CPA FAR Ch 12 Cash, Stmt CF

Question 1

Cash and cash equivalents

Answer 1

cash: USD, foreign currency, coins, petty cash, cash in bank, negotiable instruments, checks, money orders

cash equivalent: item with original maturity of 90 days or less. US Treasury bills, short term (no interest rate risk with this short term), highly liquid, readily convertible to a known amount of cash

> 90 days original maturity = NOT cash equivalent

Question 2

Cash and cash equivalents would include which of the following:
1. US treasury bill with original maturity of 60 days
2. coins and petty cash

Answer 2

Both!

Question 3

Atalas Corp is holding the following instruments at Dec 31 Yr 1. Which is a cash equivalent?
1. US Treasury notes that matures Jan 10 Yr; orig maturity 120 days
2. US Treasury bill that matures Feb 1, Yr 2 with orig maturity of 90 days

Answer 3

1 has a 120 day original maturity, and therefore, is not a cash equivalent.

Correct:
2. US Treasury bill that matures Feb 1, Yr 2 with orig maturity of 90 days

Question 4

Franklin Corp balances:
Checking acct $5,000
Money market acct $10,000
Treasury bill maturity 30 days, $3,000 orig maturity 90 days
Treasury bill maturing in 10 days, $1,000, orig maturity 120 days

How much is cash and cash equivalents?

Answer 4

$18,000

checking acct + money mkt acct* + T-bill with 90 day original maturity

*assuming no restrictions

T-bill with 120 day original maturity = NOT cash equivalent

Question 5

Restricted cash

Answer 5

separate line item B/S- noncurrent asset

Ex bond sinking fund (segregated account that feeds into the bond sinking fund)

Ex escrow account legally required to hold a balance

cash may be restricted from a bond indenture or restricted b/c compensating balance requirements from a lender

footnote disclosure on related restrictions required

Question 6

which of the following is reported on the B/S as restricted cash?
1. money market account set aside as a bond sinking fund
2. US Treasury bill with 60 days left until maturity (orig maturity 180 days)

Answer 6

Correct: 1. money market account set aside as a bond sinking fund

Question 7

which would be reported on the B/S as current asset?
1. checking account segregated in order to feed a bond sinking fund
2. US Treasury bill with 30 days left until maturity (orig maturity 120 days)

Answer 7

Correct: 2. US Treasury bill with 30 days left until maturity (orig maturity 120 days)

Question 8

checking account overdrawn

Answer 8

checking account overdrawn = overdraft is a liability

if there is a savings acct in same bank that is set up to cover the overdraft= “right of offset”

Question 9

Barth Corp:
Bank A Checking acct balance (5,000)
Bank B Savings acct 12,000
AP (1,000)

current liabilities per US GAAP?

Answer 9

current liabilities = (6,000) = overdraft + AP

The checking overdraft may have been covered by a “right to offset” saving acct, but the banks are different

Question 10

Barth Corp:
Bank A Checking acct balance (5,000)
Bank A Savings acct 12,000
Bank B money market acct 10,000
UUS T-bill orig maturity 60 days 30,000
AP (1,000)

cash and cash equivalents per US GAAP?

Answer 10

12,000 - 5,000 + 10,000 + 30,000 = 47,000

the overdraft was the same bank and there is a “right to offset”

otherwise, the overdraft would be a current liability

Question 11

A company has an overdrawn checking account ($3,000)
savings acct same bank $50,000 = restricted for bond indenture
savings acct different bank $5,000

Per US GAAP, how should the overdraft be reported?

Answer 11

current liability

No right to offset:
restricted acct = cannot access for the overdraft
acct at different bank = cannot access for the overdraft

Question 12

A company has an overdrawn checking account ($3,000)
savings acct same bank $50,000 = restricted for bond indenture
savings acct different bank $5,000

Per US GAAP, how much should be reported for cash and cash equivalents?

