Chapter 21 - The Statement of Cash Flows Revisited

Kleister Company issues bonds for $100 million and repays a long-term notes payable of $10 million. The company also repurchases its own shares for $12 million and issues stock dividends with a market value of $5 million. Net cash flow from financing activities will be

$78 million net inflow. Reason: 100 million - 10 million - 12 million

Which of the following transactions/events commonly give rise to cash inflows for business entities? (Select all that apply.)

- Cash is collected from customers. - Common stock is sold to investors.

Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Additional information reveals that during the year accounts totaling $7,000 were written off and bad debt expense of $10,000 recognized. A journal entry prepared to determine cash collected from customers would include credits to (Select all that apply.)

- accounts receivable for $14,000. - allowance for doubtful accounts for $3,000. - sales revenue for $200,000.

Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Additional information reveals that during the year accounts totaling $7,000 were written off and bad debt expense of $10,000 was recognized. A journal entry prepared to determine cash collected from customers would include debits to (Select all that apply.)

- bad debt expense for $10,000. - cash for $207,000.

To identify all the operating, investing, and financing activities using a spreadsheet, we must account for the changes in each account on the: (Select all that apply.)

- balance sheet - income statement

Which of the following are valid categories in the statement of cash flows? (Select all that apply.)

- cash flows from financing activities - cash flows from operating activities - cash flows from investing activities

During the current year, Mainzel Corp.'s income statement shows that the company accrued interest expense of $5,000; for the same period the interest payable balance increased by $300. Cash paid for interest is

$4,700.

During the current period, Schmidt Corp. disposed of old equipment and received $1,000 cash; purchased new equipment for $10,000 cash; paid an accounts payable balance of $2,500; and sold an investment costing $2,000 for $2,800. Net cash from investing activities is (indicate the amount and whether it is a net inflow or outflow)

$6,200 net outflow

Jasper's income statement reports revenue from investments that lack significant influence of $10,000, and its balance sheet reports that dividends receivable decreased by $1,500. How much will Jasper report as cash received from investments?

$11,500

During the year, Munster Company sold common stock for $50 million, paid dividends of $5 million, and repaid its bonds payable with a face amount of $30 million. In its statement of cash flows, Munster will report net cash flows from financing activities of:

$15 million Reason: $(50-5-30)million

Abner Corp. prepares its statement of cash flows utilizing the direct method. During the current period, its cash from operating activities was $15.5 million. If the company had utilized the indirect method, its cash from operating activities would have been

$15.5 million.

Brandt Corp. sells short-term treasury bills that have a book value of $10,000 and are classified as cash equivalents on the company's balance sheet for $11,000. On its statement of cash flows, Brandt should report

$1,000 of operating activity inflows.

Malt Corporation reported insurance expense of $15,000. Prepaid insurance shows a beginning balance of $1,800 and an ending balance of $2,300. The amount of cash paid for insurance must be:

$15,500

Klein Corp. reports income tax expense of $157,000. During the current year, the company's income tax payable increased by $3,000. Cash paid for income taxes is

$154,000.

An examination of Margot Company's records indicate that investment income relating to equity method investments was $100,000 and that the related investment account increased by $75,000. Cash received on the investment was

$25,000.

Which of the following are classified as cash inflows from financing activities? (Select all that apply.)

- issuance of bonds - sale of common stock

Which of the following concepts governs recognition of revenue and expense?

Accrual accounting

Short-term, highly liquid investments that can be readily converted to cash, with little risk of loss, are referred to as _____ _____.

Blank 1: cash Blank 2: equivalents

The _____ method of reporting cash flows from operating activities reports the cash effect of each operating activity.

Blank 1: direct

If a spreadsheet is used to assist in the preparation of a statement of cash flows, an income statement section is NOT included under the _____ method.

Blank 1: indirect

The _____ method of reporting cash flows from operating activities begins with net income and works backward to derive cash from operating activities.

Blank 1: indirect

Sales and service revenue

Cash collected from customers

Which of the following is true regarding classification on the statement of cash flows?

Cash flows from inventory are classified as operating while cash flows from property, plant, and equipment are classified as investing.

Which of the following financial statements tends to provide the best indication of current operating performance?

Income statement

Which of the following is correct regarding depreciation expense?

It is a noncash expense that does not require the use of cash.

Depreciation expense

Not reported

Which of the following would result in a cash outflow from investing activities?

Purchase of a machine for cash.

Which of the following would result in a cash inflow from investing activities?

