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Flashcards in Statement of Cash Flows Deck (64):
1

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?

  1. The major classes of gross cash receipts and gross cash payments.
  2. The amount of income taxes paid.
  3. A reconciliation of net income to net cash flow from operations.
  4. A reconciliation of ending retained earnings to net cash flow from operations.

A reconciliation of ending retained earnings to net cash flow from operations.

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.

2

Which of the following information should be disclosed as supplemental information in the Statement of Cash Flows?

  1. Cash flow per share    
  2. Conversion of debt to equity 

  1. Cash flow per share = NO
  2. Conversion of debt to equity = YES 

Cash flow per share is specifically prohibited from being disclosed unless it is based on contractual amounts.

The conversion of debt to equity is an example of a transaction that would appear in the supplemental noncash disclosure schedule.

3

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?

  1. $27,000
  2. $40,000
  3. $208,000
  4. $248,000

$208,000

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.

4

The primary purpose of a Statement of Cash Flows is to provide relevant information about:

  1. Differences between net income and associated cash receipts and disbursements.
  2. An enterprise's ability to generate future positive net cash flows.
  3. The cash receipts and cash disbursements of an enterprise during a period.
  4. An enterprise's ability to meet cash operating needs.

The cash receipts and cash disbursements of an enterprise during a period.

The Statement of Cash Flows is a listing of cash flows for a period in meaningful categories. Thus, it depicts the major cash receipts and disbursements during a period. Although such information may help a user to assess the ability of a firm to generate future cash flows, it does not, necessarily, say anything about the firm's ability to do so in the future.

Similarly, the cash flow statement does not directly indicate the firm's ability to meet future cash operating needs. The reconciliation of income and net operating cash flows does indicate the differences between income and operating cash flows, but this is not the primary purpose of the statement.

5

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?

  1. $0
  2. $10,000
  3. $20,000
  4. $30,000

$0

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

6

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?

  1. As an outflow from operating activities.
  2. As an outflow from investing activities.
  3. As an outflow from financing activities.
  4. Not reported.

Not reported.

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.

7

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  

  • Working capital - Overstated
  • Cash flows from operating activities - No effect

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.

8

In a Statement of Cash Flows, which of the following items is reported as a cash outflow from financing activities?

  • I. Payments to retire mortgage notes;
  • II. Interest payments on mortgage notes;
  • III. Dividend payments.

A.  I, II, and III.

B.  II and III.

C.  I only.

D.  I and III.

I and III.

Both I and III are financing cash outflows. Principal payments on loans from financial institutions are financing because they are a return of a source of long-term financing.

The dividends are a return to shareholders who have provided a considerable portion of total firm financing.

Interest expense is not a financing flow. All interest payments are defined as operating cash flows, in part, because they affect income.

9

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?

  1. $3,000
  2. $9,000
  3. $12,000
  4. $30,000

$3,000

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.

10

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?

  1. Cash payment.
  2. Acquisition price.
  3. Zero.
  4. Mortgage amount

Zero.

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.

11

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?

  1. Cash payment.
  2. Acquisition price.
  3. Zero.
  4. Mortgage amount.

Cash payment.

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.

12

Abbott Co. is preparing its Statement of Cash Flows for the year. Abbott's cash disbursements during the year included the following:

  • Payment of interest on bonds payable $500,000
  • Payment of dividends to stockholders $300,000
  • Payment to acquire 1,000 shares of Marks Co. common stock $100,000

What should Abbott report as total cash outflows for financing activities in its Statement of Cash Flows?

$300,000

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.

13

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?

  1. $14,000
  2. $15,000
  3. $18,000
  4. $26,000

$14,000

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.

14

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?

  1. $50
  2. $150
  3. $250
  4. $550

$250

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.

15

Duke Co. reported cost of goods sold of $270,000 for 2005. Additional information is as follows:

  • Inventory increase $15,000
  • Accounts payable decrease $13,000

If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its 2005 Statement of Cash Flows?

  1. $242,000
  2. $268,000
  3. $272,000
  4. $298,000

$298,000

Cost of goods sold is used as a beginning estimate for cash paid to suppliers. It is adjusted by the change in the two accounts that affect payments to suppliers: inventory and accounts payable.

  • Cost of goods sold $270,000
  • Plus inventory increase (an amount of inventory purchased but not sold during the period, thus increasing cash payments relative to cost of goods sold) $15,000
  • Plus decrease in accounts payable (an amount of accounts payable paid in excess of purchases, thus increasing cash payments relative to cost of good sold) $13,000

Equals cash paid to suppliers $298,000

16

In a Statement of Cash Flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment:

  1. Less the loss and plus the amount of tax attributable to the loss.
  2. Less both the loss and the amount of tax attributable to the loss.
  3. Less the loss.
  4. With no addition or subtraction.

