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1

Rock Co.'s financial statements had the following balances at December 31:

Extraordinary gain $ 50,000
Foreign currency translation gain 100,000
Net income 400,000
Unrealized gain on the available-for-sale equity securities 20,000

What amount should Rock report as comprehensive income for the year ended December 31?
A. $400,000
B. $420,000
C. $520,000
D. $570,000
















C
Correct!
By definition, comprehensive income includes all changes in enterprise equity during a period except those changes resulting from transaction between the enterprise and its owners (e.g., investments by owners, dividends to owners, etc.). Therefore, comprehensive income includes net income plus/minus changes in equity that do not enter into the determination of net income (called items of "other comprehensive income").
Currently, there are four possible items of other comprehensive income:
1.minimum additional pension liability adjustment,
2. unrealized gains and losses on investments classified as available-for-sale (and certain other related unrealized gains/losses),
3. gains and losses resulting from translating financial statements expressed in a foreign currency (foreign currency translation) and losses/gains on related hedges,
4. and gains and losses on the effective portion of cash flow hedges.



For Rock Co. comprehensive income would be computed as:
Net income (includes the extraordinary gain) $400,000
Items of other comprehensive income:
Foreign currency translation gain 100,000
Unrealized gain on available-for-sale security 20,000
Comprehensive income $520,000

2

Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealized loss on investments in noncurrent marketable equity securities.
B. Unrealized loss on investments in current marketable equity securities.
C. Loss on exchange of similar assets.
D. Loss on exchange of dissimilar assets.





Correct!
Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings.
This is a change in owners' equity that is not included in earnings and is not the result of a transaction with owners. It is an "other" comprehensive income item. "Other" refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.

3

Under FASB U.S. GAAP, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?
A. Unrealized loss on investments in noncurrent marketable equity securities.
B. Unrealized loss on investments in current marketable equity securities.
C. Loss on exchange of similar assets.
D. Loss on exchange of dissimilar assets.

B
Correct!
Unrealized gains and losses on securities available for sale are among the few items that appear in comprehensive income but not in earnings. Only SAS can be noncurrent. Assuming the current securities are classified as trading securities, then that unrealized loss is included in earnings.
This is a change in owners' equity that is not included in earnings and is not the result of a transaction with owners. It is an "other" comprehensive income item. "Other" refers to other than net income, which is the largest component of comprehensive income. The remaining items are recognized in income.

4

Which of the following is included in other comprehensive income?
A. Unrealized holding gains and losses on trading securities.
B. Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category.
C. Foreign currency translation adjustments.
D. The difference between the accumulated benefit obligation and the fair value of pension plan assets.


















D
Incorrect...
This item is not included in other comprehensive income. The question is trying to trick you into thinking that this is the minimum pension liability adjustment.

B

Incorrect...
Unrealized holding gains and losses from a debt security that is transferred from held-to-maturity to available-for-sale are reported in net income.

5

The Statement of Changes in Equity:

A.
Is one of the required financial statements under U.S. GAAP

B.
Includes accounts such as the retained earnings and common share accounts but not other comprehensive income items.

C.
Is used only if a corporation frequently issues common shares

D.
Reconciles all of the beginning and ending balances in the equity accounts.


A
Incorrect...

The Statement of Changes in Equity is not a required financial statement under U.S. GAAP.

D Correct
Correct!

The Statement of Changes in Equity reconciles all of the beginning and ending balances in the equity accounts. The statement shows the opening balance then details all changes in the accounts, ending with the closing balance.

6

The Statement of Changes in Equity shows an increase in the common stock account of $2,000 and an increase in the additional paid-in capital account of $10,000. If the common stock has a par value of $2, and the only transactions affecting these accounts were these issues of common stock, what was the average issue price of the common stock during the year?

A.
$2

B.
$5

C.
$10

D.
$12


A
Incorrect...

The average issue price is the sum of the par value and the additional paid-in capital. $2 represents the par value per share amount, $2.

