Financial Accounting 1e · 2015-08-30 · 11.1-4 The statement of cash flows is prepared to show...

Financial Accounting, 1e Chapter 11: The Statement of Cash Flows

Test Item File 11.1-1 The balance sheet reports the ending cash, but does not include cash equivalents.

Answer: False LO: 11-1 Difficulty: 1 EOC Ref: S11-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.1-2 A comparative balance sheet reports at least two consecutive years of ending cash balances that can be used to compile a statement of cash flows.

Answer: True LO: 11-1 Difficulty: 1 EOC Ref: S11-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.1-3 A comparative balance sheet details why the ending cash balance increased or decreased.


11.1-4 The statement of cash flows is prepared to show why the cash amount changed from the beginning of the period to the end of the period.


Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

11.1-5 A statement of cash flows shows the company’s sources of cash, but does not detail how the cash was used by the company.


11.1-6 The statement of cash flows reports the sources and uses of cash from all of the following EXCEPT:

A. managerial activities. B. financing activities. C. operating activities. D. investing activities.

Answer: A LO: 11-1 Difficulty: 1 EOC Ref: S11-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.1-7 Past cash receipts and payments do NOT help to predict:

A. management decisions. B. ability to pay debts and dividends. C. future cash flows. D. future net income.

Answer: D LO: 11-1 Difficulty: 1 EOC Ref: S11-3 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.1-8 A lender wants to know if they can collect on their loans. A cash flow statement for the company owing the money will help the lender to predict all EXCEPT:

A. their ability to pay debts and dividends. B. future cash flows. C. and evaluate management decisions. D. future net income.


11.1-9 In order to help the business prosper, a cash flow statement can aid in all EXCEPT:

A. predicting future net income. B. predicting future cash flows. C. evaluating management decisions. D. predicting the ability to pay debts and dividends.


11.1-10 In order to determine why net income and cash on the balance sheet do not equal, an accountant can prepare a(n):

A. income statement. B. statement of retained earnings. C. balance sheet. D. statement of cash flows.



11.1-11 Which of the financial statements listed below represents a point in time? A. Statement of cash flows B. Statement of stockholders’ equity . C. Income statement D. Balance sheet


11.1-12 The cash flow statement is the communicating link between the:

A. statement of stockholders’ equity and the cash reported on the balance sheet. B. income statement and the statement of stockholders’ equity. C. cash reported on the balance sheet and the accrual based income statement. D. cash reported on the balance sheet and the statement of stockholders’ equity.

Answer: C LO: 11-1 Difficulty: 1 EOC Ref: S11-3 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.1-13 The _________________________ is the financial statement associated with the operating, investing and financing activities of a corporation.

A. income statement B. statement of stockholders’ equity C. statement of cash flows D. balance sheet



11.1-14 The accuracy of the statement of cash flows can be verified by computing the change in the balance of the:

A. cash and cash equivalent accounts. B. equity account. C. revenue accounts. D. asset and liability accounts.

Answer: A LO: 11-1 Difficulty: 1 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.1-15 The purpose of the statement of cash flows is to show:

A. the revenue earned. B. the profits that were earned. C. the expenses that were paid. D. how cash was received and used during the period.

Answer: D LO: 11-1 Difficulty: 1 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.2-1 The three types of business activities on a statement of cash flows are operating, investing, and management activities.


11.2-2 Operating activities reflect such things as purchasing fixed assets.



11.2-3 Issuing stock would be included in financing activities.


11.2-4 Current assets on the balance sheet would be affected by and be part of operating activities.


11.2-5 The direct method of formatting a statement of cash flows starts with net income.


11.2-6 Which of the following is NOT a part of operating activities? A. Paying dividends B. Paying payables C. Earnings revenue D. Paying utilities



11.2-7 Which of the following is NOT a part of investing activities? A. Buying a building B. Collecting on a loan receivable C. Borrowing money D. Selling off equipment


11.2-8 Which of the following is NOT a part of financing activities? A. Paying dividends B. Issuing stock C. Paying off loans D. Buying land


11.2-9 Operating cash flows affect:

A. current assets and current liabilities. B. long-term asset accounts. C. equity accounts. D. long-term liability accounts.



11.2-10 Investing cash flows affect: A. current assets and current liabilities. B. long-term asset accounts. C. equity accounts. D. long-term liability accounts.

Answer: B LO: 11-2 Difficulty: 1 EOC Ref: S11-3 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.2-11 Financing activities affect:

A. current and long-term assets. B. current and long-term liabilities C. current assets and current liabilities. D. long-term liabilities and equity accounts.


