FAR SU17

Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?

Statement of cash flows A statement of cash flows is required as part of a full set of financial statements of all business and not-for-profit entities. The primary purpose of a statement of cash flows is to provide information about the cash receipts and payments of an entity during a period. A secondary purpose is to provide information about operating, investing, and financing activities. The financing activities section of a cash flow statement would clearly show if the company has cash inflows from the sale of debt or equity securities.

Cash flows from operating activities

Should be presented using the direct method, but use of the indirect method of disclosure is allowed. The FASB has expressed a preference for the direct method. However, if the direct method is used, a separate reconciliation based on the indirect method must be provided in a separate schedule. For this reason, most entities use the indirect method. The same net operating cash flow is reported under both methods.

Barber Company has recorded the following payments for the current period: Interest paid on bank loan $300,000 Dividends paid to Barber shareholders 200,000 Repurchase of Barber stock 400,000 The amount to be shown in the financing activities section of Barber's statement of cash flows should be

$600,000 The payment and collection of interest are treated as cash flows from operating activities. Financing activities include paying dividends and treasury stock transactions. Thus, the amount to be reported in the financing activities section of the statement of cash flows is $600,000 ($200,000 + $400,000).

Selected financial information for Kristina Company for the year just ended is shown below. Net income $2,000,000 Increase in net accounts receivable 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 the sale of available-for-sale securities 2,800,000 Assuming the indirect method is used, Kristina's cash flow from operating activities for the year is

$1,700,000 The following is the net cash flow from operating activities calculated using the indirect method: Net income $2,000,000 Add: Decrease in inventory 100,000 Add: Increase in accounts payable 200,000 Add: Depreciation expense 400,000 Minus: Increase in net accounts receivable (300,000) Minus: Gain on sale of securities (700,000) Net cash provided by operating activities $1,700,000 The adjustment from cost of goods sold (an accrual accounting amount used to calculate net income) to cash paid to suppliers requires two steps: (1) from cost of goods sold to purchases and (2) from purchases to cash paid to suppliers. The $100,000 decrease in inventory is added to net income. It indicates that purchases were $100,000 less than cost of goods sold. The $200,000 increase in accounts payable is added to net income. It indicates that cash paid to suppliers was $200,000 less than purchases. Thus, the net effect of the changes in inventory and accounts payable is that cash paid to suppliers was $300,000 ($100,000 + $200,000) less than the accrual basis cost of goods sold. Depreciation expense ($400,000) is a noncash item included in net income. Hence, it is added back to net income. The net accounts receivable balance increased by $300,000, implying that cash collections were less than sales. If sales, collections, write-offs, and recognition of credit loss expense were the only relevant transactions, $300,000 should be subtracted from net income. Use of the change in net accounts receivable as a reconciliation adjustment is a short-cut method. It yields the same net adjustment to net income as separately including the effects of the change in gross accounts receivable, credit loss expense (a noncash item resulting in an addition), and bad debt write-offs (a subtraction to reflect that write-offs did not result in collections). The sale of securities is an investing activity. It also is subtracted from net income.

A company calculated the following data for the period: Cash received from customers $25,000 Cash received from sale of equipment 1,000 Interest paid to bank on note 3,000 Cash paid to employees 8,000 What amount should the company report as net cash provided by operating activities in its statement of cash flows?

$14,000 Operating activities are all transactions and other events that are not financing or investing activities. In general, operating activities involve the production and delivery of goods and the provision of services. Their effects normally are reported in earnings. Cash inflows from operating activities include receipts from collection or sale of accounts and notes resulting from sales to customers. Cash outflows from operating activities include cash payments to employees for services and creditors for interest. Thus, the net cash provided by operating activities is ($25,000 − $8,000 − $3,000) $14,000.

Fara Co. reported bonds payable of $47,000 on December 31, Year 1, and $50,000 on December 31, Year 2. During Year 2, Fara issued $20,000 of bonds payable in exchange for equipment. There was no amortization of bond premium or discount during the year. What amount should Fara report in its Year 2 statement of cash flows for redemption of bonds payable?

$17,000 Assuming no amortization of premium or discount, the net amount of bonds payable reported was affected solely by the issuance of bonds for equipment and the redemption of bonds. Given that $20,000 of bonds were issued and that the amount reported increased by only $3,000, $17,000 of bonds must have been redeemed. This amount should be reported in the statement of cash flows as a cash outflow from a financing activity.

Reed Co.'s Year 1 statement of cash flows reported cash provided from operating activities of $400,000. For Year 1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed's Year 1 statement of cash flows, what amount was reported as net income?

