17.1 Flashcards

1
Q

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available:

Accounts receivable increase: $20,000
Equipment gain on sale increase: 10,000
Nontrade notes payable increase: 50,000
Prepaid insurance increase: 40,000
Accounts payable increase: 30,000

What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year?

A

$40,000

Under the indirect method, the net cash flow from operating activities is determined by adjusting the net income for the effect of (1) noncash revenue and expenses that were included in net income, (2) items included in net income whose cash effects relate to investing or financing cash flows, (3) all deferrals of past operating cash flows, and (4) all accruals of expected future operating cash flows. Accordingly, the net cash flows provided by operating activities can be calculated as follows:
Net income for the period: $70,000
Add noncash losses and expenses included in net income (add depreciation expense): 10,000
Subtract gains and revenues whose cash effects are related to investing or financing cash flows (subtract gain on sale of equipment): (10,000)
Add increase in current operating liabilities (add increase in accounts payable): 30,000
Subtract increase in current operating assets (subtract increase in accounts receivable of $20,000 and increase in prepaid insurance of $40,000): (60,000)
Net cash provided by operating activities: $40,000

Nontrade notes payable is not an operating item. Thus, the increase in nontrade notes payable has no effect on operating cash flows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Fact Pattern:
Flax Corp. uses the direct method to prepare its statement of cash flows. Flax’s trial balances at December 31, Year 6 and Year 5, are as follows:

Cash
Year 6: $35,000
Year 5: $32,000
Accounts receivable
Year 6: 33,000
Year 5: 30,000
Inventory
Year 6: 31,000
Year 5: 47,000
Property, plant, & equipment
Year 6: 100,000
Year 5: 95,000
Unamortized bond discount
Year 6: 4,500
Year 5: 5,000
Cost of goods sold
Year 6: 250,000
Year 5: 380,000
Selling expenses
Year 6: 141,500
Year 5: 172,000
General and administrative expenses
Year 6: 137,000
Year 5: 151,300
Interest expense
Year 6: 4,300
Year 5: 2,600
Income tax expense
Year 6: 20,400
Year 5: 61,200
Year 6 total: $756,700
Year 5 total: $976,100
Credits
Year 6: 
Year 5: 
Allowance for uncollectible accounts
$    1,300
$    1,100
Accumulated depreciation
16,500
15,000
Trade accounts payable
25,000
17,500
Income taxes payable
21,000
27,100
Deferred income taxes
5,300
4,600
8% callable bonds payable
45,000
20,000
Common stock
50,000
40,000
Additional paid-in capital
9,100
7,500
Retained earnings
44,700
64,600
Sales
Year 6 total: 538,800
Year 5 total: 778,700
  • Flax purchased $5,000 in equipment during Year 6.
  • Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses, which include the provision for uncollectible accounts.

What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for income taxes?

A

$25,800

To reconcile income tax expense to cash paid for income taxes, a two-step adjustment is needed. The first step is to add the decrease in income taxes payable. The second step is to subtract the increase in deferred income taxes. Hence, cash paid for income taxes equals $25,800 [$20,400 + ($27,100 – $21,000) – ($5,300 – $4,600)].

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Which of the following statements is true regarding a statement of cash flows prepared under IFRS?

A

Certain bank overdrafts may be classified as cash and cash equivalents.

Under IFRS, bank overdrafts may be classified as cash and cash equivalents if they are (1) repayable on demand and (2) part of an entity’s cash management.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Barber Company has recorded the following payments for the current period:

Interest paid on bank loan: $300,000
Dividends paid to Barber shareholders: 200,000
Repurchase of Barber stock: 400,000

The amount to be shown in the financing activities section of Barber’s statement of cash flows should be

A

$600,000

The payment and collection of interest are treated as cash flows from operating activities. Financing activities include paying dividends and treasury stock transactions. Thus, the amount to be reported in the financing activities section of the statement of cash flows is $600,000 ($200,000 + $400,000).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

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 under U.S. GAAP?