11.2-12 In order to be successful over the long run, the main source of a company’s cash must

come from: A. managerial activities. B. investing activities. C. operating activities. D. financing activities.



11.2-13 Which of the following activities is computed differently using the two methods of formatting a statement of cash flows?

A. Operating activities B. Financing activities C. Investing activities D. Both operating activities and investing activities


11.2-14 If $10,000 was generated from operations, $4,000 was used for investing activities and $6,000 was generated from financing activities, the cash balance must have increased by:

A. $ 6,000. B. $ 8,000. C. $12,000. D. $20,000.

Answer: C Calculation: $10,000 - $4,000 + $6,000 = $12,000 LO: 11-2 Difficulty: 1 EOC Ref: S11-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.2-15 Operating activities are transactions and events associated with selling a product or providing a service related to the:

A. revenues and expenses reported on the income statement. B. assets and liabilities reported on the balance sheet. C. net income reported on the statement of retained earnings. D. retained earnings reported on the balance sheet.



11.2-16 When comparing net cash provided by operations using the direct method versus indirect method, we find that:

A. net cash is higher using the indirect method. B. net cash is lower using the indirect method. C. there is no difference in the net cash between the two methods. D. depreciation expense is used in the direct method.


11.2-17 Identify each of the following transactions as an operating activity (O), investing activity (I), financing activity (F) or a transaction not reported on the statement of cash flows(N).

A. Receipt of interest B. Increase of accounts payable C. Borrowed money from a bank D. Purchase of a building for cash

Answer: a) O b) O c) F d) I LO: 11-2 Difficulty: 2 EOC Ref: S11-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.2-18 Identify each of the following transactions as an operating activity (O), investing activity (I), financing activity (F) or a transaction not reported on the statement of cash flows (N).

A. Declared cash dividends B. Sold plant equipment for cash C. Increase of accounts receivable D. Payment on principal of a note

Answer: a) N b) I c) O d) F LO: 11-2 Difficulty: 2 EOC Ref: S11-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-1 Most businesses prefer to use the indirect method of formatting a statement of cash flows.


11.3-2 In order to prepare a statement of cash flows using the indirect method, you need the income statement only.


11.3-3 The operating section of a statement of cash flows using the indirect method is prepared differently from the operating section of a statement of cash flows using the direct method.


11.3-4 Operating cash flows under the indirect method starts with the net income for the period from the income statement.



11.3-5 Even though depreciation, depletion and amortization are expenses, they are considered non-cash transactions and must be subtracted from net income in the operating activities section of an indirect method cash flow statement.


11.3-6 Gains and losses do not represent cash flows.


11.3-7 Changes in the long-term assets and long-term liabilities accounts must be analyzed to determine how they are presented in the operating section of a cash flow statement.


11.3-8 Acquisitions and sales of long-term assets belong in the financing section of a cash flow statement using the indirect method.



11.3-9 Changes in long-term liabilities belong in the financing section of a cash flow statement using the indirect method.


11.3-10 The sum of the net increases/decreases in the operating, investing and financing sections

of the cash flow statement is equal to the change in cash over the period.


11.3-11 A transaction that exchanged a building for shares of stock would be an investing activity and would appear on the cash flow statement.


11.3-12 A transaction acquiring land by issuing a note for the full purchase price would not

appear on the cash flow statement because no cash was involved, but it may be disclosed In a separate section. Answer: True LO: 11-3 Difficulty: 1 EOC Ref: S11-6 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-13 Business transactions that do NOT involve the payment or receipt of cash are considered to be non-cash transactions.


11.3-14 Gains on the sale of long-term assets are:

A. added to investing activities. B. added to financing activities. C. added to operating activities. D. subtracted from operating activities.


11.3-15 Losses on the sale of long-term assets are:

A. added to operating activities. B. subtracted from operating activities. C. added to investing activities. D. subtracted from investing activities.



11.3-16 Cash receipts from the sale of long-term assets, such as equipment and vehicles, are: A. added to operating activities. B. subtracted from operating activities. C. added to investing activities. D. subtracted from investing activities.

Answer: C LO: 11-3 Difficulty: 1 EOC Ref: E11-15A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-17 The cost of purchasing long-term assets, such as buildings and land, are:

A. added to operating activities. B. subtracted from operating activities. C. added to investing activities. D. subtracted from investing activities.


11.3-18 All current assets EXCEPT ___________ are adjusted to net income in the operating

section of an indirect cash flow statement. A. prepaid expenses B. inventory C. cash D. notes receivable



11.3-19 Which would be added back to net income in the operating section of an indirect cash flow statement?

