ANSWER:
b
199. Exchange of a note for equipment
ANSWER:
c
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Chapter 12: The Statement of Cash Flows
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Flannery Company uses a worksheet to prepare its statement of cash flows. The company also uses the indirect method
for the Operating Activities section of its statement. For each of the following changes in the balance sheet, indicate what
activity it affects and whether it is an addition or deduction.
a.
Deducted from Operating activity
b.
Added to Operating activity
c.
Deducted from Investing activity
d.
Added to Investing activity
e.
Deducted from Financing activity
f.
Added to Financing activity
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
200. Accounts Receivable increased
ANSWER:
a
201. Land increased
ANSWER:
c
202. Inventory decreased
ANSWER:
b
203. Accounts payable decreased
ANSWER:
a
204. Income taxes payable increased
ANSWER:
b
205. Capital stock increased
ANSWER:
f
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206. The following events occurred at Jack Company during its first year of business:
a.
To establish the company, the two owners contributed a total of $60,000 in exchange for common stock.
b.
Grooming service revenue for the first year amounted to $175,000, of which $50,000 was on account.
c.
Customers owe $15,000 at the end of the year from the services provided on account.
d.
At the beginning of the year, a storage building was rented. The company was required to sign a three-year lease for
$15,000 per year and make a $3,000 refundable security deposit. The first year’s lease payment and the security
deposit were paid at the beginning of the year.
e.
At the beginning of the year, the company purchased a patent at a cost of $120,000 for a revolutionary system to be
used for dog grooming. The patent is expected to be useful for ten years. The company paid 20% down in cash and
signed a four-year note at the bank for the remainder.
f.
Operating expenses, including amortization of the patent and rent on the storage building, totaled $90,000 for the first
year. No expenses were accrued or unpaid at the end of the year.
g.
The company declared and paid a $25,000 cash dividend at the end of the first year.
Required:
1.
Prepare an income statement for the first year.
2.
Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section.
3.
Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is
a difference.
4.
Prepare a balance sheet as of the end of the first year.
ANSWER:
1. Income statement:
Jack Company
INCOME STATEMENT
FOR THE YEAR ENDED XX/XX/XX
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2. Statement of cash flows:
Jack Company
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED XX/XX/XX
Cash Flows from Operating
Activities
Add:
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4. Balance sheet:
Jack Company
BALANCE SHEET
AS OF XX/XX/XX
Assets
Current assets:
Cash [from part (2)]
$90,000
Accounts receivable
15,000
Security deposit
3,000
Total current assets
$108,000
Long-term assets:
Patent
108,000*
Total assets
$216,000
Liabilities and Stockholders’ Equity
Long-term liabilities:
Notes payable
$ 96,000
Stockholders’ equity:
Common stock
$60,000
Retained earnings
60,000**
Total stockholders’ equity
120,000
Total liabilities and stockholders’
equity
$216,000
*$120,000 – $12,000
**Net income of $85,000 less cash dividends of $25,000.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-01 - LO: 12-01
FACC.PONO.13.12-05 - LO: 12-05
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
207. Fairleigh Industries invested its excess cash in the following instruments during December 2016:
Certificate of deposit, due January 31, 2017
$ 45,000
Certificate of deposit, due June 30, 2017
95,000
Investment in City of Cleveland bonds, due May 1, 2018
15,000
Investment in Techno Data stock
66,000
Money market fund
125,000
90-day Treasury bills
95,000
Treasury note, due December 1, 2017
200,000
Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at
December 31, 2016, and for purposes of preparing a statement of cash flows for the year ended December 31, 2016.
ANSWER:
Investments made during December 2016 that qualify as cash equivalents at December 31,
2016:
Certificate of deposit, due January 31, 2017
$ 45,000
Money market fund
125,000
90-day Treasury bills
95,000
Cash equivalents at December 31, 2016
$265,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.12-02 - LO: 12-02
KEYWORDS:
Bloom's: Analyzing
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© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
208. Bucknelli Inc. has the following debt outstanding on December 31, 2016:
10% bonds payable, due 12/31/20
$600,000
Discount on bonds payable
(70,000)
Net bonds payable
$530,000
On this date, Bucknelli retired the entire bond issue by paying cash of $610,000.
Required:
1. Prepare the journal entry to record the bond retirement.
2. Describe how the bond retirement would be reported on the statement of cash flows assuming that Bucknelli uses the
indirect method.
ANSWER:
1. Journal entry: 2016
Dec. 31
Bonds Payable
600,000
Loss on Retirement of Bonds
80,000
Discount on Bonds Payable
70,000
Cash
610,000
To record retirement of bonds:$610,000 –
$530,000.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders'
Equity
Revenues
–
Expenses
=
Net
Income
Bonds
Payable
(600,000)
Loss on
Retirement
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209. The following account balances are taken from the records of Morgantown Corp. for the past two years. (Credit
balances are shown in parentheses.)
December 31,
2017
2016
Plant and equipment
$ 820,000
$ 600,000
Accumulated depreciation
(170,000)
(250,000)
Patents
99,000
86,000
Retained earnings
(825,000)
(675,000)
Other information available for 2017 is as follows:
a. Net income for the year was $240,000.
b. Depreciation expense on plant and equipment was $60,000.
c. Plant and equipment with an original cost of $210,000 were sold for $84,000. (You will need to determine the book
value of the assets sold.)
d. Amortization expense on patents was $11,000.
e. Both new plant and equipment and patents were purchased for cash during the year.
Required:
Indicate, with amounts, how all items related to these long-term assets would be reported in the 2018 statement of cash
flows, including any adjustments in the Operating Activities section of the statement. Assume that Morgantown uses the
indirect method.
ANSWER:
First, determine the accumulated depreciation on the assets sold so that the book value of
those sold can be found:
Accumulated Depreciation
250,000 Beginning balance
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Chapter 12: The Statement of Cash Flows
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Eastern Corp.
Use the following selected data and additional information from the records of Eastern Corp. to answer the questions that
follow.
Balance Sheet Data
2017
2016
Accounts receivable
$ 36,000
$ 42,000
Inventories
28,000
25,000
Accounts payable
31,000
35,000
Salaries payable
2,000
1,000
Equipment
60,000
40,000
Accumulated depreciation
12,000
16,000
Bonds payable
50,000
100,000
Common stock
150,000
100,000
Retained earnings
38,000
20,000
Income Statement Data
2017
Net sales
$420,000
Cost of goods sold
300,000
Operating expenses (excluding depreciation expense)
84,000
Net income
30,000
Gain on sale of equipment (included in net income above)
2,000
Additional information:
(1)
Equipment with a cost of $15,000 and a book value of $3,000 was sold for
$5,000 during 2017.
(2)
Common stock was issued to retire bonds payable during 2017.
(3)
The only items affecting retained earnings in 2017 were net income and
dividends declared and paid.

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