Intermediate Accounting II EXAM 4 Smartbook

Able Company records income tax expense of $75,000. During the current year, the company's income tax payable decreased by $11,000 and its deferred tax asset increased by $3,000. Cash paid for income taxes is

$89,000 Reason: $75,000 + $3,000 + 11,000

deduct from net income

Additions to net income that did not have a cash effect

Which of the following transactions is reported on the statement of cash flows as a significant noncash investing and financing activity?

Common stock is issued in exchange for services

Which of the following statements regarding the disclosure of cash equivalents are correct? (Select all that apply.)

Companies must disclose what type of instruments are classified as cash equivalents. Companies must establish a policy regarding the types of instruments that are classified as cash equivalents.

Add to net income

Deductions from net income that did not have a cash effect

If a change in accounting principle does not require additional taxes to be paid or taxes to be refunded, which account is used to record the tax effects of a change in accounting principle?

Deferred tax asset or liability accounts

Dividends paid

Financing activity

Andrea Mueller prepares a spreadsheet to assist in the preparation of a statement of cash flows. One of the journal entries she enters in the spreadsheet recognizes the effect of net income on retained earnings. Which of the following statements is correct about the effect of this journal entry? (Select all that apply.)

It helps explain part of the change in retained earnings. It does not affect cash flows.

Combined financing and investing transactions that, if they had been structured as two separate transactions, would have involved cash are reported in the statement of cash flows as

Noncash investing and financing activities

Interest paid

Operating activity

Which of following statements regarding the profitability of companies and role of cash flows is correct?

Profitable entities that cannot generate sufficient cash can fail.

Which of the following may explain why a profitable company may still fail?

The company doesn't properly manage its cash flows

Which method of preparing the statement of cash flows lists net income or net loss as the first item?

The indirect method

Which of the following represents a limitation of income statement information with respect to cash flows?

The information is provided only indirectly. Information about the timing of cash flows is not shown.

Which of the following statements is correct regarding the entries made in the spreadsheet.

They are duplicates of the journal entries made during the year.

What circumstance typically causes a company to use a spreadsheet to analyze transactions in order to prepare a statement of cash flows?

Transactions that are complex.

True or false: There can be no operating, investing, or financing activity without a corresponding change in one or more of the non-cash accounts.

True

True or false: Because of the convergence efforts by FASB and IASB, few differences remain between U.S. GAAP and IFRS with respect to accounting changes and error correction.

True Reason: The two standards (IAS No. 8 and SFAS 154 [ASC 250]) converged standards on accounting changes and error correction.

Klein Corp. reports income tax expense of $157,000. During the current year, the company's income tax payable increased by $3,000. The journal entry to derive cash paid for income taxes will include (Select all that apply.)

a credit to income tax payable for $3,000. a debit to income tax expense for $157,000. a credit to cash for $154,000.

Gross Industries reports income tax expense of $57,000. During the current year, the company's income tax payable decreased by $3,000. The journal entry to derive cash paid for income taxes will include (Select all that apply.)

a debit to income tax expense for $57,000. a debit to income tax payable for $3,000.

When using a spreadsheet to analyze transactions and events that must be reported in the statement of cash flows we can be confident that we identified all reportable activities if

all changes to account balances have been explained.

When using a spreadsheet to analyze the information needed to prepare a statement of cash flows, journal entries that explain changes in account balances during the year, as well as the _______ must be entered.

beginning and ending balances

The statement of cash flows does not distinguish between cash and

cash equivalents.

Treasury bills and money market funds are common examples of

cash equivalents.

Statement of Financial Accounting Concepts No. 1 states that the primary objective of financial reporting is to provide investors and creditors with information that helps predict future

cash flows.

