RES SU16 HW1 Part I

Fact Pattern: Selected financial information for Kristina Company for the year just ended is shown below. Net income$2,000,000 Increase in net accounts receivable300,000 Decrease in inventory100,000 Increase in accounts payable200,000 Depreciation expense400,000 Gain on the sale of available-for-sale securities700,000 Cash receivable from the issue of common stock800,000 Cash paid for dividends80,000 Cash paid for the acquisition of land1,500,000 Cash received from the sale of available-for-sale securities2,800,000 Kristina's cash flow from investing activities for the year is A) $(1,500,000) B) $1,220,000 C) $2,800,000 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).

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? A) $105,000 B) $305,000 C) $595,000 D) $205,000

D) $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).

The comparative balance sheet for an entity that had profit of $150,000 for the year ended December 31, Year 2, and paid $125,000 of dividends during Year 2 is as follows: 12/31/Yr 2: ~ Cash$150,000 ~ Accounts receivable200,000 = Total assets$350,000 ~ Payables$ 80,000 ~ Share capital130,000 ~ Retained earnings140,000 = Total$350,000 12/31/Yr 1: ~ Cash$180,000 ~ Accounts receivable220,000 = Total assets$400,000 ~ Payables$160,000 ~ Share capital125,000 ~ Retained earnings115,000 = Total$400,000 If dividends paid are treated as an operating item, the amount of net cash from operating activities during Year 2 was A) $(35,000) B) $90,000 C) $150,000 D) $210,000

A) $(35,000) Profit is adjusted to determine the net cash from operations. The payment of cash dividends is regarded as a cash flow from an operating activity. Hence, it is a reconciling item requiring a $125,000 reduction of profit. However, the decrease in accounts receivable ($220,000 - $200,000 = $20,000) during the period represents a cash inflow (collections of pre-Year 2 receivables) not reflected in Year 2 profit. Moreover, the decrease in payables ($160,000 - $80,000 = $80,000) indicates a cash outflow (payment of pre-Year 2 liabilities) that also is not reflected in Year 2 profit. Accordingly, net cash from operations was -$35,000 ($150,000 - $125,000 + $20,000 - $80,000).

Fact Pattern: Selected financial information for Kristina Company for the year just ended is shown below. Net income$2,000,000 Increase in net accounts receivable300,000 Decrease in inventory100,000 Increase in accounts payable200,000 Depreciation expense400,000 Gain on the sale of available-for-sale securities700,000 Cash receivable from the issue of common stock800,000 Cash paid for dividends80,000 Cash paid for the acquisition of land1,500,000 Cash received from the sale of available-for-sale securities2,800,000 Kristina's cash flow from financing activities for the year is A) $(80,000) B) $720,000 C) $3,520,000 D) $800,000

A) $(80,000) Cash flows from financing activities for the year consist of the $80,000 outflow for dividends paid. The issue of common stock is a financing activity, but the $800,000 of proceeds have not yet been received.

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) $100,000 C) $80,000 D) $20,000

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.

Cash flows from transactions in which of the following securities are most likely to be considered cash flows from operating activities? A) Trading debt securities. B) Held-to-maturity securities. C) Available-for-sale debt securities. D) Noncurrent debt securities.

A) Trading debt securities. Cash flows from purchases, sales, and maturities of trading debt securities are cash flows from operating activities.

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 inventory150,000 Cost of good sold1,200,000 Beginning accounts payable300,000 Ending accounts payable200,000 What amount should Baler report as cash paid to suppliers for inventory purchases? A) $1,250,000 B) $1,200,000 C) $1,350,000 D) $1,300,000

A) $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)].

Box, a nongovernmental not-for-profit organization, had the following transactions during the year: Proceeds from sale of investments$ 80,000 Purchase of property, plant and equipment10,000 Proceeds from long-term debt100,000 Loss on sale of investment5,000 What amount should be reported as net cash provided by finance activities in Box's statement of cash flows? A) $100,000 B) $70,000 C) $80,000 D) $75,000

A) $100,000 Cash flows from finance activities generally involve the cash effects of transactions and other events that relate to the issuance, settlement, or reacquisition of an entity's debt and equity instruments. Thus, only the $100,000 proceeds from long-term debt should be reported as net cash provided by finance activities in the statement of cash flows.

Selected financial information for Floral company is as follows: Repayment of loan$18,000 Interest paid on loan 7,000 Cash dividends paid12,000 Cash received from issuance of stock45,000 Cash dividends received 4,000 Paid down accounts payable 2,000 Floral's net cash inflow from financing activities is: A) $15,000 B) $10,000 C) $19,000 D) $8,000

A) $15,000 Cash inflows from financing activities include the cash received from issuance of stock of $45,000. Cash outflows from financing activities include the repayment of the loan for $18,000 and the cash dividends paid of $12,000. Therefore, net cash flow from financing activities is $15,000 ($45,000 - $18,000 - $12,000). Interest paid on the loan, dividends received, and the reduction of accounts payable are all operating activities.

Ace Co. issued 1,000 shares of its $10 par value common stock for $15 per share in cash. How should this transaction be reported in Ace's statement of cash flows for the year of issuance? A) $15,000 cash inflow from financing activities. B) $10,000 cash flow from investing activities and $5,000 adjustment to arrive at cash flows from operating activities. C) $15,000 cash flow from investing activities. D) $10,000 cash inflow from financing activities and $5,000 adjustment to arrive at cash flows from operating activities.

A) $15,000 cash inflow from financing activities. Cash proceeds from issuing shares and other equity instruments (obtaining resources from owners) are cash inflows from financing activities in the statement of cash flows. The total cash inflow of $15,000 (1,000 shares × $15 price per share) is thus reported as a cash inflow from financing activities.