A. A decrease in accounts payable B. Depreciation C. An increase in accounts receivable D. An increase in inventory

Answer: B LO: 11-3 Difficulty: 1 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-20 Which would NOT be subtracted from net income in the operating section of an indirect cash flow statement?

A. An increase in prepaid expenses B. An increase in accounts payable C. A decrease in accounts payable D. An increase in notes receivable


11.3-21 Which would be subtracted from net income in the operating section of an indirect cash flow statement?

A. A decrease in notes payable B. A decrease in prepaid expenses C. An increase in sales tax payable D. An increase in inventory



11.3-22 An example of a cash inflow from financing activities is: A. collecting money owed by customers. B. issuing preferred stock. C. selling a piece of equipment. D. paying off a bond.


11.3-23 An example of a cash outflow from financing activities is:

A. paying dividends in cash. B. buying additional inventory. C. selling land. D. collecting notes receivable.


11.3-24 Transactions involving the purchase and sale of long-term assets, lending money and collecting the principal on loans are called:

A. investing activities. B. operating activities. C. financing activities. D. buying and selling activities.



11.3-25 An example of a cash outflow from investing activities is: A. issuance of a note payable. B. making a loan to another company. C. paying cash dividends. D. the purchase of treasury stock.


11.3-26 Which of the following is NOT a cash inflow or outflow from an investing activity? A. A loan made to another party B. A payment made to acquire property C. The purchase of treasury stock D. The sale of common stock owned in another company.


11.3-27 Under the indirect method of cash flow, which of the following adjustments would NOT

be made to net income when computing cash from operating activities? A. Add an increase in accounts payable B. Add depreciation expense C. Add a decrease in accounts payable D. Subtract the gain on sale of land



11.3-28 In the indirect method of cash flows, which of the following would be added to net income?

A. A decrease in inventory B. An increase in prepaid insurance C. A decrease in accounts payable D. An increase in accounts receivable


11.3-29 When preparing the statement of cash flows by the indirect method, if current liabilities increase, the difference is:

A. added to net income. B. added to investing activities. C. deducted from net income. D. deducted from investing activities.


11.3-30 Under the indirect method, which of the following is NOT a proper adjustment to net income under operating activities?

A. Adding a decrease in inventory B. Subtracting an increase in salaries payable C. Deducting an increase in prepaid expenses D. Subtracting a gain on the sale of equipment



11.3-31 Isaiah Corporation’s Accounts Receivable increased by $35,000 and their Accounts Payable decreased by $18,000. What is the net effect on cash from operations under the indirect method?

A. +$35,000 B. -$18,000 C. -$53,000 D. +$17,000

Answer: C Calculation: (-$35,000) + (-$18,000) = -$53,000 LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-32 Casey Company reported net income of $35,000; depreciation expenses of $20,000; an increase in accounts payable of $2,000; and an increase in current notes receivable of $3,000. Net cash flows from operating activities under the indirect method is:

A. $56,000. B. $55,000. C. $54,000. D. $50,000.

Answer: C Calculation: $35,000 + $20,000 + $2,000 - $3,000 = $54,000 LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-33 Amanda Industries reported net income of $52,000; depreciation expenses of $13,000; a gain on a land sale of $3,000; and a decrease in accounts receivable of $1,500. Under the indirect method, net cash flows from operations is:

A. $60,555. B. $63,500. C. $66,500. D. $69,500.

Answer: B Calculation: $52,000 + $13,000 - $3,000 + $1,500 = $63,500 LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-34 If $10,000 was generated from operations (indirect method); $4,000 was used for investing activities; and $6,000 was generated from financing activities, the cash balance:

A. increased by $ 6,000. B. increased by $ 8,000. C. increased by $12,000. D. decreased by $20,000.

Answer: C Calculation: $10,000 - $4,000 + $6,000 = $12,000 LO: 11-3 Difficulty: 2 EOC Ref: E11-15A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-35 The Accounts Payable balance has decreased during the year. How would this affect the statement of cash flows operations section under the indirect method?

A. It is already included in the net income. B. It would be added back to net income. C. It would be subtracted from net income. D. It does not affect the cash flow from operations.



11.3-36 The Supplies balance has decreased during the year. How would this affect the statement of cash flows operations section under the indirect method?



11.3-37 The Accounts Receivable balance has decreased during the year. How would this affect the statement of cash flows operations section under the indirect method?



11.3-38 Of the following, which would be added back to net income in the operating section of a cash flow statement using the indirect method?

