ACCT 101 Ch. 12 THE STATEMENT OF CASH FLOWS 2017

c. adding a gain from the sale of a fixed asset.

All of the following would be included in the operating activities section when preparing the statement of cash flows under the indirect method, except: a. subtracting a decrease in accounts payable. b. adding a loss on of land. THE CORRECT ANSWER c. adding a gain from the sale of a fixed asset. d. adding a decrease in inventories. WHAT YOU NEED TO KNOW Adding a gain from the sale of fixed asset would not be included in the operating activities section of the statement of cash flows. A gain on the sale of a fixed asset acts like a revenue on the income statement, increasing net income. In addition, it increases the cash proceeds from the sale of the fixed asset, which will appear in the investing activities section. Because a gain is included in both net income and in the investing activities section, it must be subtracted in the operating activities section so that it is not included twice on the statement of cash flows.

b. adding a decrease in accounts payable.

All of the following would be included in the operating activities section when preparing the statement of cash flows under the indirect method, except: a. subtracting a gain from the sale of equipment. THE CORRECT ANSWER b. adding a decrease in accounts payable. c. adding a depletion expense. d. adding an increase in salary payable. WHAT YOU NEED TO KNOW Adding a decrease in accounts payable would not be included in the operating activities section of the statement of cash flows. A decrease in accounts payable would mean that the business paid cash toward its debt, thereby decreasing cash on the statement of cash flows. A decrease in accounts payable, just as a decrease in any other current liability, is subtracted in the operating activities section as an adjustment to net income.

a. $75,000

Dad's Towing Inc. began and ended the year with a Retained Earnings balance of $420,000 and $530,000, respectively. Dad's reported Net Income during the year of $185,000. The only other transaction that affected Retained Earnings was the declaration and payment of a cash dividend. Determine the amount of dividends declared and paid by Dad's Towing during the year. THE CORRECT ANSWER a. $75,000 b. This amount cannot be determined from the information given. c. $90,000 d. $105,000 WHAT YOU NEED TO KNOW The amount of cash dividend declared and paid by Dad's Towing this year was $75,000. To determined the amount of cash dividends declared and paid, analyze Retained Earnings using the following formula, substituting X for the unknown amount, Dividends: Beginning Balance of RE + Net Income - Dividends = Ending Balance of RE $420,000 + $185,000 - X = $530,000 - X = $530,000 - $420,000 - $185,000 X = $75,000

c. $75,000

Dad's Towing Inc. began and ended the year with a Retained Earnings balance of $420,000 and $530,000, respectively. Dad's reported Net Income during the year of $185,000. The only other transaction that affected Retained Earnings was the declaration and payment of a cash dividend. Determine the amount of dividends declared and paid by Dad's Towing during the year. a. This amount cannot be determined from the information given. b. $105,000 THE CORRECT ANSWER c. $75,000 d. $90,000 WHAT YOU NEED TO KNOW The amount of cash dividend declared and paid by Dad's Towing this year was $75,000. To determined the amount of cash dividends declared and paid, analyze Retained Earnings using the following formula, substituting X for the unknown amount, Dividends: Beginning Balance of RE + Net Income - Dividends = Ending Balance of RE $420,000 + $185,000 - X = $530,000 - X = $530,000 - $420,000 - $185,000 X = $75,000

a. Financing activities

Dividend payments would be included in which section of the statement of cash flows? THE CORRECT ANSWER a. Financing activities b. Investing activities c. Operating activities d. Non-cash investing and financing activities WHAT YOU NEED TO KNOW Dividend payments would be included in the Financing Activities section of the statement of cash flows. Paying cash dividends reduces cash and Retained Earnings. Retained Earnings is a stockholder's equity account, and all cash-related transactions that affect stockholder's equity accounts are reported in the financing activities section. Therefore, dividend payments would decrease the financing activities section on the statement of cash flows. Operating Activities: changes in current assets and current liabilities Investing Activities: changes in long-term assets Financing Activities: changes in long-term liabilities and stockholders' equity The non-cash investing and financing activities section is specifically reserved for items that affect long-term assets and long-term liabilities or stockholders' equity without a corresponding change in cash. For example, a purchase of land by issuing a note payable is a non-cash investing and financing activity.