Fact Pattern: Kollar Corp.'s transactions for the year ended December 31, Year 6, included the following: ~ Purchased real estate for $550,000 cash borrowed from a bank ~ Sold available-for-sale debt securities for $500,000 ~ Paid dividends of $600,000 ~ Issued 500 shares of common stock for $250,000 ~ Purchased machinery and equipment for $125,000 cash ~ Paid $450,000 toward a bank loan ~ Reduced accounts receivable by $100,000 ~ Increased accounts payable by $200,000 Kollar's net cash used in investing activities for Year 6 was A) $175,000 B) $50,000 C) $375,000 D) $675,000

A) $175,000 The purchases of real estate and of machinery and equipment were uses of cash in investing activities. The sale of available-for-sale debt securities provided cash from an investing activity. Consequently, the net cash used in investing activities was $175,000 ($550,000 - $500,000 + $125,000). The reduction in accounts receivable and the increase in accounts payable were operating activities.

Fact Pattern: Karr, Inc. reported net income of $300,000 for the current year. Changes occurred in several balance sheet accounts as follows: Equipment$25,000 increase Accumulated depreciation40,000 increase Note payable30,000 increase Additional information: ~ During the current year, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. ~ In December of the current year, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000. ~ Depreciation expense for the year was $52,000. In Karr's current-year statement of cash flows, net cash used in investing activities should be A) $2,000 B) $12,000 C) $35,000 D) $22,000

A) $2,000 The cash flows from investing activities include the cash effects of the sale of equipment and the purchase of equipment. The issuance of a note payable as part of the acquisition price of equipment does not involve cash but should be classified as a noncash financing activity. The cash inflow from the sale of equipment (carrying amount + gain) is $18,000 [($25,000 - $12,000) + $5,000]. The cash outflow from the purchase of equipment is $20,000 cash. The $30,000 note payable is included elsewhere. Thus, net cash used is $2,000 ($20,000 - $18,000).

Fact Pattern: Kollar Corp.'s transactions for the year ended December 31, Year 6, included the following: ~ Purchased real estate for $550,000 cash borrowed from a bank ~ Sold available-for-sale debt securities for $500,000 ~ Paid dividends of $600,000 ~ Issued 500 shares of common stock for $250,000 ~ Purchased machinery and equipment for $125,000 cash ~ Paid $450,000 toward a bank loan ~ Reduced accounts receivable by $100,000 ~ Increased accounts payable by $200,000 Kollar's net cash used in financing activities for Year 6 was A) $250,000 B) $500,000 C) $50,000 D) $450,000

A) $250,000 The dividend payment and the payment of the bank loan were uses of cash in financing activities. The borrowing from the bank and the issuance of stock provided cash from financing activities. Thus, the net cash used in financing activities was $250,000 ($600,000 - $550,000 - $250,000 + $450,000).

Lane Company acquired copyrights from authors, in some cases paying advance royalties and in others paying royalties within 30 days of year-end. Lane reported royalty expense of $375,000 for the year ended December 31, Year 2. The following data are included in Lane's balance sheet: Year 1 ~ Prepaid royalties$60,000 ~ Royalties payable75,000 Year 2 ~ Prepaid royalties$50,000 ~ Royalties payable90,000 In its Year 2 statement of cash flows, Lane should report cash payments for royalties of A) $350,000 B) $370,000 C) $400,000 D) $380,000

A) $350,000 A decrease in a prepaid royalties asset account implies that royalty expense was greater than the related cash payments. Similarly, an increase in a royalties payable liability account indicates that royalties expense exceeded cash payments. Royalty expense therefore exceeds the amount of cash payments for royalty payments by the amount of the decrease in the prepaid royalties account plus the increase in the royalties payable account. Thus, Lane's Year 2 cash payments for royalty payments total $350,000 ($375,000 royalty expense - $10,000 decrease in prepaid royalties - $15,000 increase in royalties payable).

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 A) $41,000 B) $37,250 C) $39,800 D) $38,050

A) $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).

#The following information was taken from the financial statements of Planet Corp. for the year just ended:Gross accounts receivable, January 1$ 21,600Gross accounts receivable, December 3130,400Sales on account and cash sales438,000Uncollectible accounts1,000No accounts receivable were written off or recovered during the year. If the direct method is used in the statement of cash flows, Planet should report cash collected from customers as A) $429,200 B) $447,800 C) $428,200 D) $446,800

A) $429,200 Collections from customers equal sales revenue adjusted for the change in gross accounts receivable and write-offs and recoveries. Because no accounts receivable were written off or recovered during the year, no adjustment for these transactions is needed. Accounts receivable increased by $8,800 ($30,400 - $21,600), an excess of revenue recognized over cash received. Planet therefore should report cash collected from customers of $429,200 ($438,000 - $8,800).

A company reports the following information for Year 1: Sale of equipment$20,000 Issuance of the company's bonds10,000 Dividends paid5,000 Purchase of stock of another company2,000 Purchase of U.S. Treasury note2,000 Income taxes paid2,000 Interest income received500 What is the company's net cash flow from financing activities? A) $5,000 B) $5,500 C) $15,000 D) $(9,000)

A) $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).

#Violet Corp. reported net income in the current year of $120,000. The following transactions were recorded in the current year:Cash dividends of $23,000 were paid to shareholders.Stock dividends were paid to shareholders, and the market price of shares issued was $44,000.Shares of common stock were issued for $85,000.Additional information includes the following:Litigation settlement of $25,000 paid in JuneDestruction of $72,000 of obsolete inventory in NovemberAcquisition of $110,000 in assets through a finance leaseWhat is the net cash inflow (outflow) from financing activities? A) $62,000 B) $18,000 C) $37,000 D) ($120,000)

A) $62,000 Cash inflows from financing activities include cash received from issuance of common stock. Cash outflows from financing activities include cash dividends paid to shareholders. Thus, the net cash inflow from financing activities is $62,000 ($85,000 - $23,000). Cash outflows from operating activities include the litigation settlement paid. Stock dividends paid to shareholders, destruction of obsolete inventory, and acquisition of assets through a finance lease are non-cash activities.