Less the loss.

A journal entry helps to visualize the transaction:

Dr. Cash  xxx

Dr. Loss   xxx

Cr. Asset (book value)   xxx

The investing cash inflow is the book value of the asset less the loss. In actuality, this amount equals the amount of cash received on the sale. Any tax effects are accounted for in income tax payments, an operating cash outflow.

17

 

Lino Co.'s worksheet for the preparation of its 2005 Statement of Cash Flows included the following:

  • Accounts receivable increase $6,000
  • Allowance for uncollectible accounts increase $200
  • Prepaid rent expense decrease $4,200
  • Accounts payable increase $3,000

Lino's 2005 net income is $150,000. What amount should Lino include as net cash provided by operating activities in the Statement of Cash Flows?

A. $151,400

B. $151,000

C. $148,600

D. $145,400

$151,400

The reconciliation of net income and net cash flow from operations shows the calculation:

  • Net income $150,000
  • Less increase in net accounts receivable ($29,000 - $23,000) - ($1,000 - $800) ($5,800)
  • Plus decrease in prepaid rent $4,200
  • Plus increase in accounts payable $3,000
  • Equals net cash flow from operations $151,400

The net accounts receivable increase is subtracted because more sales were recognized than collected during the period. The decrease in prepaid rent is added because more rent expense was recognized than paid. The accounts payable increase is added because more cost of goods sold was recognized than the amount of inventory purchased and paid for.

18

Payne Co. prepares its Statement of Cash Flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year.

How should Payne report the change in the unamortized bond discount in its Statement of Cash Flows?

  1. As a financing cash inflow.
  2. As a financing cash outflow.
  3. As an addition to net income in the operating activities section.
  4. As a subtraction from net income in the operating activities section.

As an addition to net income in the operating activities section.

Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account.

The semiannual journal entry is: dr. Interest expense; cr. Discount; cr. Cash.

Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount).

Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow.

Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

19

The following information was taken from the 2005 financial statements of Plant Corp.:

  • Accounts receivable, January 1, 2005 $21,600
  • Accounts receivable, December 31, 2005 $30,400
  • Sales on account and cash sales $438,000
  • Uncollectible accounts $1,000

No accounts receivable were written off or recovered during the year.

If the direct method is used in the 2005 Statement of Cash Flows. Planet should report cash collected from customers as:

  1. $447,800
  2. $446,800
  3. $429,200
  4. $428,200

$429,200

Beginning AR + Sales - Collections = Ending AR

$21,600 + $438,000 - Collections = $30,400

Collections = $429,200

Although $1,000 of uncollectible accounts are indicated, the question states that no accounts were written off. The analysis includes cash sales in the "sales" term in the above equation. This is appropriate because cash sales can be considered increases and then immediate decreases in AR.

20

You have the following information:

  • Sales = $538,800
  • Increase in Accounts Receivable = $3,000

What were cash collections from customers for the year?

$535,800

Accounts receivable (gross) increased $3,000 reflecting more sales than cash collections by $3,000 for the period (the increase of $3,000 is from credit sales). With sales of $538,800, that means cash collections must be $3,000 less or $535,800.

There is no information about write-offs of accounts receivable. Without this information, we must assume no write-offs. Otherwise, there is no solution to the question because write-offs contribute to the change in accounts receivable.

21

Reed Co.'s 2001 Statement of Cash Flows reported cash provided from operating activities of $400,000. For 2001, the depreciation of equipment was $190,000, the amortization of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed's 2001 Statement of Cash Flows, what amount was reported as net income?

  1. $105,000
  2. $205,000
  3. $305,000
  4. $595,000

$205,000

he reconciliation of net income and net operating cash flows begins with net income and adjusts for items that have an effect on income different from their effect on net operating cash flow. Goodwill amortization is added to net income because it reduced earnings but caused no cash outflow. Depreciation is the same type of item. Dividends paid is a financing cash outflow and does not appear in the reconciliation. Dividends paid has no effect on income or net operating cash flow.

  • Net income ???
  • Goodwill amortization $5,000
  • Depreciation $190,000
  • Net operating cash flow $400,000

Thus, net income was $205,000. Note that goodwill is no longer amortized. This question was written before the change in accounting for intangibles.

22

You have the following information:

  • Beginning COGS = $380,000
  • Ending COGS = $250,000
  • Decrease in Inventory = $16,000
  • Increase in Accounts Payable = $7,500

What is the cash paid for goods to be sold?