D
Correct!

If the par value of the stock is $2, and the increase in the common stock account is $2,000, then $2,000/$2 = 1,000 shares issued. The average issue price is the sum of the par value ($2) and the additional paid-in capital ($10,000/1,000 shares, or $10), which totals $12.

7

PQ2517

The amount of "Cash Flows from Operating Activities" will be the same whether the direct of the indirect method is used.
True
False

True

8

Sources and Uses of Cash
AICPA.951148FAR-FA

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

C
Incorrect...

This reconciliation must be reported as a footnote or supplementary schedule to the direct method Statement of Cash Flows. It does not appear in the body of the statement.

9

Sources and Uses of Cash
AICPA.951148FAR-FA

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

A
Incorrect...

This reconciliation must be reported as a footnote or supplementary schedule to the direct method Statement of Cash Flows. It does not appear in the body of the statement.

D
Correct!

The direct method Statement of Cash Flows must be supported by the supplemental disclosure of a reconciliation, but the reconciliation is of net income to net cash flow from operations, not retained earnings to net cash flow from operations. The ending retained earnings balance is not related to, and does not affect, operating cash flow.

Two Formats Allowed By GAAP
A. As discussed in detail later, the Statement of Cash Flows can be presented using either the direct or the indirect format.
B. The only difference between the two is in the operating activity section of the statement. The direct method reports the actual operating cash flows in the operating section. The indirect method reports the reconciliation of net income and net operating cash flow in the operating section. Both lead to the same subtotal: net operating cash flow. The following diagram shows the differences and similarities between the approaches.
Direct Method Indirect Method
Operating Activities: Operating Cash Flows Reconciliation
Investing Activities: Investing Cash Flows Investing Cash Flows
Financing Activities: Financing Cash Flows Financing Cash Flows
C. The direct method reports the reconciliation in a separate schedule.
D. Only the operating-activities section is different between the formats. Most firms use the indirect method.

10

AICPA.061230FAR
Sources and Uses of Cash
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. $ 27,000
B. $ 40,000
C. $208,000
D. $248,000

C
Correct!

The cash balance at the end of the year equals the cash balance at the beginning of the year, $27,000, plus the net sum of the three categories of cash flows: $351,000 operating - $420,000 investing + $250,000 financing. The ending balance is $208,000.
The $40,000 proceeds from land sale are included in the net cash outflow from investing activities.

B
Incorrect...

The $40,000 proceeds from land sale is already included in the net cash outflow from investing activities ($420,000). The firm also had operating and financing cash flows.
The correct approach is to begin with the Jan. 1 balance and add/subtract the three net cash flow amounts for operating, investing, and financing activities.

11

AICPA.911122FAR-TH-FA
Sources and Uses of Cash
Bay Manufacturing Co. purchased a three-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 investing activities.
D. Be treated as an outflow from lending activities.
Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

A

Correct!

The three-month bill meets the definition of a cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows.
B
Incorrect...

Even if this transaction involved a change in cash and cash equivalents, it would not be classified as a financing activity. But the three-month bill meets the definition of cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase.
Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.
C
Incorrect...

Even if this transaction involved a change in cash and cash equivalents, it would not be classified as an investing activity. But the three-month bill meets the definition of cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.
D
Incorrect...

The Statement of Cash Flows does not have a category "lending activities." The transaction is the purchase of a cash equivalent, which does not change cash and cash equivalents. No disclosure is required.

12

Sources and Uses of Cash
AICPA.951147FAR-FA
Mend Co. purchased a three-month U.S. Treasury bill. Mend's policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents . How should this purchase be reported in Mend's Statement of Cash Flows?
A. As an outflow from operating activities.
B. As an outflow from investing activities.
C. As an outflow from financing activities.
D. Not reported.

D
Correct!

The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.

