Chapter 14 - Learn Smart

Kato Company had a $300,000 beginning balance in mortgage payable and a $200,000 ending balance in mortgage payable. Based on this information alone, the amount of cash flow from mortgage transactions was

$100,000 outflow. Since mortgage payables decreased by $100,000 ($300,000 - $200,000) there must have been a cash outflow to payoff part of the mortgage.

Bruno Company had a $200,000 beginning balance in bonds payable and a $210,000 ending balance in bonds payable. During the year, Bruno paid off $100,000 of bond liabilities. Based on this information alone, Bruno's statement of cash flows would include a

$110,000 cash inflow from financing activities. $200,000 beginning balance - $100,000 debt repaid = $100,000 total expected debt; $210,000 ending balance - $100,000 total expected debt = $110,000 debt issued, thereby signaling a cash inflow. Issuing or repaying debt is a financing activity.

Kato Company sold land that cost $30,000. Kato reported a $12,000 loss on the sale of land on its income statement. Based on this information alone, the amount of cash inflow from the sale of land was

$18,000. $30,000 cost - $12,000 loss = $18,000 sales price.

The income statement for Kato Company showed net income of $17,500 and depreciation expense of $500. Based on this information alone, the amount of cash flow from operating activities was

$18,000. Rule 3 states that noncash expenses must be added back to net income when determining cash flow from operating activities.

Kato Company had a beginning unearned revenue balance of $5,600 and an ending unearned revenue balance of $5,000. Given that unearned revenue recognized amounted to $22,000, the amount of cash collected form unearned revenue is

$21,400. The balance in unearned revenue decreased by $600 ($5,600 beginning balance - $5,000 ending balance). As a result, the company did not collect cash for all of the revenue it recognized. Specifically, cash collected for unearned revenue had to be $22,000 - $600 = $21,400

Como Company had a $3,600 beginning balance in prepaid rent and a $3,200 ending balance in prepaid rent. Also, Como reported net income of $24,000. Based on this information alone, the amount of cash inflow from operating activities was

$24,400. Rule 1 states that decreases in short-term assets be added to net income to arrive at cash flow from operations. Therefore, cash flow from operations is $24,000 + $400 = $24,400.

Kato Company had a beginning salaries payable balance of $2,600 and an ending salaries payable balance of $2,800. Given that salaries expense amounted to $27,000, the amount of cash paid for salaries during the period was

$26,800. The balance in salaries payable increased by $200 ($2,800 ending balance - $2,600 beginning balance). As a result, the company did not pay cash for all of the expense it incurred. Specifically, cash paid for salaries had to be $27,000 - $200 = $26,800.

Mario Company had a $2,000 beginning balance in accounts receivable and a $2,200 ending balance in accounts receivable. Also, Mario reported net income of $30,000. Based on this information alone, the amount of cash inflow from operating activities was

$29,800. Rule 1 states that increases in short-term assets be deducted from net income to arrive at cash flow from operations. Therefore, cash flow from operations is $30,000 - $200 = $29,800.

Kato Company had a beginning operating expenses payable balance of $600 and an ending operating expenses payable balance of $500. Given that operating expense amounted to $2,900, the amount of cash paid for operating expenses during the period was

$3,000. The balance in operating expense payable decreased by $100 ($600 beginning balance - $500 ending balance). As a result, the company paid more cash for operating expense than the amount of operating expense it recognized. Specifically, cash paid for operating expensed had to be $2,900 interest expense + $100 settlement on operating expenses payable = $3,000.

Kato Company had a $500 beginning balance in interest receivable and a $460 ending balance in interest receivable. Accrued interest revenue for the period amounted to $6,000. Based on this information alone, the amount of cash inflow from interest revenue is

$6,040. The balance in interest receivable decreased by $40 ($500 beginning balance - $460 ending balance). As a result, the company must have collected all of the $6,000 of accrued interest revenue earned during the period plus $40 resulting from the decrease in the interest receivable account. Therefore, cash collections must have been $6,000 + $40 = $6,040.

Kato Company had a beginning accounts payable balance of $5,000 and an ending accounts payable balance of $5,500. Given that purchases of inventory on account amounted to $69,000, the amount of cash paid for the purchase of inventory during the period was: (Assume that the accounts payable is used exclusively for the purchase of inventory.)