The net increase or decrease in the cash flows reported on the statement of cash flows is always equal to the ________ evident from the amounts reported on the comparative balance sheet.

change in the cash balance

The benefit of using a spreadsheet to analyze transactions and events that must be reported in the statement of cash flows is that it allows us to: (select all that apply)

classify activities to be reported on the statement of cash flows record entries to explain account balance changes

In preparing the current year statement of cash flows, what information is readily available to assist preparers in reconstructing the various cash flows during the reporting period? (Select all that apply.)

current year balance sheet prior year balance sheet detailed accounting records current year income statement

What type of information that helps in the preparation of a current year statement of cash flows is readily available in the accounting system? (Select all that apply.)

current year income statement current year balance sheet prior year balance sheet

Transactions that do not involve cash, but that result in significant investing or significant financing activities, are

disclosed as noncash investing and financing activities

The entries in the spreadsheet used to prepare the statement of cash flows

duplicate the actual journal entries that occurred during the year.

A change in reporting entity requires

financial statements of prior periods to be revised retrospectively.

Under IAS 7, interest paid can be classified as a(n) (Select all that apply.)

financing activity. operating activity.

Net cash from operating activities reported in a statement of cash flows prepared using the indirect method is _____ the amount reported in a statement of cash flows prepared using the direct method.

identical to

Provided that we are able to identify the events and transactions that caused the change in each noncash account during the year, we will be able to

identify all operating, investing and financing activities.

Noncash investing and financing activities can be reported (Select all that apply.)

in the notes to the financial statements on the face of statement of cash flows

A limitation of income statement information with respect to cash flows is that the information is reported

indirectly

Which of the following information would be useful in order to project a particular company's future profitability and risk? (Select all that apply.)

information about the company's investing activities information about the company's expansion plans

The first item listed in the statement of cash flows - indirect method is:

net income or loss

The prospective approach for reporting a change in accounting principle requires that

no change is made to previous years' financial statements.

Spreadsheet analysis relies on the fact that in order for cash to increase or decrease, there must be a corresponding change in one or more ____ accounts.

noncash

Halon Company's net income was reduced by income tax expense of $5,000. The company's income tax payable shows both a beginning and ending balance of $500. Related to income tax expense, Halon should ______ in its statement of cash flows - direct method.

not adjust net income

In the statement of cash flows, cash and cash equivalents are

not reported separately.

Under IAS 7, dividends received can be classified as a(n) (Select all that apply.)

operating activity. investing activity.

When using a spreadsheet to derive a statement of cash flows, we can be confident that we considered all reportable items if there are no ____________ activity(ies) without a corresponding change in one or more of the non-cash accounts.

operating, investing, financing

Noncash investing and financing activities can be reported on the same_____ as the statement of cash flows or in the________ to the financial statements.

page notes

The journal entry to close the income summary: (Select all that apply.)

partially explains the change in retained earnings does not affect cash flows

When correcting errors in previously issued financial statements, IFRS ______ the effect of the error to be reported in the current period if it is not considered practicable to report it retrospectively; U.S. GAAP ____ such treatment.

permits; prohibits

When preparing the statement of cash flows using the indirect method, components of net income that increase cash by an amount exactly the same as that reported in the income statement,

require no adjustment to net income

When a company makes accounting choices that cause earnings to follow a steady trend from year to year, this manipulation is called income

smoothing

When a company makes accounting choices that cause earnings to follow a steady trend from year to year, this manipulation is called income_________ .

smoothing

The statement of cash flows provides information about cash and

sources of cash.

Much of the value of the underlying information provided by the _____ is lost if that information is reported only in the balance sheet.

statement of cash flows

Events that cause changes in retained earnings are reported in the

statement of retained earnings

When an error causes the ending balance of retained earnings to be incorrect, a prior period adjustment is reported in the

statement of retained earnings

If a change in accounting principle requires prior tax savings to be repaid, the tax effects are recorded in a ________ account; however, if the tax law does not require a recapture of prior tax savings, then the tax effects are recorded in a _________ account.

taxes payable; deferred tax liability

Which of the following financial statements provide useful information that helps financial statement users to forecast a company's cash-generating potential? (Select all that apply.)

the balance sheet the income statement

The amount of net cash from operating activities shown when the indirect method is used is

the same as under the direct method.

What type of information does a statement of cash flows provide? (Select all that apply.)

the sources of cash flows the amount of cash flows

The cash flow statement is intended to help investors and creditors assess the amounts, timing, and ________of future cash flows.

uncertainty

Under the indirect method of preparing the statement of cash flows, gains reported in the income statement are deducted from net income because they

were added in deriving net income. did not result in additional cash inflows.