For the year ended December 31, Ion Corp. had cash inflows of $25,000 from the purchases, sales, and maturities of held-to-maturity debt securities and $40,000 from the purchases, sales, and maturities of available-for-sale debt securities. What amount of net cash from investing activities should Ion report in its cash flow statement? A) $65,000 B) $25,000 C) $0 D) $40,000

A) $65,000 Investing activities include purchases, sales, and maturities of available-for-sale debt securities ($40,000) and held-to-maturity debt securities ($25,000), for a total cash inflow from investing activities of $65,000. These amounts are reported gross for each classification of security in the cash flow statement.

The following information is from Mabel Co.'s year-end financial statements for the current and previous years:Current yearPrevious yearPrepaid expenses$ 10,000$ 20,000Accounts payable50,00030,000Land250,000600,000Land was sold during the current fiscal year for cash resulting in a loss of $40,000. What is Mabel's net adjustment to net income to determine net cash from operating activities? A) $70,000 B) ($70,000) C) $30,000 D) $0

A) $70,000 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. Noncash losses and expenses included in net income should be added to net income. Consequently, the loss of $40,000 from disposal of the land should be added to net income. In addition, increase in current operating liabilities and decrease in current operating assets are both added to net income, resulting in an increase of $30,000 ($20,000 for increase in accounts payable + $10,000 for decrease in prepaid expenses). As a result, the net adjustment to net income to determine net cash from operating activities is $70,000 ($40,000 + $30,000).

#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: January 1: Accounts receivable$15,000$20,000 Prepaid expenses7,0004,000 Accrued liabilities2,5002,000 December 31: Accounts receivable$20,000 Prepaid expenses4,000 Accrued liabilities2,000 What is the accrual-basis net income? A) $77,500 B) $72,500 C) $75,000 D) $83,500

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).

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from A) Financing activities. B) Operating activities. C) Investing activities. D) Lending activities.

A) Financing activities. Financing activities include the issuance of stock, the payment of dividends and other distributions to owners, treasury stock transactions, the issuance of debt, and the repayment or other settlement of debt obligations. It also includes receiving restricted resources that by donor stipulation must be used for long-term purposes.

When using the statement of cash flows to evaluate a company's continuing solvency, the most important factor to consider is the cash A) Flows from (used for) operating activities. B) Flows from (used for) investing activities. C) Balance at the end of the period. D) Flows from (used for) financing activities.

A) Flows from (used for) operating activities. Solvency is the ability of an entity to pay its noncurrent debts as they become due. A statement of cash flows provides information about, among other things, an entity's activities in generating cash through operations (operating activities) to (1) repay debt, (2) distribute dividends, or (3) reinvest to maintain or expand operating capacity. Thus, cash flows from operating activities (net operating cash inflows), which are generated by an entity's ongoing major or central activities, are the best indicator of its ability to remain solvent over the long term.

Bay Manufacturing Co. purchased a 3-month U.S. Treasury bill. In preparing Bay's statement of cash flows, this purchase would A) Have no effect. B) Be treated as an outflow from financing activities. C) Be treated as an outflow from lending activities. D) Be treated as an outflow from investing activities.

A) Have no effect. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Moreover, cash equivalents ordinarily include only investments with original maturities to the holder of 3 months or less. The T-bill is therefore a cash equivalent and has no effect on the statement of cash flows.

The sale of available-for-sale debt securities should be accounted for on the statement of cash flows as a(n) A) Investing activity. B) Financing activity. C) Noncash investing and financing activity. D) Operating activity.

A) Investing activity. Investing activities include acquiring and disposing of debt or equity instruments.

In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for A) Operating activities. B) Borrowing activities. C) Lending activities. D) Financing activities.

A) Operating activities. Cash receipts from sales of goods and services, interest on loans, and dividends on equity securities are from operating activities. Cash payments to (1) suppliers for inventory; (2) employees for services; (3) other suppliers for other goods and services; (4) governments for taxes, duties, fines, and fees; and (5) lenders for interest are also from operating activities.

In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment A) Plus the gain. B) With no addition or subtraction. C) Plus the gain and less the amount of tax attributable to the gain. D) Plus both the gain and the amount of tax attributable to the gain.

A) Plus the gain. Assuming a sale for cash, the cash inflow must equal the carrying amount plus the gain, that is, the total cash receipt.

The primary purpose of a statement of cash flows is to provide relevant information about A) The cash receipts and cash disbursements of an entity during a period. B) An entity's ability to generate future positive net cash flows. C) Differences between net income and associated cash receipts and disbursements. D) An entity's ability to meet cash operating needs.

A) The cash receipts and cash disbursements of an entity during a period. The primary purpose is to provide information about the cash receipts and cash payments of a business entity during a period. This information helps investors, creditors, and other users to assess the entity's ability to generate net cash inflows, meet its obligations, pay dividends, and secure external financing. It also helps assess reasons for the differences between net income and net cash flow and the effects of cash and noncash financing and investing activities.

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment$20,000 Available-for-sale securities purchased10,000 increase Bonds payable-issued50,000 increase Inventory40,000 increase Accounts payable30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year? A) $30,000 B) $0 C) $20,000 D) $10,000

B) $0 The payment of dividends, the repayment of debt (the mortgage), and the issuance of debt (the bonds) are financing activities. The purchase of debt or equity instruments the (available-for-sale securities) is an investing activity. Operating cash flows exclude these financing and investing cash flows. Moreover, these items do not affect net income. Consequently, net cash provided by operating activities can be determined by adjusting net income for the changes in inventory and accounts payable. To account for the difference between cost of goods sold (a deduction from income) and cash paid to suppliers, a two-step adjustment is necessary. The difference between cost of goods sold and purchases is the change in inventory. The difference between purchases and the amount paid to suppliers is the change in accounts payable. Accordingly, the conversion of cost of goods sold to cash paid to suppliers requires subtracting the inventory increase and the accounts payable decrease. The net cash provided by operating activities is therefore $0 ($70,000 net income - $40,000 inventory increase - $30,000 accounts payable decrease).

