Preview Extract
Chapter 14
The Statement of Cash Flows
Multiple Choice Questions
1. How will a company classify ‘proceeds received from the issuance of long-term bonds’ on
its statement of cash flows?
a. Cash provided from operations
b. Cash used in operations
c. Cash provided from investing activities
d. Cash provided from financing activities
Answer: D
2. How will a company classify the exchange of common stock for land on its statement of
cash flows?
a. An operating activity
b. An investing activity
c. A financing activity
d. A footnote
Answer: D
3. How will a company classify money paid for the acquisition of land on its statement of
cash flows?
a. Cash provided from operations
b. Cash used in financing activities
c. Cash provided from investing activities
d. Cash used for investing activities
Answer: D
4. Equipment that cost $10,000 that had a book value of $6,000 was sold for $7,000. Data
from the comparative balance sheets are:
Equipment purchased during 2009 cost
a. $120,000.
b. $110,000.
c. $145,000.
d. $10,000.
Answer: A
5. If an investor is interested in the solvency of a company, he/she should analyze the
a. balance sheet and income statement.
b. income statement, balance sheet, and statement of cash flows.
c. balance sheet and statement of cash flows.
d. statement of cash flows only.
Answer: C
6. How will a company classify the sale of treasury stock at an amount equal to its cost on its
statement of cash flows?
a. Operating activity
b. Investing activity
c. Extraordinary activity
d. Financing activity
Answer: D
7. How will a company classify money paid to suppliers on its statement of cash flows?
a. Cash provided from operations
b. Cash used in operations
c. Cash provided from investing activities
d. Cash used in financing activities
Answer: B
8. Payments for purchases of property, plant, and equipment and other productive assets are
classified as cash outflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.
Answer: C
9. How will a company classify money paid for inventory acquisitions on its statement of
cash flows?
a. Cash provided from operations
b. Cash used in operations
c. Cash provided from investing activities
d. Cash used for investing activities
Answer: B
10. How will a company classify money received from selling equipment no longer used in
operations on its statement of cash flows?
a. Cash provided from operations
b. Cash provided from financing activities
c. Cash provided from investing activities
d. Cash used for investing activities
Answer: C
11. A company uses the indirect method of preparing the statement of cash flows. Current
year depreciation expense can be found on the
a. income statement and statement of cash flows.
b. balance sheet and income statement.
c. statement of cash flows and balance sheet.
d. income statement and statement of comprehensive income.
Answer: A
12. A company uses the direct method of preparing the statement of cash flows. Current year
depreciation expense can be found on the
a. balance sheet and income statement.
b. income statement and statement of cash flows.
c. statement of cash flows and balance sheet.
d. income statement only.
e. statement of cash flows only.
Answer: D
13. An investor is interested in assessing the effectiveness of a company’s cash management.
Where will the investor look to evaluate this?
a. Statement of cash flows
b. Income statement
c. Balance sheet
d. Company’s bank statements
Answer: A
14. A company declares cash dividends on the last day of the year. Payment will be made
during the following fiscal period. Cash flows
a. from operations will be less than if dividends were not declared.
b. from operations will be more than if dividends were not declared.
c. from investing activities will be less than if dividends were not declared.
d. from financing activities will be less than if dividends were not declared.
e. will be the same as if dividends had not been declared.
Answer: E
15. What is reported on the statement of cash flows?
a. Operating, investing, and financing activities of an entity for a period of time
b. All revenues and expense listed by operating, financing, and operating activity
c. Operating, investing, and financing activities of an entity at the balance sheet date
d. A detail of all incoming and outgoing cash flows of a business
Answer: A
16. Which statement is True with respect to the preparation of the cash flows from operating
activities’ section?
a. It can be calculated by using the direct or indirect methods.
b. Cash flows are calculated as the difference between revenues and expenses.
c. It is always equal to accrual accounting income.
d. Cash payments for depreciation and dividends are reported in the operating activates
sections.
Answer: A
17. Which one of the following transactions is an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of cash dividend
d. Issuance of bonds payable at a discount
Answer: A
18. How will a company classify the income tax payments on its statement of cash flows?
a. Operating activities
b. Taxing activities
c. Lending activities
d. Financing activities
Answer: A
19. A company uses straight-line instead of the units of production method of depreciation.
Assuming a tax rate of zero, which statement is True as a result of its choice of depreciation
methods?
a. Cash flows from operations will be less than under the straight-line method
b. Cash flows from operations will be more than under the straight-line method
c. Cash used for investing activities will be more than under the straight-line method
d. Cash used for investing activities will be less than under the straight-line method.
e. Cash flows are the same as if the straight-line method had been used.