Answer 12

overdraft = current liability *no right to offset

5,000 = 5,000

disclose restricted cash but do not include in cash and cash equivalents =separate line items

cash and cash equivalent= short-term, highly liquid, readily convertible to a known amount of cash

Question 13

Dec 31, cash acct at 3 banks-
Bank X segregated acct with 3,000 that will be deposited into a bond sinking fund on Jan 20
Bank Y has an overdraft 2,000
Bank Z is the operating account 20,000 balance (positive)

1. 3,000 should be reported as noncurrent asset
2. 2,000 overdraft should be netted against the 20,000 positive balance and 18,000 shown as current asset

Answer 13

1 is correct= it is a noncurrent asset as it is not available for current operations due to being transferred to a bond sinking fund

Bank X = restricted cash and separate line item= noncurrent asset
Bank Y = overdraft = current liability
Bank Z = current asset

2. incorrect as no right of offset exists

Question 14

which is included in cash and cash equivalents at Dec 31, Yr 14?
1. postdated check from a customer dated Jan 8, year 15
2. petty cash

Answer 14

petty cash = correct

postdated check = incorrect, they are receivables since they are not cashable until a later date

Question 15

a company would list a highly liquid, ST investment as a cash equivalent provided the instrument matures 90 days or less from the:
current B/S
date originally purchased

Answer 15

Correct: date originally purchased

Question 16

a company has $10,000 in checking account at First Bank at year end. This amount would be included in cash and cash equivalents if:

Answer 16

it is not restricted by legal or contractual obligations

legal or contractual obligations: escrow account, compensating balance, amount to be transferred to a restricted account such as a bond sinking fund

Question 17

Overdrafts: US GAAP vs IFRS

Answer 17

GAAP: overdrafts can only be netted if same bank

IFRS: allows cash in other banks to offset the overdraft = less likely to report a liability under IFRS

Question 18

bank reconciliation

Answer 18

a schedule comparing the cash balance per books with the balance per bank statement

start with ending bank balance, we reconcile to the book balance to reach the true balance of cash

bank rec allow entity to determine whether the difference is attributable to normal conditions such as unrecorded items due to timing, error or fraud. An error could be made by the bank, but the entity is more likely to have made the error.

Question 19

items known to client but not to bank

Answer 19

outstanding checks= written, sent but not cleared (subtracted from balance for true cash balance)

deposits in transit= checks deposited but not yet cleared (add for true cash balance)

bank errors= wrongly charged or credited or failed to record a transaction (subtract for true cash balance)

Question 20

in bank reconciliation, which of the following bank errors would result in the client having to increase the bank statement balance in order to arrive at the true cash balance?

Answer 20

client made a deposit of a customer check for $100 but it was recorded by the bank for $10

Question 21

in bank reconciliation, the client receives the bank statement and adds which of the following to the bank statement balance to arrive at the true cash balance as of Dec 31?

Answer 21

Added: deposits made before Dec 31, but not cleared until Jan 3= deposits in transit

Subtracted: checks not yet cleared but written and sent

Question 22

items known to bank but not client: Added

Answer 22

interest income: known to bank and already on statement. known to client after bank statement is read. *Must be added to book balance

notes collected by the bank: bank acts as collection agent for client notes. client reads statement and knows the amount has been added upon collection. *Must be added to book balance

Question 23

items known to bank but not client: subtracted

Answer 23

bank charges

customer checks NSF (check bounced)= client must correct/subtract from their book balance

client bookkeeping errors if applicable

Question 24

in a bank rec, which of the following bookkeeping errors would result in the client subtracting from the book balance to arrive at the true cash balance?
1. write check for $500, record at $50 in error
2. record deposit for $500, when only $50 deposited

Answer 24

Both!!
write check for $500, record at $50 in error
record deposit for $500, when only $50 deposited

Question 25

in a bank rec, which of the following would result in the client adding from the book balance to arrive at the true cash balance after receiving the bank statement?
1. interest earned
2. notes collected by the bank
3. Both
4. Neither

Answer 25

Both!

Question 26

in a bank rec, which of the following would result in the client subtracting from the book balance to arrive at the true cash balance after receiving the bank statement?
1. checks received from customers returned for NSF
2. service charges
3. interest income

Answer 26

1 and 2

Question 27

in a bank rec, which of the following would result in the client subtracting from the book balance to arrive at the true cash balance after receiving the bank statement for Dec 31?
1. checks written and mailed before year end that clear the bank in early Jan
2. Deposits made before Dec 31 but not credited to the client’s acct until Jan 3

Answer 27

1. checks written and mailed before year end that clear the bank in early Jan

Question 28

in a bank rec, which of the following would result in the client adding from the book balance to arrive at the true cash balance after receiving the bank statement for Dec 31?
1. interest received
2. check written for $300 but the bank charged $30 in error
3. NSF checks
4. deposit for 300 that the bank credited $30 in error

Answer 28

4. deposit for 300 that the bank credited $30 in error

Question 29

Errors in bookkeeping

Answer 29

client bookkeeping errors: deposit for $1,000 recorded as $1,500 in error = need to subtract the difference to correct

bank bookkeeping errors: client wrote check for $500 that the bank cleared for $50. Client needs to subtract $450 to arrive at true cash balance. Bank will need to correct the error.