A. Increase in inventory B. Decrease in accounts payable C. Increase in accounts receivable D. Decrease in prepaid insurance



11.3-39 The records of Ashley Boutique showed a net loss of $30,000; depreciation expense of $25,000; and an increase in supplies on hand of $5,000. The amount of net cash flow from operating activities using the indirect method is:

A. ($15,000). B. ($10,000). C. $15,000. D. $20,000.

Answer: B Calculation: -$30,000 + $25,000 - $5,000 = ($10,000) LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-40 Accounts receivable amounted to $215,000 at the beginning of the year and $245,000 at the end of the year. Income reported on the income statement for the year was $300,000. The cash flow from operating activities on the cash flow statement using the indirect method is:

A. $330,000. B. $270,000. C. $300,000. D. $315,000.

Answer: B Calculation: $300,000 – ($245,000 - $215,000) = $270,000 LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-41 Big Toy’s records show net income of $30,000; depreciation expense of $10,000; and cash dividends paid of $5,000. The cash flow from operating activities on the cash flow statement using the indirect method is:

A. $45,000. B. $40,000. C. $35,000. D. $25,000.

Answer: B Calculation: $30,000 + $10,000 = $40,000 LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-42 Fine Furniture Company had net income of $50,000. Accounts receivable increased by $30,000; inventory decreased by $20,000; amounts payable increased by $4,000 and salaries payable decreased by $1,000. The amount of cash flow from continuing operating activities under the indirect method is:

A. $37,000. B. $43,000. C. $55,000. D. $65,000.

Answer: B Calculation: $50,000 - $30,000 +$20,000 + $4,000 - $1,000 = $43,000 LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-43 An increase in long-term mortgage payable would mean a(n): A. increase in cash flow from investing activities. B. decrease in cash flow from investing activities. C. increase in cash flow from financing activities. D. decrease in cash flow from financing activities.


11.3-44 Activities that increase and decrease as a result of selling a company’s stock are:

A. marketing activities. B. operating activities. C. investing activities. D. financing activities.


11.3-45 Of the following, which is NOT classified as an investing activity on the statement of

cash flows? A. Sale of equipment for cash B. Purchasing land C. Collecting the principal on loans D. Selling goods and services



11.3-46 A transaction of stock in exchange for equipment would be recorded as a(n): A. operating activity. B. investing activity. C. financing activity. D. noncash investing and financing activity.


11.3-47 A statement of cash flows would NOT disclose:

A. stock dividends declared. B. bonds payable issued. C. purchase of treasury stock. D. capital stock issued.



11.3-48 Tayler Company’s comparative balance sheets as of 12/31/10 and 12/31/09 show the following with regard to investing and financing activities: Item 12/31/10 12/31/09_____ Building $358,000 $ 0 Equipment 111,000 0 Notes Payable (long-term) 38,000 33,000 Common Stock 256,000 192,000 Paid-in Capital in Excess of Par—Common 56,000 38,000 Retained Earnings 231,000 174,000 Net income for the year 2010 was $98,000 and cash dividends of $25,000 were paid. Complete a partial cash flow statement for the investing and financing sections for the year ended 12/31/10. Answer:

Tayler Company Statement of Cash Flows (partial)

For the Year Ended December 31, 2010 Investing Activities: Purchased building $(358,000) Purchased equipment (111,000) Net cash used by investing activities $(469,000)Financing Activities: Borrowed on notes payable $ 5,000 Issuance of common stock 82,000 Cash dividends paid ( 25,000) Net cash from financing activities $ 62,000

LO: 11-3 Calculation: Common Stock ($256,000 + $56,000) - ($192,000 + $38,000) = $82,000 Difficulty: 3 EOC Ref: E11-15A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-49 Tayler Company had net income of $56,000 in 2010 and depreciation expense of $13,000 in 2010. Additional information:

Change in accounts receivable: $6,700 Change in accounts payable: $6,500 Change in inventory: ($21,000) Change in prepaid expenses: $4,400 Change in current accrued liabilities: $8,200

Complete the operating activities section of a cash flow statement for December 31, 2010 using the indirect method.

Answer:

Tayler Company Statement of Cash Flows (partial)

For the Year Ended December 31, 2010 Net income $56,000Add depreciation expense 13,000Add change in accounts payable $ 6,500Add change in inventory 21,000Add change in accrued liabilities 8,200Subtract change in accounts receivable (6,700)Subtract change in prepaid expense (4,400) Total changes 24,600Cash from operating activities $93,600

LO: 11-3 Difficulty: 3 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-50 Lowry Landscapes had net income of $50,000 for 2010. Land was sold for $40,000 of which $3,000 was a gain. The beginning cash balance was $53,000 and the ending cash balance was $151,000. Depreciation expenses were $11,000. Prepare a statement of cash flows for the year ended December 31, 2010 for Lowry Landscapes using the indirect method.