A

$300,000

The $300,000 dividend should be classified as a financing cash outflow. The payment of interest is an operating cash outflow under U.S. GAAP, and the payment to acquire the common stock of Marks is an investing cash outflow. Under IFRS, payment of dividends may be classified as an operating or a financing activity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Flax Corp. uses the direct method to prepare its statement of cash flows. The selected data from Flax’s trial balances at December 31, Year 6 and Year 5, are as follows:

Year 6:
Property, plant, & equipment $100,000
Selling expenses $141,500
General and administrative expenses $137,000
Accumulated depreciation $16,500

Year 5:
Property, plant, & equipment $95,000
Selling expenses $172,000
General and administrative expenses $151,300
Accumulated depreciation $15,000
  • Flax purchased $5,000 in equipment during Year 6.
  • Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.

What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for selling expenses?

A

$141,000

The cash paid for selling expenses equals selling expenses minus the depreciation allocated to selling expenses, or $141,000 {$141,500 Year 6 expense – [($16,500 – $15,000) Year 6 depreciation × 33 1/3% allocated to selling]}. Since no equipment was sold in Year 6, the depreciation expense for the period is calculated as a difference between the ending and beginning balances of accumulated depreciation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Fara Co. reported bonds payable of $47,000 on December 31, Year 1, and $50,000 on December 31, Year 2. During Year 2, Fara issued $20,000 of bonds payable in exchange for equipment. There was no amortization of bond premium or discount during the year. What amount should Fara report in its Year 2 statement of cash flows for redemption of bonds payable?

A

$17,000

Assuming no amortization of premium or discount, the net amount of bonds payable reported was affected solely by the issuance of bonds for equipment and the redemption of bonds. Given that $20,000 of bonds were issued and that the amount reported increased by only $3,000, $17,000 of bonds must have been redeemed. This amount should be reported in the statement of cash flows as a cash outflow from a financing activity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Ina Co. had the following beginning and ending balances in its prepaid expenses and accrued liabilities accounts for the current year:

Prepaid Expenses
Beginning Balance: $5,000
Ending Balance: $10,000

Accrued Liabilities
Beginning Balance: $8,000
Ending Balance: $20,000

Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the current year?

A

$93,000

Debits to operating expenses totaled $100,000 for the year. The accrued liabilities account increased by $12,000 ($20,000 ending – $8,000 beginning). This means that $12,000 of the debited operating expenses were not paid in the current year and must be subtracted from the $100,000. The prepaid expenses account increased by $5,000 ($10,000 ending – $5,000 beginning). This means $5,000 of operating expenses were prepaid in the current year but not included in debited operating expenses because the prepaid expense account was debited instead; these must be added to the $100,000. Thus, Ina paid $93,000 total in operating expenses during the current year ($100,000 – $12,000 + $5,000).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Cash flows from operating activities

A

Should be presented using the direct method, but use of the indirect method of disclosure is allowed.

The FASB has expressed a preference for the direct method. However, if the direct method is used, a separate reconciliation based on the indirect method must be provided in a separate schedule. For this reason, most entities use the indirect method. The same net operating cash flow is reported under both methods.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

During Year 1, a company had the following cash transactions:

Interest paid: $1,000
Interest received: 800
Dividend paid: 350
Dividend received: 100

Which of the following cannot be the effect of the transactions above on the company’s Year 1 statement of cash flows?

A

Under IFRS:
Net cash used in operating activities: $1,350
Net cash provided by financing activities: $900

Under IFRS, interest and dividends received may be classified as cash flows from either operating or investing activities but not financing activities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows?