Sale of a machine for cash.

Indirect method

net income and required adjustments for non-cash effects

In a statement of cash flows—direct method, depreciation expense should

not be reported.

Which of the following transactions that involve cash flows typically is (are) not reported on a SCF?

sale of cash equivalents

Daffodil Corp. acquires new equipment with a long-term lease. This transaction will

be reported as a noncash investing and financing activity

An important advantage of using a spreadsheet to analyze transactions that may need to be reported in the statement of cash flows is to

make sure that no reportable activity is overlooked.

Wichtel Corp. reports sales revenue of $400,000. During the year, the company's accounts receivable balance decreased by $10,000 and its deferred revenue decreased by $6,000. Cash collected from customers is

$404,000. Reason: $400,000 + $10,000 - $6,000

During the current year, Hainzel Corp.'s income statement shows that the company accrued interest expense of $5,000; for the same period the interest payable balance decreased by $300. Cash paid for interest is

$5,300.

During the current year, Parsley Company sold equipment with an original cost of $100,000 and accumulated depreciation of $70,000. The income statement reveals a gain of $20,000 relating to this disposal. Cash received from the sale of the equipment is

$50,000.

For the current year ended, Fohlen Corp. accrued $1,200 of insurance expense. The company's account balance of prepaid insurance decreased by $500. Cash paid for insurance is

$700.

During the current year, Mainzel Corp.'s income statement shows that the company accrued salary expense of $85,000; for the same period the salary payable balance increased by $3,000. Cash paid for salaries is

$82,000.

Which of the following sources commonly provide funding for investing activities? (Select all that apply.)

- financing activities - operating activities

Which of the following decision makers tend to be especially interested in cash flow information? (Select all that apply.)

- investors - creditors

Which of the following are required characteristics of cash equivalents? (Select all that apply.)

- low risk - high liquidity - short-term

In addition to the primary activities, what other required information must be presented in a statement of cash flows? (Select all that apply.)

- noncash investing and financing activities - a reconciliation of the net increase or decrease in cash with the change in the cash balance

Which of the following are included in the statement of cash flows? (Select all that apply.)

- noncash investing and financing activities - cash flows from financing activities - cash flows from operating activities - cash flows from investing activities

Which of the following transactions would be classified as financing activities in the statement of cash flows? (Select all that apply.)

- repurchase of the company's own common stock - issuance of bonds - sale of the company's common stock

During the current year, Hainzel Corp.'s income statement shows that the company accrued salary expense of $85,000; for the same period the salaries payable balance decreased by $3,000. The journal entry to derive cash paid for salaries would include debits to (Select all that apply.)

- salaries payable for $3,000. - salaries expense for $85,000.

Peony Corporation acquires a new office building by signing a long-term note. This transaction represents a (Select all that apply.)

- significant noncash investing activity - significant noncash financing activity

Two systematic approaches that assist in the preparation of the statement of cash flows are the

- spreadsheet method - T-account method

Which accounts or balances must be considered in order to calculate the amount of cash paid to suppliers for inventory? (Select all that apply.)

- the change in the accounts payable balance - cost of goods sold - the change in the inventory account balance

Investing activities, such as the purchase of new machinery, may be financed by the company's primary operating activities, or by _____ sources.

Blank 1: external, outside, or exterior

Cash from the sale of land is reported on the statement of cash flows as a(n) _____ activity.

Blank 1: investing or investment

Interest expense

Cash paid to creditors

Which of the following statements regarding reporting of cash from investing and cash from financing activities is correct under the direct and the indirect method?

They are the same

When preparing the statement of cash flows using the indirect method, depreciation expense and losses are

added to net income.

During the current year, Hainzel Corp.'s income statement shows that the company accrued salary expense of $85,000; for the same period the salary payable balance decreased by $3,000. The journal entry to derive cash paid for salaries would include a credit to

cash for $88,000.

Direct method

cash in and outflows from operating activities

Michal Corp.'s land account decreased by $250,000. No specific information regarding this decrease is available. In its statement of cash flows, Michael should report

cash inflows from investing activities of $250,000.

A cash inflow from the sale of land is categorized as a(n)

investing activity

If a company reports neither an investment income receivable or a long-term investment account, we can conclude that the amount of cash received during the current year _______ that the company reports on the income statement.

is the same as investment revenue

Carmen Company shows salaries expense of $25,000 in its income statement. During the current year, the balance of its salaries payable account decreased by $3,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $3,000 should be

subtracted from net income.