c. $823,000

In 2017, Morgan, Inc. had net income of $657,000. Morgan also recorded $203,000 in deprecation expense and had the following changes in its balance sheet accounts: Accounts Receivable $ 28,000 increase Inventories 12,000 decrease Accounts payable 21,000 decrease Compute the net cash provided by operating activities using the indirect method. a. $620,000 b. $417,000 THE CORRECT ANSWER c. $823,000 d. $596,000 WHAT YOU NEED TO KNOW Using the indirect method, the net cash provided by operating activities is $823,000. Using the indirect method, calculating cash flows from operating activities begins with net income. Non-cash income statement items are then added in (depreciation), and increases and decreases in current assets and current liabilities are adjusted accordingly. For Morgan, net cash provided by operating activities would be calculated as: Net income 657,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 203,000 Increase in Accounts Receivable (28,000) Decrease in Inventory 12,000 Decrease in Accounts Payable (21,000) 166,000 Net cash provided by operating activities 823,000

c. Non-cash investing and financing activities

Luke Land Development purchased Land during the year by signing a 10-year, $300,000, 4% Note Payable. Under which section of the statement of cash flows would this purchase of Land appear? a. Financing activities b. Investing activities THE CORRECT ANSWER c. Non-cash investing and financing activities d. Investing activities (Land) and Financing activities (Note Payable) WHAT YOU NEED TO KNOW Purchasing Land by signing a Note Payable would appear in the non-cash investing and financing activities section of the statement of cash flows. This transaction is not reported within operating, investing, or financing activities because it does not involve cash. However, a long-term asset (investing activity) and a long-term liability (financing activity) are being affected, so it is reported in the Non-cash Investing and Financing Activities section. The non-cash investing and financing activities section is specifically reserved for items that affect long-term assets and long-term liabilities or stockholders' equity without a corresponding debit or credit to cash.

b. subtracted from net income.

Oblique, Inc. prepares its statement of cash flows using the indirect method. In calculating cash from operating activities, increases in current assets other than Cash should be: a. ignored. THE CORRECT ANSWER b. subtracted from net income. c. added or subtracted, depending on each individual current asset account. d. added to net income. WHAT YOU NEED TO KNOW In calculating cash from operating activities using the indirect method, increases in current assets other than Cash should be subtracted from net income. Changes in current assets affect the operating activities section on the statement of cash flows. If a current asset increases (regardless of the individual current asset account) it will cause a subtraction adjustment from net income in the operating activities section of the statement of cash flows.

d. added to net income.

Oblique, Inc. prepares its statement of cash flows using the indirect method. In calculating cash from operating activities, increases in current liabilities should be: a. subtracted from net income. b. This depends on each individual current liabilities account as to the treatment on the statement of cash flows. c. ignored. THE CORRECT ANSWER d. added to net income. WHAT YOU NEED TO KNOW In calculating cash from operating activities using the indirect method, increases in current liabilities should be added to net income. Changes in current liabilities affect the operating activities section on the statement of cash flows. If a current liability increases (regardless of the individual current liability account), it will cause an addition adjustment to net income in the operating activities section of the statement of cash flows.