Operating Activities:
Investing Activities:

A

$100,000 addition to net income
$400,000 cash inflow

Cash receipts from the sale of property, plant, and equipment of $400,000 are reported as a cash inflow from investing activities. Under the indirect method, the net cash flow from operating activities is determined by adjusting net income for the effect of items included in net income whose cash effects relate to investing or financing cash flows. Losses and expenses whose cash effects are related to investing or financing cash flows are added to net income. Bear recognized a loss on disposal of equipment of $100,000 ($500,000 carrying value – $400,000 cash receipts). Accordingly, $100,000 is reported as an addition to net income in the operating activities section of the statement of cash flows.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Dunbarn Co. had the following activities during the year:

Purchase of inventory: $120,000
Purchase of equipment: 80,000
Purchase of available-for-sale debt securities: 60,000
Purchase of treasury stock: 70,000
Issuance of common stock: 150,000

What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash flows for the year?

A

$(140,000)

Cash flows from investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. These expenditures include (1) cash payments for property, plant, and equipment; (2) other long-lived assets; (3) equity and debt instruments held for investment purposes; and (4) cash advances and loans made to other parties. The cash outflows used by investing activities is $140,000 ($80,000 purchase of equipment + $60,000 purchase of AFS securities).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

A company calculated the following data for the period:

Cash received from customers: $25,000
Cash received from sale of equipment: 1,000
Interest paid to bank on note: 3,000
Cash paid to employees: 8,000

What amount should the company report as net cash provided by operating activities in its statement of cash flows?

A

$14,000

Operating activities are all transactions and other events that are not financing or investing activities. In general, operating activities involve the production and delivery of goods and the provision of services. Their effects normally are reported in earnings. Cash inflows from operating activities include receipts from collection or sale of accounts and notes resulting from sales to customers. Cash outflows from operating activities include cash payments to employees for services and creditors for interest. Thus, the net cash provided by operating activities is ($25,000 − $8,000 − $3,000) $14,000.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Fact Pattern:
Flax Corp. uses the direct method to prepare its statement of cash flows. Flax’s trial balances at December 31, Year 6 and Year 5, are as follows:

Cash
Year 6: $35,000
Year 5: $32,000
Accounts receivable
Year 6: 33,000
Year 5: 30,000
Inventory
Year 6: 31,000
Year 5: 47,000
Property, plant, & equipment
Year 6: 100,000
Year 5: 95,000
Unamortized bond discount
Year 6: 4,500
Year 5: 5,000
Cost of goods sold
Year 6: 250,000
Year 5: 380,000
Selling expenses
Year 6: 141,500
Year 5: 172,000
General and administrative expenses
Year 6: 137,000
Year 5: 151,300
Interest expense
Year 6: 4,300
Year 5: 2,600
Income tax expense
Year 6: 20,400
Year 5: 61,200
Year 6 total: $756,700
Year 5 total: $976,100
Credits
Year 6: 
Year 5: 
Allowance for uncollectible accounts
$    1,300
$    1,100
Accumulated depreciation
16,500
15,000
Trade accounts payable
25,000
17,500
Income taxes payable
21,000
27,100
Deferred income taxes
5,300
4,600
8% callable bonds payable
45,000
20,000
Common stock
50,000
40,000
Additional paid-in capital
9,100
7,500
Retained earnings
44,700
64,600
Sales
Year 6 total: 538,800
Year 5 total: 778,700
  • Flax purchased $5,000 in equipment during Year 6.
  • Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses, which include the provision for uncollectible accounts.

What amount should Flax report in its statement of cash flows for the year ended December 31, Year 6, for cash paid for interest?

A

$3,800

Interest expense is $4,300. This amount includes $500 of discount amortization, a noncash item. Hence, the cash paid for interest was $3,800 ($4,300 – $500).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Carlson Company has the following payments recorded for the current period:

Dividends paid to Carlson shareholders: $150,000
Interest paid on bank loan: 250,000
Purchase of equipment: 350,000

The total amount of the above items to be shown in the operating activities section of Carlson’s statement of cash flows should be

A

$250,000

Cash flows from operating activities include cash flows from all activities not classified as investing or financing. Their effects normally are reported in earnings. Operating cash flows include the payment and collection of interest, dividends paid are a financing cash outflow, and the purchase of equipment is an investing activity. Thus, the total amount to be reported in the operating activities section of the statement of cash flows is $250,000.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

When the direct method of preparing a statement of cash flows is used, an enterprise should provide a reconciliation of net income to net cash flows from which activity?

