17.1 Flashcards
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?
$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.
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?
$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)].
Which of the following statements is true regarding a statement of cash flows prepared under IFRS?
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.
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
$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).
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?
$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.
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?
$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.
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?
$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.
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?
$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).
Cash flows from operating activities
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.
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?
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.
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:
$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.
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?
$(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).
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?
$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.
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?
$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).
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
$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.