$68,500. The balance in accounts payable increase by $500 ($5.500 ending balance - $5,000 beginning balance). As a result, the company did not pay cash for all of the inventory it purchased. Specifically, cash paid to purchase inventory had to be $69,000 - $500 = $68,500.

Kato Company had a beginning inventory balance of $23,000 and an ending inventory balance of $24,000. Given that the cost of goods sold during the period amounted to $68,000, the amount of inventory purchased during the period was

$69,000. There had to be enough inventory purchased to cover the $68,000 of inventory sold plus the $1,000 increase in the balance of inventory. Accordingly, the company must have purchased $69,000 of inventory.

Kato Company had a $4,000 beginning balance in accounts receivable and a $4,200 ending balance in accounts receivable. Revenue on account during the period amounted to $70,000. Based on this information alone, the amount of cash inflow from customers was

$69,800. The balance in accounts receivable increases by $200 ($4,200 ending balance - $4,000 beginning balance). As a result, the company must have collected all of the $70,000 of revenue earned on account except the $200 increase in accounts receivable. Therefore, cash collections must have been $70,000 - $200 = $69,800.

Which of the following is not a section of the statement of cash flows?

Purchasing activities

Kato Company had a $15,000 beginning balance in equipment and an $18,000 ending balance in equipment. Kato purchased equipment costing $4,000 during the accounting period. There were no gains or losses from the sale of equipment shown on the income statement. Based on this information alone, the amount of cash inflow from selling equipment was: (Assume all purchases were made with cash.)

$1,000. The beginning balance of $15,000 plus the $4,000 purchase of equipment suggests a $19,000 balance before any sales. Given an $18,000 ending balance, the cost of the equipment sold had to be $1,000 ($19,000 - $18,000). Since no gains or losses were recognized, the price of the equipment sold had to be equal to its cost.

Kato Company had a $10,000 beginning balance in investment securities and a $14,000 ending balance in investment securities. Kato's sold investment securities costing $1,000 during the accounting period. Assuming the income statement shows a $200 gain on the sale of securities, the cash inflow from the sale of marketable securities was

$1,200. $1,000 cost + $200 gain = $1,200 sales price.

Kato Company had a beginning prepaid insurance balance of $1,200 and an ending prepaid insurance balance of $1,300. Given that insurance expense for the period amounted to $1,400, the amount of cash paid to purchase insurance during the period was: (Assume cash was paid for all insurance purchased.)

$1,500. There had to be enough insurance purchased to cover the $1,400 of insurance expense recognized plus the $100 increase in the balance of prepaid insurance. Accordingly, the company must have paid $1,500 of insurance.

Kato Company had a beginning interest payable balance of $240 and an ending interest payable balance of $220. Given that accrued interest expense amounted to $1,800, the amount of cash paid for interest expenses during the period was

$1,820. The balance in interest payable decreased by $20 ($240 beginning balance - $220 ending balance). As a result, the company paid more cash for interest than the amount of accrued interest expense. Specifically, cash paid for interest had to be $1,800 interest expense + $20 settlement on interest payable = $1,820.

Chen Company had a $1,100 beginning balance in utilities payable and a $1,400 ending balance in utilities payable. Also, Chen reported net income of $13,000. Based on this information alone, the amount of cash inflow from operating activities was

$13,300. Rule 2 states that increases in short-term liabilities be added to net income to arrive at cash flow from operations. Therefore, cash flow from operations is $13,000 + $300 = $13,300.

Bruno Company had a $120,000 beginning balance in retained earnings and a $130,000 ending balance in retained earnings. During the year, Bruno paid a $15,000 cash dividend. Based on this information alone, Bruno statement of cash flows would include a

$15,000 cash outflow from financing activities. The payment of a cash dividend is a financing activity.

Kato Company had an $80,000 beginning balance in land and a $60,000 ending balance in land. Kato purchased land costing $10,000 during the accounting period. No gain or loss on the sale of land was shown on the income statement. Based on this information alone, the amount of cash inflow from the sale of land was

$30,000. The beginning balance of $80,000 plus the $10,000 purchase of land suggests a $90,000 balance before any sales. Given a $60,000 ending balance, the cost of the land sold had to be $30,000 ($90,000 - $60,000). Since no gains or losses were recognized, the price of the land sold had to be equal to its cost.