$205,000 Depreciation expense and the loss from goodwill impairment are noncash items that are added to net income to arrive at net cash provided by operating activities. Hence, they are subtracted from net cash provided by operating activities to arrive at net income. The payment of cash dividends is not a reconciling item because it is a financing cash flow that does not affect net income. Net income was therefore $205,000 ($400,000 net cash provided by operating activities - $190,000 depreciation - $5,000 goodwill impairment).

Carlson Company has the following payments recorded for the current period: Dividends paid to Carlson shareholders $150,000 Interest paid on bank loan 250,000 Purchase of equipment 350,000 The total amount of the above items to be shown in the operating activities section of Carlson's statement of cash flows should be

$250,000 Cash flows from operating activities include cash flows from all activities not classified as investing or financing. Their effects normally are reported in earnings. Operating cash flows include the payment and collection of interest, dividends paid are a financing cash outflow, and the purchase of equipment is an investing activity. Thus, the total amount to be reported in the operating activities section of the statement of cash flows is $250,000.

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, Year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, Year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, Year 1?

$3,000 Investing activities include acquiring property, plant, and equipment. Polk has a cash outflow of $3,000 for the equipment and finances the remaining amount. The monthly payments made by Polk are repayments of a debt obligation. Thus, they are financing cash flows.

Abbott Co. is preparing its statement of cash flows for the year. Abbott's cash disbursements during the year included the following: Payment of interest on bonds payable $500,000 Payment of dividends to stockholders 300,000 Payment to acquire 1,000 shares of Marks Co. common stock 100,000 What should Abbott report as total cash outflows for financing activities in its statement of cash flows under U.S. GAAP?

$300,000 The $300,000 dividend should be classified as a financing cash outflow. The payment of interest is an operating cash outflow under U.S. GAAP, and the payment to acquire the common stock of Marks is an investing cash outflow. Under IFRS, payment of dividends may be classified as an operating or a financing activity.

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

$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).

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale increase 10,000 Nontrade notes payable increase 50,000 Prepaid insurance increase 40,000 Accounts payable increase 30,000 What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year?

$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.

Alp, Inc., had the following activities during the current year: Acquired 2,000 shares of stock in Maybel, Inc., for $26,000 Sold an investment in bonds classified as available for sale for $35,000 when the carrying amount was $33,000 Acquired a $50,000, 4-year certificate of deposit from a bank that was classified as held to maturity. (During the year, interest of $3,750 was paid to Alp.) Collected dividends of $1,200 on stock investments In Alp's current-year statement of cash flows, net cash used in investing activities should be

$41,000 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. Thus, the purchase of debt and equity securities, sale of debt and equity securities, and acquisition of a long-term certificate of deposit (not a cash equivalent) are investing activities assuming the debt securities are not trading securities. The receipts of interest and dividends are cash flows from operating activities. The net cash used in investing activities therefore equals $41,000 ($26,000 - $35,000 + $50,000).

A company reports the following information for Year 1: Sale of equipment $20,000 Issuance of the company's bonds 10,000 Dividends paid 5,000 Purchase of stock of another company 2,000 Purchase of U.S. Treasury note 2,000 Income taxes paid 2,000 Interest income received 500 What is the company's net cash flow from financing activities?

$5,000 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. In addition, payments of cash dividends are classified as cash outflows from financing activities. Therefore, the items that should be classified as cash flows from financing activities are the dividends paid ($5,000) and the issuance of the company's bonds ($10,000). The net cash flow should be an inflow of $5,000 ($10,000 - $5,000). Cash flows from investing activities include the sale of equipment ($20,000), the purchase of stock of another company ($2,000), and the purchase of a U.S. Treasury note ($2,000). Cash flows from operating activities include income taxes paid ($2,000) and interest income received ($500).

A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative balance sheet information: Beginningof Year End ofYear Accounts payable $3,000 $1,000 Unearned revenue 300 500 Wages payable 300 400 Prepaid rent 1,200 1,500 Accounts receivable 1,400 600 What amount should the company report as its accrual-based net income for the current year?

$71,200 The decrease in accounts payable implies that cash paid to suppliers exceeded purchases. The decrease ($3,000 - $1,000 = $2,000) is included in the calculation of cash-basis net income but not accrual-basis net income. The increase in the liability for unearned revenue ($500 - $300 = $200) implies a cash inflow that increased cash-basis net income but not accrual-basis net income. The increase in wages payable ($400 - $300 = $100) implies an accrual-basis expense not recognized in cash-basis net income. The increase in prepaid rent ($1,500 - $1,200 = $300) implies reduced cash-basis net income with no effect on accrual-basis net income. The decrease in accounts receivable ($1,400 - $600 = $800) implies that cash collections exceeded accrual-basis revenue. Accrual-basis net income based on these adjustments is therefore $71,200. Cash-basis net income $70,000 A/P decrease 2,000 Unearned revenue increase (200) Wages payable increase (100) Prepaid rent increase 300 A/R decrease (800) $71,200

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?