Answer: E
20. An acquisition of land by signing a 10-year mortgage payable is reported on the statement
of cash flows as
a. an operating activity.
b. an investing activity.
c. a financing activity.
d. a footnote.
Answer: D
21. Which one of the following is consistent with a company recording a large operating loss
but still having healthy cash flows from operations?
a. A large amount of depreciation and/or amortization expense
b. An increase in accounts receivable and inventory
c. A decrease in accounts payable
d. All sales are on a cash basis.
Answer: A
22. Which one of the following is consistent with a company recording a large operating
income but having a net cash outflow from operations?
a. A great amount of depreciation expense
b. An increase in accounts receivable and inventory
c. An increase in accounts payable
d. Acquisition of new plant assets for cash
Answer: B
23. Which one of the following is added to net income in determining cash flows from
operations?
a. Decrease in amounts paid to reduce long-term notes
b. Decrease in accounts payable
c. Depreciation or amortization
d. Cash received from selling treasury stock
Answer: C
24. Which one of the following is added to net income in determining cash flows from
operations?
a. Amortization of intangibles
b. Decrease in accounts payable
c. Increase in accounts receivable
d. A gain on the sale of plant assets
Answer: A
25. Which one of the following is added to net income in determining cash flows from
operations?
a. Cash dividends paid
b. Increase in accounts payable and decrease in accounts receivable
c. Decrease in accounts receivable and cash dividends declared
d. Increase in prepaid expenses
Answer: B
26. Which one of the following is added to net income in determining cash flows from
operations?
a. Increase in inventory
b. Decrease in wages payable
c. Loss from sale of land
d. Gain from selling treasury stock above its original cost
Answer: C
27. Which one of the following is subtracted from net income in determining cash flows from
operations?
a. Loss from sale of land
b. Depreciation expense
c. Stock dividends declared and distributed
d. Gain from sale of equipment
Answer: D
28. Which one of the following is subtracted from net income in determining cash flows from
operations?
a. Increase in prepaid insurance
b. Increase in accounts payable
c. Decrease in accounts receivable
d. Decrease in prepaid insurance
Answer: A
29. The primary purpose of the statement of cash flows is to provide information
a. about the revenue and expenses of an entity’s operations during a period.
b. that predicts future cash flows.
c. about the operating, investing, and financing activities of an entity during a period.
d. about the entity's ability to meet its obligations, its ability to pay dividends, and its needs
for external financing.
Answer: C
30. An increase in inventory is reported in a statement of cash flows using the indirect
method as a(n)
a. addition to net income in arriving at net cash flows from operating activities.
b. deduction from net income in arriving at net cash flows from operating activities.
c. cash outflow from investing activities.
d. cash outflow from financing activities.
Answer: B
31. Which one of the following would you expect to find as part of cash flows from investing
activities?
a. The issuance of common stock in exchange for a factory
b. Cash dividends paid
c. Cash inflows from the proceeds of a sale of a building
d. The write-off of accounts receivable
Answer: C
32. When preparing a statement of cash flows using the indirect method, an increase in
inventory will result in an adjustment to reported net income because
a. cost of goods sold on an accrual basis is less than on a cash basis.
b. inventory was paid for with cash, but is still on hand at the end of the period.
c. acquisition of inventory is an investment activity.
d. inventory purchased created smaller cash outflows than cash inflows received from
inventory sales.
Answer: B
33. In determining cash flow from operating activities, which of the following adjustments
will be made as a result of an increase in accounts receivable during a period?
a. An addition to net income when the direct method is used
b. An addition to net income when the indirect method is used
c. A deduction to net income when the direct method is used
d. A deduction to net income when the indirect method is used
Answer: D
34. In determining net cash flows from operating activities, a decrease in salaries payable
during a period
a. means that income on an accrual basis is equal to income on a cash basis.
b. must be added to net income under the indirect method.
c. creates a cash outflow to pay for salaries that were previously accrued.
d. creates a cash inflow from employees.
Answer: C
Use the information that follows concerning Calvin Corporation for the year ending
December 31, 2009, to answer questions 35 and 36.
