Accounting for Cash Flow

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 purchased 10,000 increase Bonds payable-issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year? $0 $10,000 $20,000 $30,000

$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 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 $15,000 $18,000 $26,000

$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.

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 Zero. $50,000 $100,000 $150,000

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

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 $300,000 $500,000 $600,000 $900,000

$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 decrease in accounts payable during the year. An increase in cash resulting from the issuance of previously authorized common stock. The payment of cash for the purchase of additional equipment needed for current production. The payment of a cash dividend from money arising from current operations.

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.

Which of the following is not disclosed on the statement of cash flows when prepared under the direct method, either on the face of the statement or in a separate schedule? The major classes of gross cash receipts and gross cash payments. The amount of income taxes paid. A reconciliation of net income to net cash flow from operations. A reconciliation of ending retained earnings to net cash flow from operations.

A reconciliation of ending retained earnings to net cash flow from operations. A reconciliation of net income, not ending retained earnings, to net cash flow from operations is reported in a separate schedule if the direct method is used. This reconciliation may be reported within the statement or provided in a separate schedule if the indirect method is used.

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

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.

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? Cash outflow of $32,000. Cash outflow of $42,000. Cash inflow of $5,000 and cash outflow of $47,000. Cash inflow of $15,000 and cash outflow of $47,000.

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.

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? Cash payment. Acquisition price of the building. Zero. Mortgage amount.

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.

The presentation of the major classes of operating cash receipts (such as receipts from customers) minus the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the Direct method of calculating net cash provided or used by operating activities. Cash method of determining income in conformity with generally accepted accounting principles. Format of the statement of cash flows. Indirect method of calculating net cash provided or used by operating activities.

Direct method of calculating net cash provided or used by operating activities. The direct method converts the accrual-basis amounts in the income statement to the cash basis. It then reports the separate categories of gross cash receipts and disbursements. Net cash flow from operating activities is the difference between total cash receipts and total cash disbursements.

In a statement of cash flows of a business enterprise, which of the following will increase reported cash flows from operating activities using the direct method? (Ignore income tax considerations.) Dividends received from investments. Gain on sale of equipment. Gain on early retirement of bonds. Change from straight-line to accelerated depreciation.

Dividends received from investments. Operating activities are transactions and other events not classified as investing and financing activities. In general, the cash effects of operating activities (other than gains and losses) enter into the determination of the net income of a business enterprise or the change in net assets of a not-for-profit entity. Thus, cash receipts from dividends are cash flows from an operating activity.

All of the following are classifications on the statement of cash flows except Operating activities. Equity activities. Investing activities. Financing activities.

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

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

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 Balance at the end of the period. Flows from (used for) operating activities. Flows from (used for) investing activities. Flows from (used for) financing activities.

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.

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? Gain on sale of plant asset. Sale of property, plant, and equipment. Payment of cash dividend to the shareholders. Issuance of common stock to the shareholders.

Gain on sale of plant asset. The indirect method reconciles net income to net operating cash flow. It removes the effects of (1) all deferrals of past operating cash flows, (2) all accruals of estimated future operating cash flows, and (3) items included in net income that do not affect net operating cash flow (including items with cash effects that are investing or financing cash flows). The gain on the sale of plant assets is an investing cash flow. Thus, its effect must be subtracted from net income in the operating section of the cash flow statement.

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

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 Operating activities. Borrowing activities. Lending activities. Financing activities.

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.

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

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.

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? Investing. Financing. Operating. 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.

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 Plus the gain. Plus the gain and less the amount of tax attributable to the gain. Plus both the gain and the amount of tax attributable to the gain. With no addition or subtraction.

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.

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

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.

Cash flows from operating activities Must be presented using the direct method of disclosure. Must be presented using the indirect method of disclosure. Should be presented using the direct method, but use of the indirect method of disclosure is allowed. Can be presented in any logical format if cash flow per share of common stock is clearly disclosed.

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.

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? Balance sheet. Statement of cash flows. Statement of changes in equity. Income statement.

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.

Dunbarn Co. had the following activities during the year: Purchase of inventory $120,000 Purchase of equipment 80,000 Purchase of available-for-sale debt securities 60,000 Purchase of treasury stock 70,000 Issuance of common stock 150,000 What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year? $(120,000) $(140,000) $(210,000) $150,000

$(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).

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

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 Operating cash inflows. Operating cash outflows. Cash flows from investing activities. Cash flows from financing activities.

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.

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

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.

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 Operating activities. Investing activities. Financing activities. Lending activities.

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 Operating activities. Financing activities. Investing activities. Selling activities.

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.

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 Yes Yes No Yes Yes No No No

No 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.

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) Financing activity. Investing activity. Operating activity. Noncash financing and investing activity.

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.

During the current year, Ace Co. amortized a bond discount. Ace prepares its statement of cash flows using the indirect method. In which section of the statement should Ace report the amortization of the bond discount? Financing activities. Operating activities. Investing activities. Supplemental disclosures.

Operating activities. The indirect method reconciles the net income of a business with the net operating cash flow. The indirect method removes the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of estimated future operating cash receipts and payments, and (3) all items not affecting operating cash flows to arrive at the net cash flow from operating activities. Hence, the amortization of the discount on bonds payable is added to net income in the reconciliation because it represents a noncash increase in interest expense (a decrease in net income).

Depreciation expense is added to net income under the indirect method of preparing a statement of cash flows in order to Report all assets at gross carrying amount. Ensure depreciation has been properly reported. Reverse noncash charges deducted from net income. Calculate net carrying amount.

Reverse noncash charges deducted from net income. The indirect method begins with net income and then removes the effects of (1) deferrals of past operating cash receipts and payments, (2) accruals of estimated future operating cash receipts and payments, and (3) net income items not affecting operating cash flows (e.g., depreciation).

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

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.

With respect to the content and form of the statement of cash flows, The pronouncements covering the cash flow statement encourage the use of the indirect method. The indirect method adjusts ending retained earnings to reconcile it to net cash flows from operations. The direct method of reporting cash flows from operating activities includes disclosing the major classes of gross cash receipts and gross cash payments. The reconciliation of the net income to net operating cash flow need not be presented when using the direct method.

The direct method of reporting cash flows from operating activities includes disclosing the major classes of gross cash receipts and gross cash payments. Use of the direct method of reporting major classes of operating cash receipts and payments is encouraged, but the indirect method may be used. The minimum disclosures of operating cash flows under the direct method are (1) cash collected from customers, (2) interest and dividends received (unless donor-restricted to long-term purposes), (3) other operating cash receipts, (4) cash paid to employees and other suppliers of goods or services, (5) interest paid, (6) income taxes paid (and the amount that would have been paid if excess tax benefits from share-based payment arrangements had not been available), and (7) other operating cash payments.