A company calculated the following data for the period: Cash received from customers$25,000 Cash received from sale of equipment1,000 Interest paid to bank on note3,000 Cash paid to employees8,000 What amount should the company report as net cash provided by operating activities in its statement of cash flows? A) $15,000 B) $14,000 C) $18,000 D) $26,000

B) $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.

#Flax Corp. uses the direct method to prepare its statement of cash flows. The selected data from Flax's trial balances at December 31, Year 6 and Year 5, are as follows:December 31Year 6Year 5Property, plant, & equipment100,00095,000Selling expenses141,500172,000General and administrative expenses137,000151,300Accumulated depreciation16,50015,000•Flax purchased $5,000 in equipment during Year 6.•Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for selling expenses? A) $142,000 B) $141,000 C) $141,500 D) $140,000

B) $141,000 The cash paid for selling expenses equals selling expenses minus the depreciation allocated to selling expenses, or $141,000 {$141,500 Year 6 expense - [($16,500 - $15,000) Year 6 depreciation × 33 1/3% allocated to selling]}. Since no equipment was sold in Year 6, the depreciation expense for the period is calculated as a difference between the ending and beginning balances of accumulated depreciation.

Three years ago, Jameson Company purchased stock in Zebra, Inc., at a cost of $100,000. This stock was sold for $150,000 during the current fiscal year. The result of this transaction should be shown in the investing activities section of Jameson's statement of cash flows as A) Zero. B) $150,000 C) $100,000 D) $50,000

B) $150,000 The statement of cash flows reports the cash effects of transactions. The accrual-basis gain on the stock is not relevant.

During the year, Verity Co. purchased $200,000 of Otra Co. bonds at par and $50,000 of U.S. Treasury bills. Verity classified the Otra bonds as available-for-sale securities and the Treasury bills as cash equivalents. In Verity's statement of cash flows, what amount should it report as net cash used in investing activities? A) $150,000 B) $200,000 C) $0 D) $250,000

B) $200,000 Cash flows from purchases, sales, and maturities of available-for-sale debt securities and held-to-maturity debt securities are from investing activities. No specific classification is necessary for cash and cash equivalents in the statement of cash flows. Thus, only the $200,000 relating to the available-for-sale securities is reported as net cash used in investing activities.

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? A) $30,000 B) $3,000 C) $12,000 D) $9,000

B) $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.

Atwater Company has recorded the following payments for the current period: Purchase Trillium stock$300,000 Dividends paid to Atwater shareholders200,000 Repurchase of Atwater Company stock400,000 The amount to be shown in the investing activities section of Atwater's statement of cash flows should be A) $500,000 B) $300,000 C) $700,000 D) $900,000

B) $300,000 Financing activities include paying dividends and treasury stock transactions. Investing activities include acquiring and disposing of debt and equity instruments. Thus, the amount to be shown in the investing activities section of Atwater's statement of cash flows is $300,000.

Green Co. had the following transactions at December 31: Cash proceeds from sale of investment in bonds of Blue Co. classified as available-for-sale (carrying amount = $60,000)$75,000 Dividends received on Grey Co. stock10,500 Common stock purchased from Brown Co.38,000 What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31? A) $75,000 B) $37,000 C) $47,500 D) $85,500

B) $37,000 The sale proceeds of available-for-sale debt securities ($75,000) are a cash inflow from an investing activity. Cash outflows from acquiring equity instruments ($38,000) also are from an investing activity. But cash inflows from operating activities include cash receipts in the form of dividends ($10,500). Thus, the net cash flow from investing activities is $37,000 ($75,000 - $38,000).

Barber Company has recorded the following payments for the current period: Interest paid on bank loan$300,000 Dividends paid to Barber shareholders200,000 Repurchase of Barber stock400,000 The amount to be shown in the financing activities section of Barber's statement of cash flows should be A) $500,000 B) $600,000 C) $300,000 D) $900,000

B) $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).

Which one of the following should be classified as a cash flow from an operating activity on the statement of cash flows? A) The payment of a cash dividend from money arising from current operations. B) A decrease in accounts payable during the year. C) The payment of cash for the purchase of additional equipment needed for current production. D) An increase in cash resulting from the issuance of previously authorized common stock.

B) A decrease in accounts payable during the year. 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. A decrease in accounts payable indicates a cash outflow to the entity's suppliers in payment for goods or services.

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli's statement of cash flows as a(n) A) Financing activity. B) Noncash financing and investing activity. C) Investing activity. D) Operating activity.

B) Noncash financing and investing activity. The exchange of debt for a long-lived asset does not involve a cash flow. It is therefore classified as a noncash financing and investing activity.

Fact Pattern: Royce Company had the following transactions during the fiscal year ended December 31, Year 2: ~ Accounts receivable decreased from US $115,000 on December 31, Year 1, to US $100,000 on December 31, Year 2. ~ Royce's board of directors declared dividends on December 31, Year 2, of US $.05 per share on the 2.8 million shares outstanding, payable to shareholders of record on January 31, Year 3. The company did not declare or pay dividends for fiscal Year 1. ~ Sold a truck with a net carrying amount of US $7,000 for US $5,000 cash, reporting a loss of US $2,000. ~ Paid interest to bondholders of US $780,000. ~ The cash balance was US $106,000 on December 31, Year 1, and US $284,000 on December 31, Year 2. Royce Company uses the direct method to prepare its statement of cash flows at December 31, Year 2. The interest paid to bondholders is reported in the A) Investing section, as a use or outflow of cash. B) Operating section, as a use or outflow of cash. C) Financing section, as a use or outflow of cash. D) Debt section, as a use or outflow of cash.

