Chapter 20

The following data is for the Matt Company for 20X1: Loss on sale of equipment $ 4,000 Purchase of Ithaca Corp. bonds (face value $400,000) 375,000 Proceeds from sale of machinery 200,000 Dividends paid 25,000 Proceeds from sale of treasury stock 100,000 The amount reported as net cash from investing activities is:

$(175,000).

Jones Company elected to use the cumulative earnings approach for distributions from its equity-method investment purchased at the beginning of 20X1. During 20X1, Jones earned $200,000 on the investment and received $210,000 in dividends. In the investing activities section of the statement of cash flows prepared under the direct method, Jones reports dividends of:

$0.

The dividends actually paid during 20X2 are:

$0.

The following data is for the Kris Company for 20X1: Gain on sale of equipment $ 8,000 Purchase of First Corp. bonds (face value $250,000) 275,000 Proceeds from sale of machinery 300,000 Dividends paid 50,000 Proceeds from sale of treasury stock 200,000 The amount reported as net cash provided by financing activities is:

$150,000.

Which of the following adjustments is commonly made to the cash flow from operating activities section under the indirect method because it does not cause cash to increase or decrease?

Amortization expense

Which of the following statements does not correctly describe an adjustment to net income in determining cash flows from operating activities when using the indirect method?

An increase in inventory will be added to net income.

Which of the following transactions would not be reported within the financing activities section of the cash flow statement?

An issue of common stock in order to retire a bond liability.

Under U.S. GAAP, which of the following is not included in net cash flow from operating activities under the direct method?

Cash dividends paid

Which of the following is not correct with respect to the difference between accrual accounting and cash flow reporting?

Cash flow reporting uses subjective judgment which can introduce errors and uncertainty.

Which of the following statements does not correctly describe an issue pertaining to the comparability of the cash flow statement across firms?

Companies that aggressively manage their working capital can't easily manage the short-run appearance of their operating cash flows relative to those companies that do not aggressively manage their working capital.

The FASB decided that the allocation of income taxes paid to operating, financing, and investing activities would be complex and arbitrary, and relied on which one of the following justifications for its decision?

Cost-benefit constraint

Which of the following adjustments is commonly made to the cash flow from operating activities under the indirect method because it does not cause cash to increase or decrease?

Depreciation expense

Which of the following does not represent the impact of the use of stock options when comparing operating cash flows?

Firms not using stock options will generally have lower compensation expense and higher net income.

Which of the following would be reported in the cash flow from operating activities section of the cash flow statement under the direct method?

Increase in taxes payable.

Which of the following is not an accurate description of the direct method?

It requires a reconciliation of net income to net cash provided by operating activities.

For a firm using the indirect method, which of the following statements does not correctly describe an adjustment to net income when determining cash flows from operating activities?

Patent amortization expense will be deducted from net income.

Which of the following does not reflect the accounting and impact on the statement of cash flows for the sale or transfer of accounts receivable?

Receivable sales are not reported in the statement of cash flows as they do not represent collections from the end customers and therefore are not part of operating cash flows.

Which of the following does not accurately describe the presentation of software development costs on the statement of cash flows?

Reclassifying software development costs undoes the misleading effects for any firm that attempts to improve operating cash flows by lowering the technological feasibility threshold in the current period relative to prior periods.

Which of the following transactions would be reported within the investing activities section of the cash flow statement?

The cash sale of a building at a loss.

Analysts' preferences regarding use of the direct method or indirect method may be based on all except which of the following reasons?

The reconciliation between accrual earnings and operating cash flows for firms using the direct method enhances the comparability of operating cash flows to those of firms using the indirect method.

Under the indirect method, the gain on sale of equipment should be:

added back to net income to arrive at cash flow from operating activities.

Strafford Inc. elected to use the nature of distribution approach for distributions from its equity-method investment purchased at the beginning of 20X1. In the statement of cash flows, Strafford should classify dividends received from its investment:

based on the nature of the earnings generated by the investee company.

U.S. GAAP mandates that firms provide a:

cash flow statement.

Which of the following is an acceptable accounting approach for distributions under the equity method?

cumulative earnings approach

An increase in inventory of $7,000 for the year:

decreases cash flow from operating activities by $7,000.

An increase in accounts receivable of $6,000 for the year:

decreases cash flow from operations by $6,000.

Accrual accounting net income can differ from operating cash flows for all of the following reasons except:

dividend declaration and payment dates.