Kato Company had a $17,000 beginning balance in treasury stock and a $19,000 ending balance in treasury stock. During the year, Kato issued treasury stock costing $3,000. Based on this information alone, Kato's statement of cash flows would include a

$5,000 cash outflow from financing activities. $17,000 beginning balance - $3,000 reissued = $14,000 expected ending treasury stock balance; $19,000 actual ending balance - $14,000 expected ending balance = $5,000 additional treasury stock purchased.

Stella Company had a $7,300 beginning balance in unearned revenue and a $6,000 ending balance in unearned revenue. Also, Stella reported net income of $62,000. Based on this information alone, the amount of cash inflow from operating activities was

$60,700. Rule 2 states that decreases in short-term liabilities be subtracted from net income to arrive at cash flow from operations. Therefore, cash flow from operations is $62,000 - $1,300 = $60,700.

Kato Company sold equipment that cost $2,000. At the time of the sale, the equipment had accumulated depreciation of $1,500. Assuming the income statement shows a $300 gain on the sale of equipment, the cash inflow from the sale was

$800. $2,000 cost - $1,500 accumulated depreciation = $500 book value; $500 book value + $300 gain = $800 sales price.

Bruno Company had a $27,000 beginning balance in treasury stock and a $22,000 ending balance in treasury stock. During the year, Bruno purchased treasury stock costing $6,000. Based on this information alone, Bruno's statement of cash flows would include a(n):

1. $6,000 cash outflow from financing activities. 2. $11,000 cash inflow from financing activities. $27,000 beginning balance + $6,000 treasury stock purchased = $33,000 total expected treasury stock balance; $33,000 expected ending treasury stock balance - $22,000 actual balance = $11,000 cost of treasury stock reissued. Reissuing treasury stock signals a cash inflow from financing activities.

Which of the following formulas is correct? (All are correct)

1. Beginning accounts payable + Purchases on account - Cash payments on accounts payable = Ending accounts payable 2. Beginning accounts receivable balance + revenue earned on account - cash collections = ending accounts receivable balance 3. Beginning inventory + Purchases - Cost of goods sold = Ending Inventory 4. Beginning prepaid insurance + Cash purchases of insurance - Insurance expense = Ending prepaid insurance 5. Beginning operating expense payable + Operating expenses incurred on account - Cash payments = Ending operating expense payable 6. Beginning salaries payable + Accrued salaries expense/payable - Cash payments = Ending salaries payable 7. Beginning unearned revenue + Cash collected for unearned revenue - Revenue recognized = Ending unearned revenue 8. Beginning marketable securities balance + Securities purchases - Securities sales = Ending marketable securities balance 9. Beginning mortgage payable + Increase from additional mortgage debt - Decrease due to mortgage repayment = Ending mortgage payable 10. Beginning bonds payable + Increase from issuing bonds - Decrease due to bond repayment = Ending bonds payable 11. Beginning retained earnings + Increase due to net income - Decrease due to dividend payments = Ending retained earnings 12. Beginning treasury stock + Additional treasury stock purchased - Reissue of treasury stock = Ending treasury stock balance

Which of the following items are included in the financing activities section of the statement of cash flows?

1. Cash flows associated with transactions involving the issuance of common stock 2. Cash flows associated with borrowing money 3. Paying off a bond liability 4. Cash paid for dividends

Which of the following items are included in the operating activities section of the statement of cash flows?

1. Cash inflows from customers 2. Cash outflows for interest 3. Cash inflows from dividends 4. Cash outflows for expenses Routine cash inflows and outflows resulting from running (operating) a business are reported in the operating activities section of the statement of clash flows.

Which of the following items are included in the investing activities section of the statement of cash flows?

1. Cash sale of marketable securities 2. Cash purchase of equipment 3. Cash collections from a mortgage 4. Cash flows associated with transactions involving long-term assets 5. Cash flows associated with making long-term loans

Which of the following signal cash inflows from financing activities?