Calvin Company provided the following information during 2009:
35. How much is ‘net cash provided (used) by investing activities’ during 2009?
a. $790,000
b. $360,000
c. $910,000
d. $(120,000)
Answer: B
36. How much is ‘net cash provided by financing activities’ during 2009?
a. $(500,000)
b. $550,000
c. $50,000
d. $600,000
Answer: C
$300,000 - $120,000 + $300,000 - $430,000 = $50,000
37. Which of the following is subtracted from income in determining cash flows from
operations?
a. Decrease in accounts payable
b. Depreciation
c. Cash dividends declared and distributed
d. Amounts due from customers at yearend
Answer: A
38. Selected information from Hsu Inc. is provided below for the years ending December 31,
2009 and 2008.
During 2009, depreciation expense was recorded. New equipment was acquired for cash. Old
equipment which was 70% depreciated with an original cost of $26,000 was sold for a gain of
$4,000. For how much was the equipment sold?
a. $11,800
b. $5,000
c. $3,800
d. $31,000
Answer: A
Use the information that follows concerning Martinez Corporation for the year ending
December 31, 2009, to answer questions 39 and 43.
Relevant account balances for Martinez Corporation are:
39. How much cash was received from customers during 2009?
a. $120,000
b. $116,000
c. $138,000
d. $124,000
Answer: B
40. How much cash was paid to suppliers for inventory during 2009?
a. $2,000
b. $59,000
c. $63,000
d. $61,000
Answer: B
41. How much cash was paid for insurance during 2009?
a. $5,400
b. $6,000
c. $6,600
d. $600
Answer: A
42. How will depreciation appear on Martinez’s statement of cash flows under the direct
method?
a. Added in the operating activities section
b. Subtracted in the operating activities section
c. In the investing activities section since it relates to plant assets
d. It will not be reported since it is not a cash flow.
Answer: D
43. How much is Martinez’s cash flows from operations for 2009?
a. $28,400
b. $38,400
c. $23,600
d. $33,600
Answer: D
44. Selected information from Cooke Inc. is provided below for the years ending December
31, 2009 and 2008.
During 2009, depreciation expense was recorded. New equipment was acquired for cash. Old
equipment which was 70% depreciated with an original cost of $26,000 was sold for a gain of
$4,000. What is the cost of the new equipment acquired?
a. $11,800
b. $5,000
c. $21,000
d. $31,000
Answer: D
45. The May 1 and May 31 balances in accounts receivable are $35,000 and $36,000,
respectively. During May, the company reported sales totaling $235,000 from its customers.
The company incurred $211,000 of expenses, although $12,000 was not paid as of May 31.
How much is cash flows from operations for May?
a. $24,000
b. $37,000
c. $11,000
d. $35,000
Answer: D
Use the information for Forman Incorporated for the year ending December 31, 2009 that
follows to answers questions 46 and 47.
The following are relevant account balances from Forman Incorporated’s comparative
balance sheet and 2009 income statement:
46. Determine the amount of cash that Forman Incorporated collected from customers during
2009.
a. $150,000
b. $158,000
c. $151,000
d. $156,000
Answer: A
47. Determine the amount of cash that Forman Incorporated paid for salaries during 2009.
a. $91,000
b. $88,000
c. $85,000
d. $80,000
Answer: C
48. Johnson Company engaged in the following transactions during 2010:
1. Johnson wrote off an open receivable as uncollected.
2. Johnson purchased a piece of plant equipment
3. Johnson reacquired 5,000 shares of its common stock.
4. Johnson sold a building at a loss in exchange for a five-year note.
5. Johnson declared, but did not pay a cash dividend.
If Johnson uses the indirect method, which of these transactions or parts of these transactions
would be included in the operating activity section of the statement of cash flows?
a. Transaction 4
b. Transaction 1
c. More than one of these transactions would be found in the operating activity section.
d. None of these transactions would be found in the operating activity section.
Answer: A
49. Johnson Company engaged in the following transactions during 2010:
1. Johnson wrote off an open receivable as uncollected.
2. Johnson purchased a piece of plant equipment
3. Johnson reacquired 5,000 shares of its common stock.
4. Johnson sold a building at a loss in exchange for a five-year note.
5. Johnson declared, but did not pay a cash dividend.
Which of these transactions or parts of these transactions would be included in the financing
activity section of the statement of cash flows?
a. Transactions 2 and 4.
b. Transactions 2 through 5
c. Transaction 3
d. None of these choices are correct.
