17.4 Flashcards
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?
$545,000
If an entity uses the indirect method to present its statement of cash flows, the interest paid (excluding amounts capitalized) and income taxes paid must be disclosed. The sum of these amounts is $545,000 ($220,000 + $325,000).
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?
$208,000
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?
On July 1, Year 1, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its Year 1 statement of cash flows?
An outflow equal to the Year 1 principal payments only.
Financing activities include the repayment or settlement of debt obligations. Financing activities do not include the payment of interest. Thus, the payment of principal is an outflow from financing activities. The payments for interest are operating cash flows.
The comparative balance sheet for an entity that had profit of $150,000 for the year ended December 31, Year 2, and paid $125,000 of dividends during Year 2 is as follows:
12/31/YR 2
Cash: $150,000
A/R: $200,000
Total Assets: $350,000
Payables: $80,000
Share Capital: $130,000
Retained Earnings: $140,000
Total:
12/31/YR 1
Cash: $180,000
A/R: $220,000
Total Assets: $400,000
Payables: $160,000
Share Capital: $125,000
Retained Earnings: $115,000
Total: $400,000
If dividends paid are treated as an operating item, the amount of net cash from operating activities during Year 2 was
$(35,000)
Profit is adjusted to determine the net cash from operations. The payment of cash dividends is regarded as a cash flow from an operating activity. Hence, it is a reconciling item requiring a $125,000 reduction of profit. However, the decrease in accounts receivable ($220,000 – $200,000 = $20,000) during the period represents a cash inflow (collections of pre-Year 2 receivables) not reflected in Year 2 profit. Moreover, the decrease in payables ($160,000 – $80,000 = $80,000) indicates a cash outflow (payment of pre-Year 2 liabilities) that also is not reflected in Year 2 profit. Accordingly, net cash from operations was –$35,000 ($150,000 – $125,000 + $20,000 – $80,000).
Lance Corp.’s statement of cash flows for the year ended October 31, 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 for the year. What amount of cash did Lance receive from its customers during the year ended October 31, Year 1?
$70,000
Collections from customers equal sales revenue minus the increase in accounts receivable, or $70,000 ($75,000 – $5,000).
Which of the following cash flows per share should be reported in a statement of cash flows?
Cash flows per share should not be reported.
Financial statements must not report cash flow per share. Reporting per-share amounts might improperly imply that cash flow is an alternative to net income as a performance measure.
The following balances were reported by Mall Co. at December 31, Year 2 and Year 1:
12/31/Yr 2
Inventory: $260,000
A/P: $75,000
12/31/Yr 1
Inventory: $290,000
A/P: $50,000
Mall paid suppliers $490,000 during the year ended December 31, Year 2. What amount should Mall report for cost of goods sold in Year 2?
$545,000
If trade accounts increased by $25,000, purchases must have been $25,000 higher than the disbursements for purchases. Purchases thus are $515,000 ($490,000 + $25,000). The decrease in merchandise inventory indicates that cost of goods sold must have been $30,000 higher than purchases. Hence, COGS equals $545,000 ($515,000 + $30,000).
Savor Co. had $100,000 in cash-basis pretax income for Year 2. At December 31, Year 2, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, Year 1, balances. Compared to the accrual basis method of accounting, Savor’s cash pretax income is
Lower by $16,000.
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 in an earlier period (Year 2) than 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 in Year 2, but the related expense was accrued in Year 1. Hence, cash pretax income is lower than accrual-basis income by $16,000.
Ionia Company reports operating activities in its statement of cash flows using the indirect method. Which of the following items, if any, should Ionia add back to net income to arrive at net operating cash flow?
Excess of Treasury Stock Acquisition Cost over Sales Proceeds(Cost Method):
Bond Discount Amortization:
No
Yes
Bond discount amortization is a noncash component of interest expense. Because the amortization decreases net income, it is added back in the reconciliation of net income to net operating cash flow. Treasury stock transactions involve cash flows that do not affect net income. They are also classified as financing activities, not operating activities.
In its Year 6 income statement, Kilm Co. reported cost of goods sold (COGS) of $450,000. Changes occurred in several balance sheet accounts as follows:
Inventory: $160,000 decrease
Accounts payable – suppliers: 40,000 decrease
What amount should Kilm report as cash paid to suppliers in its Year 6 cash flow statement, prepared under the direct method?
$330,000
COGS is included in the determination of net income. Cash paid to suppliers, however, is the amount included in determining net cash flows from operating activities. To determine cash paid to suppliers, a two-step adjustment to COGS is necessary. The first step adjusts for the difference between COGS and purchases. The second step adjusts for the difference between purchases and the amounts disbursed to suppliers. The decrease in inventory is therefore subtracted from COGS to arrive at purchases. The decrease in accounts payable is then added to purchases to determine cash paid to suppliers. Accordingly, cash paid to suppliers equals $330,000 ($450,000 COGS – $160,000 + $40,000).
Which of the following items is included in the financing activities section of the statement of cash flows?
Cash effects of transactions obtaining resources from owners and providing them with a return on their investment.
Financing activities include (1) issuance of stock, (2) payment of dividends, (3) treasury stock transactions, (4) issuance of debt, (5) obtaining cash from creditors and repayment or other settlement of debt obligations, (6) the exercise of share options resulting in excess tax benefits, and (7) receiving resources that are donor-restricted to long-term use.
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?
$45,000
Cash payments for insurance is equal to the $50,000 ending balance, plus the $20,000 expensed in Year 2, minus the $25,000 beginning balance, or $45,000.
Fact Pattern:
Kollar Corp.’s transactions for the year ended December 31, Year 6, included the following:
- Purchased real estate for $550,000 cash borrowed from a bank
- Sold available-for-sale debt 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 used in financing activities for Year 6 was
$250,000
The dividend payment and the payment of the bank loan were uses of cash in financing activities. The borrowing from the bank and the issuance of stock provided cash from financing activities. Thus, the net cash used in financing activities was $250,000 ($600,000 – $550,000 – $250,000 + $450,000).
In accordance with IFRS, which combination below explains the effect of credit card interest incurred and paid during the period on (1) equity on the statement of financial position and (2) the statement of cash flows?
Equity on the Balance Sheet:
Reflected on the Statement of Cash Flows;
Decrease
Operating or financing outflow
Interest incurred is classified as interest expense on the income statement, which in turn reduces equity on the statement of financial position by reducing retained earnings. According to IAS 7, cash payments for interest made by an entity that is not a financial institution may be classified on the statement of cash flows as an outflow of cash from operating or financing activities.
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 unamortized bond discount in its statement of cash flows?
As an addition to net income in the operating activities section.
The amortization of bond discount (debit interest expense, credit discount) is a noncash item that reduces net income. In a statement of cash flows prepared using the indirect method, net operating cash flow is determined by adjusting net income. The indirect method begins with net income and then removes the effects of (1) deferrals of past operating cash receipts and payments, (2) accruals of estimated future operating cash receipts and payments, and (3) net income items not affecting operating cash flows. Thus, bond discount amortization should be added to net income in the reconciliation to net operating cash flow.