Answer:

Lowry Landscapes Statement of Cash Flows (Indirect Method)

For the Year Ended December 31, 2010 Cash flows from operating activities: Net income $50,000 Add depreciation 11,000 Deduct Gain on sale of land ( 3,000) Net cash from operating activities $58,000Investing activities: Cash proceeds from selling land $40,000Net increase in cash $98,000 Cash January 1, 2010 $53,000 Cash December 31, 2010 $151,000



11.3-51 The following information was taken from the financial statements of Brandon Company for 12/31/10 and12/31/09:

Net income for 2010: $313,000 Depreciation expense for 2010: $28,400 Loss on sale of equipment: $7,300

Balance Sheet 12/31/10 12/31/09 Accounts Receivable $46,000 $50,000 Merchandise Inventory 35,000 28,000 Accounts Payable 27,000 24,000 Interest Payable 6,000 8,000

Prepare the operating activities section of the statement of cash flows under the indirect method for the year ended December 31, 2010.

Answer:

Brandon Company Statement of Cash Flows (partial)

For the Year Ended December 31, 2010 Net Income $313,000 Add Depreciation expense 28,400 Decrease in accounts receivable 4,000 Increase in merchandise inventory (7,000) Increase in accounts payable 3,000 Decrease in interest payable (2,000) Add Loss on sale of equipment 7,300 Net cash from operating activities $346,700



11.3-52 The following information is given for Tripp Company, which uses the indirect method.

Net income: $20,000Depreciation expense 3,000Increase in A/R 2,000Payment of dividends 2,000Sales of equipment 6,000Increase in A/P 4,000Decrease in inventory 3,000

The cash flow from operating activities is $______________. The cash flow from investing activities is $______________. The cash flow from financing activities is $______________. Answer: Operating, $28,000; Investing, $6,000; Financing: ($2,000) Calculations: $20,000 + $3,000 - $2,000 + $4,000 + $3,000 = $28,000 for operating $6,000 for investing ($2,000) for financing LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-53 The following information is given for Ashley Apparel:

Net income: $20,000Depreciation expense 4,000Decrease in A/R 2,000Increase in prepaid insurance 3,000Sale of common stock 10,000Purchase of equipment 5,000Loan money to a customer 4,000Decrease in A/P 1,000

The cash flow from operating activities is $______________. The cash flow from investing activities is $______________. The cash flow from financing activities is $______________. Answer: Operating, $22,000; Investing, ($9,000); Financing: $10,000 Calculations: $20,000 + $4,000 + $2,000 - $3,000 - $1,000 = $22,000 for operating ($5,000) – ($4,000) = ($9,000) for investing $10,000 for financing LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-54 Indicate the effect that each of the following transactions has on the cash balance. Use (I) (I) for increase, (D) for decrease and (N) for non-cash transaction. A. Increase of inventory _____________ B. Sale of common stock for cash _____________ C. Payment of dividends _____________ D. Depreciation expense for the period _____________

Answer: a) D b) I c) D d) N LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-55 Indicate the effect that each of the following transactions has on the cash balance. Use (I) for increase, (D) for decrease and (N) for non-cash transaction.

A. Payment of long-term debt ______________ B. Loan money to another company ______________ C. Increase in accounts payable ______________ D. Purchase of equipment on account ______________

Answer: a) D b) D c) I d) N LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-56. Indicate the effect that each of the following transactions has on the cash balance. Use (I) for increase, (D) for decrease and (N) for non-cash transaction.

A. Issued common stock for equipment _____________ B. Acquired land for cash _____________ C. Borrowed money on long-term note _____________ D. Purchased inventory for cash _____________

Answer: a) N b) D c) I d) D LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-57. Indicate the effect that each of the following transactions has on the cash balance. Use (I) for increase, (D) for decrease and (N) for non-cash transaction.

A. Purchased treasury stock ______________ B. Collected cash from customers ______________ C. Received cash dividends ______________ D. Loss on sale of building ______________

Answer: a) D b) I c) I d) N LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.3-58 Identify where each of the following transactions would be shown on the statement of cash flows using the indirect method. Use (O) for operating activities, (I) for investing activities, (F) for financing activities and (N) for a transaction that is not reported in the statement of cash flows.

A. Paid for fire insurance in advance B. Cash used to purchase new computers C. Cash used to retire bonds outstanding D. Depreciation expense

Answer: a) O b) I c) F d) O LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.3-59 Identify where each of the following transactions would be shown on the statement of cash flows using the indirect method. Use (O) for operating activities, (I) for investing activities, (F) for financing activities and (N) for a transaction that is not reported in the statement of cash flows.