$226,500

Two accounts are related to cost of goods sold: inventory and accounts payable.

  • Cost of goods sold $250,000
  • Less decrease in inventory (this represents an increase to cost of goods sold for inventory not purchased in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount). ($16,000)
  • Less increase in accounts payable (this represents an increase in purchases and, therefore, cost of goods sold that was not paid for in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount). ($7,500)

Equals cash paid for inventory$226,500

23

You have the following information:

Cash paid to suppliers = $490,000

Decrease in Inventory = $30,000

Increase in Accounts Payable = $25,000

What is Cost of Goods Sold?

$545,000

Amount paid to suppliers = Cost of goods sold - Inventory decrease - AP increase.

$490,000 = Cost of goods sold - $30,000 - $25,000

$545,000 = Cost of goods sold

The inventory decrease is subtracted from cost of goods sold because it is an inventory reduction included in cost of goods sold that was not paid for in the current period. The accounts payable increase is also subtracted because it represents an increase in inventory and, therefore, cost of goods sold that was not paid for in the current period.

24

Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities:

  • Beginning inventory $200,000
  • Ending inventory $150,000
  • Cost of goods sold $1,200,000
  • Beginning accounts payable $300,000
  • Ending accounts payable $200,000

What amount should Baler report as cash paid to suppliers for inventory purchases?

  1. $1,200,000
  2. $1,250,000
  3. $1,300,000
  4. $1,350,000

$1,250,000

cash paid to suppliers is calculated as cost of goods sold less the decrease in inventory and plus the decrease in ending accounts payable, or $1,250,000 ($1,200,000 cost of goods sold − $50,000 decrease in inventory + $100,000 decrease in accounts payable).

25

n a statement of cash flows, if used equipment is sold at a loss, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment

  1. Less the loss and plus the amount of tax attributable to the loss.
  2. Less both the loss and the amount of tax attributable to the loss.
  3. Less the loss.
  4. With no addition or subtraction.

Less the loss.

Per ASC Topic 230, the cash inflow from the sale of equipment is equal to the cash received from the sale. If a loss occurs, then the cash inflow is equal to the carrying value of the equipment less the loss.

Gain on sale of fixed assets. The entry to record the sale would have been

  • Cash $4,000 
  • Accumulated depreciation $3,000 
    • Gain on sale $2,000
    • Asset $5,000

The total amount of cash received in payment for the asset, not just the amount of the gain, represents the cash inflow. Since cash inflow from the sale (including the amount of the gain) appears in the investing section, the gain should be subtracted from net income.

26

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

  1. Operating activities.
  2. Financing activities.
  3. Investing activities.
  4. Selling activities.

Investing activities.

Per ASC Topic 230, receipts from sales of property, plant, and equipment and other productive assets are categorized as cash flows from investing activities.

Investing activities include the acquisition and disposition of long-term productive assets or securities that are not considered cash equivalents.  Investing activities also include the lending of money and collection on loans.

27

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year.  Changes occurred in several balance sheet accounts as follows:

  • Accrued interest payable $17,000 decrease
  • Prepaid interest $23,000 decrease

In its income statement for the current year, what amount should Ness report as interest expense?

  1. $30,000
  2. $64,000
  3. $76,000
  4. $110,000

$76,000

The amount is calculated as cash paid for interest minus the decrease in accrued interest payable and plus the amount of decrease in prepaid interest, or $76,000 = $70,000 − $17,000 + $23,000.

28

Darinda Corporation has a cash advance from the bank for an overdraft of $5,000 on its checking account. Darinda prepares its financial statements in accordance with IFRS.  The cash advances from the bank  due to the overdraft should be reported on the statement of cash flows as

  1. Operating activities.
  2. Investing activities.
  3. Financing activities.
  4. Other significant noncash activities.

Operating activities.

IFRS requires cash advances and loans from bank overdrafts to be classified as operating activities.

Statement of Cash Flows. 

The accounting rules for the Statement of Cash Flows are similar to US GAAP.  For IFRS, cash flows include the inflows and outflows of both cash and cash equivalents. Cash equivalents include cash on hand, bank balances for immediate use, other demand deposits, and short-term investments with maturities of three months or less.  Both the direct method and indirect method are acceptable methods for preparing the statement of cash flows. However, for the indirect method, operating activities may be presented using a modified approach. This modified indirect method shows revenues and expenses in operating activities, and then reports the changes in working capital accounts.

