Ch. 12

A company reported that its bonds with a par value of $40,000 and a carrying value of $52,000 are retired for $60,000 cash, resulting in a loss of $8,000. The amount to be reported under cash flows from financing activities is _____.

$(60,000) Explanation Knowledge Check 01 Cash flows from financing activities should include the cash paid to retire the bonds of $60,000.

Place the steps to preparing the statement of cash flows in the correct order.

STEPS TERMS Step 1 Compute net increase or decrease in cash Step 2 Compute net cash from or for operating activities Step 3 Compute net cash from or for investing activities Step 4 Compute net cash from or for financing activities Step 5 Compute net cash from all sources, then prove it

All of the following are correct forms of the accounting equation except:

Cash = Liabilities + Equity + Noncash assets Explanation Knowledge Check 01 The accounting equation states that Assets = Liabilities + Equity. Assets are comprised of cash and noncash assets and, as such, can be replaced by these two components in the accounting equation so that it reads Cash + Noncash assets = Liabilities + Equity. The equation can be rearranged by subtracting the noncash assets from both sides so that it reads: Cash = Liabilities + Equity − Noncash assets.

Each of the following are classifications in the statement of cash flows except:

Income Explanation Knowledge Check 01 The three sections in the statement of cash flows includes operating, investing and financing.

Each of the following are classified as a financing activity except:

purchase of long-term investments Correct Explanation Knowledge Check 01 The purchase of long-term investments is a cash outflow from investing activities, not financing.

Each of the following are classified as an operating activity except:

purchase of short-term investments Correct Explanation Knowledge Check 01 The purchase of short-term investments is classified as a cash outflow from investing activities, not operating.

Cash flow on total assets is computed as:

Cash flow from operations divided by average total assets. Explanation Knowledge Check 01 Cash flow on total assets is computed as cash flow from operations divided by average total assets.

Each of the following are classified as an investing activity except:

receipt of interest revenue Explanation Knowledge Check 01 The receipt of cash from interest revenue is a cash inflow from operating activities, not investing.

The Will Company reported the following data for last year: Decrease in the cash account $25,000 Net cash provided by operating activities 20,000 Net cash provided by investing activities 15,000 Based solely on this information, the net cash provided (used) by financing activities on the statement of cash flows would be:

$(60,000) Explanation Knowledge Check 01 Net cash provided (or used) by operating activities + Net cash provided (or used) by investing activities + Net cash provided (or used) by financing activities = Net increase (or decrease) in cash for the period. The net cash provided (or used) by financing activities (the unknown) would be determined as follows: $20,000+$15,000+x(the unknown)=($25,000) $35,000+x(the unknown)=($25,000) Subtract $35,000 from both sides of the equation: x=$(60,000)

The correct order of the three-step analysis of determining cash provided or used by investing activities is:

Identify changes in investing accounts, explain the changes, report the cash flow effects. Explanation Knowledge Check 01 The three-step analysis to determine cash provided or used by investing activities is: 1. Identify the changes in investing-related accounts, 2. Explain these changes using T-accounts and reconstructed entries, and 3. Report the cash flow effects.

The issuance of common stock and declaration and payment of cash dividends will result in the following:

Increase in financing activities for the issuance and a decrease in financing activities for the dividends. Explanation Knowledge Check 01 Issuance of stock will result in a cash inflow (increase) from financing activities and a declaration and payment of cash dividends will result in a cash outflow (decrease) from financing activities.

All of the following are sources of information to prepare the statement of cash flows except:

Prior year's income statement Explanation Knowledge Check 01 Sources used to prepare the statement of cash flows includes comparative balance sheets, the current year's income statement, and additional information. The prior year's income statement is not used.

A statement of cash flows helps answer all of the following:

What explains the changes in the cash account? Where does a company spends its cash? How does a company receives its cash? Explanation Knowledge Check 01 The statement of cash flows helps answer the following: What explains the change in the cash balance? Where does a company spend its cash? How does a company receive its cash? Why do income and cash flows differ?

Montego Company's Cash account had a balance of $14,000 on January 1. Analysis of the company's Cash account during the year revealed the following information: Decrease in interest payable $1,000 Depreciation expense 30,900 Gain on retirement of bonds 32,300 Increase in accounts receivable 40,000 Loss on sale of plant assets 5,900 Net income 78,000 The net cash provided (used) by operating activities is:

$41,500 Explanation Knowledge Check 01 Net income $78,000 − Increase in accounts receivable $40,000 − Decrease in interest payable $1,000 + Depreciation expense $30,900 + Loss on sale of plant assets $5,900 − Gain on retirement of bonds $32,300 = Net cash provided by operations $41,500.