A. Cash used to purchase fixed assets B. Cash received from sale of company stock C. Purchased treasury stock for cash D. Received cash dividends

Answer: a) I b) F c) F d) O LO: 11-3 Difficulty: 2 EOC Ref: E11-13A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.4-1 The FASB recommends use of the direct method, rather than the indirect method, of

preparing a cash flow statement.



11.4-2 Under the direct method, the only section that differs from the indirect method is the financing activities section.


11.4-3 In the direct method, each line of the income statement is converted from the accrual basis to cash basis.


11.4-4 Because depreciation is not cash-based, it is NOT reported in the direct method of the statement of cash flows.


11.4-5 Gains and losses on the sale of plant, property and equipment are ignored in the direct method of preparing a statement of cash flows.



11.4-6 One formula for determining cash collections from customers is to take Sales plus the increase in Accounts Receivable.


11.4-7 In the direct method of preparing a cash flow statement, interest received and interest expense are in the financing activities section.


11.4-8 Dividends received by a company appear in the operating activities section of a direct method cash flow statement.


11.4-9 Payments to suppliers include items such as employee compensation, interest and income taxes.



11.4-10 Cash payments for inventory is computed as— Total inventory purchased plus a decrease in Accounts payable OR minus an increase in Accounts payable.


11.4-11 Some investing and financing activities involve no cash flows, so they: A. represent no significant financial change. B. should be included in the three main sections of the statement of cash flows. C. should be reported in a separate section of the cash flow statement. D. must be converted to cash at the end of the accounting period.


11.4-12 Cost of goods sold for the year was $850,000. Inventory was $60,000 at the beginning of the year and $90,000 at the end of the year. There were no changes in the amount in account payable for the year. Cash payment for merchandise to be reported under the direct method is:

A. $850,000. B. $910,000. C. $940,000. D. $880,000.

Answer: D Calculation: $850,000 + ($90,000 - $60,000) = $880,000 LO: 11-4 Difficulty: 2 EOC Ref: P11-33A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.4-13 Operating expenses— other than depreciation— for the year were $335,000. Prepaid expenses decreased by $7,000. Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

A. $335,000. B. $342,000. C. $328,000. D. $ 7,000.

Answer: C Calculations: $335,000 - $7,000 = $328,000 LO: 11-4 Difficulty: 2 EOC Ref: P11-33A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.4-14 Operating expenses other than depreciation for the year were $400,000. Accrued expenses increased by $35,000. Cash payments for operating expenses to be reported on the cash flow statement using the direct method would be:

A. $435,000. B. $400,000. C. $365,000. D. $ 35,000.

Answer: C Calculation: $400,000 - $35,000 = $365,000 LO: 11-4 Difficulty: 1 EOC Ref: P11-33A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.4-15 The section of the statement of cash flows from investing activities does NOT include:

A. the sale of common stock. B. buying stock of other companies. C. the cash purchases of equipment. D. collecting the principal on loans.



11.4-16 The gains and losses on the sale of equipment under the direct method would be reported: A. in the investing section of the cash flow statement. B. in the operating section of the cash flow statement. C. in the financing section of the cash flow statement. D. as a separate disclosure.


11.4-17 Exchanging stock for a building under the direct method would be reported: A. in the investing section of the cash flow statement. B. in the operating section of the cash flow statement. C. in the financing section of the cash flow statement. D. as a separate disclosure.


11.4-18 A purchase of new equipment on a note payable under the direct method would be reported:

A. as a separate disclosure as a non-cash transaction. B. in the investing section of the cash flow statement. C. in the operating section of the cash flow statement. D. in the financing section of the cash flow statement.



11.4-19 Under the direct method, paying and collecting interest on loans are: A. financing and investing activities. B. operating and financing activities. C. operating and investing activities. D. operating activities.


11.4-20 When a corporation receives dividends, they are shown as a(n):

A. investing activity. B. operating activity. C. financing activity. D. non-cash disclosure.


11.4-21 Depreciation of factory equipment under the direct method would be reported as a(n):

A. investing activity. B. operating activity. C. financing activity. D. non-cash disclosure.



11.4-22 The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following:

A. If sales for the current year were $600,000 and accounts receivable decreased by $25,500 during the year, what was the amount of cash received from customers? B. If salaries expense for the current year was $80,000 and sales salaries payable increased $25,000 during the year, what was the amount of cash for sales salaries? A. _________________________ B. ________________________