Relay Corp. estimates bad debt expense as 3% of credit sales. During year 1 Relay sold $100,000 of goods on account. During year 2, Relay determines that a more accurate estimate of bad debts is 4% of credit sales. Year 2 sales on account was $300,000. The entry in year 2 to record the change in accounting estimate would include a debit to

bad debt expense for $12,000.

Gross Industries reports income tax expense of $57,000. During the current year, the company's income tax payable decreased by $3,000 and its deferred tax liability increased by $2,000. Cash paid for income taxes is

58,000 Reason: $57,000 + $3,000 - $2,000

Which of the following is correct regarding the relationship between cash flows, income, and company survival?

A company with negative income, but good cash flows may survive for a number of years.

Which of the following is true regarding the classification of investments as cash equivalents?

A company's policy should be consistent with its motivation for acquiring various investments.

Which of the following represents an inherent difficulty of preparing the statement of cash flows?

Accounting systems typically do not produce the information needed to prepare the statement.

Which of the following approaches is commonly used to analyze transactions to help in the preparation of a statement of cash flows?

An electronic or manual spreadsheet

Which of the following statements is correct regarding the information content of the income statement and the balance sheet?

Both provide information that helps forecast a company's ability to generate cash.

Dividends received typically are reported as cash from investing activities by ____ based companies.

IFRS

Which of the following may be objectives of companies that manage earnings? (Select all that apply.)

Increasing income Smoothing income Decreasing income

Which of the following may justify the difference in the rule for classifying interest paid and dividends paid?

Interest expense reduces net income, while dividends are a reduction of equity.

Andrea Mueller prepares a spreadsheet to assist in the preparation of a statement of cash flows. One of the journal entries she enters in the spreadsheet recognizes the effect of net income on retained earnings. Which of the following statements is correct about the effect of this journal entry? (Select all that apply.)

It helps explain part of the change in retained earnings. It does not affect cash flows.

Which of the following occur with the prospective approach for reporting a change in accounting principle? (Select all that apply.)

It reflects the changes in the current and future years only. It does not restate financial statements.

Which financial statement shows whether a business expansion was financed with debt, equity, or cash generated from operations?

Statement of cash flows

Which of the following transactions is not reported on the statement of cash flows as a significant investing and financing activity?

Stock dividends are declared and distributed

Which of the following represent limitations with respect to cash flows? (Select all that apply.)

The items reported in the income statement are not necessarily reported in the period they occurred. The information in the balance sheet is provided only indirectly.

Which of the following represent differences between IFRS and U.S. GAAP with respect to the presentation of the statement of cash flows?

The potential classification of individual items among the categories The degree of flexibility in some areas

Which of the following should be included in the disclosure for a change in reporting entity? (Select all that apply.)

The reason for the change. The nature of the change. The effect of the change on net income.

Which of the following aspects of a statement of cash flows are the same under IFRS and U.S. GAAP?

The same three major categories are presented

Which of the following statements is correct regarding the relationship between the cash balance in the balance sheet and the net change in cash reported in the statement of cash flows?

The two amounts usually are not the same.

True or false: An unprofitable company with good cash flow can survive for a period of time.

True

True or false: The statement of cash flows is inherently difficult to prepare because the typical accounting system is not designed to produce the specific information required for the statement.

True

Which of the following are common cash equivalents? (Select all that apply.)

commercial paper treasury bills

IFRS-based statements of cash flows typically report interest received as

investing cash flows.

Recognition of a loss on disposal of long-lived assets

is not reported as a cash flow.

Which of the following information is entered in a spreadsheet used to analyze information for the preparation of a statement of cash flows?

journal entries that explain the changes in the account balances beginning and ending account balances

During 2017, Trey Corporation accrued warranty expense based on 3.5% of net sales revenue. During 2018, Trey Corporation revised its estimate to 4%. Sales revenue was $2 million for each year. For the year ended December 31, 2018, the warranty-related entry would include a debit to:

warranty expense for $80,000