B) Operating section, as a use or outflow of cash. Payment of interest on debt is considered an operating activity, although repayment of debt principal is a financing activity.

A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders? A) Financing, investing, operating. B) Operating, investing, financing. C) Operating, financing, investing. D) Investing, financing, operating.

B) Operating, investing, financing. A statement of cash flows prepared using either the direct or the indirect method lists the categories of cash flows in the following order: operating, investing, and financing.

During the year, Deltech, Inc., acquired a long-term productive asset for $5,000 and also borrowed $10,000 from a local bank. These transactions should be reported on Deltech's statement of cash flows as A) Outflows for operating activities, $5,000; inflows from financing activities, $10,000. B) Outflows for investing activities, $5,000; inflows from financing activities, $10,000. C) Outflows for financing activities, $5,000; inflows from investing activities, $10,000. D) Inflows from investing activities, $10,000; outflows for financing activities, $5,000.

B) Outflows for investing activities, $5,000; inflows from financing activities, $10,000. The acquisition and disposal of property, plant, equipment, and other productive assets are investing activities. Borrowing money is a financing activity. Deltech's transactions should therefore be reported on its statement of cash flows as a $5,000 outflow for investing activities and a $10,000 inflow from financing activities.

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? A) Statement of changes in equity. B) Statement of cash flows. C) Balance sheet. D) Income statement.

B) 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.

The statement of cash flows may be presented in either a direct or an indirect (reconciliation) format. In which of these formats would cash collected from customers be presented as a gross amount? [1] Direct [2] Indirect A) [1] No, [2] No B) [1] Yes, [2] No C) [1] Yes, [2] Yes D) [1] No, [2] Yes

B) [1] Yes, [2] No The statement of cash flows may report cash flows from operating activities in either an indirect (reconciliation) or a direct format. The direct format reports the major classes of operating cash receipts and cash payments as gross amounts. The indirect presentation reconciles net income to the same amount of net cash flow from operations that would be determined in accordance with the direct method. To arrive at net operating cash flow, the indirect method adjusts net income by removing the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of expected future operating cash receipts and payments, (3) all financing and investing activities, and (4) all noncash operating transactions.

Dunbarn Co. had the following activities during the year: Purchase of inventory$120,000 Purchase of equipment80,000 Purchase of available-for-sale securities60,000 Purchase of treasury stock70,000 Issuance of common stock150,000 What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year? A) $(120,000) B) $(210,000) C) $(140,000) D) $150,000

C) $(140,000) Cash flows from investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. These expenditures include (1) cash payments for property, plant, and equipment; (2) other long-lived assets; (3) equity and debt instruments held for investment purposes; and (4) cash advances and loans made to other parties. The cash outflows used by investing activities is $140,000 ($80,000 purchase of equipment + $60,000 purchase of AFS securities).

Larry Mitchell, Bailey Company's controller, is gathering data for the statement of cash flows for the most recent year end. Mitchell is planning to use the direct method to prepare this statement and has made the following list of cash inflows for the period: ~ Collections of $100,000 for goods sold to customers ~ Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000 ~ Proceeds from the issuance of additional company stock totaling $10,000 The correct amount to be shown as cash inflows from operating activities is A) $135,000 B) $225,000 C) $100,000 D) $235,000

C) $100,000 Cash flows from operating activities are those generated by the firm's major and ongoing activities. They include cash flows from all activities not classified as investing or financing. Only the $100,000 of collections on sales to customers qualifies.

The following data were extracted from the financial statements of a company for the year ended December 31: Net income$70,000 Depreciation expense14,000 Amortization of intangible assets1,000 Decrease in accounts receivable2,000 Increase in inventories9,000 Increase in accounts payable4,000 Increase in plant assets47,000 Increase in contributed capital31,000 Decrease in short-term notes payable55,000 There were no disposals of plant assets during the year. Based on the above, a statement of cash flows will report a net increase in cash of A) $69,000 B) $54,000 C) $11,000 D) $17,000

C) $11,000 Depreciation and amortization are noncash expenses and are added to net income. A decrease in receivables indicates that cash collections exceed sales on an accrual basis, so it is added to net income. To account for the difference between cost of goods sold (a reduction of income) and cash paid to suppliers, a two-step adjustment of net income is necessary. The difference between cost of goods sold and purchases is the change in inventory. The difference between purchases and the amount paid to suppliers is the change in accounts payable. Accordingly, the conversion of cost of goods sold to cash paid to suppliers requires deducting the inventory increase and adding the accounts payable increase. An increase in plant assets indicates an acquisition of plant assets, causing a decrease in cash, so it is deducted. An increase in contributed capital represents a cash inflow and is added to net income. A decrease in short-term notes payable is deducted from net income because it reflects a cash outflow. Thus, cash increased by $11,000 ($70,000 NI + $14,000 + $1,000 + $2,000 - $9,000 + $4,000 - $47,000 + $31,000 - $55,000).

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? A) $20,000 B) $3,000 C) $17,000 D) $23,000

C) $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.

New England Co. had net cash provided by operating activities of $351,000, net cash used by investing activities of $420,000, and cash provided by financing activities of $250,000. New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year? A) $248,000 B) $40,000 C) $208,000 D) $27,000

C) $208,000 The cash balance at year end is $208,000 ($27,000 on January 1 + $351,000 provided by operations - $420,000 used by investing activities + $250,000 provided by financing activities). The proceeds from the land sale are included in the calculation of the cash used by investing activities.