13

AICPA.940505FAR-FA
Sources and Uses of Cash
The primary purpose of a Statement of Cash Flows is to provide relevant information about:
A. Differences between net income and associated cash receipts and disbursements.
B. An enterprise's ability to generate future positive net cash flows.
C. The cash receipts and cash disbursements of an enterprise during a period.
D. An enterprise's ability to meet cash operating needs.


C
Correct!

The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.

A
Incorrect...

This is not the primary purpose; although, it is one of the functions of the Statement of Cash Flows. Both the direct and indirect methods require the disclosure of the reconciliation of net income and net operating cash flow.
B
Incorrect...

Although a user may be helped by the Statement of Cash Flows when attempting to make this assessment, this is not the main purpose of the statement.
D
Incorrect...

Although a user may be helped by the Statement of Cash Flows when attempting to make this assessment, this is not the main purpose of the statement.

14

AICPA.040213FAR-SIM
Sources and Uses of Cash

Which of the following sets of financial statements generally cannot be prepared directly from the adjusted trial balance?
A. Income Statement, Balance Sheet, Statement of Cash Flows.
B. Income Statement, Statement of Cash Flows.
C. Statement of Cash Flows.
D. Balance Sheet and Statement of Cash Flows.

C
Correct!

This statement generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The Statement of Cash Flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.

15


AICPA.070771FAR
Sources and Uses of Cash

Paper Co. had net income of $70,000 during the year. The 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?
A. $0
B. $10,000
C. $20,000
D. $30,000

B
Incorrect...

Operating Activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70.000 - $40 000 - $30 000 = $0

A
Correct!

Operating Activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income - increase in inventory - decrease in accounts payable $70.000 - $40 000 - $30 000 = $0

16

The major cash flow items in this category are the following:





The major cash flow items in this category are the following:

Inflows (Cash Received)
From Customers
Dividends (from Investment)
Interest

Outflows (Cash Paid)
To Suppliers (Goods/Services)
To Employees (Payroll)
Interest Interest
Income taxes


17

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?

A. $14,000
B. $15,000
C. $18,000
D. $26,000






B, C,D
Incorrect...
Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity-remember the principle payments/receipts are financing activities, but the interest is operating. Cash received on equipment is an investing activity.

A
Correct!
Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000 - 3,000 - 8,000 = $14,000.

18

AICPA.120624FAR


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. $3,000
B. $9,000
C. $12,000
D. $30,000



A
Correct!
Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment for the forklift and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.

19


AICPA.921105FAR-TH-FA


On December 31, 20x1, Deal, Inc. failed to accrue the December 20x1 sales salaries that were payable on January 6, 20x2.
What is the effect of the failure to accrue sales salaries on working capital and cash flows from operating activities in Deal's 20x1 financial statements?



Working capital

Cash flows from operating activities

Overstated No effect
Overstated Overstated
No effect Overstated
No effect No effect



A
Correct!
Failure to accrue salaries at the end of 20x1 understates salaries payable, a current liability. Working capital equals current assets minus current liabilities. With current liabilities understated, working capital is overstated.
The accrued salaries at the end of 20x1 would not have been paid in 20x1, even if they had been accrued correctly. Therefore, 20x1 operating cash flows are not affected by the failure to accrue the salaries.

20

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 balance.
In a Statement of Cash Flows for the purchasing company, what amount is included in financing activities for the above transaction?

A. Cash payment.
B. Acquisition price.
C. Zero.
D. Mortgage amount.





















D
Incorrect...
The mortgage amount is the amount NOT paid in cash. Therefore, this amount would not appear in the Statement of Cash Flows.
Furthermore, the cash payment is an investing cash outflow, not a financing cash flow. The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow. However, the non-cash activity schedule would disclose the mortgage amount, if material.

C
!
The cash payment is an investing cash outflow, not a financing cash flow. The transaction would show no entry in the financing section of the Statement of Cash Flows.
The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow.

21

AICPA.110566FAR
Operating, Investing and Financing Activities

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
A. $0
B. $300,000
C. $800,000
D. $900,000

C
Correct!