As in US GAAP, the statement of cash flows is divided into three parts: operating, investing, and financing activities.  At the bottom of the statement of cash flows, a reconciliation must be made with the amounts in the statement of cash flows and the cash and cash equivalents reported in the statement of financial position.

The most significant difference between IFRS and US GAAP is where certain items are presented on the statement of cash flows. For example, interest and dividends received may be reported on the statement of cash flows as operating or investing activities.  Interest and dividends paid may be reported either in the operating activities or the financing activities sections. Although the entity has discretion on where interest and dividends are reported, it must be reported on a consistent basis. Cash from the purchase and sale of trading securities are classified as operating activities. Cash advances and loans (bank overdrafts) are also usually classified as operating activities.  Taxes paid on income must be disclosed separately in operating activities. However, cash flows from certain taxes may be classified elsewhere if they are related to investing or financing activities. In addition, the effects of noncash transactions are not reported on the statement of cash flows. Instead, significant noncash activities must be disclosed in the notes to the financial statements.

29

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method? (Ignore income tax considerations.)

  1. Dividends received from investments.
  2. Gain on sale of equipment.
  3. Gain on early retirement of bonds.
  4. Change from straight-line to accelerated depreciation.

Dividends received from investments.

ASC Topic 230 specifically states that dividends received from investments be reported separately under operating activities when the direct method is used.

Under the direct approach, cash flow elements of operating activities are derived from the accrual basis components of net income.  In converting to the cash basis, accounts that should be analyzed under operating activities are those which are debited or credited when recording transactions that affect the income statement.  These transactions include transactions with outsiders and adjusting entries.  For example, these accounts include sales, cost of sales, operating expenses, and tax expense, as well as assets and liabilities which are related to them, such as accounts receivable, inventory, accounts payable, accrued expenses, and prepaid expenses.  Note that interest expense and interest revenue are included within operating activities.

30

A company’s wages payable increased from the beginning to the end of the year.  In the company’s statement of cash flows in which the operating activities section is prepared under the direct method, the cash paid for wages would be

  1. Salary expense plus wages payable at the beginning of the year.
  2. Salary expense plus the increase in wages payable from the beginning to the end of the year.
  3. Salary expense less the increase in wages payable from the beginning to the end of the year.
  4. The same as salary expense.

Salary expense less the increase in wages payable from the beginning to the end of the year.

In a statement of cash flows in which the operating activities section is prepared using the direct method, the cash paid for wages equals the accrual-basis salary expense plus/minus any decrease/increase in the wages payable account. (The logic is essentially the same as an accrual-basis to cash-basis adjustment.)

31

Jackson Company classifies trading securities as an operating activity based on their nature and purpose. In a statement of cash flows in which the operating activities section is prepared under the indirect method, the realized gain on an investment in securities held for trading should be presented as a(n)

  1. Deduction from net income in the amount of the gain.
  2. Addition to net income in the amount of the securities’ fair value at the beginning of the period.
  3. Cash inflow from investing activities.
  4. Both a deduction from net income in the amount of the gain and cash inflow from investing activities.

Addition to net income in the amount of the securities’ fair value at the beginning of the period.

Per ASC Topic 230, cash inflows and outflows from trading securities may be included in either operating or investing activities, based on the nature and purpose of the securities. Unrealized gains and losses on trading securities should be included in current income. Therefore, trading securities are carried at fair value and the amount of realized gain on the sale is the difference between the securities’ fair value at the beginning of the period and the amount of appreciation to the date of sale. Net income is the starting point when preparing the operating activities section of a statement of cash flows using the indirect method. Since the realized gain on sale is already included as a component of net income, only the fair value (carrying amount) of the securities at the beginning of the period must be added to net income. The total cash inflow from the sale (carrying amount plus realized gain) will then be included in operating activities.

32

In a statement of cash flows in which the operating activities section is prepared under the indirect method, a gain on the sale of an investment in available-for-sale securities should be presented as a(n)

  1. Deduction from net income.
  2. Addition to net income.
  3. Inflow and outflow of cash.
  4. Outflow of cash.

Deduction from net income.

Any gain on the sale of an investment other than trading securities should be included as part of the total proceeds reported in investing activities. However, this gain has been included in net income. Under the indirect method, net income is adjusted for items which affect income but not cash. Therefore, the amount of the gain must be deducted from net income to remove the book gain from the cash flows from operating activities, thereby avoiding double counting the gain.

33

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?

  1. Financing activities.
  2. Operating activities.
  3. Investing activities.
  4. Supplemental disclosures.

Operating activities.

The adjustments made for bond amortization to change accrual-basis interest expense to the cash interest paid will be reported in the operating section of the statement of cash flows.