Answer: a) $625,500 b) $55,000 Calculation: $600,000 + $25,500 = $625,500; $80,000 - $25,000 = $55,000 LO: 11-4 Difficulty: 3 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.4-23 The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following: A. If accrued expenses showed $50,000 on the income statement and payables increased from $15,000 to $18,000 on the balance sheet, what was the amount of cash paid? B. If insurance expense showed $10,000 on the income statement and Prepaid Insurance increased from $10,000 to $12,000 on the balance sheet, what was the amount of cash paid for insurance? A. ________________________ B. _________________________

Answer: a) $47,000 b) $12,000 Calculation: $50,000 - $3,000 = $47,000; $10,000 + $2,000 = $12,000 LO: 11-4 Difficulty: 3 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.4-24 A machine with a cost of $175,000 and accumulated depreciation of $94,000 is sold for $87,000 cash. The amount to be reported under cash flows from investing is:

A. $81,000. B. 6,000. C. $87,000. D. nothing. This is an operations activity.

Answer: C$ Calculation: 87,000. Only the amount of cash received, and not the gain or loss is recorded. LO: 11-4 Difficulty: 2 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.4-25 A company settles a long-term note payable plus interest by paying $68,000 cash toward the principal amount and $5,440 cash for the interest. Under the direct method of reporting interest, the $5,440 would be listed as a(n):

A. operating activity. B. financing activity. C. investing activity. D. separate disclosure only.



11.4-26 From the income statement and balance sheet information listed below, what amount of cash is paid for salaries and wages?

Salaries and wages expense 2010 $255,000 Salaries and wages payable 12/31/09 8,200 Salaries and wages payable 12/31/10 10,900 A. $252,300

B. $257,700 C. $255,000 D. $274,100

Answer: A Calculation: $255,000 + $8,200 - $10,900 = $252,300 LO: 11-4 Difficulty: 2 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.4-27 The following information is available for Isaiah Company. What amount is paid for merchandise for the current year (2010)?

Cost of goods sold $545,000 Merchandise inventory, 12/31/09 105,000 Merchandise inventory, 12/31/10 112,000 Accounts payable 12/31/09 98,500 Accounts payable 12/31/10 101,300

A. $545,000 B. $554,800 C. $540,800 D. $549,200

Answer: D Calculation: Increase in inventory = $7,000; Increase in A/P = $2,800 Cash paid for merchandise = $545,000 + $7,000 - $2,800 = $549,200 LO: 11-4 Difficulty: 2 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.4-28 The following information was made available from the income statement and balance sheet of Lauren Company.

Item 12/31/10 12/31/09 Accounts Receivable $ 53,40 0 58,600 Accounts Payable 35,600 32,700 Merchandise Inventory 85,000 79,000 Sales (2010) 243,000 Interest Revenue (2010) 5,600 Dividend Revenue (2010) 1,200 Tax Expense (2010) 12,300 Salaries Expense (2010) 28,000 COGS (2010) 65,000 Interest Expense (2010) 3,600 Operating Expenses 28,500

Complete the cash flow from operating activities section for Lauren Company using the direct method for the year ended December 31, 2010.

Answer:

Lauren Company Statement of Cash Flows (partial)

For the Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers $248,200 Interest received 5,600 Dividends received 1,200 Total cash receipts 255,000 Payments: To suppliers (96,600) To employees (28,000) For interest (3,600) For taxes (12,300) Total cash payments (140,500) Net cash provided by operating activities $114,500

LO: 11-4 Calculations: Collections from customers $243,000 + ($58,600 - $53,400) = $248,200 Inventory purchased $65,000 + ($85,000 - $79,000) = $71,000 purchased Paid for inventory $71,000 – ($35,600 - $32,700) = $68,100 for inventory Cash for operations $28,500 – ($35,600 - $32,700) = $25,600 Cash to suppliers $68,100 + $25,600 Difficulty: 3 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.4-29 The following information was made available from the income statement and balance sheet of Meranda Company.

Item 12/31/10 12/31/09 Accounts Receivable $ 42,000 $45,100 Accounts Payable 27,900 24,500 Merchandise Inventory 68,000 63,000 Sales (2010) 170,000 Interest Revenue (2010) 3,200 Dividend Revenue (2010) 1,800 Tax Expense (2010) 11,600 Salaries Expense (2010) 22,400 COGS (2010) 57,000 Interest Expense (2010) 2,200 Operating Expenses 19,400

Complete the cash flow from operating activities section for Meranda Company using the direct method for the year ended December 31, 2010.