Answer: C
50. Johnson Company engaged in the following transactions during 2010:
1. Johnson wrote off an open receivable as uncollected.
2. Johnson purchased a piece of plant equipment
3. Johnson reacquired 5,000 shares of its common stock.
4. Johnson sold a building at a loss in exchange for a five-year note.
5. Johnson declared, but did not pay a cash dividend.
If Johnson uses the indirect method, which of these transactions or parts of these transactions
would not appear on the statement of cash flows?
a. Transaction 1 and 5 only.
b. Transactions 4 and 5 only.
c. Transactions 1, 4, and 5.
d. None of these would appear on the statement of cash flows.
Answer: C
51. Denver Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Denver retired bonds payable by issuing common stock.
2. Denver collected on a long-term note receivable.
3. Denver issued a stock dividend.
4. Denver recorded depreciation on fixed assets.
5. Denver paid interest on long-term debt.
Which of these transactions or parts of these transactions would be included in the operating
activity section of the statement of cash flows?
a. Transaction 2
b. Transaction 5
c. Transaction 4
d. None of these choices is correct.
Answer: B
52. Denver Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Denver retired bonds payable by issuing common stock.
2. Denver collected on a long-term note receivable.
3. Denver issued a stock dividend.
4. Denver recorded depreciation on fixed assets.
5. Denver paid interest on long-term debt.
Which of these transactions or parts of these transactions would not appear on the statement
of cash flows?
a. Transactions 1 & 2
b. Transactions 2 & 3
c. Transactions 1, 2, 3, & 4
d. Transactions 1, 3, & 4
Answer: D
53. Denver Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Denver retired bonds payable by issuing common stock.
2. Denver collected on a long-term note receivable.
3. Denver issued a stock dividend.
4. Denver recorded depreciation on fixed assets.
5. Denver paid interest on long-term debt.
Which of these transactions or parts of these transactions would be included in the financing
activity section of the statement of cash flows?
a. Transaction 1
b. Transaction 3
c. Transactions 1 & 3
d. None of these transactions would be found in the financing activity section.
Answer: D
54. Samuels Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Samuels purchased inventory on account.
2. Samuels collected open accounts receivable.
3. Samuels exchanged a building for land and realized a gain.
4. Samuels issued 75,000 shares of preferred stock.
5. Samuels purchased a three-year fire insurance policy.
Which of these transactions or parts of these transactions would be included in the operating
activity section of the statement of cash flows?
a. Transactions 1,2 & 5
b. Transactions 2 & 5 only
c. Transactions 2, 3, & 5
d. None of these choices is correct.
Answer: B
55. Samuels Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Samuels purchased inventory on account.
2. Samuels collected open accounts receivable.
3. Samuels exchanged a building for land and realized a gain.
4. Samuels issued 75,000 shares of preferred stock.
5. Samuels purchased a three-year fire insurance policy.
Which of these transactions or parts of these transactions would be included in the financing
activity section of the statement of cash flows?
a. Transaction 3 only.
b. Transaction 4 only.
c. Transactions 3 & 4
d. None of these transactions would be found in the financing activity section.
Answer: B
56. Samuels Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Samuels purchased inventory on account.
2. Samuels collected open accounts receivable.
3. Samuels exchanged a building for land and realized a gain.
4. Samuels issued 75,000 shares of preferred stock.
5. Samuels purchased a three-year fire insurance policy.
Which of these transactions or parts of these transactions would be included in the investing
activity section of the statement of cash flows?
a. Transaction 3 only.
b. Transaction 4 only.
c. Transactions 3 & 4.
d. None of these transactions would be found in the investing activity section.
Answer: D
57. Samuels Company prepares its statement of cash flows using the direct method and
engaged in the following transactions during 2010:
1. Samuels purchased inventory on account.
2. Samuels collected open accounts receivable.
3. Samuels exchanged a building for land and realized a gain.
4. Samuels issued 75,000 shares of preferred stock.
5. Samuels purchased a three-year fire insurance policy.
Which of these transactions or parts of these transactions would not be included on the
statement of cash flows?
a. Transaction 1 only.
b. Transaction 5 only.
c. Transactions 1, 3, & 5.
d. Transactions 1 & 3.
Answer: D
58. The following information was taken from the records of Albert’s Fine Coffee:
During 2010, machinery with a cost of $16,000 was sold.