Dividends paid to shareholders are a financing activity. The payment of interest on bonds is an operating activity, and payments to acquire shares of Marks Co. stock are investing activities.

Incorrect...

Dividends paid to shareholders are a financing activity. Therefore, an answer of $800,000 is incorrect. The payment of interest on bonds is an operating activity, and payments to acquire shares of Marks Co. stock are investing activities.

22


AICPA.130711FAR




AICPA.130711FAR
Operating, Investing and Financing Activities
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 stock $250
Borrowings under a line of credit $200
Proceeds from the issuance of convertible bonds $100
Proceeds from the sale of a building $150
What is the company's increase in cash flows provided by financing activities for the year?

A. $50
B. $150
C. $250
D. $550

Incorrect...

Cash flows from financing activities are those associated with how the company is financed such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock, convertible bonds and borrowing on the line of credit are all cash inflows from financing activities. The payment of dividends is a cash outflow from financing activities.
C

Correct!

Cash flows from financing activities are those associated with how the company is financed such as with borrowing or equity. Therefore, the proceeds from the sale of the building would not be included in financing activities. The proceeds from the issuance of common stock (250), convertible bonds (100) and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 - 300 = 250.

23

AICPA.900528FAR-TH-FA


AICPA.900528FAR-TH-FA

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 balance.
In a Statement of Cash Flows for the purchasing company, what amount is included in financing activities for the above transaction?

A. Cash payment.
B. Acquisition price.
C. Zero.
D. Mortgage amount.

D
Incorrect...

The mortgage amount is the amount NOT paid in cash. Therefore, this amount would not appear in the Statement of Cash Flows.
Furthermore, the cash payment is an investing cash outflow, not a financing cash flow. The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow. However, the non-cash activity schedule would disclose the mortgage amount, if material.
C
Correct!

The cash payment is an investing cash outflow, not a financing cash flow. The transaction would show no entry in the financing section of the Statement of Cash Flows.
The payment amount (only) would be reported in the investing activity section of the Statement of Cash Flows as an outflow.

24

Cash Flows from Financing Activities

This category reports cash inflows and cash outflows that relate to how the entity is financed.

A. The major cash flow items in this category are the following:

Inflows (Cash Received)
Outflows(Cash Paid)



Inflows (Cash Received)
Sale of (Own) Stock
Proceeds from Borrowing (Bonds, Notes, etc.) Paying
Outflows (Cash Paid)

Repurchase Own (Treasury) Stock
Paying Back Lenders (Principal Only)
Payment of Dividends

25

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. $3,000
B. $9,000
C. $12,000
D. $30,000



ACorrect!
Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment for the forklift and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.

26

AICPA.900527FAR-TH-F
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 balance.
In a Statement of Cash Flows, what amount is included in investing activities for the above transaction?

A. Cash payment.
B. Acquisition price.
C. Zero.
D. Mortgage amount.



a
Correct!
The amounts paid to purchase plant assets and passive investments, such as stocks and bonds from other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, only the cash amount paid is disclosed in the Statement of Cash Flows. The non-cash activity schedule would disclose the acquisition price and amount financed with the mortgage.

c
Incorrect...
Although the full acquisition price was not paid in cash, the amount of the cash payment is disclosed as an investing cash outflow. When part of the purchase price is financed, as in this question, only the cash amount paid is disclosed in the Statement of Cash Flows. The non-cash activity schedule would disclose the acquisition price and amount financed with the mortgage.

d
Incorrect...
The mortgage amount is the amount NOT paid in cash. Therefore, this amount would not appear in the Statement of Cash Flows. The amounts paid to purchase plant assets and passive investments, such as stocks and bonds of other firms, are investing cash outflows. When part of the purchase price is financed, as in this question, only the cash amount paid is disclosed in the Statement of Cash Flows. The non-cash activity schedule would disclose the acquisition price and amount financed with the mortgage.

