17.5 Flashcards

1
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.

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2
Q

The primary purpose of a statement of cash flows is to provide relevant information about

A

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

The primary purpose is to provide information about the cash receipts and cash payments of a business entity during a period. This information helps investors, creditors, and other users to assess the entity’s ability to generate net cash inflows, meet its obligations, pay dividends, and secure external financing. It also helps assess reasons for the differences between net income and net cash flow and the effects of cash and noncash financing and investing activities.

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3
Q

Metro, Inc., reported net income of $150,000 for the current year. Changes occurred in several balance sheet accounts during the current year as follows:

Investment in Videogold, Inc., stock, all of which was acquired in the previous year, carried on the equity basis: $5,500 increase
Accumulated depreciation, caused by major repair to projection equipment: 2,100 decrease
Premium on bonds payable: 1,400 decrease
Deferred income tax liability (long-term): 1,800 increase

In Metro’s current-year cash flow statement, the reported net cash provided by operating activities should be

A

$144,900

The increase in the equity-based investment reflects the investor’s share of the investee’s net income after adjustment for dividends received. Thus, it is a noncash revenue and should be subtracted in the reconciliation of net income to net operating cash inflow. A major repair provides benefits to more than one period and therefore should not be expensed. One method of accounting for a major repair is to charge accumulated depreciation if the useful life of the asset has been extended, with the offsetting credit to cash, a payable, etc. However, the cash outflow, if any, is from an investing activity. The item has no effect on net income and no adjustment is necessary. Amortization of bond premium is a noncash income statement item that reduces accrual-basis expenses and therefore must be subtracted from net income to arrive at net cash flow from operating activities. The increase in the deferred tax liability is a noncash item that reduces net income and should be added in the reconciliation. Accordingly, net cash provided by operations is $144,900 ($150,000 – $5,500 – $1,400 + $1,800).

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4
Q

Kresley Co. has provided the following current account balances for the preparation of the annual statement of cash flows:

January 1
Accounts receivable $11,500
Allowance for uncollectible accounts $400
Prepaid rent expense $6,200
Accounts payable $9,700
December 31
Accounts receivable $14,500
Allowance for uncollectible accounts $500
Prepaid rent expense $4,100
Accounts payable $11,200

Kresley’s current-year net income is $75,000. Net cash provided by operating activities in the statement of cash flows should be

A

$75,700

The net income of a business should be adjusted for the effects of items properly included in the determination of net income but having either a different effect or no effect on net operating cash flow. The increase in gross accounts receivable should be subtracted from net income. The increase indicates that sales exceeded cash received. The increase in the allowance for uncollectible accounts should be added to net income. This amount reflects a noncash expense. The decrease in prepaid rent expense should be added to net income. The cash was disbursed in a prior period, but the expense was recognized currently as a noncash item. The increase in accounts payable indicates that liabilities and related expenses were recognized without cash outlays. Thus, the change in this account should be added to net income. The net cash provided by operating activities is $75,700 ($75,000 NI – $3,000 change in A/R + $100 change in allowance + $2,100 decrease in prepaid rent + $1,500 increase in A/P).

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5
Q

In a statement of cash flows (indirect method) of a business, an increase in inventories should be presented as a(n)

A

Deduction from income from continuing operations.

The objective of a statement of cash flows is to explain the cash receipts and cash disbursements of an entity during an accounting period. In a statement of cash flows of a business in which operating activities are presented on an indirect or reconciliation basis, cash flows from operating activities are determined by adjusting net income (which includes income from continuing operations) to remove the effects of all (1) non-cash items, (2) deferrals of past operating cash receipts and payments, (3) accruals of expected future operating cash receipts and payments, and (4) items whose cash effects are investing or financing activities. Cost of goods sold is included in the determination of net income. Cash paid to suppliers, however, should be the amount included in determining net cash flows from operating activities. To adjust net income to cash flow from operating activities for the difference between cost of goods sold and cash paid to suppliers, a two-step adjustment is necessary. The first step is to adjust net income for the change in the inventory account. This step adjusts for the difference between cost of goods sold and purchases. The second step is to adjust for the changes in the accounts payable account. This step adjusts for the difference between purchases and the amounts disbursed to suppliers. An increase in inventories indicates that purchases were greater than cost of goods sold. Thus, as part of the first step, an increase in inventories should be presented in a statement of cash flows (indirect method) as a deduction from net income.

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6
Q

A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders?

A

Operating, investing, financing.

A statement of cash flows prepared using either the direct or the indirect method lists the categories of cash flows in the following order: operating, investing, and financing.

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7
Q

Dee’s inventory and accounts payable balances at December 31, Year 2, increased over their December 31, Year 1, balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at Year 2 cost of goods sold?

Increase in Inventory:
increase in A/P:

A

Deducted from
Added to

A two-step adjustment is needed. The first step is to adjust for the difference between cash paid to suppliers and purchases. Because accounts payable increased, purchases must have been greater than cash paid to suppliers. Thus, the increase in accounts payable is an addition. The second step adjusts for the difference between purchases and cost of goods sold. Given that inventory increased, purchases must have exceeded cost of goods sold. Hence, the increase in inventories is a subtraction.

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8
Q

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

A

Financing activities.

Financing activities include the issuance of stock, the payment of dividends and other distributions to owners, treasury stock transactions, the issuance of debt, and the repayment or other settlement of debt obligations. It also includes receiving restricted resources that by donor stipulation must be used for long-term purposes.