Question 30

Bank statement Dec 31 $10,000 balance
book balance $9,000
bank did not include $3,000 in checks written and mailed but not yet cleared
the bank did NOT show $2,000 bounced check NSF

what is the true cash balance?

Answer 30

True cash balance $7,000

bank:
10,000 less 3,000 = 7,000
book:
9,000 less 2,000 = 7,000

Question 31

Bank statement Dec 31 $7,000 balance
book balance Dec 31 $8,000
bank included $955 note proceeds
bank did not include deposit $2,000
bank error check cleared for $5 not $50 in

What is the true cash balance?

Answer 31

True cash balance $8,955

bank: 7,000 + 2,000 DIT less 45 error = 8,955
book: 8,000 + 955 = 8,955

Question 32

Statement of Cash Flows: Why did cash change?

Answer 32

required part of full set of financial statements that finds sources of uses of cash

Cash increases from income generated from core ops = good

Cash increases: Did they borrow cash, sell fixed assets or add partners/stockholders = might not be as good

Question 33

3 sections of statements of cash flows

Answer 33

1. operating cash flows: direct and indirect method
2. investing cash flows
3. financing cash flows

Question 34

operating cash flows: direct and indirect method of preparing this section

Answer 34

cash receipts and disbursements from:

1. transactions reported on the I/S
2. current assets and current liabilities (excluding current notes payable and current portion of LT debt which are reported in financing cash flows)

always want operating cash flow to go up!

Question 35

investing cash flows

Answer 35

cash receipts and disbursements from:
noncurrent assets

purchasing and selling noncurrent assets like PPE

Question 36

financing cash flows

Answer 36

cash receipts and disbursements from:
1. debt and 2. equity

issuing debt or equity to finance the business

Question 37

operating cash flows: Two methods of reporting
direct and indirect method

Answer 37

Two methods of reporting: direct and indirect method

this only affects the operating section and how cash flow is presented for this section = results are the same but format differs

investing and financing are always prepared the same way

Question 38

operating activities: direct method

Answer 38

Direct: shows the major classes of where cash is coming from and where cash is going

starting point: cash received from customers (start with revenue and adjust from accrual to cash)

Revenue (accrual basis cash inflow)
add:
decrease in receivables (deduct increase AR)
increase in unearned revenue (deduct decrease unearned rev)

Question 39

Other operating cash inflows

Answer 39

while cash received from customers is the most important operating cash flow, Insurance proceeds and lawsuit settlements, cash dividends received, interest received, = increase operating cash flows

Question 40

On the statement of cash flows, all of the following cash inflows are operating inflows except:
1. cash received from customers
2. interest and dividends received
3. lawsuit settlements and insurance proceeds
4. issuance of company bonds to investors

Answer 40

Correct: 4. issuance of company bonds to investors = financing activities along with stock issuance

Question 41

Direct method: operating outflows

Answer 41

cash paid to vendors is an operating outflow

If not given, need to calc COGS (outflow/accrual basis)= an expense that has been accrued. Need to eval chg in AP and inventory

Question 42

calculate cash paid to vendors

Answer 42

begin with COGS (accrual basis cash outflow)
ADD: increase in inventory
Subtract: decrease in inventory (cash inflow)

Question 43

Net cash paid to vendors

Answer 43

COGS (accrual basis outflow)
ADD: Increase in inventory (cash outflow)
Subtract: Decrease in inventory (cash inflow)
Add: Decrease in AP (cash outflow)
Subtract: increase in AP (cash inflow)

Question 44

Other operating outflow

Answer 44

US GAAP:

*interest paid is considered an operating outflow under US GAAP

*Taxes paid is an operating outflow under US GAAP (current or deferred= does not matter)