d. $690,000

Our Feathered Friends, Inc. reported credit sales of $1,500,000 for 2017. Cost of goods sold was $700,000. How much cash was paid for inventory in 2017? a. $705,000 b. $700,000 c. $695,000 THE CORRECT ANSWER d. $690,000 WHAT YOU NEED TO KNOW Cash paid for inventory in 2017 was $690,000. To determine cash paid for inventory, first determine the amount of inventory purchased during the year using the beginning and ending balances of inventory, as well as Cost of Goods Sold. The following formula is used for this calculation, substituting X for the unknown purchases: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold $80,000 + X - $75,000 = $700,000 X = $700,000 - $80,000 + $75,000 X = $695,000 (Purchases on Account) Once the amount of purchases on account is determined, you can now determine the amount of cash paid for these purchases using the amount of the purchases on account (just calculated) and the beginning and ending balance of Accounts Payable. The following formula is used for this calculation, substituting X for the unknown amount, Payment for Inventory: Beginning A/P + Purchases on account - Payments for Inventory = Ending A/P $25,000 + $695,000 - X = $30,000 - X = $30,000 - $25,000 - $695,000 X = $690,000

b. $1,490,000

Our Feathered Friends, Inc. reported credit sales of $1,500,000 for 2017. Cost of goods sold was $700,000. The following additional information is available from the company's records: How much cash did the company collect from customers in 2017? a. $1,510,000 THE CORRECT ANSWER b. $1,490,000 c. $1,500,000 d. $10,000 WHAT YOU NEED TO KNOW The company collected $1,490,000 from customers in 2017. Cash collected from the customer is determine by analyzing the Accounts Receivable account, using the following formula, substituting X for the unknown value, collections: Beginning Balance + Sales - Collections = Ending Balance $40,000 + $1,500,000 - X = $50,000 -X = $50,000 - 40,000 - 1,500,000 X = $1,490,000

c. $18,200

Tag Traders had Plant Assets (net) of $256,000 and $340,000 at the beginning and end of the year, respectively. Tag also included the following information related to its plant assets, net account: Purchases of plant assets totaled $124,000 Depreciation Expense recorded, $25,000 Gain on Sale of Plant Assets reported on the income statement, $3,200. How much cash did Tag receive for the sale of plant assets? a. $15,000 b. $20,200 THE CORRECT ANSWER c. $18,200 d. $11,800 WHAT YOU NEED TO KNOW Tag received $18,200 for the sale of plant assets during the year. To determine the amount of cash received from the sale of plant asset (net), first calculate the book value of the plants assets sold using the following formula for the Plant Assets (net) account, substituting X for the unknown value (Book Value of Asset Sold): Beginning Balance + Acquisitions - Depreciation Expense - BV of Assets Sold = Ending Balance $256,000 + $124,000 - $25,000 - X = $340,000 -X = $340,000 - $256,000 - $124,000 + $25,000 X = $15,000 Next, determine the cash proceeds using the following formula: Cash Proceeds = Book Value of Assets Sold + Gain on Sale - Loss on Sale Cash Proceeds = $15,000 + $3,200 - $0 Cash Proceeds = $18,200

d. operating, investing, and financing activities.

The activity classifications in the statement of cash flows include: a. operating, investing, and equity activities. b. operating, financing, and equity activities. c. investing, operating, and expense activities. THE CORRECT ANSWER d. operating, investing, and financing activities. WHAT YOU NEED TO KNOW The activity classifications in the statement of cash flows include operating, investing, and financing activities. Cash flows from operating activities represent the day-to-day operations of the business (changes in current assets and current liabilities, depreciation, gains/losses). Investing activities represents the cash flows from the changes in long-term assets. Financing activities represents the cash flows from the changes in long-term liabilities and owners' equity. It's important to remember the order of the three sections: Operating, Investing, Financing

d. Current assets and current liabilities

The operating activities section has a relationship with which part of the balance sheet? a. Long-term assets and long-term liabilities b. Long-term assets c. Stockholders' equity and long-term liabilities THE CORRECT ANSWER d. Current assets and current liabilities WHAT YOU NEED TO KNOW The operating activities section has a relationship with the current assets and current liabilities part of the balance sheet. Each group of activities reported on the statement of cash flows has a relationship with a group of accounts from the balance sheet. This specific relationship is: Operating Activities: changes in current assets and current liabilities Investing Activities: changes in long-term assets Financing Activities: changes in long-term liabilities and stockholders' equity