1. Increases in common stock 2. Increases in short-term notes payable

Which of the following signal cash outflows from financing activities?

1. Increases in treasury stock 2. Decreases in retained earnings caused by cash dividends

Which of the following statements is true?

1. Operating activities is one of three categories of information presented in a statement of cash flows. 2. Financing activities is one of three categories of information presented in a statement of cash flows.

Which of the following items would appear in the schedule of non-cash financing and investing activities.

1. Paying for a building with common stock 2. Trading a truck for a computer

A(n) _______________ in the balance of a long-term asset account suggests that a cash inflow from _______________ occurred.

1. decrease 2. investing The primary reason the balance in a long-term asset account would decrease is that assets were sold, thereby creating a cash inflow.Events dealing with long-term assets are classified as investing activities.

To determine the cash flow from operating activities using the indirect method, add _______________ (decreases/increases) in short-term liabilities to and subtract _______________ (decreases/increases) in short-term liabilities from the amount of net income.

1. increases 2. decreases

An increase in the balance in the common stock account signals a cash _______________ from _______________ activities.

1. inflow 2. financing

To determine cash flow from operating activities under the indirect method,

1. long-term gains must be subtracted from net income. 2. long-term losses must be added to net income.

To determine cash flow from operating activities under the indirect method, _______________ (gains/losses) are added to net income and _______________ (gains/losses) are subtracted from net income.

1. losses 2. gains

The beginning interest receivable balance _______________ (plus/minus) the amount of accrued interest revenue _______________ (plus/minus) cash collections from interest equals the ending interest receivable balance.

1. plus 2. minus

To determine the cash flow from operating activities using the indirect method,:

1. subtract decreases in short-term liabilities from net income. 2. add increases in short-term liabilities to net income.

Which of the following formulas is correct for the settlement of interest payable?

Beginning balance + interest expense incurred on account - cash payments for interest payable= Ending balance interest payable

True or false: The Financial Accounting Standards Board (FASB) recommends the indirect method for preparing the statement of cash flows.

False

Which of the following events will require disclosure in the noncash investing and financing activities section of the statement of cash flows?

Purchase of a building by issuing common stock The issue of the stock would be shown as a noncash financing activity, while the increase in buildings would be classified as a noncash investing activity.

To determine cash flow from operating activities under the indirect method, noncash expenses, such as depreciation expense, must be

added to net income. Rule 3 states that non-cash expenses must be added back to net income when determining cash flow from operating activities.

The schedule of noncash investing and financing activities is normally shown

at the bottom of the statement of cash flows.

Kato Company had a $250,000 beginning balance in bonds payable and a $200,000 ending balance in bonds payable. During the year, Kato issued $75,000 of bonds during the accounting period. Based on this information alone, Kato's statement of cash flows would include a $125,000

cash outflow from financing activities. $250,000 beginning balance + $75,000 issued = $325,000 total expected debt; $325,000 - $200,000 ending balance = $125,000 debt repaid, thereby signaling a cash outflow. Issuing or repaying debt is a financing activity.

The FASB recommends the _______________ method for preparing the statement of cash flows.

direct **because people typically find the direct method easier to understand.

The _______________ method of statement of cash flow preparation makes adjustments to net income to determine the net cash flow from operating activities.

indirect

Kato Company had a $140,000 beginning balance in common stock and a $160,000 ending balance. Based on this information alone, Kato's statement of cash flow would include a $20,000

inflow from financing activities. The $20,000 ($160,000 ending balance - $140,000 beginning balance) increase signals a cash inflow from the issue of stock. The issue of common stock is a financing activity.

A(n) increase in the balance of a long-term asset account suggests that a cash outflow from _______________ activities occurred.

investing The primary reason the balance in a long-term asset account would increase is that assets were purchased, thereby, creating a cash outflow.

Significant noncash investing and financing events are shown in a _______________ schedule that is called the Schedule of Noncash Investing and Financing Activities.

separate

The statement of cash flows shows

the amount of the beginning and ending cash balances.

The amount of net cash flow from operating activities shown on the statement of cash flows will be

the same, regardless of whether the company uses the direct or indirect method to prepare the statement. **The direct and indirect methods are alternative ways of displaying the same information. The results are the same, only the presentation is different.