Not: if repaying principal (not interest)= financing outflow

Not: Buying assets (like machinery and equipment)= investing outflow, not operating

Question 45

Add back noncash expenses

Answer 45

depreciation expense is a noncash expense. there was no cash outflow = ADD BACK to net income

bond discount amortization = added back indirect method as a noncash expense

Question 46

Which of the following gets added back to net income indirect method?
1. depreciation expense
2. amortization of bond discount

Answer 46

Both!

add both back to net income as they are noncash expenses

Question 47

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
operating
investing

Answer 47

operating = added back to net income

Question 48

Indirect method: Bond premium

Answer 48

subtract bond premium as it reduces interest expense below cash paid

reduction of interest expense = increases net income

Question 49

Indirect method: gains and losses

Answer 49

Add back: all losses
Subtract: all gains

Question 50

Indirect method

Answer 50

indirect method:
start Net income I/S
Add: Depreciation
Add: amortization of bond discount
Subtract: Amortization of bond premium
Add: all losses *
Subtract: all gains*
Subtract: Equity earnings

*from sale of noncurrent assets which is investing section

Question 51

Indirect method: Subtract equity earnings from affiliate

Answer 51

when you own at least 20% but not more than 50%, your percentage share of the affiliates profit goes on I/S, the equity earnings

Subtract equity earnings:
Under the equity method of accounting, those equity earnings = undistributed (no cash rec’d) = it made net income increase = need to back it out under the indirect method

if equity affiliate had a loss= add back

Question 52

In a statement of cash flows prepared using indirect method, which of the following would have to be added to net income to determine cash provided by operating activities?
1. Depreciation Expense $50,000
2. Equity earnings 20% affiliate, affiliate earned 100,000

Answer 52

Correct: 1. Depreciation Expense = always an add back as a noncash expense

Incorrect: earnings= gain = subtract (if loss = it would be added back)

Question 53

Indirect method: B/S change in operating assets

Answer 53

this includes all current assets except cash and cash equivalents

includes: rec’v, prepaids, inventories

assets UP = outflow = SUBTRACT
assets DOWN = inflow = ADD

Question 54

Under the indirect method, a decrease in which of the following would represent a cash inflow and added back to net income?
1. AR
2. Inventory

Answer 54

Both!

any operating (current) asset decrease is positive for cash

Ex prepaid goes down = more expense incurred than cash out = ADD

Question 55

Under the indirect method, which of the following would represent a cash inflow and would be added back to net income to arrive at cash flows from operations?
1. prepaid
2. inventory
3. AR
4. None

Answer 55

None = all would be subtracted due to increases

increase in current assets = cash outflows = subtract

this means more accrual basis income than cash basis income

Ex AR goes up = earned more than collected
prepaid goes up = cash out (spent more than expired/incurred expense)

Question 56

Indirect method: change in operating liabilities

Answer 56

any liability on B/S that does not bear interest

Ex salaries payable, interest payable, AP, unearned revenue

Liabilities UP = borrowing = inflow = ADD
Liabilities DOWN = cash outflow = Subtract

Question 57

Investing Cash flow

Answer 57

*should go down every year for a growing company

If investing cash flow decreases= it means the company is opening stores, purchasing PP&E (long lived assets)

Investing cash outflows means a growing company= analysts like to see investing cash flow decline

Increases in investing cash flow= selling stores, closing stores and selling off long lived assets

Question 58

Operating cash flow

Answer 58

operating cash flow included cash effects of transactions that enter into determination of net income.

Cash received from customers, interest and dividends received, payments to vendors, payments for operating expenses.

*Companies and analysts always want to see operating cash flow increase for the year.

Question 59

Investing activities

Answer 59

change in noncurrent assets:

if noncurrent asset goes up= made an investments= investing outflow

if noncurrent asset goes down= sold an investment = investing inflow

Question 60

Investing or not?

AFS and HTM vs trading securities

Answer 60

AFS and HTM:
if a company puts excess cash to use, purchasing debt securities classified as available for sale or held to maturity = investing outflows
Sell AFS or HTM = investing inflow

Debt securities classified as trading securities = operating cash flow = sell short term is operating cash flow

Equity: only investing cash flow if they intend to keep the equity securities (short term = operating activities)

Ex. making loan from company to CEO = investing activity. CEO repaying the loan= investing inflow

Question 61

On the statement of cash flows, purchase of what type of debt securities would be investing outflow?

