17.6 Flashcards
Bay Manufacturing Co. purchased a 3-month U.S. Treasury bill. In preparing Bay’s statement of cash flows, this purchase would
Have no effect.
Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Moreover, cash equivalents ordinarily include only investments with original maturities to the holder of 3 months or less. The T-bill is therefore a cash equivalent and has no effect on the statement of cash flows.
A significant noncash transaction that need not be reported in disclosures related to the statement of cash flows is
A stock dividend declared during the year.
A stock dividend is the issuance of an entity’s own common stock to its common shareholders for no consideration. Because it does not affect recognized assets or liabilities, it need not be reported among the noncash investing and financing activities disclosures.
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.
Madden Corporation’s controller has gathered the following information as a basis for preparing the statement of cash flows. Net income for the current year was $82,000. During the year, old equipment with a cost of $60,000 and a net carrying amount of $53,000 was sold for cash at a gain of $10,000. New equipment was purchased for $100,000. Shown below are selected closing balances for last year and the current year.
Cash Last Year:$39,000 Current Year: $85,000 Accounts receivable net Last Year: 43,000 Current Year: 37,000 Inventories Last Year: 93,000 Current Year: 105,000 Equipment Last Year: 360,000 Current Year: 400,000 Accumulated depreciation -- equipment Last Year: 70,000 Current Year: 83,000 Accounts payable Last Year: 22,000 Current Year: 19,000 Notes payable Last Year: 100,000 Current Year: 100,000 Common stock Last Year: 250,000 Current Year: 250,000 Retained earnings Last Year: 93,000 Current Year: 175,000
Madden’s net cash flow from operating activities for the current year is
$83,000
This long question can be solved using the Gleim Success Tips (in the outline) that help to reconcile the net income to net cash flow from operating activities.
Net income: $82,000
Add: Decrease in receivables: 6,000
Add: Depreciation expense; 20,000
Minus: Increase in inventories: (12,000)
Minus: Decrease in payables; (3,000)
Minus: Gain on sale of equipment: (10,000)
Net cash provided by operating activities: $83,000
An increase in current operating assets and a decrease in current operating liabilities must be subtracted from net income. Therefore, the increase in inventories of $12,000 and the decrease in accounts payable of $3,000 must be subtracted from net income.
A decrease in current operating assets and an increase in current operating liabilities must be added to net income. Therefore, the decrease in receivables of $6,000 must be added to net income. A gain on sale of equipment is a gain whose cash effect is related to investing activities. Thus, the gain on sale of equipment of $10,000 must be subtracted from net income. The depreciation expense for the year of $20,000 ($83,000 ending accumulated depreciation + $7,000 accumulated depreciation on equipment sold – $70,000 beginning accumulated depreciation) is a noncash expense included in net income. Thus, it must be added to net income to determine the net cash flow from operating activities.
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).
Reed Co.’s Year 1 statement of cash flows reported cash provided from operating activities of $400,000. For Year 1, depreciation of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were $100,000. In Reed’s Year 1 statement of cash flows, what amount was reported as net income?
$205,000
Depreciation expense and the loss from goodwill impairment are noncash items that are added to net income to arrive at net cash provided by operating activities. Hence, they are subtracted from net cash provided by operating activities to arrive at net income. The payment of cash dividends is not a reconciling item because it is a financing cash flow that does not affect net income. Net income was therefore $205,000 ($400,000 net cash provided by operating activities – $190,000 depreciation – $5,000 goodwill impairment).
Green Co. had the following transactions at December 31:
Cash proceeds from sale of investment in bonds of Blue Co. classified as available-for-sale (carrying amount = $60,000): $75,000
Dividends received on Grey Co. stock: 10,500
Common stock purchased from Brown Co.: 38,000
What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31?
$37,000
The sale proceeds of available-for-sale debt securities ($75,000) are a cash inflow from an investing activity. Cash outflows from acquiring equity instruments ($38,000) also are from an investing activity. But cash inflows from operating activities include cash receipts in the form of dividends ($10,500). Thus, the net cash flow from investing activities is $37,000 ($75,000 – $38,000).
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).
Larry Mitchell, Bailey Company’s controller, is gathering data for the statement of cash flows for the most recent year end. Mitchell is planning to use the direct method to prepare this statement and has made the following list of cash inflows for the period:
- Collections of $100,000 for goods sold to customers
- Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000
- Proceeds from the issuance of additional company stock totaling $10,000
The correct amount to be shown as cash inflows from operating activities is
$100,000
Cash flows from operating activities are those generated by the firm’s major and ongoing activities. They include cash flows from all activities not classified as investing or financing. Only the $100,000 of collections on sales to customers qualifies.
Compared with the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of
A/R:
Accrued Expenses:
No
Yes
A net decrease in accounts receivable indicates that cash collected exceeded accrual-basis revenue from receivables in the current period. A net decrease in accrued expenses indicates that cash paid for expenses exceeded the current period’s accrual-basis expenses. Thus, a net decrease in receivables results in an overstatement of cash-basis income compared with accrual-basis income, and a net decrease in accrued expenses results in an understatement.
During Year 6, Xan, Inc., had the following activities related to its financial operations:
Payment for the early retirement of long-term
bonds payable (carrying amount $370,000): $375,000
Distribution in Year 6 of cash dividend declared in Year 5 to preferred shareholders: 31,000
Carrying amount of convertible preferred stock in Xan, converted into common shares: 60,000
Proceeds from sale of treasury stock (carrying amount at cost, $43,000): 50,000
In Xan’s Year 6 statement of cash flows, net cash used in financing activities should be
$356,000
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. The conversion of preferred stock to common stock is a noncash transaction, but the early retirement of bonds, the payment of the cash dividend, and the sale of treasury stock are financing activities that affect cash flow. Thus, the net cash used in financing activities is $356,000 ($375,000 + $31,000 – $50,000).
Fact Pattern:
Karr, Inc. reported net income of $300,000 for the current year. Changes occurred in several balance sheet accounts as follows:
Equipment: $25,000 increase
Accumulated depreciation: 40,000 increase
Note payable: 30,000 increase
Additional information:
During the current year, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.
In December of the current year, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.
Depreciation expense for the year was $52,000.
In Karr’s current-year statement of cash flows, net cash used in investing activities should be
$2,000
The cash flows from investing activities include the cash effects of the sale of equipment and the purchase of equipment. The issuance of a note payable as part of the acquisition price of equipment does not involve cash but should be classified as a noncash financing activity. The cash inflow from the sale of equipment (carrying amount + gain) is $18,000 [($25,000 – $12,000) + $5,000]. The cash outflow from the purchase of equipment is $20,000 cash. The $30,000 note payable is included elsewhere. Thus, net cash used is $2,000 ($20,000 – $18,000).
The following information is available from Sand Corp.’s accounting records for the year ended December 31, Year 6:
Cash received from customers: $870,000 Rent received: 10,000 Cash paid to suppliers and employees: 510,000 Taxes paid: 110,000 Cash dividends paid: 30,000
Net cash flow provided by operations for Year 6 was
$260,000
Which one of the following would result in a decrease in cash flow measured under the indirect method of preparing a statement of cash flows?
Decrease in income taxes payable.
The indirect method reconciles accrual-basis net income to net operating cash flow. A decrease in income taxes payable implies an operating cash outflow not reflected in net income. Thus, the reconciling adjustment is a subtraction from net income. The result is a lower measure of net operating cash flow.
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?
$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).