The following information is available from Hoyt Corp.'s accounting records for the current year: Cash received from customers$950,000 Cash paid to suppliers and employees620,000 Taxes paid120,000 Purchase of Ramsey, Inc., bonds (par value $100,000)90,000 Amortization of discount on bonds receivable1,000 Cash dividends paid20,000 In Hoyt's current-year cash flow statement, the reported net cash provided by operating activities should be A) $189,000 B) $330,000 C) $210,000 D) $190,000

C) $210,000 Acquisition of bonds is an investing activity, assuming they are not classified as trading securities. Payment of dividends is a financing activity. Amortization of a discount on bonds receivable is a noncash interest revenue. All other transactions listed are cash flows from operating activities. Accordingly, the net cash flow provided by operations is $210,000 ($950,000 - $620,000 - $120,000).

Carlson Company has the following payments recorded for the current period: Dividends paid to Carlson shareholders$150,000 Interest paid on bank loan250,000 Purchase of equipment350,000 The total amount of the above items to be shown in the operating activities section of Carlson's statement of cash flows should be A) $350,000 B) $750,000 C) $250,000 D) $150,000

C) $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.

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) $21,000 decrease. B) $52,000 decrease. C) $31,000 increase. D) $10,000 increase.

C) $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).

Fact Pattern: Karr, Inc. reported net income of $300,000 for the current year. Changes occurred in several balance sheet accounts as follows: Equipment$25,000 increase Accumulated depreciation40,000 increase Note payable30,000 increase Additional information: ~ During the current year, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. ~ In December of the current year, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.Depreciation expense for the year was $52,000. ~ In Karr's current-year statement of cash flows, net cash provided by operating activities should be A) $340,000 B) $357,000 C) $347,000 D) $352,000

C) $347,000 Under the indirect approach to calculating cash flows from operating activities, net income is adjusted for the effects of items included in the determination of net income that had no effect on cash. Depreciation is included in the determination of net income but has no cash effect. The increase in equipment resulted in a gain included in the determination of net income, but the cash effect is classified as an inflow from an investing activity. Thus, the gain should be subtracted from net income. The cash outflow for the purchase of equipment is from an investing activity and has no effect on net income. Hence, it requires no adjustment. Thus, the net cash provided by operating activities is $347,000 ($300,000 NI + $52,000 depreciation - $5,000 gain).

During Year 6, Xan, Inc., had the following activities related to its financial operations: Payment for the early retirement of long-term bonds payable (carrying amount $370,000)$375,000 Distribution in Year 6 of cash dividend declared in Year 5 to preferred shareholders31,000 Carrying amount of convertible preferred stockin Xan, converted into common shares60,000 Proceeds from sale of treasury stock(carrying amount at cost, $43,000)50,000 In Xan's Year 6 statement of cash flows, net cash used in financing activities should be A) $296,000 B) $265,000 C) $356,000 D) $358,000

C) $356,000 Financing activities include the issuance of stock, the payment of dividends and other distributions to owners, treasury stock transactions, the issuance of debt, and the repayment or other settlement of debt obligations. The conversion of preferred stock to common stock is a noncash transaction, but the early retirement of bonds, the payment of the cash dividend, and the sale of treasury stock are financing activities that affect cash flow. Thus, the net cash used in financing activities is $356,000 ($375,000 + $31,000 - $50,000).

Rory Co.'s prepaid insurance was $50,000 at December 31, Year 2, and $25,000 at December 31, Year 1. Insurance expense was $20,000 for Year 2 and $15,000 for Year 1. What amount of cash disbursements for insurance would be reported in Rory's Year 2 net cash flows from operating activities presented on a direct basis? A) $30,000 B) $20,000 C) $45,000 D) $55,000

C) $45,000 Cash payments for insurance is equal to the $50,000 ending balance, plus the $20,000 expensed in Year 2, minus the $25,000 beginning balance, or $45,000.

Glass 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 (sale price $100,000)10,000 increase Nontrade notes payable increase50,000 Equipment purchases40,000 increase Accounts payable increase30,000 What amount should Glass report as net cash provided by investing activities in its statement of cash flows for the year? A) $50,000 B) $(40,000) C) $60,000 D) $10,000

C) $60,000 Cash flows from investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. They include (1) cash payments to acquire (cash receipts from sale of) long-lived assets, (2) cash payments to acquire (cash receipts from sale and maturity of) equity and debt instruments of other entities for investing purposes, and (3) cash advances and loans made to other parties (cash receipts from repayment of advances and loans made to other parties). Glass's investing activities cash flows include the proceeds from selling the equipment for $100,000 and the payment to purchase the equipment for $40,000. Thus, net cash provided by investing activities is $60,000 ($100,000 - $40,000).

A significant noncash transaction that need not be reported in disclosures related to the statement of cash flows is A) Obtaining a building by donation. B) The acquisition of assets by assuming directly related liabilities. C) A stock dividend declared during the year. D) An issuance of equity securities to retire debt.

C) A stock dividend declared during the year. A stock dividend is the issuance of an entity's own common stock to its common shareholders for no consideration. Because it does not affect recognized assets or liabilities, it need not be reported among the noncash investing and financing activities disclosures.

On July 1, Year 1, Dewey Co. signed a 20-year building lease that it reported as a finance lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its Year 1 statement of cash flows? A) The lease payments should not be reported in the financing activities section. B) An outflow equal to the Year 1 principal and interest payments on the lease. C) An outflow equal to the Year 1 principal payments only. D) An inflow equal to the present value of future lease payments at July 1, Year 1, less Year 1 principal and interest payments.

C) An outflow equal to the Year 1 principal payments only. Financing activities include the repayment or settlement of debt obligations. Financing activities do not include the payment of interest. Thus, the payment of principal is an outflow from financing activities. The payments for interest are operating cash flows.