1. trading securities and AFS
2. HTM and AFS
3. HTM and trading securities
4. trading, HTM and AFS

Answer 61

Correct: 2. HTM and AFS = investing activities

trading securities = operating activities (implies quick turnover)

Question 62

Allen Corp has excess cash and is looking to put it to use. Which of the following is considered investing outflow on statement of cash flows?
1. purchase of bonds classified HTM
2. purchase of bonds classified trading
3. purchase of equity securities acquired for resale in ST
4. All

Answer 62

Correct:
1. purchase of bonds classified HTM = investing

Incorrect:
2. purchase of bonds classified trading = operating
3. purchase of equity securities acquired for resale in ST= operating

Question 63

which of the following is considered investing outflow on the statement of cash flows?
1. purchase of PP&E
2. Sale of debt securities classified AFS
3. purchase of debt securities classified as trading
4. All

Answer 63

Correct:
1. purchase of PP&E= outflow (LT, noncurrent asset)

Incorrect
2. Sale of AFS = investing inflow
3. purchase trading= operating outflow

Question 64

which of the following is included investing activities section of statement of cash flows:
1. cash effects of transaction involving making and collecting loans
2. cash effects of transaction that enter into the determination of net income

Answer 64

Correct:
1. cash effects of transaction involving making and collecting loans= investing, such as example of loan to CEO (interest income = operating)

Incorrect:
2. cash effects of transaction that enter into the determination of net income= operating

Question 65

which of the following is included investing activities section of statement of cash flows:
1. cash effects of acquiring and disposing of PP&E
2. Cash effects of acquiring and disposing of long-term investments

Answer 65

Both!

acquiring a patent is another example of an investing activity

Question 66

Financing activities

Answer 66

Debt and equity financing

includes cash effects of obtaining resources from owners and providing with return on investment

if a company is doing fine on its own and doesn’t need to borrow money, there could be no financing cash flow.

Earnings might be able to finance expansion and growth without the sale of stocks or bonds

Question 67

Cash flows for the three types of activities

Answer 67

operating cash flow should always be increasing, or it is likely a going concern issue

investing cash flow should be decreasing for a growing company

financing cash flow does not fall into any pattern

Question 68

Financing activities: debt and equity

Answer 68

when LT debt or equity goes up or down = financing activity

Financing cash inflow: borrowing or issuing stock = financing cash inflow

Financing activities include:
change in your own equity
cash effects of transactions obtaining resources from owners &
providing them with ROI

Financing out flows:
principal payments on leases and bonds (interest portion of payment = operating)

debt or equity going down: repurchasing stock, repaying debt, paying a dividend = financing cash outflow

Question 69

which of the following is included in financing activities sections of the statement of cash flows?
1. cash effects of transactions making and collecting loans
2. cash effects of transactions obtaining resources from owners and providing them ROI

Answer 69

Correct:
2. cash effects of transactions obtaining resources from owners and providing them ROI= financing
Incorrect:
1. cash effects of making and collecting loans= investing

Question 70

which of the following is included in financing activities sections of the statement of cash flows?
1. cash effects of transactions making and collecting loans
2. cash effects of transactions that enter into determination of net income
3. cash effects of transactions obtaining resources from owners and providing them ROI
4. cash effects of acquiring and disposing of investments and PP&E

Answer 70

1. cash effects of transactions making and collecting loans= investing (interest income = operating)
2. cash effects of transactions that enter into determination of net income = operating
   CORRECT: 3. cash effects of transactions obtaining resources from owners (cash from new investors) and providing them ROI (dividends paid)
3. cash effects of acquiring and disposing of investments and PP&E= investing

Question 71

Purchase of a patent

Answer 71

investing outflow of cash (selling patent = investing inflow)

Question 72

which of the following is included in financing outflow activities sections of the statement of cash flows?
1. interest paid on bond debt
2. interest paid on lease payments
3. principal paid on bond debt
4. loan payments rec’d from CEO

Answer 72

1. interest paid on bond debt = operating exp/outflow
2. interest paid on lease payments = operating exp/outflow
   CORRECT: 3. principal paid on bond debt = financing outflow
3. loan payments rec’d from CEO = investing inflow