FAR - Chapter 17
True or False - Information about noncash investing and financing activities need not be disclosed.
FALSE Information about all investing and financing activities that affect recognized assets or liabilities but not cash flows must be reported in related disclosures.
True or False - Investing activities include transactions in equity securities acquired for resale in the short-term.
FALSE Investing activities exclude transactions in (1) cash equivalents and (2) certain loans or other debt or equity instruments acquired for resale in the short-term.
What are examples of cash OUTFLOWS and INFLOWS from Investing Activities?
1. Cash Payments to acquire (or Cash receipts from Sale of) property, plant and equipment, intangible assets, and other long lived assets. 2. Cash Payments to acquire (or Cash receipts from Sale of and maturity of) equity and debt instruments of other entities for investing purposes. 3. Cash advances and loans made to other parties or Cash Receipts from repayment of advances and loans made to other parties.
What are examples of Operating Activities that are cash OUTFLOWS?
1. Cash payments to suppliers for goods and services. 2. Cash payments to employees. 3. Cash payments to government for taxes, duties, fines, and other fees or penalties. 4. Payments of interest on debt
What are examples of Financing Activities INFLOWS?
1. Cash proceeds from issuing shares and other equity instruments. 2. Cash proceeds from issuing loans, notes, bonds, and other short-term borrowings.
What are examples of Operating Activities that are cash INFLOWS?
1. Cash receipts from the sale of goods or services. 2. Cash receipts from royalties, fees, commissions, and other revenue 3. Cash received in the form of interest or dividends. 4. Cash receipts from certain loans and other debt and equity instruments of other entities that are acquired specifically for resale in the short term
What are examples of Financing Activities OUTFLOWS?
1. Cash repayment of amounts borrowed. 2. Payment of cash dividends. 3. Cash payments to acquire or redeem the entity's own shares. 4. Cash payments by a lessee for a reduction of the outstanding liability relating to a finance lease.
What are the two ways to present a Statement of Cash Flows?
1. Direct Method 2. Indirect Method (The only difference between the two is their presentation of net cash flows from operating activities).
To achieve its primary purpose, the Statement of Cash Flows should provide information about cash inflows and outflows from what three types of activities?
1. Operating 2. Investing 3. Financing
During the year, Granite Co. sold a building for $100,000, resulting in a gain of $20,000. The building has a net book value of $80,000 at the time of the sale. Granite uses the indirect method when preparing its statement of cash flows. What is the amount that would be included in Granite's financing activities section because of the building sale? A) $0 B) $20,000 C) $100,000 D) $80,000
A) $0 Cash flows from financing activities generally involve the cash effects of transactions and other events that relate to the issuance, settlement, or reacquisition of the entity's debt and equity instruments. Cash receipts from the sale of property, plant, and equipment; intangible assets; and other long-lived assets are investing activities. Under the indirect method, the gain on disposal of a building of $20,000 is reported as an adjustment to calculate the net cash flows from operating activities. Therefore, the amount that would be included in Granite's financing activities on the statement of cash flows is $0.
A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred: Dividends paid - $300 Proceeds from the issuance of common stock - $250 Borrowings under a line of credit - $200 Proceeds from the issuance of convertible bonds - $100 Proceeds from the sale of a building - $150 What is the company's increase in cash flows provided by financing activities for the year? A) $250 B) $150 C) $550 D) $50
A) $250 Cash flows from financing activities generally involve the cash effects of transactions and other events that relate to the issuance, settlement, or reacquisition of the entity's debt and equity instruments. The proceeds from the sale of a building is an investing cash flow. All of the other transactions represent cash flows from financing activities. Thus, the company's increase in cash flows provided by financing activities is $250 [($300) + $250 + $200 + $100].
During the current year, a tornado completely destroyed a building belonging to Holland Corp. The building cost $100,000 and had accumulated depreciation of $48,000 at the time of the loss. Holland received a cash settlement from the insurance company and reported a loss of $21,000. In Holland's current-year cash flow statement, the net change reported in the cash flows from investing activities section should be a A) $31,000 increase. B) $21,000 decrease. C) $52,000 decrease. D) $10,000 increase.
A) $31,000 increase. Investing activities include the lending of money; the collection of those loans; and the acquisition, sale, or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specifically for resale and (2) property, plant, equipment, and other productive assets. The building had a carrying amount of $52,000 ($100,000 - $48,000), and the loss was $21,000. Hence, the cash inflow from the involuntary conversion (a disposal of property) must have been $31,000 ($52,000 - $21,000).