Montego Company's Cash account had a balance of $14,000 on January 1. Analysis of the company's Cash account during the year revealed the following information: Receipts from customers $50,000 Payments for dividends 10,000 Receipts of dividends 5,000 Payments for merchandise 25,000 Receipts from issuance of stock 20,000 On December 31, the company's Cash account had a balance of ____.

$54,000 Explanation Knowledge Check 01 Beginning balance of $14,000 + Receipts from customers $50,000 − Payments for dividends $10,000 + Receipts of dividends $5,000 − Payments for merchandise $25,000 + Receipts from issuance of stock $20,000 = Ending balance of $54,000.

A machine with a cost of $100,000 and accumulated depreciation of $98,000 is sold for $70,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is _____.

$70,000 Explanation Knowledge Check 01 Cash flows from investing activities should include the proceeds of the sale of the machine of $70,000.

Background information as of 12/31/19: Cash and currency in cash registers $50,000 An investment in a debt security maturing on 2/15/20 $25,000 An investment in an equity security 10,000 Checking account balance 20,000 Petty cash 1,000 At December 31, 2019, the amount of cash and cash equivalents that will be reported on the company's balance sheet is?

$96,000 Explanation Knowledge Check 01 A cash equivalent must satisfy two criteria: (1) be readily convertible to a known amount of cash and (2) be sufficiently close to its maturity so its market value is unaffected by interest rate changes. Cash and cash equivalents equal $96,000 comprised of cash and currency in cash registers of $50,000, an investment in a debt security maturing on February 15, 2020 of $25,000, the checking account balance of $20,000, and petty cash of $1,000.

Blue, Inc., reported net cash flows from operating activities of $120,000, cash flows from investing activities of $300,000, cash flows from financing activities of $80,000, and average total assets of $2,500,000. The company's cash flow on total assets ratio (stated as a percentage rounded to one decimal point) is _____.

4.8% Explanation Knowledge Check 01 Cash Flow on Total Assets = Cash Flow from Operations of $120,000 ÷ Average Total Assets of $2,500,000 = 0.048 = 4.8%.

Under the indirect method of preparing the statement of cash flows, decreases in noncash current operating assets should be:

Added to net income Explanation Knowledge Check 01 Decreases in noncash current operating assets should be added to net income under the indirect method of reporting cash flows.

Under the indirect method of preparing the statement of cash flows, depreciation and amortization should be:

Added to net income Explanation Knowledge Check 01 Expenses and losses which are not cash outflows should be added back to net income.

The following information was reported by three competitors: Armor Biloxi Calliope Cash flows provided (used by) operating activities $(3,000) $(5,000) $75,000 Cash flows provided (used by) investing activities Proceeds from sale of plant assets 29,000 20,000 Purchase of plant assets (40,000) Cash flows provided (used by) financing activities Proceeds from issuance of debt 10,000 Repayment of debt (6,000) (5,000) (15,000) Net increase in cash $20,000 $20,000 $20,000 The company(s) most capable of generating future cash flows is (are):

Calliope Explanation Knowledge Check 01 Each company generates an identical $20,000 net increase in cash, but its sources and uses of cash flows are very different. Calliope's operating activities provide net cash flows of $75,000, allowing it to purchase plant assets of $40,000 and repay $15,000 of its debt. Armor used $3,000 in its operating activities and generated $29,000 through the sale of plant assets but used $6,000 to retire debt. Biloxi used $5,000 in its operating activities, generated $20,000 through the sale of plant assets, and generated a net $5,000 by issuing and retiring debt. Overall, analysis of these cash flows reveals that Calliope is more capable of generating future cash flows than its competitors.

Under the indirect method of preparing the statement of cash flows, increases in current assets should be:

Deducted from net income Explanation Knowledge Check 01 Increases in current assets are subtracted from net income and decreases in current assets are added to net income.

Under the indirect method of preparing the statement of cash flows, decreases in current liabilities should be:

Deducted from net income Explanation Knowledge Check 01 Increases in current liabilities are added to net income and decreases in current liabilities are subtracted from net income.

The _______ method of reporting adjusts net income to get the net cash provided or used by operating activities.

indirect Explanation Knowledge Check 01 The indirect method reports net income and then adjusts for items that do not affect cash to determine the cash inflows and outflows from operating activities.

Each of the following are classified as a noncash investing or financing activity except:

reissuing treasury stock Explanation Knowledge Check 01 Reissuing treasury stock is a cash inflow from financing activity.