The objective in preparing the statement of cash flows is to identify all transactions and events that represent _____, _____ and _____ activities and to classify and list them in the proper format.

Blank 1: operating Blank 2: investing Blank 3: financing

Under which method(s) will a reconciliation of net income to cash from operating activities be presented? (Select all that apply.)

Both the direct and the indirect method

Mark wishes to evaluate Jones Company's current operating performance. Mark will find the most pertinent information in Jones Company's

income statement.

During the current year, Barber Corp.'s balance in bonds payable decreased. In the absence of specific information, it should be assumed that

the bonds were repaid.

During the current year, Hainzel Corp.'s income statement shows that the company accrued salary expense of $85,000; for the same period the salary payable balance decreased by $3,000. Cash paid for salaries is

$88,000.

Marten Company's records indicate that, during the current year, land costing $50,000 was sold. A gain of $45,000 was recognized on the sale. Cash inflows associated with this sale were

$95,000.

Inflows and outflows of cash resulting from the external funding of a business are cash flows from _____ activities.

Blank 1: financing or finance

Cash received from the sale of common and preferred stock and the issuance of bonds and other debt securities are reported on the statement of cash flows as _____ activities.

Blank 1: financing, financial, or finance

Salaries expense

Cash paid to employees

Sales revenue for the year was $100,000; accounts receivable had a beginning balance of $10,000 and an ending balance of $18,000. Cash collected from customers was

$92,000.

Investment revenue

Cash received from dividends and interest

Fuller Company's retained earnings increased by $20,000 during the current year. Net income for the year was $50,000. No other information is available regarding retained earnings. In its statement of cash flows, Fuller should report

an outflow of $30,000 from financing activities relating to cash dividends.

Tomasine Company's retained earnings increased by $50,000 during the current year. Net income for the year was $110,000. No other information is available regarding retained earnings. In its statement of cash flows, Tomasine should report

an outflow of $60,000 from financing activities relating to cash dividends.

During the current year, Barber Corp.'s balance in bonds payable decreased. No specific information about this decrease is available. In the statement of cash flows, the decrease should

be reported as a cash outflow from financing activities.

Margaret is analyzing the current year income statement and the comparative balance sheet in order to prepare the statement of cash flows. She should expect the operating cash flows to be ______ the amounts reported in the income statement.

different from

The method that reports the cash effect of each operating activity explicitly on the statement of cash flows is referred to as the _____ method.

direct

During the current year, Palmer Company purchased equipment costing $100,000 by signing a 2-year promissory note. In its statement of cash flows, Palmer should

disclose information in the noncash investing and financing section.

During the current year, Schneider Company purchased equipment costing $200,000 by issuing 1,000 shares of its common stock. In its statement of cash flows, Schneider should

disclose information in the noncash investing and financing section.

Margot Inc. reacquires its own shares and plans to immediately retire them. In its statement of cash flows, Margot should report this transaction as a(n)

financing activity

Marian Company's balance sheet shows that the balance in "treasury stock" increased by $200,000. No additional information that explains this change is available. If you were to prepare Marian's statement of cash flows, you would report the $200,000 as a(n)

financing outflow

Cash flows from operating activities are both inflows and outflows of cash that result from activities reported in the

income statement.

The method of presenting the statement of cash flows that begins with a presentation of net income or net loss is referred to as the ____ method.

indirect

During the current year, Mainzel Corp. sold inventory costing $100,000 for $220,000. The company's accounts payable balance increased by $10,000, and the inventory account balance increased by $6,000. The journal entry to derive cash paid to vendors would include debits to (Select all that apply.)

- cost of goods sold for $100,000. - inventory for $6,000.

Under the indirect method of preparing the statement of cash flows, depreciation expense and losses are added back to net income because they (Select all that apply.)

- do not require an outflow of cash. - were subtracted in deriving net income.

During the current year, Marked Company sold equipment with an original cost of $100,000 and accumulated depreciation of $60,000. The income statement reveals a loss of $10,000 relating to this disposal. Cash received from the sale of the equipment is:

$30,000

Olsen Company reports investment income relating to equity method investments of $50,000, and it had a related investment account that increased by $15,000. Cash received on the investment was

$35,000

During the current period, Kunze Corp. disposed of old equipment and received $2,000 cash; purchased new equipment for $20,000 cash; collected an accounts receivable balance of $2,500; and purchased an investment for $3,000. Net cash from investing activities is (indicate the amount and whether it is a net inflow or outflow)

$21,000 net outflow.