27

Correct classification of cash flows is critical to the accurate reporting of cash flow information. Categorized cash flow information is more useful than a mere listing of cash flows in random order. In the table below, determine the cash flow classification which applies to each item by double clicking on the shaded box in the cash flow classification column and selecting one or more classifications. A particular classification may be used once, more than once, or not at all.

Item Cash Flow Classification
Payments to suppliers Operating cash flow
Interest payments Operating cash flow
Payments to retire bonds outstanding Financing cash flow
Down payment on purchase of equipment Investing cash flow
Obtain loan to purchase land to be held as an investment Financing cash flow
Purchase of treasury stock Financing cash flow
Depreciation expense Not a cash flow
Purchase of trading securities Operating cash flow
Monthly mortgage payment* Operating cash flow and Financing cash flow
Dividends received on investments Operating cash flow
Loss on disposal of equipment Not a cash flow
Proceeds from sale of securities available for sale Investing cash flow
Annual lease payment on capital lease* Operating cash flow and Financing cash flow
Payments to fund company pension plan Operating cash flow
Increase in accounts receivable for the period Not a cash flow

Correct classification of cash flows is critical to the accurate reporting of cash flow information. Categorized cash flow information is more useful than a mere listing of cash flows in random order. In the table below, determine the cash flow classification which applies to each item by double clicking on the shaded box in the cash flow classification column and selecting one or more classifications. A particular classification may be used once, more than once, or not at all.

Item Cash Flow Classification
Payments to suppliers   Operating cash flow
Interest payments     Operating cash flow
Payments to retire bonds outstanding
           Financing cash flow
Down payment on purchase of equipment
           Investing cash flow
Obtain loan to purchase land to be held as an investment              Financing cash flow
Purchase of treasury stock   Financing cash flow
Depreciation expense     Not a cash flow
Purchase of trading securities Operating cash flow
Monthly mortgage payment*
    Operating cash flow and Financing cash flow
Dividends received on investments
            Operating cash flow
Loss on disposal of equipment Not a cash flow
Proceeds from sale of securities available for sale Investing cash flow
Annual lease payment on capital lease* Operating cash flow and Financing cash flow
Payments to fund company pension plan Operating cash flow
Increase in accounts receivable for the period Not a cash flow
Rationale:

* Both of these cash outflows include interest (operating cash flow component) and principal amounts (financing cash flow component).

28

Prepare the 2010 statement of cash flows for the Benz Company, using the information below. All the information is provided; assume no other data. Prepare the statement using the direct method format by entering cash flows and reconciling items into the form below. In column A, the name or description has been entered for you. In column B, enter the amount of each item using parentheses for outflows or negative amounts. In column C, enter your net cash flow amounts and other subtotals. Enter 0 if no other amount is appropriate.

Information from the Benz Company's 2010 annual report appears below. This information will be used to prepare the firm's 2010 statement of cash flows.
What is the wage paid?
Rent Paid?

Income Statement for the Year Ended 12/31/10

Sales $400
Wages expense (125)
Rent expense (100)
Depreciation expense (75)
Net income $100
Comparative Balance Sheets 12/31/10

      2009 2010
Cash   $100 $155
AR      50 75
Prepaid rent 70 50
Equipment 300 400
Accum. Dep. (75) (150)
Total Assets $445 $530
Wages payable 30 10
Capital stock 200 230
Retained earnings 215 290
Total L+OE $445 $530

Beg Wage Payable 30accrual
+Wage expense (今年の人件費用総額)accrual 125
- End wage payable accrual 10 = 145(cash basis今年実際支払った人件費)


Prepaid rent 70 + Rent paid 今年実際支払った金額 cash basis = rent expense 今年かかった費用accrual + END prepaid rent

29

AICPA.090666.FAR.III
Operating Cash Flows - Indirect Method
Baker Co. began its operations during the current year. The following is Baker's Balance Sheet at December 31:

Baker Co.
Balance Sheet
Assets
Cash $192,000
Accounts receivable 82,000
Total Assets $274,000
Liabilities and stockholders' equity
Accounts payable $ 24,000
Common stock 200,000
Retained earnings 50,000
Total liabilities and stockholders' equity $274,000
Baker's net income for the current year was $78,000, and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its Statement of Cash Flows for the current year?