$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).

Savor Co. had $100,000 in accrual basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances. Under the cash basis of accounting, what amount of pretax income should Savor report for the year?

$84,000 The increase in accounts receivable indicates that cash-basis pretax income is $10,000 lower than accrual-basis pretax income. Revenues from the increase in receivables are reported as earned prior to the future related cash inflows. The decrease in accounts payable indicates that cash-basis pretax income is $6,000 lower than accrual-basis pretax income. The cash outflows related to the increase in payables occurred, but the related expense was accrued in a prior year. Thus, cash pretax income is $84,000 ($100,000 - $10,000 - $6,000). When reconciling net income to net cash flows provided by operating activities, the increase in current operating assets and the decrease in current operating liabilities must be subtracted from net income.

Ina Co. had the following beginning and ending balances in its prepaid expenses and accrued liabilities accounts for the current year: PrepaidExpenses AccruedLiabilities Beginning balance $ 5,000 $ 8,000 Ending balance 10,000 20,000 Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?

$93,000 Debits to operating expenses totaled $100,000 for the year. The accrued liabilities account increased by $12,000 ($20,000 ending - $8,000 beginning). This means that $12,000 of the debited operating expenses were not paid in the current year and must be subtracted from the $100,000. The prepaid expenses account increased by $5,000 ($10,000 ending - $5,000 beginning). This means $5,000 of operating expenses were prepaid in the current year but not included in debited operating expenses because the prepaid expense account was debited instead; these must be added to the $100,000. Thus, Ina paid $93,000 total in operating expenses during the current year ($100,000 - $12,000 + $5,000).

Which of the following should be disclosed as supplemental information in the statement of cash flows? Cash Flow per share Conversion of Debt to Equity

Cash Flow per share: NO Conversion of Debt to Equity: YES Financial statements must not report cash flow per share. Reporting a per-share amount might improperly imply that cash flow is an alternative to net income as a performance measure. Conversion of debt to equity is a noncash financing activity. Information about all material investing and financing activities that affect recognized assets or liabilities but not cash flows must be disclosed. Given only a few transactions, disclosure may be on the same page as the statement of cash flows. Otherwise, disclosure may be elsewhere in the statements with a clear reference to the statement of cash flows.

Which of the following statements is true regarding a statement of cash flows prepared under IFRS? Certain bank overdrafts may be classified as cash and cash equivalents. Interest paid is classified as a cash flow from investing activities. Interest received may be classified as a cash flow from either investing or financing activities. Dividends received may be classified as cash flows from either operating or financing activities

Certain bank overdrafts may be classified as cash and cash equivalents. Under IFRS, bank overdrafts may be classified as cash and cash equivalents if they are (1) repayable on demand and (2) part of an entity's cash management.

The computations required to prepare the statement of cash flows include all of the following except The sale of investments in debt or equity securities. The sale of goods or services. Borrowing via notes payable or bonds. Equipment purchased with a note payable.

Equipment purchased with a note payable The acquisition of a long-lived asset in exchange for debt is a noncash investing transaction. It is therefore classified as a noncash financing and investing activity because it affects a recognized asset and a recognized liability but not cash flows. It is disclosed outside the statement of cash flows.

When the direct method of preparing a statement of cash flows is used, an enterprise should provide a reconciliation of net income to net cash flows from which activity? Operating. Investing. Financing. No reconciliation should be provided.

Operating If the direct method is used, a reconciliation of net income and net cash flows from operating activities is required to be provided in a separate schedule.

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows?

Operationg Activities: $100,000 addition to net income Investing Activities: $400,000 cash inflow Cash receipts from the sale of property, plant, and equipment of $400,000 are reported as a cash inflow from investing activities. Under the indirect method, the net cash flow from operating activities is determined by adjusting net income for the effect of items included in net income whose cash effects relate to investing or financing cash flows. Losses and expenses whose cash effects are related to investing or financing cash flows are added to net income. Bear recognized a loss on disposal of equipment of $100,000 ($500,000 carrying value - $400,000 cash receipts). Accordingly, $100,000 is reported as an addition to net income in the operating activities section of the statement of cash flows.