During the current year Hainzel Corp. sold inventory costing $200,000 for $500,000. The balance of accounts payable decreased by $20,000, and the balance of the inventory account decreased by $10,000. Cash paid to suppliers is

$210,000

Glueck Corp. reports sales revenue of $200,000. During the year, the company's accounts receivable balance decreased by $14,000. Cash collected from customers is

$214,000.

Gross Industries reports income tax expense of $57,000. During the current year, the company's income tax payable decreased by $3,000. Cash paid for income taxes is

$60,000.

Which sections are identical under the direct and indirect method of the statement of cash flows? (Select all that apply.)

- Cash from financing activities - Cash from investing activities

Which of the following are classified as cash outflows from financing activities? (Select all that apply.)

- Principal repayment on notes payable - Purchase of treasury stock - Payment of dividends

Which of the following are not valid categories in the statement of cash flows? (Select all that apply.)

- cash flows from continuing operations - cash flows from discontinued operations

During the current year Mainzel Corp. sold inventory costing $100,000 for $220,000. The balance of accounts payable increased by $10,000, and the balance of the inventory account increased by $6,000. The journal entry to derive cash paid to vendors would include credits to (Select all that apply.)

- cash for $96,000. - accounts payable for $10,000.

Common types of cash outflows from investing activities include (Select all that apply.)

- payments to acquire nontrade receivables. - purchases of property, plant, and equipment. - purchases of investment securities.

Two systematic approaches that assist in the preparation in the statement of cash flows are the spreadsheet method and the _____-_____ method.

Blank 1: T Blank 2: account

Which of the following methods of preparing the statement of cash flows is (are) acceptable under U.S. GAAP?

Both the direct and the indirect method

Which of the following statements is correct regarding the direct and indirect methods of preparing the operating activities section of the statement of cash flows?

Cash from operating activities is the same under either method.

Muller Company's income statement reports a gain from the sale of equipment. Which of the following statements is correct regarding the gain?

The gain does not represent a cash flow

Under the indirect method of deriving net cash flows from operating activities, increases in liabilities relating to operating activities must be

added to net income.

The difference between net income and cash from operating activities must be reconciled under

both the direct and indirect method.

Kester Corp.'s land account increased by $140,000. No specific information regarding this increase is available. In its statement of cash flows, Kester should report

cash outflows from investing activities of $140,000.

Kunze's common stock and paid-in capital accounts increased by a total of $10 million. To analyze the transaction using a journal entry, Kunze should debit ______ and credit ____.

cash; common stock and paid-in capital

Net cash flows for the year represent the

change in the cash account

Olsen Company reports investment income relating to equity method investments of $50,000, and it had a related investment account that increased by $15,000. If Olsen uses only one journal entry to determine cash received from the investments, the entry would include

credit to investment revenue of $50,000

Milky Company reports sales revenue of $200, an increase in deferred revenue of $2, and an increase in accounts receivable of $1. Using a journal entry to determine cash collected from customers, accounts receivable should be ____ and deferred revenue ___.

debited; credited

Amounts reported in the income statement usually are ______ the cash effects of the items reported.

different from

Financing activities are inflows and outflows of cash resulting from the

external financing of a business.

Greer Company prepares its statement of cash flows using the direct method. Greer should present the reconciliation between net income and cash from operating activities

in a supplemental or separate schedule.

Kunze's common stock and paid-in capital accounts increased by $10 million. All known changes to retained earnings were already explained, except for a $10 million decrease, which remains unexplained. The likely explanation for the changes in the two equity categories is that Kunze

issued stock dividends

During the year, Pernell Company issued a 10% stock dividend. In its statement of cash flows, Pernell should

not report the stock dividend.

Gains or losses on the sale of cash equivalents are reported in the statement of cash flows as

operating inflows or outflows.

If a journal entry is used to derive the amount of cash collected from customers,

sales revenue, bad debt accruals, and changes in A/R and the allowance account need to be recognized.

Bart Company's common stock account increased by $5 million. The company issues only no-par shares. In the absence of additional information, you would assume that Bart

sold common shares and received $5 million in cash

Kunze's common stock and paid-in capital accounts increased by a total of $10 million. In the absence of additional information, the likely explanation for the increase in the accounts is that Kunze

sold common stock for cash.