Answer:

Meranda Company Statement of Cash Flows (partial)

For the Year Ended December 31, 2010 Cash flows from operating activities: Receipts: Collections from customers $173,100 Interest received 3,200 Dividends received 1,800 Total cash receipts 178,100j Payments: To suppliers (78,000) To employees (22,400) For interest (2,200) For taxes (11,600) Total cash payments (114,200) Net cash provided by operating activities $63,900

LO: 11-4 Calculations: Collections from customers $170,000 + ($45,100 - $42,000) = $173,100 Inventory purchased $57,000 + ($68,000 - $63,000) = $62,000 purchased Paid for inventory $62,000 – ($27,900 - $24,500) = $58,600 for inventory Cash for operations $19,400 – ($27,900 - $24,500) = $16,000 Cash to suppliers $58,600 + $16,000= $74,600 Difficulty: 3 EOC Ref: E11-18A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.5-1 Free cash flow is the anticipated amount of cash available from operations after paying for planned financing of stock and paying dividends.

Answer: False LO: 11-5 Difficulty: 1 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.5-2 The formula for free cash flow is anticipated cash from operations minus planned payments in investing operations minus anticipated cash for dividends.

Answer: True LO: 11-5 Difficulty: 1 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.5-3 The cash conversion cycle depends upon the time it takes to sell merchandise inventory, to collect receivables and to pay payables.


11.5-4 Days to turn inventory is calculated by dividing 365 by the inventory turnover rate.



11.5-5 Generally, the higher the cash conversion cycle, the healthier the company is financially.


11.5-6 The cash conversion cycle represents the number of days the cash is “tied up” in the operating activities of the business.


11.5-7 Casey Company has an accounts receivable turnover of 36 days, an inventory turnover of 77 days and an accounts payable turnover of 40 days. Casey’s cash conversion cycle is:

A. 153 days. B. 81 days. C. 73 days. D. 1 day

Answer: 73 days Calculation: 77 days + 36 days - 40 days = 73 days LO: 11-5 Difficulty: 1 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.5-8 Ryan Industries has an inventory turnover of 112 days, an accounts payable turnover of 73 days and an accounts receivable turnover of 82 days. Ryan’s cash conversion cycle is:

A. 121 days. B. 103 days. C. 43 days. D. 9 days.

Answer: A Calculation: 112 days + 82 days – 73 days = 121 days LO: 11-5 Difficulty: 1 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

11.5-9 The following information was taken from the balance sheet and income statements of Amanda Enterprises.

Item 12/31/10 12/31/09 Inventory $345,000 $385,000 COGS 554,000 538,000 Accounts Receivable 83,400 80,800 Accounts Payable 38,000 34,000 Net Credit Sales 214,000

Compute the following to the nearest day:

Amanda’s inventory turnover in days is: _______________ Amanda’s A/R turnover in days is: ____________________ Amanda’s A/P turnover in days is: ____________________ Amanda’s cash conversion cycle is: ____________________

Answer: Inventory turnover in days is: 240 days [($345,000 + $385,000)/2] divided by $554,000 x 365 = 240.48 days

A/R turnover in days is: 140 days [($83,400 + $80,800)/2] divided by $214,000 x 365 = 140.03 days

A/P turnover in days is: 24 days [($38,000 + $34,000)/2] divided by $554,000 x 365 = 23.72 days

Cash conversion cycle is: 357 days 240.48 days + 140.03 days – 23.72 days = 356.79 days

LO: 11-5 Difficulty: 3 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


11.5-10 The following information was taken from the balance sheet and income statements of Kacee Kennels.


Compute the following to the nearest day: Amanda’s inventory turnover in days is: _______________ Amanda’s A/R turnover in days is: ____________________ Amanda’s A/P turnover in days is: ____________________ Amanda’s cash conversion cycle is: ____________________ Answer: Inventory turnover in days is: 221 days [($210,000 + $250,000)/2] divided by $380,000 x 365 = 220.92 days


A/P turnover in days is: 32 days [($30,000 + $36,000)/2] divided by $380,000 x 365 = 31.70 days Cash conversion cycle is: 380days 220.92 days + 190.61 days – 31.70 days = 379.83 days LO: 11-5 Difficulty: 3 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting



11.5-11 The following information was taken from the balance sheet and income statements of Ashley Apparel.


Compute the following to the nearest day: Amanda’s inventory turnover in days is: _______________ Amanda’s A/R turnover in days is: ____________________ Amanda’s A/P turnover in days is: ____________________ Amanda’s cash conversion cycle is: ____________________ Answer: Inventory turnover in days is: 228 [($140,000 + $160,000)/2] divided by $240,000 x 365 = 228.13 days


A/P turnover in days is: 68 days [($42,000 + $48,000)/2] divided by $240,000 x 365 = 68.44 days

Cash conversion cycle is: 276 days 228.13 days + 116.42 days – 68.44 days = 276.11 days LO: 11-5 Difficulty: 3 EOC Ref: Section Guidelines AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

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