34

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from

  1. Lending activities.
  2. Operating activities.
  3. Investing activities.
  4. Financing activities.

Financing activities.

Per ASC Topic 230, financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment. Proceeds from issuing equity instruments are specifically identified as cash inflows from financing activities.

35

During year 2, Teb, Inc. had the following activities related to its financial operations:

  • Payment for the early retirement of long-term bonds payable (carrying value $740,000) $750,000
  • Distribution in year 2 of cash dividend declared in year 1 to preferred shareholders $62,000
  • Carrying value of convertible preferred stock in Teb, converted into common shares $120,000
  • Proceeds from sale of treasury stock (carrying value at cost, $86,000) $95,000

In Teb’s year 2 statement of cash flows, net cash used in financing activities should be

  1. $717,000
  2. $716,000
  3. $597,000
  4. $535,000

$717,000

Financing activities include all cash flows involving liabilities and equity, other than operating items.  The only item given which is not classified as a cash flow from financing activities is the conversion of preferred stock into common stock ($120,000). This is a noncash item, reported in a separate schedule at the bottom of the statement of cash flows.  The other items are cash financing activities, resulting in net cash used in financing activities of $717,000.

  • Cash paid to retire bonds payable $(750,000)
  • Payment of cash dividend (62,000)
  • Sale of treasury stock 95,000
  • $(717,000)

Note that the preferred dividends were a cash payment in year 2, not in year 1 when declared. For the other items, the important number is the cash flow, not the carrying value or cost.

36

The amortization of bond premium on long-term debt should be presented in a statement of cash flows (using indirect approach for operating activities) as a(n)

  1. Financing activity.
  2. Investing activity.
  3. Addition to net income.
  4. Deduction from net income.

Deduction from net income.

If bonds are sold at a discount or premium, the interest expense for the period will differ from the change in cash resulting from payment of interest expense. When the premium is amortized, the interest expense included in income determination is not as large as the interest paid or becoming payable in the period. Because the cash outflow is larger than the deduction in arriving at net income, a deduction from net income is necessary to determine cash provided by operating activities (when using the indirect approach of presenting cash flows from operating activities).

37

A loss on the sale of machinery in the ordinary course of business should be presented in a statement of cash flows (using indirect approach for operating activities) as a(n)

  1. Deduction from net income.
  2. Addition to net income.
  3. Inflow and outflow of cash.
  4. Outflow of cash.

Addition to net income.

When preparing the statement of cash flows under the indirect approach, a loss on the sale of machinery would be an addition to net income. The loss decreases net income, but does not reduce cash. Therefore, the loss must be added back to net income to determine cash flows from operating activities.

38

Green Co. had the following equity transactions at December 31:

  • Cash proceeds from sale of investment in Blue Co. (carrying value—$60,000) $75,000
  • Dividends received on Grey Co. stock $10,500
  • Common stock purchased from Brown Co. $38,000

What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31?

  1. $37,000
  2. $47,500
  3. $75,000
  4. $85,500

$37,000

Net cash from investing activities is computed as the cash proceeds from the sale of investment in Blue Co. less the cash used for the common stock purchase from Brown Co. or $37,000 ($75,000 − $38,000). The dividends received on Grey Co. stock would be included in net cash flows from operating activities.

39

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

  1. Gain on sale of plant asset.
  2. Sale of property, plant, and equipment.
  3. Payment of cash dividend to the shareholders.
  4. Issuance of common stock to the shareholders.

Gain on sale of plant asset.

The cash flow statement includes those items related to producing goods for sale and providing services. Generally, operating activities are related to net income and the current asset and current liability sections of the balance sheet. This answer is correct because a gain on the sale of plant assets would be a reconciling item from net income to operating cash flows.

40

In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for

  1. Operating activities.
  2. Borrowing activities.
  3. Lending activities.
  4. Financing activities.

Operating activities.

Per ASC Topic 230, interest payments to lenders and other creditors are categorized as cash flows from operating activities.

41

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) which will be held until maturity should be classified as cash outflows for

  1. Operating activities.
  2. Investing activities.
  3. Financing activities.
  4. Lending activities.

Investing activities.

​​Per ASC Topic 230, investing activities include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment. Per ASC Topic 230, cash flows from transactions in held-to-maturity and available-for-sale securities are to be classified as cash flows from investing activities. Conversely, amounts related to securities held for trading are classified as operating activities.

42

Which of the following would be reported as an investing activity in a company’s statement of cash flows?

  1. Collection of proceeds from a note payable.
  2. Collection of a note receivable from a related party.
  3. Collection of an overdue account receivable from a customer.
  4. Collection of a tax refund from the government.