Based on this information, how much machinery was purchased during 2010?
a. $50,000
b. $66,000
c. $40,000
d. $60,000
Answer: B
59. The following information was taken from the records of Albert’s Fine Coffee:
During 2010, machinery with a cost of $16,000 was sold.
Based on this information, how much cash was collected on the sale of the machinery during
2010?
a. $10,000
b. $20,000
c. $4,000
d. $16,000
Answer: When the machinery was sold during 2010, Albert’s would prepare the appropriate
entry using the following format.
We can find the cash collected for the sale of the machinery by first calculating the other
three amounts.
Machinery
It is given in the exercise that the cost of the machinery sold was $16,000.
Gain on Sale of Machinery
It is given in the exercise that the gain on the sale was $4,000.
Accumulated Depreciation
Answer: D
60. The following information was taken from the records of Albert’s Fine Coffee:
During 2010, machinery with a cost of $16,000 was sold.
The journal entry to record the sale of the machinery would include:
a. a debit to Accumulated Depreciation of $4,000.
b. a debit to Cash of $2,000.
c. a debit to Machinery for $16,000.
d. a credit to Gain on Sale for $3,000.
Answer: A
61. The following year-end totals were taken from the records of Langston Company.
What is the amount of cash outflow associated with insurance during 2010?
a. $4,000
b. $2,800
c. $1,700
d. $6,800
Answer: D
62. The following year-end totals were taken from the records of Langston Company.
What is the amount of cash outflow associated with wages during 2010?
a. $9,500
b. $2,500
c. $5,500
d. $7,000
Answer: B
Matching Questions
1. For each transaction provided in items 1 through 12, select the proper section of the
statement of cash flows in which it should be reported from the reporting categories
provided below.
Answer:
1. A
2. C
3. A
4. A
5. C
6. A
7. C
8. A
9. B
10. B
11. A
12. B
2. For each transaction provided in items 1 through 5, select the proper section of the statement
of cash flows in which it should be reported using the indirect method from the reporting
categories provided in a through h below. If the item is not required to be reported on the
statement of cash flows, place an ‘X’ in the space provided.
Answer:
1. a
2. f
3. x
4. x
5. a
3. For each transaction provided in items 1 through 5, select the proper section of the statement
of cash flows in which it should be reported using the indirect method from the reporting
categories provided in a through h below. If the item is not required to be reported on the
statement of cash flows, place an ‘X’ in the space provided.
Answer:
1. f
2. b
3. a
4. g or x
5. a
4. For each transaction provided in items 1 through 7, select the proper section of the statement
of cash flows in which it should be reported using the indirect method from the reporting
categories provided in a through h below.
Answer:
1. a
2. g
3. a
4. c
5. h
6. b
7. g
Short Problems
1. Accrued wages payable on December 31, 2008 and 2009 are $9,000 and $4,000,
respectively. During 2009, wages expense is $36,000. Calculate the amount of cash paid for
wages during 2009.
Answer: $36,000 + $5,000 = $41,000
2. Graham, Inc. experienced the following changes in its cash balance during the current
calendar year:
Prepare, in good form, a cash flow statement for the current year.
Answer:
3. Beginning and ending balances for relevant balance sheet accounts are as follows:
During 2009, cost of goods sold was $102,000. Calculate the amount of cash paid to suppliers
of merchandise inventory.
Answer: $102,000 + $11,000 – $7,000 = $106,000
4. The following is the cash ledger account for Jensen Corp., which summarizes events that
impacted the cash account during 2010.
Answer:
5. Richards Inc. presented its comparative financial data and other data as follows:
Additional information:
1. Equipment was purchased for $43,200 and was paid in cash. Other equipment was sold at a
$3,000 gain and was 50% depreciated at the time of sale.
2. During 2009, Richards Inc. declared and paid cash dividends.
3. Part of the investment in the stock portfolio was sold at book value. The stock is closelyheld so no fair value adjustments are made.
4. Net income was $49,000.
Prepare a statement of cash flows using the indirect method for 2010. You may omit the
heading.
Answer:
6. The comparative balance sheets of Shad Inc. contain prepaid insurance of $48,000 on
January 1, 2009 and $37,000 on December 31, 2009. Shad’s 2009 income statement contains
insurance expense of $15,000. Calculate the amount of cash paid for insurance premiums
during 2009.