A. $20,000
B. $50,000
C. $192,000
D. $250,000

A
Correct!

Cash provided from operating activities is derived as follows: $78,000 net income - $82,000 accounts receivable increase + $24,000 accounts payable increase = $20,000. Net income is the starting point for operating activities under the indirect method. The accounts receivable increase represents sales included in net income but not yet collected. This amount is subtracted because income was increased by an amount exceeding cash collections. The accounts payable increase represents purchases of inventory included in cost of goods sold not yet paid for. This amount is added because income was reduced by an amount exceeding cash payments. No other items are related to operations.

B
Incorrect...

This response includes items which are not operating activities. The correct calculation is $78,000 net income - $82,000 accounts receivable increase + $24,000 accounts payable increase = $20,000 = net operating cash flow.

30

AICPA.941159FAR-FA
Notes to Financial Statements
Which of the following information should be disclosed in the summary of significant accounting policies?
A. Refinancing of debt subsequent to the balance sheet date.
B. Guarantees of indebtedness of others.
C. Criteria for determining which investments are
treat
D. Adequacy of pension plan assets relative to vested benefits.

cCorrect!

All four answers reflect information that should be disclosed in the footnotes, but only information about general accounting policies (measurement and recognition) should appear in the footnote referred to in the question. The policy concerning which investments are treated as cash equivalents is an accounting policy.

ABD
Incorrect...

This information, although normally disclosed in the footnotes, does not concern general accounting policies about measurement and recognition. Therefore, it would not appear in the summary of significant accounting policies footnote. The information would appear in a footnote related to a specific account or activity of the firm.

31

AICPA.061201FAR
Notes to Financial Statements
Which of the following should be disclosed in a summary of significant accounting policies?
A. Basis of profit recognition on long-term construction contracts.
B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
C. Depreciation expense.
D. Composition of sales by segment.

A
Correct!

The summary of significant accounting policies footnote presents information that helps assist users in understanding the recognition, measurement, and disclosure decisions made by the firm.
GAAP allows many choices. In the long-term construction contracts area, GAAP allows both the completed contract and percentage of completion methods. The result of applying each method significantly affects both the Income Statement and Balance Sheet.

A user is much better equipped to evaluate the firm's financial performance and position with the knowledge of the revenue recognition method used by the firm.

B

Incorrect...

Although this information is generally included in the footnotes, it is designed to embellish financial disclosures provided in the statements about leasing. The summary of significant accounting policies footnote provides more general information about methods and other GAAP choices allowed firms.

32

AICPA.900530FAR-TH-FA
Notes to Financial Statements


Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation method Composition
No Yes
Yes Yes
Yes No
No No

B
Incorrect...

The summary of significant accounting policies requires that the methods of depreciation used by a firm be disclosed.
The composition of plant assets must also be disclosed, but not in the summary of significant accounting policies. The composition information typically is disclosed in another footnote.

33

AICPA.051153FAR-FA
Notes to Financial Statements

Where in its financial statements should a company disclose information about its concentration of credit risks?
A. No disclosure is required.
B. The notes to the financial statements.
C. Supplementary information to the financial statements.
D. Management's report to shareholders.

b
Correct!

GAAP requires disclosure of all significant concentrations of credit risk from receivables and other financial instruments in the notes. A concentration of credit risk occurs when receivables from different sources reflect common economic risks (for example, a group of receivables from several firms within the same industry).