Which of the following items is included in the financing activities section of the statement of cash flows? A) Cash effects of acquiring and disposing of investments and property, plant, and equipment. B) Cash effects of transactions that enter into the determination of net income. C) Cash effects of transactions obtaining resources from owners and providing them with a return on their investment. D) Cash effects of transactions involving making and collecting loans.

C) Cash effects of transactions obtaining resources from owners and providing them with a return on their investment. Financing activities include (1) issuance of stock, (2) payment of dividends, (3) treasury stock transactions, (4) issuance of debt, (5) obtaining cash from creditors and repayment or other settlement of debt obligations, (6) the exercise of share options resulting in excess tax benefits, and (7) receiving resources that are donor-restricted to long-term use.

Dividends paid to shareholders are shown on the statement of cash flows as A) Cash flows from investing activities. B) Operating cash outflows. C) Cash flows from financing activities. D) Operating cash inflows.

C) Cash flows from financing activities. The payment of dividends is a cash outflow from a financing activity. The receipt of dividends, however, is generally considered a cash inflow from an operating activity.

During the current year, Beck Co. purchased equipment for cash of $47,000, and sold equipment with a $10,000 carrying amount for a gain of $5,000. How should these transactions be reported in Beck's current-year statement of cash flows? A) Cash outflow of $32,000. B) Cash inflow of $5,000 and cash outflow of $47,000. C) Cash inflow of $15,000 and cash outflow of $47,000. D) Cash outflow of $42,000.

C) Cash inflow of $15,000 and cash outflow of $47,000. Investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets, that is, assets held for or used in the production of goods or services (other than the materials held in inventory). Thus, the cash effects of purchases and sales of equipment should be reported in the investing cash flows section of the statement of cash flows. Moreover, cash inflows and outflows ordinarily are not netted. They should be reported separately at gross amounts. Accordingly, Beck should report a cash inflow of $15,000 ($10,000 carrying value + $5,000 gain) for the sale of equipment and a $47,000 outflow for the purchase. In adjusting accrual-based net income to net operating cash flow, the $5,000 gain on the sale of equipment should be subtracted to prevent double counting.

Which of the following transactions should be classified as investing activities on an entity's statement of cash flows? A) Increase in accounts receivable. B) Payment of cash dividend to the shareholders. C) Sale of property, plant, and equipment. D) Issuance of common stock to the shareholders.

C) Sale of property, plant, and equipment. Investing activities include (1) making and collecting loans; (2) acquiring and disposing of debt or equity instruments; and (3) acquiring and disposing of property, plant, and equipment and other productive assets (but not materials in inventory) held for or used in the production of goods and services.

Which of the following should be disclosed as supplemental information in the statement of cash flows? [1] Cash Flow per Share [2] Conversion of Debt to Equity A) [1] No, [2] No B) [1] Yes, [2] No C) [1] No, [2] Yes D) [1] Yes, [2] Yes

C) [1] No, [2] 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.

#Fact Pattern:Flax Corp. uses the direct method to prepare its statement of cash flows. Flax's trial balances at December 31, Year 6 and Year 5, are as follows: December 31DebitsYear 6Year 5Cash$ 35,000$ 32,000Accounts receivable33,00030,000Inventory31,00047,000Property, plant, & equipment100,00095,000Unamortized bond discount4,5005,000Cost of goods sold250,000380,000Selling expenses141,500172,000General and administrativeexpenses137,000151,300Interest expense4,3002,600Income tax expense20,40061,200$756,700$976,100 December 31CreditsYear 6Year 5Allowance for credit losses$ 1,300$ 1,100Accumulated depreciation16,50015,000Trade accounts payable25,00017,500Income taxes payable21,00027,100Deferred income taxes5,3004,6008% callable bonds payable45,00020,000Common stock50,00040,000Additional paid-in capital9,1007,500Retained earnings44,70064,600Sales538,800778,700$756,700$976,100•Flax purchased $5,000 in equipment during Year 6.•Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses, which include the provision for credit losses. What amount should Flax report in its statement of cash flows for the year ended Dece

D) $226,500 To reconcile cost of goods sold to cash paid for goods sold, a two-step adjustment is needed. The first step is to determine purchases by subtracting the decrease in inventory from cost of goods sold. The second step is to determine cash paid for goods sold by subtracting the increase in trade accounts payable from purchases. Thus, cash paid for goods sold equals $226,500 [$250,000 - ($47,000 - $31,000) - ($25,000 - $17,500)].

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 stock250 Borrowings under a line of credit200 Proceeds from the issuance of convertible bonds100 Proceeds from the sale of a building150 What is the company's increase in cash flows provided by financing activities for the year? A) $150 B) $550 C) $50 D) $250

D) $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].

The following information is available from Sand Corp.'s accounting records for the year ended December 31, Year 6: Cash received from customers$870,000 Rent received10,000 Cash paid to suppliers and employees510,000 Taxes paid110,000 Cash dividends paid30,000 Net cash flow provided by operations for Year 6 was A) $220,000 B) $230,000 C) $250,000 D) $260,000

D) $260,000 Payment of dividends is a financing activity. All other transactions listed are cash flows from operating activities. Accordingly, the net cash flow provided by operations is $260,000 ($870,000 + $10,000 - $510,000 - $110,000).

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 stockholders300,000 Payment to acquire 1,000 shares of Marks Co. common stock100,000 What should Abbott report as total cash outflows for financing activities in its statement of cash flows under U.S. GAAP? A) $0 B) $800,000 C) $900,000 D) $300,000

D) $300,000 The $300,000 dividend should be classified as a financing cash outflow. The payment of interest is an operating cash outflow, and the payment to acquire the common stock of Marks is an investing cash outflow.

