17.8 Flashcards

1
Q

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?

A

$208,000

The cash balance at year end is $208,000 ($27,000 on January 1 + $351,000 provided by operations – $420,000 used by investing activities + $250,000 provided by financing activities). The proceeds from the land sale are included in the calculation of the cash used by investing activities.

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2
Q

Which one of the following should be classified as a cash flow from an operating activity on the statement of cash flows?

A

A decrease in accounts payable during the year.

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. A decrease in accounts payable indicates a cash outflow to the entity’s suppliers in payment for goods or services.

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3
Q

The following balances were reported by Mall Co. at December 31, Year 2 and Year 1:

Inventory
12/31/2: $260,000
12/31/1: $290,000

Accounts Payable
12/31/2: $75,000
12/31/1: $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?

A

$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).

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4
Q

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?

A

$70,000

Collections from customers equal sales revenue minus the increase in accounts receivable, or $70,000 ($75,000 – $5,000).

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5
Q

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli’s statement of cash flows as a(n)

A

Noncash financing and investing activity.

The exchange of debt for a long-lived asset does not involve a cash flow. It is therefore classified as a noncash financing and investing activity.

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6
Q

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

A

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.

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7
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:

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

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

A

$71,200

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
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8
Q

Fact Pattern:
Selected financial information for Kristina Company for the year just ended is shown below.
Net income: $2,000,000
Increase in net accounts receivable: 300,000
Decrease in inventory: 100,000
Increase in accounts payable: 200,000
Depreciation expense: 400,000
Gain on the sale of available-for-sale securities: 700,000
Cash receivable from the issue of common stock: 800,000
Cash paid for dividends: 80,000
Cash paid for the acquisition of land: 1,500,000
Cash received from the sale of available-for-sale securities: 2,800,000

Kristina’s cash flow from investing activities for the year is

A

$1,300,000

Cash flows from investing activities for the year include the $2,800,000 inflow from the sale of available-for-sale securities and the $1,500,000 cash outflow for the purchase of land ($2,800,000 − $1,500,000 = $1,300,000 net cash inflow).

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9
Q

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

A

Gain on sale of plant asset.

The indirect method reconciles net income to net operating cash flow. It removes the effects of (1) all deferrals of past operating cash flows, (2) all accruals of estimated future operating cash flows, and (3) items included in net income that do not affect net operating cash flow (including items with cash effects that are investing or financing cash flows). The gain on the sale of plant assets is an investing cash flow. Thus, its effect must be subtracted from net income in the operating section of the cash flow statement.

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10
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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11
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 financing activities for Year 6 was

A

$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).

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12
Q

Mend Co. purchased a 3-month U.S. Treasury bill. Mend’s policy is to treat as cash equivalents all highly liquid investments with an original maturity of 3 months or less when purchased. How should this purchase be reported in Mend’s statement of cash flows?

A

Not Reported.

Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near 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.

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13
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).

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14
Q

Fact Pattern:
Selected financial information for Kristina Company for the year just ended is shown below.
Net income: $2,000,000
Increase in net accounts receivable: 300,000
Decrease in inventory: 100,000
Increase in accounts payable: 200,000
Depreciation expense: 400,000
Gain on the sale of available-for-sale securities; 700,000
Cash receivable from the issue of common stock: 800,000
Cash paid for dividends: 80,000
Cash paid for the acquisition of land: 1,500,000
Cash received from the sale of available-for-sale securities: 2,800,000

Kristina’s cash flow from financing activities for the year is

A

$(80,000).

Cash flows from financing activities for the year consist of the $80,000 outflow for dividends paid. The issue of common stock is a financing activity, but the $800,000 of proceeds have not yet been received.

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15
Q

The following data were extracted from the financial statements of a company for the year ended December 31:

Net income: $70,000
Depreciation expense: 14,000
Amortization of intangible assets: 1,000
Decrease in accounts receivable: 2,000
Increase in inventories: 9,000
Increase in accounts payable: 4,000
Increase in plant assets: 47,000
Increase in contributed capital: 31,000
Decrease in short-term notes payable: 55,000

There were no disposals of plant assets during the year. Based on the above, a statement of cash flows will report a net increase in cash of

A

$11,000

Depreciation and amortization are noncash expenses and are added to net income. A decrease in receivables indicates that cash collections exceed sales on an accrual basis, so it is added to net income. To account for the difference between cost of goods sold (a reduction of income) and cash paid to suppliers, a two-step adjustment of net income is necessary. The difference between cost of goods sold and purchases is the change in inventory. The difference between purchases and the amount paid to suppliers is the change in accounts payable. Accordingly, the conversion of cost of goods sold to cash paid to suppliers requires deducting the inventory increase and adding the accounts payable increase. An increase in plant assets indicates an acquisition of plant assets, causing a decrease in cash, so it is deducted. An increase in contributed capital represents a cash inflow and is added to net income. A decrease in short-term notes payable is deducted from net income because it reflects a cash outflow. Thus, cash increased by $11,000 ($70,000 NI + $14,000 + $1,000 + $2,000 – $9,000 + $4,000 – $47,000 + $31,000 – $55,000).

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16
Q

When using the indirect method to prepare a statement of cash flows, which one of the following should be subtracted from net income when determining net cash flows from operating activities?

A

Amortization of premiums on bonds payable.

The indirect method reconciles the net income of a business with the net operating cash flow. The indirect method removes the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of estimated future operating cash receipts and payments, and (3) all items not affecting operating cash flows to arrive at the net cash flow from operating activities. Thus, the amortization of the premium on bonds payable is subtracted from net income in the reconciliation because it represents a noncash decrease in interest expense (an increase in net income).

17
Q

Cash flows from transactions in which of the following securities are most likely to be considered cash flows from operating activities?

A

Trading Debt Securities.

Cash flows from purchases, sales, and maturities of trading debt securities are cash flows from operating activities.

18
Q

The net income for Cypress, Inc., was $3,000,000 for the year ended December 31. Additional information is as follows:

Depreciation on fixed assets: $1,500,000
Gain from cash sale of land: 200,000
Increase in accounts payable: 300,000
Dividends paid on preferred stock: 400,000

The net cash provided by operating activities in the statement of cash flows for the year ended December 31 is

A

$4,600,000

Net operating cash flow may be determined by adjusting net income for items that did not affect cash (the indirect method). Depreciation is an expense not directly affecting cash flows that should be added back to net income. The increase in accounts payable is added to net income because it indicates that an expense has been recorded but not paid. The gain on the sale of land is an inflow from an investing, not an operating, activity and should be subtracted from net income. The dividends paid on preferred stock are cash outflows from financing, not operating, activities and do not require an adjustment. Thus, net cash flow from operations is $4,600,000 ($3,000,000 + $1,500,000 – $200,000 + $300,000).

19
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.

20
Q

The following information pertains to Ash Co., which prepares its statement of cash flows using the indirect method:

Interest payable at beginning of year: $15,000
Interest expense during the year: 20,000
Interest payable at end of year: 5,000

What amount of interest should Ash report as a supplemental disclosure of cash flow information?

A

$30,000

Under the indirect method, an entity must provide a supplemental disclosure of the amount of interest paid during the period. The amount of interest paid during the period can be calculated from the following equation that reconciles the beginning and ending balance of interest payable:
Beginning interest payable: $15,000
Interest expense recognized during the period: 20,000
Interest paid during the period: (30,000)
Ending interest payable $ 5,000