A

Operating.

If the direct method is used, a reconciliation of net income and net cash flows from operating activities is required to be provided in a separate schedule.

17
Q

A company records items on the cash basis throughout the year and converts to an accrual basis for year-end reporting. Its cash-basis net income for the year is $70,000. The company has gathered the following comparative balance sheet information:

Beginning of the Year:
Accounts payable: $3,000
Unearned revenue: 300
Wages payable: 300
Prepaid rent: 1,200
Accounts receivable $1,400
End of Year
Accounts payable: $1,000
Unearned revenue: $500
Wages payable: $400
Prepaid rent: $1,500
Accounts receivable: $600

What amount should the company report as its accrual-based net income for the current year?

A
The decrease in accounts payable implies that cash paid to suppliers exceeded purchases. The decrease ($3,000 – $1,000 = $2,000) is included in the calculation of cash-basis net income but not accrual-basis net income. The increase in the liability for unearned revenue ($500 – $300 = $200) implies a cash inflow that increased cash-basis net income but not accrual-basis net income. The increase in wages payable ($400 – $300 = $100) implies an accrual-basis expense not recognized in cash-basis net income. The increase in prepaid rent ($1,500 – $1,200 = $300) implies reduced cash-basis net income with no effect on accrual-basis net income. The decrease in accounts receivable ($1,400 – $600 = $800) implies that cash collections exceeded accrual-basis revenue. Accrual-basis net income based on these adjustments is therefore $71,200.
Cash-basis net income: $70,000
A/P decrease: 2,000
Unearned revenue increase: (200)
Wages payable increase: (100)
Prepaid rent increase: 300
A/R decrease: (800)
= $71,200
18
Q

A company reports the following information for Year 1:

Sale of equipment: $20,000
Issuance of the company’s bonds: 10,000
Dividends paid: 5,000
Purchase of stock of another company: 2,000
Purchase of U.S. Treasury note: 2,000
Income taxes paid; 2,000
Interest income received: 500

What is the company’s net cash flow from financing activities?

A

$5,000

Cash flows from financing activities generally involve the cash effects of transactions and other events that relate to the issuance, settlement, or reacquisition of the entity’s debt and equity instruments. In addition, payments of cash dividends are classified as cash outflows from financing activities. Therefore, the items that should be classified as cash flows from financing activities are the dividends paid ($5,000) and the issuance of the company’s bonds ($10,000). The net cash flow should be an inflow of $5,000 ($10,000 – $5,000). Cash flows from investing activities include the sale of equipment ($20,000), the purchase of stock of another company ($2,000), and the purchase of a U.S. Treasury note ($2,000). Cash flows from operating activities include income taxes paid ($2,000) and interest income received ($500).

19
Q

Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?

A

Statement of Cash Flows.

A statement of cash flows is required as part of a full set of financial statements of all business and not-for-profit entities. The primary purpose of a statement of cash flows is to provide information about the cash receipts and payments of an entity during a period. A secondary purpose is to provide information about operating, investing, and financing activities. The financing activities section of a cash flow statement would clearly show if the company has cash inflows from the sale of debt or equity securities.

20
Q

Savor Co. had $100,000 in accrual basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances. Under the cash basis of accounting, what amount of pretax income should Savor report for the year?

A

$84,000

The increase in accounts receivable indicates that cash-basis pretax income is $10,000 lower than accrual-basis pretax income. Revenues from the increase in receivables are reported as earned prior to the future related cash inflows. The decrease in accounts payable indicates that cash-basis pretax income is $6,000 lower than accrual-basis pretax income. The cash outflows related to the increase in payables occurred, but the related expense was accrued in a prior year. Thus, cash pretax income is $84,000 ($100,000 – $10,000 – $6,000). When reconciling net income to net cash flows provided by operating activities, the increase in current operating assets and the decrease in current operating liabilities must be subtracted from net income.