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9
Q

Depreciation expense is added to net income under the indirect method of preparing a statement of cash flows in order to

A

Reverse noncash charges deducted from 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 (e.g., depreciation).

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10
Q

Lane Company acquired copyrights from authors, in some cases paying advance royalties and in others paying royalties within 30 days of year-end. Lane reported royalty expense of $375,000 for the year ended December 31, Year 2. The following data are included in Lane’s balance sheet:

Year 1
Prepaid Royalties: $60,000
Royalties Payable: $75,000

Year 2
Prepaid Royalties: $50,000
Royalties Payable: $90,000

In its Year 2 statement of cash flows, Lane should report cash payments for royalties of

A

$350,000

A decrease in a prepaid royalties asset account implies that royalty expense was greater than the related cash payments. Similarly, an increase in a royalties payable liability account indicates that royalties expense exceeded cash payments. Royalty expense therefore exceeds the amount of cash payments for royalty payments by the amount of the decrease in the prepaid royalties account plus the increase in the royalties payable account. Thus, Lane’s Year 2 cash payments for royalty payments total $350,000 ($375,000 royalty expense – $10,000 decrease in prepaid royalties – $15,000 increase in royalties payable).

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11
Q

Fact Pattern:
- Royce Company had the following transactions during the fiscal year ended December 31, Year 2:
Accounts receivable decreased from $115,000 on December 31, Year 1, to $100,000 on December 31, Year 2.
- Royce’s board of directors declared dividends on December 31, Year 2, of $.05 per share on the 2.8 million shares outstanding, payable to shareholders of record on January 31, Year 3. The company did not declare or pay dividends for fiscal Year 1.
- Sold a truck with a net carrying amount of $7,000 for $5,000 cash, reporting a loss of $2,000.
- Paid interest to bondholders of $780,000.
- The cash balance was $106,000 on December 31, Year 1, and $284,000 on December 31, Year 2.

The total of cash provided (used) by operating activities plus cash provided (used) by investing activities plus cash provided (used) by financing activities is

A

Cash provided of $178,000.

The total of cash provided (used) by the three activities (operating, investing, and financing) should equal the increase or decrease in cash for the year. During Year 2, the cash balance increased from $106,000 to $284,000. Thus, the sources of cash must have exceeded the uses by $178,000.

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12
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.

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13
Q

Dannon Co. mistakenly reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information:

Beginning prepaid expense: $1,300
Beginning accrued expense: $1,650
Ending prepaid expense: $1,800
Ending accrued expense; $1,200

What amount of expense should the Dannon report on its books under the accrual basis?

A

$34,250.

The beginning balance of net expense payable is $350 ($1,650 accrued expense – $1,300 prepaid expense). The ending balance of net expense payable is -$600 ($1,200 accrued expense – $1,800 prepaid expense). The $35,200 cash expense paid during the period decreases the expense payable account. The expense recognized under the accrual method increases the expense payable account. Thus, the expense that should be reported by Dannon in its books under the accrual method can be derived from the following equation:
Beginning expense payable: $350
(Expense paid during the period): (35,200)
Expense recognized under accrual method: 34,250
Ending expense payable: $(600)

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14
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.

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15
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 collected from customers?

A

$535,800

Collections from customers equal sales minus the increase in gross accounts receivable, or $535,800 ($538,800 – $33,000 + $30,000).

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16
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 goods sold?

A

$226,500

To reconcile cost of goods sold to cash paid for goods sold, a two-step adjustment is needed. The first step is to determine purchases by subtracting the decrease in inventory from cost of goods sold. The second step is to determine cash paid for goods sold by subtracting the increase in trade accounts payable from purchases. Thus, cash paid for goods sold equals $226,500 [$250,000 – ($47,000 – $31,000) – ($25,000 – $17,500)].

17
Q

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 investing activities for Year 6 was

A

$175,000

The purchases of real estate and of machinery and equipment were uses of cash in investing activities. The sale of available-for-sale debt securities provided cash from an investing activity. Consequently, the net cash used in investing activities was $175,000 ($550,000 – $500,000 + $125,000). The reduction in accounts receivable and the increase in accounts payable were operating activities.

18
Q

Three years ago, Jameson Company purchased stock in Zebra, Inc., at a cost of $100,000. This stock was sold for $150,000 during the current fiscal year. The result of this transaction should be shown in the investing activities section of Jameson’s statement of cash flows as

A

$150,000

The statement of cash flows reports the cash effects of transactions. The accrual-basis gain on the stock is not relevant.

19
Q

Dividends paid to shareholders are shown on the statement of cash flows as

A

Cash flows from financing activities.

The payment of dividends is a cash outflow from a financing activity. The receipt of dividends, however, is generally considered a cash inflow from an operating activity.

20
Q

The following information is available from Hoyt Corp.’s accounting records for the current year:

Cash received from customers: $950,000
Cash paid to suppliers and employees: 620,000
Taxes paid: 120,000
Purchase of Ramsey, Inc., bonds (par value $100,000): 90,000
Amortization of discount on bonds receivable: 1,000
Cash dividends paid: 20,000

In Hoyt’s current-year cash flow statement, the reported net cash provided by operating activities should be

A

$210,000

Acquisition of bonds is an investing activity, assuming they are not classified as trading securities. Payment of dividends is a financing activity. Amortization of a discount on bonds receivable is a noncash interest revenue. All other transactions listed are cash flows from operating activities. Accordingly, the net cash flow provided by operations is $210,000 ($950,000 – $620,000 – $120,000).