Collection of a note receivable from a related party.

Investing activities tend to relate to noncurrent assets and securities.

Investing activities include the acquisition and disposition of long-term productive assets or securities that are not considered cash equivalents.

  • Investing activities also include the lending of money and collection on loans.

 

43

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from

  1. Lending activities.
  2. Operating activities.
  3. Investing activities.
  4. Financing activities.

Financing activities.

Per ASC Topic 230, financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment. Proceeds from issuing equity instruments are specifically identified as cash inflows from financing activities.

44

In a statement of cash flows (using indirect approach for operating activities) an increase in inventories should be presented as a(n)

  1. Outflow of cash.
  2. Inflow and outflow of cash.
  3. Addition to net income.
  4. Deduction from net income.

Deduction from net income.

When presenting cash flows from operating activities under the indirect approach, net income must be adjusted for changes in current assets (other than cash) and in current liabilities. Further, noncash events must be removed from net income to complete the conversion of net income from an accrual basis to a cash basis. When inventory increases, inventory sold is less than inventory purchased. Therefore, CGS on an accrual basis is less than it would have been if the cash basis were used. In converting to the cash basis, the increase in inventory must be subtracted from net income to arrive at cash from operations.

45

The following information is available from Sand Corp.’s accounting records for the year ended December 31, year 2:

  • Cash received from customers $870,000
  • Rent received $10,000
  • Cash paid to suppliers and employees $510,000
  • Taxes paid $110,000
  • Cash dividends paid $30,000

Net cash flow provided by operations for year 2 was

  1. $220,000
  2. $230,000
  3. $250,000
  4. $260,000

$260,000

The net cash flow provided by operations can be computed using either the indirect approach or the direct approach.  In this question, the direct approach is used. Under the direct approach, each income statement item is directly adjusted for changes in related balance sheet items, and these adjusted amounts are used to compute the net cash flow.  The items in this question have already been adjusted, so the net cash flow can be computed as follows:

  • Cash received from customers $870,000
  • Rent received $10,000
  • Cash paid to suppliers and employees ($510,000)
  • Taxes paid ($110,000)
  • Net cash flow provided by operations $260,000

Dividends are not used because they are a financing activity.

46

Deferred income tax expense resulting from temporary differences related to depreciation of plant assets should be presented in a statement of cash flows (using indirect approach for operating activities) as a(n)

  1. Noncash financing and investing activity reported in a separate schedule.
  2. Financing activity.
  3. Deduction from net income.
  4. Addition to net income.

Addition to net income.

When using the indirect approach to determine cash flows from operating activities, noncash deductions from net income should be added back to determine cash flows from operating activities. Since the deferred income tax expense did not use cash but was subtracted in determining net income, it is proper to add it back to net income in cash flows from operating activities.

47

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year.  Changes occurred in several balance sheet accounts as follows:

  • Accrued interest payable $17,000 decrease
  • Prepaid interest $23,000 decrease

In its income statement for the current year, what amount should Ness report as interest expense?

  1. $30,000
  2. $64,000
  3. $76,000
  4. $110,000

$76,000

the amount is calculated as cash paid for interest minus the decrease in accrued interest payable and plus the amount of decrease in prepaid interest, or $76,000 = $70,000 − $17,000 + $23,000.

48

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method? (Ignore income tax considerations.)

  1. Dividends received from investments.
  2. Gain on sale of equipment.
  3. Gain on early retirement of bonds.
  4. Change from straight-line to accelerated depreciation.

Dividends received from investments.

ASC Topic 230 specifically states that dividends received from investments be reported separately under operating activities when the direct method is used.

49

In a statement of cash flows (operating activities shown using indirect approach), a decrease in prepaid expenses should be

  1. Reported as an inflow and outflow of cash.
  2. Reported as an outflow of cash.
  3. Deducted from net income.
  4. Added to net income.

Added to net income.

When presenting cash flows from operating activities under the indirect approach, net income must be adjusted for changes in current assets (other than cash) and in current liabilities. Further, noncash events must be removed from net income to complete the conversion of net income from an accrual basis to a cash basis. When prepaid expenses decrease, reported expenses exceed cash paid. The decrease in prepaid expenses must therefore be added to net income.

50

Kollar Corp.’s transactions for the year ended December 31, year 2, included the following:

  • Purchased real estate for $550,000 cash which was borrowed from a bank.
  • Sold investment securities for $500,000.
  • Paid dividends of $600,000.
  • Issued 500 shares of common stock for $250,000.
  • Purchased machinery and equipment for $125,000 cash.
  • Paid $450,000 toward a bank loan.
  • Reduced accounts receivable by $100,000.
  • Increased accounts payable by $200,000.