34

AICPA.082118FAR-I.C
Ratios - Liquidity/Solvency and Operational

Redwood Co.'s financial statements had the following information at year end:
Cash $ 60,000
Accounts receivable 180,000
Allowance for uncollectible accounts 8,000
Inventory 240,000
Short-term marketable securities 90,000
Prepaid rent 18,000
Current liabilities 400,000
Long-term debt 220,000
What was Redwood's quick ratio?

A. 0.81 to 1
B. 0.83 to 1
C. 0.94 to 1
D. 1.46 to 1

a

Correct!
The quick ratio is the quotient of very liquid current assets to total current liabilities. Inventories and prepaids are not included in the numerator because they are not considered sufficiently liquid. As such, it is a more stringent test of liquidity than the current ratio. In this case, the quick ratio consists of: cash + net AR + marketable securities divided by current liabilities: ($60,000 + $180,000 - $8,000 + $90,000)/$400,000) = .805. The closest answer is 0.81 to 1.

B
Incorrect...

This answer is close but it fails to deduct the allowance for uncollectible accounts. Net accounts receivable (gross AR less the allowance) is the amount to include in the numerator because that is the amount expected to be collected.

35

Question #2 (AICPA.910538FAR-TH-FA)
On December 30, 2004, Solomon Co. had a current ratio greater than 1:1 and a quick ratio less than 1:1.
On December 31, 2004, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?
Current ratio Quick ratio
Decreased Decreased
Decreased Increased
Increased Decreased

C
Correct
Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased.
The current ratio was greater than 1.0 before the transaction. Therefore, the denominator decreased a greater percentage than the numerator causing the ratio to increase.
The quick ratio was less than 1.0 before the transaction. Therefore, the numerator decreased a greater percentage than the denominator causing the ratio to decrease.
Increased Increased
Incorrect for quick ratio. Cash is both a current and a quick asset (an asset immediately available to pay debts). Accounts payable is a current liability. Thus, the numerator and denominator of both ratios have decreased.
The quick ratio was less than 1.0 before the transaction. Therefore, the numerator decreased a greater percentage than the denominator causing the ratio to decrease.

. If the WCR exceeds 1.00:
i. Equal increases in current assets and liabilities decrease the WCR.
WCR = CA 20,000 / CL 10,000 = 2
WCR = (CA 20,000 + 10,000) / (CL 10,000 + 10,000) = 30,000 / 20,000 = 1.5

ii. Equal decreases in current assets and liabilities increase the WCR.
WCR = CA 30,000 / CL 20,000 = 1.5
WCR = CA 20,000 / CL 10,000 = 2

d. If the WCR is less than 1.00:
i. equal increases in current assets and liabilities increase the WCR.
WCR = CA 10,000 / CA 20,000 = .50
WCR = (CA 10,000 + 10,000) / (CA 20,000 + 10,000) = 20,000 / 30,000 = .66

ii. Equal decreases in current assets and liabilities decreases the WCR.
WCR = 20,000 / 30,000 = .66
WCR = 10,000 / 20,000 = .50

36

Question #19 (AICPA.082119FAR-I.C)
The following information was taken from Baxter Department Store's financial statements:
Inventory on January 1 $ 100,000
Inventory on December 31 300,000
Net sales 2,000,000
Net purchases 700,000
What was Baxter's inventory turnover for the year ending December 31?

A. 2.5
B. 3.5
C. 5
D. 10

a
correct
Inventory turnover is the ratio of cost of goods (CGS) sold to average inventory. First, calculate CGS = beginning inventory $100,000 + purchases $700,000 - ending inventory $300,000 = $500,000. Then, average inventory = (beginning inventory + ending inventory)/2 = ($100,000 + $300,000)/2 = $200,000. Turnover = $500,000/$200,000 = 2.5.

b Incorrect
This response is the ratio of purchases to average inventory and would be correct if purchases and cost of goods sold (CGS) were the same. However, with inventory increasing, the cost of goods sold is less than purchases. Inventory turnover uses CGS, not purchases, as the numerator. The denominator is average inventory.