Answer: $15,000 – $11,000 = $4,000
7. Beginning and ending balances for relevant balance sheet accounts are as follows:
During 2010, cost of goods sold was $148,000. Calculate the amount of cash paid to suppliers
of merchandise inventory.
Answer: $148,000 + $14,000 + $7,000 = $169,000
8. List two distinct examples of investing activities and two distinct examples of financing
activities.
Answer: Investing activities:
Purchase or sale of noncurrent assets
Purchase or sale of securities of other entities
Loans or collection of principal of loans to other entities
Financing activities:
Issuance or reacquiring stock
Issuance or redeeming debt
Cash dividends paid to shareholders
9. The accounts receivable balances on January 1 and December 31 are $22,000 and $18,000,
respectively. The income statement for the year included sales revenue of $120,000.
Determine the amount of cash collected from customers during the year.
Answer: $4,000 + $120,000 = $124,000
10. Selected information from Thompson Corporation is provided below for the years ending
December 31, 2009 and 2008.
During 2009 depreciation expense was recorded. New equipment was acquired for cash. Old
equipment which was 60% depreciated with an original cost of $26,000 was sold for a loss of
$4,000. Prepare the investing activities section of the statement of cash flows.
Answer:
11. Beginning and ending balances for selected accounts are as follows:
12/31/09 1/01/09
Answer: $110,000 + $3,000 + $5,000 = $118,000
12. The August 1 and August 31 balances in accounts receivable are $21,000 and $18,000,
respectively. During August, the company collected $56,000 from its customers and incurred
$37,000 of expenses, all paid in cash. Calculate the amount of cash flows from operations for
August.
Answer: $56,000 – $37,000 = $19,000
13. During the current year, Martini Foods reported sales of $250,000, and wrote off $7,000
of accounts receivable as uncollectible under the direct write-off method. On January 1 and
December 31 of the current year, Richard Young had accounts receivable of $26,000 and
$14,000, respectively. Determine the amount of cash collected from customers during the
current year.
Answer: $250,000 – $7,000 + $12,000 = $255,000
14. List two distinct examples of significant noncash transactions and two distinct examples
of transactions not reported directly on a statement of cash flows
Answer: Significant noncash transactions:
Acquiring assets by issuing stock or liabilities
Acquiring capital leases with plant asset
Conversion of bonds or preferred stock into common stock
Declaring dividends
Not reported directly on a statement of cash flows:
Stock dividends distributed
Appropriations of retained earnings
Fair value adjustments for available-for-sale investments
15. During 2009, equipment was sold for $57,000. This equipment cost $90,000 and had a
book value of $47,000. Accumulated depreciation for equipment was $184,000 at 12/31/05
and $147,000 at 12/31/04. Show how the results of the three items will appear on the
statement of cash flows using the indirect method from this information.
Answer:
16. Wilson Corporation reported cost of goods sold of $100,000. On January 1, Wilson
Corporation had inventory and accounts payable of $21,000 and $33,000, respectively. On
December 31, inventory and accounts payable were $28,000 and $20,000, respectively.
Calculate cash payments to suppliers of inventory.
Answer: $7,000 + $13,000 + $100,000 = $120,000
17. Parton Inc.. reported accounting service revenue of $450,000 for 2009. On January 1,
2009, Parton Inc. had $38,000 of accounts receivable and $0 of cash deposits received from
customers. On December 31, 2009, accounts receivable and deposits received were $49,000
and $6,000, respectively. Calculate the amount of cash collected from clients during 2009.
Answer: $450,000 – $11,000 + $6,000 = $445,000
18. Lawson Co. sold equipment that cost $40,000 and a current book value of $18,000, for
$20,000 cash. Lawson purchased additional equipment during the year. Data from the
company’s balance sheets at December 31, 2009 and 2008 are:
Show how the results of the transactions will appear on the statement of cash flows using the
indirect method.
Answer:
19. Relevant account balances for Jeremy Supply Co. are:
Determine the amount of cash provided (used) by operations for 2009.
Answer:
20. Benton Company reported insurance expense of $301,000 during the current year. On
January 1 and December 31 of the current year, prepaid insurance was $28,000 and $41,000,
respectively. Calculate cash paid for insurance premiums for the current year.
Answer: $301,000 + $13,000 = $314,000
Use the information for Winthrop Company for the year ending December 31, 2009 that
follows to answers questions 21 through 23.