A company had the following transactions during the year: Principal payments on long-term notes payable$48,000 Interest payments on notes payable8,000 Cash payment to purchase 100 shares of another company's common stock25,000 What amount is classified as cash outflow for financing activities in the company's statement of cash flows? A) $73,000 B) $81,000 C) $56,000 D) $48,000

D) $48,000 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. The principal payments of $48,000 on notes payable are repaid cash borrowed and are cash outflows for financing activities. However, cash received or paid as interest is included in cash flows from operating activities. In addition, cash payments to acquire equity or debt instruments of other entities are classified as cash outflows for investing activities.

#The following balances were reported by Mall Co. at December 31, Year 2 and Year 1:12/31/Year 212/31/Year 1Inventory$260,000$290,000Accounts payable75,00050,000Mall paid suppliers $490,000 during the year ended December 31, Year 2. What amount should Mall report for cost of goods sold in Year 2? A) $435,000 B) $495,000 C) $485,000 D) $545,000

D) $545,000 If trade accounts increased by $25,000, purchases must have been $25,000 higher than the disbursements for purchases. Purchases thus are $515,000 ($490,000 + $25,000). The decrease in merchandise inventory indicates that cost of goods sold must have been $30,000 higher than purchases. Hence, COGS equals $545,000 ($515,000 + $30,000).

Which collection is reported as an investing activity in statement of cash flows? A) An overdue account receivable from a customer. B) A tax refund. C) Proceeds from a note payable. D) A note receivable from a related party.

D) A note receivable from a related party. Investing activities include making and collecting loans. Whether the debtor is a related party affects disclosure requirements, not the classification of the cash inflow.

Which of the following cash flows per share should be reported in a statement of cash flows? A) Both basic and diluted cash flows per share. B) Primary cash flows per share only. C) Fully diluted cash flows per share only. D) Cash flows per share should not be reported.

D) Cash flows per share should not be reported. Financial statements must not report cash flow per share. Reporting per-share amounts might improperly imply that cash flow is an alternative to net income as a performance measure.

Mend Co. purchased a 3-month U.S. Treasury bill. Mend's policy is to treat as cash equivalents all highly liquid investments with an original maturity of 3 months or less when purchased. How should this purchase be reported in Mend's statement of cash flows? A) As an outflow from financing activities. B) As an outflow from operating activities. C) As an outflow from investing activities. D) Not reported.

D) Not reported. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near maturity that they present insignificant risk of changes in value because of changes in interest rates. Moreover, cash equivalents ordinarily include only investments with original maturities to the holder of 3 months or less. The T-bill is therefore a cash equivalent and has no effect on the statement of cash flows.

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the remaining balance. In a statement of cash flows, what amount is included in investing activities for this transaction? A) Acquisition price of the building. B) Zero. C) Mortgage amount. D) Cash payment.

D) Cash payment. 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 portion of the purchase price paid in cash to acquire a building (a productive asset) should be classified as a cash flow from an investing activity. To provide the necessary information about all investing and financing activities, those not involving cash receipts or cash payments during the accounting period should be reported in a separate schedule and not in the statement of cash flows. The issuance of a mortgage as part of the acquisition price of a building does not involve cash. It is therefore classified as a noncash financing activity and is included in a separate schedule.

In a statement of cash flows (indirect method) of a business, an increase in inventories should be presented as a(n) A) Outflow of cash. B) Addition to income from continuing operations. C) Inflow and outflow of cash. D) Deduction from income from continuing operations.

D) Deduction from income from continuing operations. The objective of a statement of cash flows is to explain the cash receipts and cash disbursements of an entity during an accounting period. In a statement of cash flows of a business in which operating activities are presented on an indirect or reconciliation basis, cash flows from operating activities are determined by adjusting net income (which includes income from continuing operations) to remove the effects of all (1) non-cash items, (2) deferrals of past operating cash receipts and payments, (3) accruals of expected future operating cash receipts and payments, and (4) items whose cash effects are investing or financing activities. Cost of goods sold is included in the determination of net income. Cash paid to suppliers, however, should be the amount included in determining net cash flows from operating activities. To adjust net income to cash flow from operating activities for the difference between cost of goods sold and cash paid to suppliers, a two-step adjustment is necessary. The first step is to adjust net income for the change in the inventory account. This step adjusts for the difference between cost of goods sold and purchases. The second step is to adjust for the changes in the accounts payable account. This step adjusts for the difference between purchases and the amounts disbursed to suppliers. An increase in inventories indicates that purchases were greater than cost of goods sold. Thus, as part of the first step, an increase in inventories should be presented in a statement of cash flows (indirect method) as a deduction from net income.

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

D) 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.

All of the following are classifications on the statement of cash flows except A) Operating activities. B) Financing activities. C) Investing activities. D) Equity activities.

D) Equity activities. The three classifications used on the statement of cash flows are operating activities, investing activities, and financing activities.

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method? A) In investment activities as a reduction of the cash inflow from the sale. B) In investment activities as a cash outflow. C) In operating activities as an addition to income. D) In operating activities as a deduction of income.

D) In operating activities as a deduction of income. Cash received from the sale of equipment is ordinarily classified in a statement of cash flows as a cash inflow from an investing activity. The cash inflow is equal to the carrying amount of the equipment plus any gain or minus any loss realized. Because the gain will be included in the determination of income from continuing operations, it must be subtracted from the net income figure presented in the statement of cash flows (indirect method) in the reconciliation of net income to net cash flow from operating activities. The purpose of the adjustment is to remove the effect of the gain from both net income and the cash inflows from operating activities. In the cash flows from investing activities section, the amount reported is the sum of the gain and the carrying amount of the equipment.

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents and debt instruments acquired specifically for resale) should be classified as cash outflows for A) Operating activities. B) Lending activities. C) Financing activities. D) Investing activities.

D) Investing activities. 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.

In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from A) Operating activities. B) Selling activities. C) Financing activities. D) Investing activities.

D) Investing activities. 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.