Kollar’s net cash from financing activities for year 2 was

  1. $50,000
  2. $250,000
  3. $450,000
  4. $500,000

$250,000

Financing activities include all cash flows involving liabilities and equity other than operating items.  The financing activities are

  • Bank borrowing $550,000
  • Dividend payment ($600,000)
  • Issuance of stock $250,000
  • Bank loan payment ($450,000)
  • Net cash used in financing activities ($250,000)

The purchase of real estate ($550,000), sale of investment securities ($500,000), and purchase of machinery and equipment ($125,000) are investing activities.  The reduction of accounts receivable ($100,000) and the increase in accounts payable ($200,000) are operating items.

51

Tam Co. reported the following items in its year-end financial statements:

  • Capital expenditures $1,000,000
  • Capital lease payments $125,000
  • Income taxes paid $325,000
  • Dividends paid $200,000
  • Net interest payments $220,000

What amount should Tam report as supplemental disclosures in its statement of cash flows prepared using the indirect method?

  1. $545,000
  2. $745,000
  3. $1,125,000
  4. $1,870,000

$545,000

ASC Topic 230 (SFAS 95, par. 29) requires that if the indirect method is used to prepare the statement of cash flows, supplemental disclosures are required to report the amount of interest paid and the amount of income taxes paid during the period. This answer is correct because the total amount of supplemental disclosures are $325,000 + $220,000 = $545,000.

52

On the statement of cash flows in which the operating activities section is prepared under the indirect method, depreciation is treated as an adjustment to reported net earnings because depreciation

  1. Is a direct inflow of cash from investing activities.
  2. Reduces reported net earnings but does not involve an outflow of cash.
  3. Reduces reported net earnings and involves an inflow of cash.
  4. Is an inflow of cash to a reserve account for replacement of assets.

Reduces reported net earnings but does not involve an outflow of cash.

Depreciation is deducted in the calculation of net earnings; however, it is a noncash expense item and as such does not affect cash. Therefore, it would be added back in to net earnings on the statement of cash flows when using the indirect method.

53

Lance Corp.’s statement of cash flows for the year ended September 30, year 1, was prepared using the indirect method and included the following: 

  • Net income $60,000
  • Noncash adjustments: 
    • Depreciation expense $9,000
    • Increase in accounts receivable ($5,000)
    • Decrease in inventory $40,000
    • Decrease in accounts payable ($12,000)
  • Net cash flows from operating activities $92,000

Lance reported revenues from customers of $75,000 in its year 1 income statement. What amount of cash did Lance receive from its customers during the year ended September 30, year 1?

  1. $80,000
  2. $70,000
  3. $65,000
  4. $55,000

$70,000

Cash collected from customers can be computed using the following formula:

  • Sales − [End AR − (Beg. AR − Write-offs)] = Collections

In the formula above, sales is adjusted for the change in AR, exclusive of write-offs, because write-offs represent sales (and AR) which will never be collected in cash.  In this problem, no mention is made of write-offs, so the formula can be rewritten as follows:

  • Sales − (End AR − Beg. AR)=Collections
  • Sales − Increase in AR=Collections
  • $75,000 − $5,000 = $70,000

54

A company’s accounts receivable decreased from the beginning to the end of the year. In the company’s statement of cash flows (operating activities shown using direct approach), the cash collected from customers would be

  1. Sales revenues plus accounts receivable at the beginning of the year.
  2. Sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.
  3. Sales revenues less the decrease in accounts receivable from the beginning to the end of the year.
  4. The same as sales revenues.

Sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.

In a statement of cash flows in which the operating activities section is prepared using the direct method, the cash collected from customers would equal the accrual-basis sales revenue plus/minus any decrease/increase in accounts receivable account.

55

The purchase for cash of treasury stock should be presented in a statement of cash flows as a(n)

  • Investing activity
  • Financing activity

  • Investing activity - NO
  • Financing activity - YES

Per ASC Topic 230, transactions which involve either an outlay of cash for treasury stock or an inflow of cash from the reissue of treasury stock shall be reported as a financing activity. The purchase of treasury stock would not be classified as an investing activity because investing activities include making and collecting loans, as well as acquiring and disposing of debt or equity instruments of other entities, property, plant, and equipment and other productive assets.

Financing activities include obtaining resources from owners and returning the investment. Also included is obtaining resources from creditors and repaying the amount borrowed.