The following are relevant account balances from Winthrop Company’s comparative balance
sheet and 2009 income statement.
21. Determine the amount of cash collected from customers during 2009.
Answer: $89,000 – $3,000 + $4,000 = $90,000
22. Determine the amount of cash paid for insurance during 2009.
Answer: $4,000 + $2,000 = $6,000
23. Determine the amount of cash paid for salaries during 2009.
Answer: $31,000 – $3,000 = $28,000
24. During 2009, Bacon Co. reported a net operating loss of $19,000. The only asset or
liability changes during 2009 were a decrease in accounts receivable of $11,000 and an
increase in accumulated depreciation of $42,000. Calculate cash flows from operations
during 2009 (indicate outflow or inflow).
Answer: ($19,000) + $11,000 + $42,000 = $34,000 cash inflow
Use the information for Hampton Inc. for the year ending December 31, 2009 that follows to
answer questions 25 through 28.
The following are relevant account balances from Hampton’s comparative balance sheet and
2009 income statement. Hampton’s balance sheets:
Other information:
No equipment was sold or retired during 2009. Hampton’s net income for 2009 was $33,000.
25. Calculate depreciation expense for 2009.
Answer: $28,000 – $13,000 = $15,000
26. Calculate the amount of dividends paid during 2009.
Answer: $49,000 + $33,000 – $68,000 = $14,000 declared; $4,000 + $14,000 – $6,000 =
$12,000 paid
27. Determine the cost of the equipment purchased during 2009.
Answer: $100,000 – $80,000 = $20,000
28. Calculate the cash proceeds from the issuance of common stock during 2009.
Answer: $38,000 – $32,000 = $6,000
29. Selected information from the 2008 and 2009 accounting records of Roman Corp. is
provided below:
Calculate the December 31, 2009 ending cash balance.
Answer: $38,000 – $19,000 + $43,000 + $23,000 = $85,000
Short Essay Questions
1. How is the statement of cash flows linked to the balance sheet?
Answer: The net increase or decrease on the statement of cash flows is linked to the change in
the cash balance from one year to the next on the company’s comparative balance sheets. The
statement of cash flows adds the beginning cash balance to the change in cash during the
period (detailed by activity on the statement of cash flows) to determine the ending cash
balance. The beginning and ending cash balances appear on the balance sheet as the current
year and previous year’s cash balances. Under the indirect method, net income (loss) from the
income statement is the starting point for the determination of net cash inflows (outflows) for
operating activities on the statement of cash flows. The amount of net income also appears on
the statement of retained earnings, which appears as the ending retained earnings balance on
the balance sheet. The investing section of the statement of cash flows is closely related to the
balance sheet in that it analyses changes in non-current assets. The financing section of the
statement of cash flows is closely related to the liabilities and equity sections of the balance
sheet because it analyses changes in non-current liabilities and equity accounts.
2. How do 'cash equivalents' fit into the statement of cash flows?
Answer: Cash equivalents include typical cash items such as coins, currency, available funds
on deposit in the bank, money orders, certified checks, cashier's checks, personal checks,
bank drafts, and certain short-term financial instruments including commercial paper and
other debt investments with maturities of less than three months. These items can be
converted to cash immediately and for all intents and purposes, they are virtually the same as
cash. A statement of cash flows explains not only the change in cash but also the changes in
cash equivalents. This means that instead of ‘net cash provided or used by operating
activities,’ the statement of cash flows explains the change in ‘net cash and cash equivalents’
for the period.
3. How does the direct method of preparing the statement of cash flows differ from the
indirect method?
Answer: The direct method is so called because the computation of cash provided (used) by
operating activities consists of cash inflows and outflows that can be directly traced to the
cash T-account. The indirect method begins with net income and shows adjustments for non-
cash items. These adjustments consist of additions and subtractions from net income to
negate the effects of non-cash items. In essence, the accrual basis income statement is
converted to a cash basis statement.
4. In the operating activities section of a statement of cash flows prepared using the indirect
method certain items are added to net income. Why is depreciation added?
Answer: Depreciation is added to net income because it is a non-cash item that was
subtracted as an expense in order to determine net income on the income statement. Since the
cash account is not impacted in the journal entry to record depreciation, there is no effect on
cash. Adding back depreciation expense negates the expense that was subtracted on the
income statement in order to convert net income to the cash basis.