A company's cash-basis net income for the year ended December 31 was $75,000. The following information is from the company's accounting records: AR - Jan 1 - $15,000 AR - Dec 31 - $20,000 PP Exp - Jan 1 - $7,000 PP Exp - Dec 31 - $4,000 Acc Liabilities - Jan 1 - $2,500 Acc Liabilities - Dec 31 - $2,000 What is the accrual-basis net income? A) $77,500 B) $83,500 C) $72,500 D) $75,000
A) $77,500 In reconciliation of the accrual-basis net income to the cash-basis net income, (1) the increase (decrease) in current operating liabilities is added to (subtracted from) the accrual-basis net income and (2) the increase (decrease) in current operating assets is subtracted from (added to) accrual-basis net income. Thus, the increase in accounts receivable indicates that cash-basis net income is $5,000 lower than accrual-basis net income. The decrease in prepaid expenses indicates that cash-basis net income is $3,000 higher than accrual-basis net income. The decrease in accrued liabilities indicates that cash-basis net income is $500 lower than accrual-basis net income. Therefore, the accrual-basis net income is $77,500 ($75,000 + $5,000 - $3,000 + $500).
Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: A/R increase - $20,000 Equip gain on sale increase- $10,000 Nontrade N/P increase - $50,000 PPd insurance increase - $40,000 A/P increase - $30,000 What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year? A) $50,000 B) $100,000 C) $40,000 D) $0
C) $40,000 Under the indirect method, the net cash flow from operating activities is determined by adjusting the net income for the effect of (1) noncash revenue and expenses that were included in net income, (2) items included in net income whose cash effects relate to investing or financing cash flows, (3) all deferrals of past operating cash flows, and (4) all accruals of expected future operating cash flows. Accordingly, the net cash flows provided by operating activities can be calculated as follows: Net income for the period $70,000 Add noncash losses and expenses included in net income (add depreciation expense) 10,000 Subtract gains and revenues whose cash effects are related to investing or financing cash flows (subtract gain on sale of equipment) (10,000) Add increase in current operating liabilities (add increase in accounts payable) 30,000 Subtract increase in current operating assets (subtract increase in accounts receivable of $20,000 and increase in prepaid insurance of $40,000) (60,000) Net cash provided by operating activities $40,000 Nontrade notes payable is not an operating item. Thus, the increase in nontrade notes payable has no effect on operating cash flows.
How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method? A) As a financing activities outflow. B) As a financing activities inflow. C) In operating activities as an addition to income. D) In operating activities as a deduction from income.
C) In operating activities as an addition to income. Amortization of bond discount on long-term debt is presented in the operating activities section as an addition to net income. It is a noncash expense.
What is something that is readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates?
Cash Equivalents
What are Financing Activities?
Cash flows from financing activities generally involve the cash effects of transactions and other events that relate to the issuance, settlement, or re-acquisition of the entity's debt and equity instruments.
What are Investing Activities?
Cash flows from investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.
Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities: Beginning inventory - $200,000 Ending inventory - $150,000 Cost of good sold - $1,200,000 Beginning A/P - $300,000 Ending A/P - $200,000 What amount should Baler report as cash paid to suppliers for inventory purchases? A) $1,300,000 B) $1,350,000 C) $1,200,000 D) $1,250,000
D) $1,250,000 A two-step adjustment is used to reconcile cost of goods sold to cash paid to suppliers. First, purchases are determined by subtracting the decrease in inventory from cost of goods sold. Second, the decrease in accounts payable is added to purchases to arrive at cash paid to suppliers. Baler should report $1,250,000 cash paid to suppliers [$1,200,000 - ($200,000 - $150,000) + ($300,000 - $200,000)].
Selected financial information for Kristina Company for the year just ended is shown below. Net income - $2,000,000 Increase in net A/R - $300,000 Decrease in Inventory - $100,000 Increase in accounts payable - $200,000 Depreciation expense $400,000 Gain on the sale of available-for-sale securities $700,000 Cash receivable from the issue of common stock $800,000 Cash paid for dividends $80,000 Cash paid for the acquisition of land $1,500,000 Cash received from sale of available-for-sale securities $2,800,000 Kristina's cash flow from investing activities for the year is A) $(1,500,000) B) $2,800,000 C) $1,220,000 D) $1,300,000
D) $1,300,000 Cash flows from investing activities for the year include the $2,800,000 inflow from the sale of available-for-sale securities and the $1,500,000 cash outflow for the purchase of land ($2,800,000 − $1,500,000 = $1,300,000 net cash inflow).
In its statement of cash flow for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: Accrued interest payable: $17,000 decrease Prepaid interest: $23,000 decrease In its income statement for the current year, what amount should Ness report as interest expense? A) $110,000 B) $30,000 C) $64,000 D) $76,000
D) $76,000 To reconcile cash paid for interest ($70,000) to interest expense, the decrease in interest payable (a prior-period expense and a current-period cash outflow) is subtracted. The decrease in prepaid interest (a prior-period cash outflow and a current-period expense) is added. Current interest expense is $76,000 ($70,000 - $17,000 + $23,000).