Cash flows arising from the issuance of company bonds are cash flows from:

financing activities.

Cash flows arising from the payment of dividends are cash flows from:

financing activities.

Debt extinguishments, debt prepayments and settlements should be classified as ____ cash flows.

financing.

A decrease in accounts receivable of $16,000 for the year:

increases cash flow from operating activities by $16,000.

A decrease in prepaid expenses of $8,000 for the year:

increases cash flow from operating activities by $8,000.

The method of preparing the statement of cash flows used by the majority of firms is the:

indirect method.

Cash flows arising from the acquisitions and divestitures of other companies are cash flows from:

investing activities.

Cash flows arising from the purchase or sale of productive assets are cash flows from:

investing activities.

Cash flow from operating activities:

is very comparable across all firms within the same industry regardless of whether they report under IFRS or U.S. GAAP.

Smith Company elected to use the cumulative earnings approach for distributions from its equity-method investment purchased at the beginning of 20X1. During 20X1, Smith earned $244,000 on the investment and received $110,000 in dividends. In its statement of cash flows—direct method, Smith should report the dividends as a(n):

operating activity.

The cash flow statement of the United Company is in process for 20X2. The United Company is reporting the following balances: 12/31/X1 12/31/X2 Equipment $100,000 $170,000 Loss on sale of equipment 0 10,000 Accumulated depreciation—equipment 75,000 95,000 During 20X2, United sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash. If these were the only investing activities, the cash flow from investing activities is a net cash:

outflow of $88,000.

Which of the following transactions would be reported within the financing activities section of the cash flow statement?

The sale of treasury stock for cash.

A company issued 1,000 shares of $10 par value common stock due to a previously declared stock dividend; the market value at both the date of declaration and distribution was $12 per share. Which of the following correctly describes the reporting of this stock issue within the financing activities section of the cash flow statement?

There is no cash flow.

Jones Company elected to use the cumulative earnings approach for distributions from its equity-method investment purchased at the beginning of 20X1. During 20X1, Jones earned $200,000 on the investment and received $210,000 in dividends. In the operating activities section of the statement of cash flows prepared under the direct method, Jones reports dividends of:

$10,000.

The cash flow statement of the United Company is in process for 20X2. The United Company is reporting the following balances: 12/31/X1 12/31/X2 Equipment $100,000 $170,000 Loss on sale of equipment 0 10,000 Accumulated depreciation—equipment 75,000 95,000 During 20X2, United sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash.Equipment purchases in 20X2 were:

$100,000.

Bruce Company reported net income for 20X1 of $100,000. The company reported depreciation expense of $17,500 and amortization of $5,000. The company also reported a loss on the sale of equipment of $2,500. Based only on this information, the company would report cash flow from operating activities of:

$125,000.

The following data is for the Kris Company for 20X1: Gain on sale of equipment $ 8,000 Purchase of First Corp. bonds (face value $250,000) 275,000 Proceeds from sale of machinery 300,000 Dividends paid 50,000 Proceeds from sale of treasury stock 200,000 The amount reported as net cash provided by investing activities is:

$25,000.

Pipe Corporation reported cost of goods sold of $250,000 for 20X1. It also reported an increase in inventory for the year of $30,000, and an increase in accounts payable of $24,000. Pipe would report cash paid to suppliers in 20X1 under the direct method for cash flows of:

$256,000.

The purchase of equipment during 20X2 is:

$400,000.

The following data is for the Matt Company for 20X1: Loss on sale of equipment $ 4,000 Purchase of Ithaca Corp. bonds (face value $400,000) 375,000 Proceeds from sale of machinery 200,000 Dividends paid 25,000 Proceeds from sale of treasury stock 100,000 The amount reported as net cash from financing activities is:

$75,000.

Treasury stock costing $89,050 was sold for $94,375 cash. Which of the following statements accurately describes the reporting of this transaction within the cash flow statement assuming that the indirect method is used to determine net cash flows from operating activities?

A gain of $5,325 is deducted from net income and a $94,375 cash inflow is reported within the investing activities section of the cash flow statement.

The statement of cash flows is used by outside parties in all but which of the following ways?

To assess if the proper amount of income taxes is reported and can be paid from current funds.

Some analysts prefer the indirect method for the preparation of the cash flow statement because the size and direction of the items reconciling net income to net operating cash flow provide a yardstick for measuring the:

current ratio.