c. Financing activities

The purchase of treasury stock would be included in which section of the statement of cash flows? a. Operating activities b. The purchase of treasury stock is not included on the statement of cash flows. THE CORRECT ANSWER c. Financing activities d. Investing activities WHAT YOU NEED TO KNOW The purchase of treasury stock would be included in the Financing Activities section of the statement of cash flows. Cash-related transactions that affect stockholder's equity accounts are reported as part of the financing activities section in the statement of cash flows. Treasury stock is the direct result of having issued stock prior to the purchase. Therefore, as common stock is a financing activity, the buying back of that stock (treasury stock) is also a financing activity.

a. $121,100

Using the above data, determine the net cash provided/used by operating activities for Asakura Corporation for the year ended December 31, 2017. Assume the indirect method is used. THE CORRECT ANSWER a. $121,100 b. $118,700 c. $13,100 d. $96,100 WHAT YOU NEED TO KNOW Assuming the indirect method, the net cash provided by operating activities for Asakura Corporation is $121,100. Net cash provided / used by Asakura Corporation is calculated as: Asakura Corporation Statement of Cash Flows Year Ended December 31, 2017 Cash flows from operating activities: Net Income $ 108,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Expense - equipment $ 5,000 DepreciationExpense - Building 7,500 Loss on sale of land 2,500 Gain on sale of equipment (1,300) Decrease in accounts receivable 3,500 Decrease in prepaid expenses 1,200 Increase in inventory (5,800) Decrease in salary payable (1,500) Increase in accounts payable 2,000 13,100 Net cash provided by operating activities $121,100

c. Statement of cash flows

Which of the following financial statements explains why a company's cash balance changed over a period of time? a. Income statement b. Balance sheet THE CORRECT ANSWER c. Statement of cash flows d. Statement of retained earnings WHAT YOU NEED TO KNOW The statement of cash flows explains why a company's cash balance changed over a period of time. After computing the cash inflows/outflows from operating, investing, and financing activities on the statement of cash flows, this overall change in cash can be added to the beginning balance of cash and it should equal the ending balance in the cash account.

e. These are all objectives of the statement of cash flows.

Which of the following is an objective of the statement of cash flows? a. Determine the ability to pay dividends and interest. b. Show the relationship between net income and cash. c. Evaluate management decisions. d. Predict future cash flows. THE CORRECT ANSWER e. These are all objectives of the statement of cash flows. WHAT YOU NEED TO KNOW These are all purposes of the statement of cash flow. The purposes of the statement of cash flows include: 1. Predicts future cash flows. Past cash receipts and payments are reasonably good predictors of future cash flows. 2. Evaluates management decisions. Businesses that make wise decisions prosper, and those that make unwise decisions suffer losses. The statement of cash flows reports how managers got cash and how they used cash to run the business. 3. Determines ability to pay dividends and interest. Stockholders want dividends on their investments. Creditors demand interest and principal on their loans. The statement of cash flows reports on the ability to make these payments. 4. Shows the relationship of net income to cash flows. Usually, high net income eventually leads to an increase in cash, and vice versa. But cash flow can suffer even when net income is high.

c. 1, 2, 4

Which of the following transactions decrease cash? 1) Purchase inventory from cash 2) Pay trade accounts payable 3) Accruing operating expenses 4) Purchase stock in R&D partner 5) Charging depreciation a. 1, 2, 3, 4 b. 1, 2, 5 THE CORRECT ANSWER c. 1, 2, 4 d. 1, 2, 3, 5 WHAT YOU NEED TO KNOW The following transactions decrease cash (1,2,4): Purchasing inventory for cash will increase inventory and decrease cash. Paying toward accounts payable, decreases cash and decreases accounts payable. The purchase of stock would decrease cash and increase investments. Accruing operating expenses involves a debit to an expense account and a credit to a liability, it does not affect cash. Depreciation is a non-cash transaction as well. It involves a debit to Depreciation Expense and a credit to Accumulated Depreciation.