True or False - Under IFRS, interest received or paid must be classified as a cash flow from operating activities.
FALSE According to IFRS, if an entity is not a financing institution, interest paid and interest received may be classified as financing or investing cash flows, respectively, because they are costs of obtaining financial resources or returns on an investment, respectively.
True or False - Any change in the policy for classifying cash equivalents is applied prospectively.
FALSE Any change in the policy for classifying cash equivalents is a change in accounting principle that requires retrospective application.
True or False - Cash flows from transactions in available-for-sale securities are classified as financing items.
FALSE Cash flows from purchases, sales, and maturities of available-for-sale and held-to-maturity securities are from investing activities. They are reported gross for each classification of security in the cash flows statement.
True or False - Operating activities include cash payment for the liability portion of a finance lease.
FALSE Financing activities include cash payments by the lessee for a reduction of the outstanding liability related to a finance lease. The cash payment for the interest portion of a capital lease is classified as an operating activity.
True or False - All qualifying investments must be classified as cash equivalents.
FALSE Not all qualifying investments must be classified as cash equivalents. An entity should consistently apply a policy for classifying cash equivalents. For example, an entity with operations that primarily involve investing in short-term, highly liquid investments may choose not to treat them as cash equivalents.
True or False - Under U.S. GAAP and IFRS, reporting cash flow per share is prohibited.
FALSE Only U.S. GAAP prohibit reporting cash flow per share. Under IFRS, reporting cash flow per share is not prohibited.
True or False - Under IFRS, an entity that is not a financial institution may classify interest and dividends received as cash inflows from operating and financing activities.
FALSE Under IFRS, an entity that is not a financial institution may classify interest and dividends received as cash inflows from operating and investing activities. Interest and dividends paid may be classified as cash inflows from operating and financing activities.
True or False - A 3-year Treasury note becomes a cash equivalent when its remaining maturity is 3 months.
FALSE Usually, investments with original maturities of 3 months or less qualify as cash equivalents. Thus, a 3-year Treasury note meets the definition if purchased 3 months from maturity. However, if the note was purchased 3 years ago, it does not meet the definition when its remaining maturity is 3 months.
True or False - An entity that invests in cash equivalents may use a descriptive term such as "funds" in its statement of cash flows.
False If an entity invests its cash in cash equivalents, it must use a descriptive term such as "cash and cash equivalents." Otherwise, the term "cash" is acceptable. Terms such as "funds" or "quick assets" may not be used.
True or False - Cash receipts can be classified in the statement of cash flows exclusively as operating or financing activities.
False The statement of cash flows classifies cash receipts and disbursements into one of the three following categories: (1) operating activities, (2) investing activities, or (3) financing activities.
What are operating activities?
Primarily derived from the principal revenue-producing activities of the entity.
True or False - Cash flows from reacquiring the entity's own equity securities result from financing activities.
TRUE
True or False - Financing activities include issuance of stock and payment of dividends.
TRUE
True or False - Under IFRS, an entity that is not a financial institution may classify dividends paid and received as financing and investing cash flows, respectively.
TRUE
True or False - Receipt of a contribution of an investment asset is a noncash investing and financing activity.
TRUE Examples of noncash investing and financing activities include (1) converting debt to equity, (2) obtaining assets by assuming directly related liabilities or entering into a capital lease, (3) obtaining a building or investment asset by receiving a gift, and (4) exchanging a noncash asset or liability for another.
What is the primary purpose of the Statement of Cash Flows?
To provide information about the cash receipts and payments of an entity during a period.
What are examples of Cash Equivalents?
Treasure Bills Commercial Paper Money Market Funds Investments with original maturities of 3 months or less
True or False - Investing activities include disposing of productive assets used in the production of services.
True
True or False - Operating activities include all transactions and other events not classified as investing and financing.
True
True or False - Operating cash outflows include principal payments on notes to suppliers.
True
True or False - Under U.S. GAAP, operating cash inflows include cash interest and dividends received.
True
True or False - Cash equivalents have an insignificant interest rate risk.
True Cash equivalents are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.
Must a company disclose investing and financing activities that affect recognized assets or liabilities but NOT cash flows?
Yes, on the Statement of Cash Flows. Examples are: 1. Conversion of debt to Equity. 2. Exchange of a noncash asset or liability for another. 3. Acquisition of assets either by assuming directly related liabilities or by means of a finance lease. 4. Obtaining a building or investment asset by gift.