5. In the operating activities section of a statement of cash flows prepared using the indirect
method certain items are added to, or subtracted from, net income. Why are changes in
current accounts added or subtracted?
Answer: The operating activities section of the statement of cash flows somewhat resembles
an income statement prepared on the cash basis. The traditional income statement reflects the
accrual basis, which includes accruals and deferrals as necessary to reflect accrual income for
the period. Most accrual and deferral effects appear as current assets and liabilities. These
items appear as additions and subtractions in the operating activities section of the cash flow
statement to reflect the removal of accrual and deferral aspects included in net of income for
the period.
6. The international financial reporting standards are requiring a statement of cash flows.
Why is this and what are some of the unique issues that multinational companies must
understand when interpreting these statements?
Answer: The importance of debt capital to many foreign companies places a premium on
cash flow information, used by banks and other lenders to assess solvency. Interpreting a
statement of cash flows for a multinational company can be difficult due to so many
currencies used and received. The changes in the value of these currencies give rise to gains
or losses reported on the income statement. However, foreign currency exchange gains and
losses involve no cash flow. Consequently, when the statement of cash flows is prepared
under the indirect method, an adjustment must be made to net income. Partly because these
adjustments are becoming more significant, accounting pronouncements now require that
they be disclosed separately at the bottom of the statement, immediately before “net increase
or decrease in cash and cash equivalents.”
7. Why is cash generated from operating activities more important than cash generated from
other sources?
Answer: Cash generated from operating activities is a normality in business and is expected
to recur. Funding a business through shareholders may not always be an option because
shareholders may be unwilling to purchase stock in certain economic situations. Debt
financing becomes very expensive, and is subject to economic pressures as well as the ability
of the company to maintain a good credit rating. Not only is cash generated from operating
activities less expensive, it is expected to provide the means on a long-term basis of
maintaining and improving solvency.
8. Presented below is a partial statement of cash flows for Santiago Company for the year
ending June 30,2009.
Mr. Santiago, the president of the Company, is puzzled by why a difference exists on the
statement presented above, as compared to the company’s income statement for the same
period that shows net income of $44,000. Provide justification why the two amounts might
not be equal.
Answer: The operating activities section of the statement of cash flows reflects only the cash
basis of revenues—the cash inflows, and the cash basis of expenses—the cash outflows. The
income statement reflects the accrual basis of accounting which recognizes revenues when
they are earned instead of when received and expenses when incurred, instead of when paid.
The indirect method used on the statement of cash flows begins with net income and removes
all non-cash items in order to convert to cash basis income. The Company experienced noncash items during the year. Non-cash items reduce net income, but have no impact on cash
flows. This result is the appearance that something may be wrong with the amounts reported.
9. Explain financial flexibility and what information it provides.
Answer: The ability to generate cash is determined by the strength of the company’s
operating activities, as well as its financial flexibility. Financial flexibility reflects a
company's capacity to borrow, issue equity, and sell nonoperating assets. This requires
effective cash management of two competing objectives. On one hand, cash must be available
to meet debt obligations as they come due, i.e., solvency must be maintained. On the other
hand, cash must be invested in productive assets to provide returns. A company with financial
flexibility provides a high return without creating a risk of insolvency.
10. How are changes in foreign currency valuations reported on a statement of cash flows?
Answer: If a U.S. corporation sells goods or services to a customer in foreign country, a gain
or loss on that transaction can result. These foreign currency exchange gains and losses are
included in the computation of net income for the period. Since neither a gain nor a loss
affect actual cash flows, the effects of the gains and losses must be removed in order to
convert net income to the cash basis in determining cash flows from operating activities. U.S.
GAAP currently requires disclosure to appear separately at the bottom of the statement of
cash flows, immediately before the net increase (decrease) in cash and cash equivalents.
11. Explain the ways in which management can ‘window dress’ the statement of cash flows.
Answer: In the short run, it is relatively easy for management to present a favorable cash
position. Delayed payments on short-term payables can significantly boost the amount of
cash provided (used) by operating activities. Selling investments can increase cash inflows
from investing activities, while dealing with debt payments and dividends can temporarily
inflate cash from financing activities. Cash flows of a particular accounting period should not
carry too much weight in assessing the company's cash position. Current period management
decisions will likely impact future reporting periods negatively.
Test Bank for Financial Accounting: In an Economic Context
Jamie Pratt
9780470635292, 9781119537571, 9781119444367