56

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

  1. $0
  2. $25,000
  3. $40,000
  4. $65,000

$65,000

Cash flows from available-for-sale and held-to-maturity investments are both included in investing activities. Therefore, net cash from investing activities should be $65,000 ($25,000 + $40,000).

57

Would the following be added back to net income when reporting operating activities’ cash flows by the indirect method?

  • Excess of treasury stock acquisition cost over sales proceeds (cost method)
  • Bond discount amortization

  • Excess of treasury stock acquisition cost over sales proceeds (cost method) - NO
  • Bond discount amortization - YES

Under the indirect method of reporting cash flows from operations, income from continuing operations is adjusted for changes in operating-related accounts and noncash expenses, revenues, losses, and gains. Noncash items that were subtracted in determining net income must be added back, including amortization of bond discount since it is a charge against income but does not increase cash. The excess of treasury stock acquisition cost would not be added back to net income when determining operating activities’ cash flows because it represents a financing activity.

58

The retirement of long-term debt by the issuance of common stock should be presented in a statement of cash flows as a

  • Financing activity
  • Investing activity

  • Financing activity - NO
  • Investing activity - NO

Per ASC Topic 230, financing and investing activities which have no effect on cash flows shall be shown either in a separate schedule of noncash financing and investing activities or in narrative form in the footnotes, not in the body of the statement.

59

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?

  1. Financing activities.
  2. Operating activities.
  3. Investing activities.
  4. Supplemental disclosures.

Operating activities.

The adjustments made for bond amortization to change accrual-basis interest expense to the cash interest paid will be reported in the operating section of the statement of cash flows.

60

Rory Co.’s prepaid insurance was $50,000 at December 31, year 2, and $25,000 at December 31, year 1. Insurance expense was $20,000 for year 2 and $15,000 for year 1. What amount of cash disbursements for insurance would be reported in Rory’s year 2 net cash flows from operating activities presented on a direct basis?

  1. $55,000
  2. $45,000
  3. $30,000
  4. $20,000

$45,000

When using the direct approach to determine cash flows from operating activities, the cash paid for insurance equals the accrual-basis insurance expense plus/minus any increase/decrease in the prepaid insurance account. The solutions approach is to prepare a T-account for prepaid insurance. In the T-account below, you must solve for the missing debit to determine that $45,000 was paid for insurance in year 2.  Note that insurance expense in year 2 is included as a credit to prepaid insurance; however, year 1 insurance expense is irrelevant and therefore not included in the T-account.
 

61

Able Company reports its income from investments under the equity method and recognized income of $15,000 from its investment in Tech Company during the current year even though no dividends were declared or paid by Tech Company during the year. On Able Company’s statement of cash flows in which the operating activities section is prepared under the indirect method, the $15,000 must

  1. Not be shown.
  2. Be shown as inflow under financing activities.
  3. Be shown as inflow under investing activities.
  4. Be shown as a deduction from net income under operating activities.

Be shown as a deduction from net income under operating activities.

The $15,000 of undistributed earnings from Tech Co. is included in net income but did not generate cash for the Able Co. Thus, the $15,000 must be deducted from net income to determine net cash flows from operations.

62

If a company issues both a balance sheet and an income statement with comparative figures from last year, a statement of cash flows

  1. Is no longer necessary, but may be issued at the company’s option.
  2. Should not be issued.
  3. Should be issued for each period for which an income statement is presented.
  4. Should be issued for the current year only.

Should be issued for each period for which an income statement is presented.

When a balance sheet, income statement, and statement of retained earnings are issued, a statement of cash flows must be presented for each period for which an income statement is presented.

63

Which of the following should be presented with the statement of cash flows in a separate schedule?

  1. Conversion of bonds to common stock.
  2. Purchase of treasury stock.
  3. Sale of common stock.
  4. Declaration of cash dividend.

Conversion of bonds to common stock.

Per ASC Topic 230, investing and financing activities which do not affect cash but do affect recognized assets and liabilities should be presented in a separate schedule to accompany the statement of cash flows. Examples of such items include:

  1. Conversion of debt to equity
  2. Acquisition of assets by either:
  • Incurring a mortgage
  • Entering into a capital lease
  • Issuing stock
  1. Exchange of noncash assets or liabilities for other noncash assets or liabilities.

64

Stevie Company owns shares of stock in Rod Inc.  Stevie received a $5,000 cash dividend.  If Stevie reports under IFRS, the dividend received can be classified as

  1. Only an operating activity.
  2. Only as an investing activity.
  3. Either an operating activity or investing activity.
  4. Either an operating activity or financing activity

Either an operating activity or investing activity.

Under IFRS, dividends received may be classified as an operating activity or an investing activity.