Pech Company's common stock account increased by $2 million. No additional information regarding the increase is available. The most likely assumption that explains the increase is that the company

sold its common stock for cash

Brown Company's short-term investment account balance decreased by $14,000. No other information is available. This means that Brown

sold some investments with an original cost of $14,000.

An important tool that can be used to ensure that no reportable activities are inadvertently overlooked is a:

spreadsheet

Under the indirect method of deriving net cash flows from operating activities, increases in assets relating to operating activities must be

subtracted from net income.

On the statement of cash flows, the net increase or decrease in cash and cash equivalents must be reconciled with

the beginning and ending balances of cash

Which of the following methods of preparing the statement of cash flows is (are) acceptable under U.S. GAAP? (Select all that apply.)

- The indirect method - The direct method

In the absence of an investment income receivable and a long-term investment account, we can conclude that the amount of investment revenue reported on the income statement _________ received during the current year.

is equal to cash

Kunze's common stock and paid-in capital accounts increased by a total of $10 million. All known changes to retained earnings were already explained, except for a decrease of $10 million, which remains unexplained. If there is no additional information available, Kunze should assume that the changes in the two equity categories involved

no cash.

In a statement of cash flows, stock dividends typically are

not reported.

The purchase and sale of cash equivalents typically are _____ on a statement of cash flows

not reported

Pernell Company's short-term investment account balance increased by $10,000. No other information is available. This means that Pernell

purchased additional investments for $10,000.

Why is inventory treated differently than property, plant, and equipment when classifying their cash effects on the statement of cash flows? (Select all that apply.)

- Inventory is purchased and sold as part of the firm's current operations. - Property, plant, and equipment benefit the business over a relatively long period of time.

An examination of Margot Company's records indicate that investment income relating to equity method investments was $100,000 and that the related investment account increased by $75,000. Utilizing only one journal entry to determine cash received from the investments, the entry would include: (Select all that apply.)

- credit to investment revenue for $100,000 - debit to investment for $75,000

Which of the following transactions would be classified as financing activities in the statement of cash flows? (Select all that apply.)

- repayment of a long-term loan - repayment of a long-term loan

Common types of cash inflows from investing activities include (Select all that apply.)

- sale of property, plant, and equipment. - collection of nontrade receivables. - sale of investment securities.

The objective in preparing the statement of cash flows is to identify all transactions and events that represent

operating, investing, and financing activities and report them in the proper statement format.

Fault Company's records indicate that, during the current year, land costing $150,000 was sold. A loss of $25,000 was recognized on the sale. Cash inflows associated with this sale were

$125,000.

Aggie Company reports investment revenue of $14,000 in its income statement relating to a 5% investment in another company's common stock. During the current year, dividends receivable increased by $1,000. Thus, cash collected from investments will be

$13,000.

During the current year, Nary Corp.'s income statement shows that the company accrued interest expense of $5,000; for the same period the interest payable balance increased by $300 and bond discounts decreased by $400. Cash paid for interest is

$4,300

During the current year, Hainzel Corp.'s income statement shows that the company accrued interest expense of $5,000; for the same period the interest payable balance decreased by $300 and bond discounts decreased by $500. Cash paid for interest is

$4,800.

Which of the following transactions/events commonly give rise to cash outflows of business entities? (Select all that apply.)

- Fire insurance is purchased. - Employees are paid.

Which of the following statements is correct with respect to analyzing accounts for the preparation of a statement of cash flows? (Select all that apply.)

- All changes in balance sheet accounts must be accounted for. - All income statement amounts must be accounted for.

Tax expense

Cash paid to governments

Under which method of preparing a statement of cash flows will a reconciliation between net income and cash from operating activities be shown on a separate schedule?

The direct method only

Which of the following is critically important with respect to the ultimate potential of a firm to provide cash flows to investors and creditors?

The firm's ability to generate cash flows for itself.

Ziegler Company's income statement reports a loss from the sale of machinery. Which of the following statements is correct regarding the loss?

The loss does not represent a cash flow

Kunzen Company shows salaries expense of $15,000 in its income statement. During the current year, the balance of its salaries payable account increased by $2,000. If the company uses the indirect method of presenting the operating activities section of the statement of cash flows, the change of $2,000 should be

added to net income.

Cost of goods sold

Cash paid to suppliers of inventory

Cash flows from _____ activities are both inflows and outflows of cash that result from activities reported in the income statement.

Blank 1: operating or operation

Net income (or loss) is the result of netting together the _____ recognized and the _____ incurred during the current reporting period.

Blank 1: revenues or revenue Blank 2: expenses or expense